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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (the "Act")
MEDQUIST INC.
(Exact name of registrant as specified in its charter)
For the fiscal year ended December 31, 2002 Commission file number 0-19941
New Jersey 22-2531298
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Five Greentree Centre, Suite 311, Marlton, NJ 08053
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (856) 810-8000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Common Stock (no par value)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of Registrant's knowledge, in definite proxy or information statements
incorporated by reference in Part III of this Form 10-K. [ ]
Indicate by check mark whether registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes[ ] No [X]
The aggregate market value of the Registrant's voting stock held by
non-affiliates was approximately $296 million on June 30, 2002, based on the
closing price of Registrant's Common Stock as reported on the Nasdaq National
Market as of such date.
The number of shares of the Registrant's Common Stock, no par value,
outstanding as of March 17, 2003 was 37,113,370.
DOCUMENTS INCORPORATED BY REFERENCE
The following document is incorporated by reference.
Part III - Proxy Statement to be filed with the Commission in
connection with the 2003 Annual Meeting.
PART I
Item 1. BUSINESS
MedQuist Inc. was incorporated in New Jersey in 1984 and reorganized in
1987 as a group of outpatient healthcare businesses affiliated with a non-profit
healthcare provider. In May 1994, we acquired our first medical transcription
business. By the end of 1995, we had divested all of our non-medical
transcription businesses. Including our first acquisition of a medical
transcription business in May 1994 through December 31, 2002, we have acquired
50 companies.
MedQuist is currently transitioning from a medical transcription
outsourcing company to a comprehensive provider of health information solutions
and services. Through our acquisitions of Speech Machines in 2001 and Lanier
Healthcare in 2002, we are positioned to offer our clients the software,
hardware and outsourcing services to fully support their health information
solutions and services needs. Clients can elect to manage their document
workflow process with on-premise or Internet-hosted solutions such as dictation,
transcription, electronic signature, speech recognition and template-based
charts.
Industry Overview
Medical document management includes medical transcription plus other
services related to health care information management such as coding, digital
dictation systems, handheld units, and electronic signature and speech
recognition.
We believe the market for outsourcing of medical document management
services will expand due in part to the following trends:
Consolidation. As healthcare providers consolidate and increase in
size, their information management needs become more complex and they
increasingly require larger and more sophisticated vendors.
Connectivity. The exchange of patient information and the delivery of
patient care must be coordinated among many entities, including physicians,
hospitals and managed care companies. Increasingly, healthcare organizations are
centralizing patient data into an accessible system creating economies of scale
to reduce overall healthcare costs and to improve the efficient delivery of
patient care. Accurate medical transcription and distribution and storage of
transcribed records and other document management services are critical to such
coordination.
Cost Containment. Outsourcing services in the healthcare industry is a
means to reduce administrative burdens and fixed costs. Hospitals and other
healthcare organizations often choose to outsource their electronic
transcription of dictated patient records as their information needs and volume
of dictated reports expand. Outsourcing medical document management services
permits providers:
o to reduce overhead and other administrative costs;
o to improve the quality of reports;
o to access leading technologies without development and
investment risk; and
o to obtain the expertise to implement and manage a system
tailored to the providers' specific requirements.
Compliance. Government agencies are increasingly focused on fraud and
abuse in the healthcare industry. For example, under Medicare, providers must
submit detailed documentation in order to receive reimbursement. In many
instances, providers have been fined and penalized for failing to substantiate
claims for reimbursement in an audit. As a result, Medicare, the insurance
industry and, in some cases healthcare accreditation organizations, are
requiring transcribed reports:
o to support claims for reimbursement;
o to facilitate communication between various parts of a
healthcare network;
o to improve the quality and efficiency of patient care; and
2
o to retain and provide reliable information in the event of
malpractice litigation.
Strategy
Our objective is to maintain our position as the premiere provider of
medical transcription and coding services and to transform into the leading
provider of complete document workflow management solutions and services. As
client needs continue to expand and evolve, we will partner with healthcare
organizations in order to provide all of the tools in which they need to
optimize their efficiencies and effectiveness.
The key elements of our strategy include the following:
Expand Existing Client Relationships. We provide most of our
transcription services to hospital medical records departments. We seek to
increase our share of transcription services through our close and continuing
client relationships as these departments outsource more of their transcription
requirements and as the volume of patient records continues to grow. In
addition, we will continue to penetrate the direct care departments at hospitals
such as radiology, emergency, oncology, pathology, pediatrics and cardiology,
within our existing client base. Historically, these departments have not
dictated their patient data or outsourced the transcription of their patient
data to the same extent as medical records departments. We will also
aggressively market and sell our front-end and back-end speech recognition
solutions to the radiology, emergency, cardiology and pathology departments.
Offer New Medical Document Management Services. We have developed, both
internally and through acquisitions, the capability of providing additional
medical document management products and services such as digital dictation,
speech recognition, electronic signature, template-based charts and
reimbursement coding services and products. We intend to further develop the
depth and breadth of this product and service line-up to better serve our
healthcare provider client base and to invest in the latest speech recognition
technologies.
Extend Current Client Base. We will continue to extend our base of
traditional, acute care hospital clients and to pursue additional clients such
as HMOs, outpatient clinics and physician practice groups, which we believe will
represent a growing percentage of the available market. Based upon input from
new clients, we believe that references from our existing client base represent
a key component of our sales and marketing efforts.
Pursue Strategic Relationships. We have initiated relationships with
developers and end-users of emerging technologies to create enhanced services
for our clients. We will continue to incorporate advances in technology to
improve the efficiency of our operations, reduce our costs, expand the breadth
and functionality of our services and enhance our competitive position.
Pursue Strategic Acquisitions. Both the medical transcription and
coding reimbursement industries are highly fragmented. Most of these industries
consist of small companies that lack the financial resources or the
technological capabilities necessary to provide services nationwide. We will
continue to pursue acquisitions that will expand our client base, product
offerings and network of qualified transcriptionists and coders to further our
geographic presence. We will also explore select opportunities to acquire
leading technologies, which may enhance our service offering.
3
Segments
As of July 1, 2002 MedQuist operates in two segments; 1) Services and
2) Solutions.
Services. The services segment provides clients with off site medical
transcription services and coding reimbursement services. Medical transcription
services include; off-site transcription labor, off-site technology through an
Application Support Provider (ASP) model, speech recognition and template-based
charts. Through our 60 transcription client service centers and approximate
10,000 transcriptionists, we meet the transcription needs of approximately 2,900
clients. Our client base is largely made up of hospital medical records
departments, however, we continue to target other patient care departments such
as radiology, emergency room, oncology, pathology, pediatrics and cardiology
departments. In addition we target HMO's, physician practice groups and
outpatient clinics.
Coding reimbursement services involve the assignment of numerical codes
to identify the diagnosis, treatment and severity of a medical episode for
reimbursement purposes. Coded documents such as CPT and ICD-9 forms are required
for reimbursement by government, HMO's and insurance companies. We provide these
services under on-site and off-site outsourcing arrangements with our hospital
customers. In the future, MedQuist anticipates the addition of a more automated
coding service offering made available by the use of developing technologies.
Solutions. This segment was created in July 2002 as a result of the
acquisition of Lanier Healthcare. This segment provides clients with enterprise
and web applications targeting the creation and connection of mission-critical
healthcare information including digital dictation systems and speech
recognition solutions. Additionally, this segment will separately contract to
provide service on these systems.
Sales and Marketing Efforts
Our existing client base is a key component of our marketing and sales
strategy. Based on input from new clients, we believe that new clients have
utilized our products and services in large part due to recommendations and
references by our existing national client base and successful product
installations and integrations. Through our acquisition of Lanier Healthcare,
MedQuist acquired a seasoned sales and service force of approximately 230.
Together with the MedQuist customer service center office managers and
Transcription Operations management team, a variety of skilled employees with
sales responsibilities make joint sales calls in order to proactively assist
clients with their document management workflow needs.
We utilize a consultative sales and marketing approach. We obtain
information concerning the particular needs of a client and educate the client
as to how our products and services can be customized to meet those needs. In
addition, we pursue potential clients through sales calls, product
demonstrations at industry conventions and meetings, direct mail and
advertising. We advertise in leading national healthcare trade publications
(including those sponsored by the American Health Information Management
Association), participate in industry conventions and communicate with clients
and prospective clients through our Web site, www.medquist.com.
Business Partners and Relationships
We are always evaluating emerging technologies and apply them as
appropriate to make our services more reliable, efficient and cost-effective. We
strive to assist our clients in meeting their complete transcription, coding and
document management needs. We have initiated relationships with developers and
end-users of emerging technologies, such as speech recognition; data mining and
outcomes analysis and Internet-based telecommunications to create value-added
services for our clients and to participate in the development of the computer
based patient record. Our executive vice president of marketing and new business
development oversees our strategic partnerships and manages our new business
development initiatives that integrate these partnerships into useable and
customizable product and service offerings.
4
Available Information
We electronically file annual reports on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K and amendments to those reports
pursuant to Section 13(a) or 15(d) of the exchange Act with the Commission. The
public may read and copy any materials filed with the Securities and Exchange
Commission at their Public Reference Room at 450 Fifth Street, NW, Washington,
DC 20549. The public may also obtain this information by calling the Commission
at 1-800-SEC-0330.
The Securities and Exchange Commission also maintains an Internet site
that contains reports, proxy and information statements, and other information
regarding electronic filers at www.sec.gov. We provide access to its most recent
Form 10-K, 10-Q and 8-K reports on its Internet website, www.medquist.com, free
of charge, as soon as reasonably practicable after those reports are
electronically filed with the Securities and Exchange Commission.
Item 2. PROPERTIES
The Company owns one property in Madison, Wisconsin, which was acquired
through the stock purchase of L&H Medical Solutions Holding, Inc. Otherwise, the
Company leases office and other space for its service centers nationally. The
Company's typical service center ranges in size from 1,000 to 20,000 square feet
and is leased for a term ranging from three to ten years. The Company's
executive offices comprise 25,000 square feet and has one year remaining on its
lease. Management believes that there is adequate office space available should
the Company need to move or expand and that minimal leasehold improvements are
required in order to open a new location.
Item 3. LEGAL PROCEEDINGS
Although the Company from time to time in the course of the operation
of its business is subject to various legal proceedings, the Company is not
currently a party to any material pending legal proceeding nor, to the knowledge
of management, is any material legal proceeding currently threatened.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
5
PART II
Item 5. MARKET PRICE FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the
symbol "MEDQ". The following table sets forth the high and low reported prices
for our Common Stock for the last two fiscal years and for the first quarter of
2003. The bid quotations for the Nasdaq National Market reflect inter-dealer
prices, do not include retail mark-ups, mark-downs or commissions and may not
necessarily reflect actual transactions.
High Low
2001
First Quarter $ 22.13 $ 15.88
Second Quarter 29.99 20.00
Third Quarter 33.14 23.95
Fourth Quarter 30.62 21.30
2002
First Quarter $30.45 $27.47
Second Quarter 29.50 26.02
Third Quarter 28.34 22.79
Fourth Quarter 23.40 16.96
2003
First Quarter (through March 17, 2003) $20.66 $14.92
On March 17, 2003, the closing sale price for the Common Stock, as
reported on the Nasdaq National Market, was $16.21 per share.
We have never declared or paid any cash dividends on our Common Stock.
We expect to retain any future earnings to fund operations and the continued
development of our business and, therefore, do not anticipate paying any cash
dividends in the foreseeable future.
The following is a summary of all of our equity compensation plans,
including plans that were assumed through acquisitions and individual
arrangements that provide for the issuance of equity securities as compensation,
as of December 31, 2002. See Note 12 to the consolidated financial statements
for additional discussion.
(A) (B) (C)
Number of Securities Number of Securities to be Remaining
Issued Upon Exercise of Weighted-Average Exercise Available for Future Issuance Under
Outstanding Options, Price of Outstanding Options, Equity Compensation Plans (excluding
Warrants and Rights Warrants and Rights securities reflected in column (A)
----------------------- ----------------------------- ------------------------------------
Equity compensation plans
Approved by security holders 5,619,155 $30.88 1,733,554
Equity compensation plans
Not approved by security holders -- -- --
--------- ------ ---------
Total 5,619,155 $30.88 1,733,554
========= ====== =========
6
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following financial information is derived from our audited
financial statements which have been restated to reflect a change from the cost
method of accounting for our investment in A-Life Medical to the equity
accounting method. This information is only a summary and you should read it in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations", our audited consolidated financial statements and
related notes and other information that we have filed with the SEC.
Year Ended December 31,
--------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(In thousands, except per share data)
Consolidated Statement of Operations Data:
Revenues $486,166 $405,308 $364,149 $330,008 $271,655
-------- -------- -------- -------- --------
Costs and expenses:
Cost of revenues, excluding depreciation 365,096 299,102 265,817 238,180 209,587
Selling, general and administrative 22,253 13,117 11,078 11,763 16,061
Research and development 2,736 -- -- -- --
Depreciation 18,829 17,001 14,720 12,000 12,697
Amortization of intangible assets 6,827 9,398 7,335 5,333 3,757
Restructuring charges (credits) (576) 868 (1,013) (2,333) 6,539
Other (income) expense -- (3,000) 6,255 (315) 11,682
-------- -------- -------- -------- --------
Total costs and expenses 415,165 336,486 304,192 264,628 260,323
-------- -------- -------- -------- --------
Operating income 71,001 68,822 59,957 65,380 11,332
Gain on sale of securities -- -- 3,672 309 --
Equity in losses of investee (895) (994) (929) -- --
Interest income, net 1,202 3,754 3,874 1,955 325
-------- -------- -------- -------- --------
Income before income taxes 71,308 71,582 66,574 67,644 11,657
Income taxes 27,453 27,940 28,773 27,439 8,472
-------- -------- -------- -------- --------
Net income $ 43,855 $ 43,642 $ 37,801 $ 40,205 $ 3,185
======== ======== ======== ======== ========
Basic net income per common share $ 1.18 $ 1.18 $ 1.05 $ 1.14 $ 0.10
======== ======== ======== ======== ========
Diluted net income per common share $ 1.16 $ 1.16 $ 1.02 $ 1.09 $ 0.09
======== ======== ======== ======== ========
Balance Sheet Data:
As of December 31,
--------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(In thousands)
Working capital $141,902 $135,703 $155,969 $ 99,354 $ 41,852
Total assets 474,871 402,114 348,907 302,183 187,311
Long-term debt net of current portion 54 1,088 22 452 215
Other, long-term liabilities 1,427 1,187 704 789 697
Shareholders' equity 410,961 362,887 317,806 256,536 151,186
7
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
We are the leading national provider of medical transcription services.
Over 88% of our revenue in 2002 was derived from the provision of medical
transcription services, which we recognize when we render services. These
services are based primarily on contracted rates. We also derive revenue from
services other than traditional transcription services, such as coding revenue,
interfacing fees, equipment rentals and equipment sales. Revenues from these
other sources are recognized when earned.
In July 2002 we acquired Lanier Healthcare, LLC, which derives revenue
largely from the sale and implementation of voice-capture and document
management solutions, and maintenance service of these products. In conjunction
with this acquisition, we began reporting a separate segment name Solutions,
which is comprised of the operations of Lanier Healthcare.
For purposes of our discussion and analysis of our results of
operations we distinguish our revenue growth as "core growth" and growth from
large acquisitions. Core growth includes revenue from all of the above sources
and revenue from companies acquired which had annual sales under $5 million,
prior to the date of acquisition. Revenues arising from acquired companies
having annual revenue in excess of $5 million, prior to the date of acquisition,
is discussed separately in our analysis of revenue growth.
In 2002 we acquired five companies with an aggregate purchase price of
$48.7 million, of which only the acquisition of Lanier Healthcare LLC on July 1,
2002 had a purchase price in excess of $5 million.
In 2001, we acquired seven companies with an aggregate purchase price
of $79.8 million of which five had a purchase price in excess of $5 million.
Cost of revenue consists of all direct costs associated with providing
sales and services, including payroll, telecommunications, repairs and
maintenance, rent and other direct costs. However, cost of revenue does not
include depreciation. Most of our cost of revenue is variable in nature, but
includes certain fixed components. Selling, general and administrative expenses
include costs associated with our senior executive management, marketing,
accounting, legal and other administrative functions. Selling, general and
administrative expenses are mostly fixed in nature, but include certain variable
components. Research and development consists of expenses related to the
development of new products and services and are mostly fixed in nature.
Critical Accounting Policies and Estimates
Management Discussion and Analysis of Financial Condition and Results
of Operations are based on our Consolidated Financial Statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and assumptions which affect the reported amounts
of assets, liabilities, revenue, expense, and related disclosures. Management
bases its estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities.
Management believes the following critical accounting policies affect
its more significant estimates and assumptions used in the preparation of its
consolidated financial statements. These critical accounting policies and
estimate have been discussed with the Company's audit committee.
Revenue Recognition
A substantial portion of our revenue is derived from providing medical
transcription services, which we recognize when services are rendered. These
services are based primarily on contracted rates. A portion of our revenue is
derived from the sale and implementation of voice-capture and document
management solutions, and maintenance service of these products. We recognize
revenue and profit on sales and implementation utilizing the percentage of
completion method. With regard to service contracts, which is arranged separate
from the product sale, the typical arrangement spans 12 months. We recognize
revenue on the service contracts on a straight line method over the term of the
underlying service contract. Deferred revenues represent cash received from
customers in advance of revenues being recognized for the related payment.
8
Bad Debt
We estimate allowances for doubtful accounts receivables based on
historical experience and evaluation of the financial condition of the
customers. Historically, our estimates have been adequate to cover accounts
receivable exposure. If circumstances related to our estimates change, we may
need to record additional allowances.
Valuation of Goodwill, Other Intangible Assets and Other Long-Lived Assets
In accordance with SFAS No. 144, "Accounting for Impairment of Disposal
of Long-Lived Assets", we assess long-lived assets, such as property, plant, and
equipment, and purchased intangibles subject to amortization, for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable.
We measure recoverability of assets to be held and used by comparing
the carrying amount of an asset to estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is recognized by
the amount by which the carrying amount of the asset exceeds the fair value of
the asset. Assets to be disposed of would be separately presented in the balance
sheet and reported at the lower of the carrying amount or fair value less costs
to sell, and are no longer depreciated. The assets and liabilities of a disposed
group classified as held for sale would be presented separately in the
appropriate asset and liability sections of the balance sheet.
We test goodwill and intangible assets not subject to amortization
annually for impairment. Should events and circumstances indicate that the asset
might be impaired at some time prior to the annual test, we will test more
frequently. An impairment loss is recognized to the extent that the carrying
amount exceeds the asset's fair value.
Deferred Taxes
We record a valuation allowance to reduce our deferred tax assets to
the amount that is more likely than not to be realized. We have considered
future taxable income and prudent and feasible tax planning strategies in
determining the need for a valuation allowance. In the event we were to
determine that we could not realize all or part of our net deferred tax assets
in the future, an adjustment to the deferred tax assets would be charged to
earnings in the period such determination is made. Likewise, if we later
determine that it is more likely than not that the net deferred tax assets would
be realized, the previously provided valuation reserve would be reversed.
9
Results of Operations
The following table sets forth, for the periods indicated, certain
financial data as a percentage of revenue.
Year Ended December 31,
--------------------------------
2002 2001 2000
------ ------ ------
Revenue 100.0% 100.0% 100.0%
----- ----- -----
Costs and expenses:
Cost of revenue, excluding depreciation 75.1 73.8 73.0
Selling, general and administrative 4.6 3.2 3.0
Research and development 0.5 -- --
Depreciation 3.9 4.2 4.0
Amortization of intangible assets 1.4 2.3 2.0
Restructuring charges (credits) (0.1) 0.2 (0.2)
Other income (expense) -- (0.7) 1.7
----- ----- -----
Total costs and expenses 85.4 83.0 83.5
----- ----- -----
Operating income 14.6 17.0 16.5
Gain on sale of securities -- -- 1.0
Equity in loss of investee (0.2) (0.2) (0.2)
Interest income, net 0.3 0.9 1.0
----- ----- -----
Income before income taxes 14.7 17.7 18.3
Income taxes 5.7 6.9 7.9
----- ----- -----
Net income 9.0% 10.8% 10.4%
===== ===== =====
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Revenues. Revenues increased 19.9% from $405.3 million in 2001 to
$486.2 million in 2002. Revenue for the service segment increased 10.7% from
$405.3 million in 2001 to $448.9 million in 2002. The increase was the result of
acquisitions made in late 2001 and 2002. Revenue for the solutions segment were
$37.9 million in 2002 and were the result of the acquisition of Lanier
Healthcare LLC on July 1, 2002. There were $605 thousand in revenues between the
two segments, which have been eliminated in consolidation.
Cost of Revenues, excluding depreciation. Cost of revenue increased
22.1% from $299.1 million in 2001 to $365.1 million in 2002. As a percentage of
revenue, cost of revenue increased from 73.8% in 2001 to 75.1% in 2002. Cost of
revenue from the services segment increased from $299.1 million or 73.8% of
revenue in 2001 to $340.7 million or 75.9% of revenue in 2002. The increase
primarily resulted from increased payroll and transcription costs in addition to
costs associated with development of our new transcription platform, partially
offset by a decrease in telecommunications costs. Cost of revenue for the
solutions segment was $24.6 million or 65.0% of revenue in 2002 consisting
primarily of costs of equipment sold and payroll related costs.
Selling, general and administrative. Selling, general and
administrative expense increased 69.7% from $13.1 million in 2001 to $22.3
million in 2002. As a percentage of revenue, selling, general and administrative
expense increased from $3.2% in 2001 to 4.6% in 2002. Of the increase in expense
between the comparable periods $7.8 million of the increase results from the
Lanier acquisition and largely relates to the cost of the sales force. The
remaining $1.4 million increase is the result of increased costs to support
operations.
10
Research and development. Research and development costs were $2.7
million in 2002. These costs relate entirely to Lanier, which was acquired on
July 1, 2002.
Depreciation. Depreciation expense increased 10.7% from $17.0 million
in 2001 to $18.8 million in 2002. As a percentage of revenue, depreciation
decreased from 4.2% in 2001 to 3.9% in 2002. The increase in expense was due to
capital purchases to support the revenue base. As a percentage of revenue,
depreciation decreased as a result of our ability to reduce certain voice
capture component costs through our acquisition of Digital Voice, Inc. early in
2001.
Amortization of intangible assets. Amortization of intangible assets
decreased from $9.4 million in 2001 to $6.8 million in 2002. The decrease is
attributable to the elimination of goodwill amortization in accordance with SFAS
142, "Goodwill and Other Intangibles", reflecting a $3.4 million reduction of
amortization partially offset by $800,000 of amortization of other intangibles
associated with the Company's acquisitions in 2001 and 2002, which were
accounted for using the purchase method.
Restructuring (Credits). In December 2001, we approved a restructuring
plan associated with the roll out of our new transcription platform. The plan
included the closure of several operating facilities in order to improve
operating efficiencies. Costs associated with the plan of approximately $1.5
million were recognized in 2001. The components of the restructuring charge and
associated activity is as follows (000's omitted):
Non-Cancelable
Leases Severance Total
-------------- --------- -----
2001 Restructuring charge $1,343 $125 $1,468
Payments against restructuring accrual in 2002 (546) (44) (591)
Revision to estimate recorded in 2002 (319) -- (318)
------ ---- ------
Accrual at December 31, 2002 $ 478 $ 81 $ 559
====== ==== ======
Payments against the restructuring accrual are scheduled to be made
through 2006.
In November 2001, we completed the purchase of a medical transcription
company. In connection with this acquisition, we established a restructure
reserve of $1.8 million. The components of the restructuring charge and
associated activity is as follows (000's omitted):
Non-Cancelable
Leases Severance Total
-------------- --------- -----
2001 Restructuring charge $1,599 $191 $1,790
Payments against restructuring accrual:
2001 (85) -- (85)
2002 (692) (181) (873)
Revision to estimate recorded in 2002 (296) -- (296)
------ ---- ------
Accrual at December 31, 2002 $ 526 $ 10 $ 536
====== ==== ======
Payments against the restructuring accrual are scheduled to be made
through 2005.
11
In December 1998, the Company's board of directors approved
management's restructuring plan associated with another entity. The components
of the restructuring charge and associated activity is as follows (000's
omitted):
Non-Cancelable
Non-Cancelable Contracts and
Leases Severance Other Exit Costs Total
-------------- --------- ---------------- -----
1998 Restructuring Charge $3,835 $1,618 $1,086 $6,539
Payments against Restructuring accrual:
1998 -- (567) (410) (977)
1999 (437) (723) (17) (1,177)
2000 (556) (20) -- (576)
2001 (164) -- -- (164)
2002 (343) -- -- (343)
Revision to estimate recorded in 1999 (1,492) (182) (659) (2,333)
Revision to estimate recorded in 2000 (471) -- -- (471)
Revision to estimate recorded in 2001 (44) (126) -- (170)
Revision to estimate recorded in 2002 (257) -- -- (257)
------ ------ ------ ------
Accrual at December 31, 2002 $ 71 $ -- $ -- $ 71
====== ====== ====== ======
In 1997, an acquired entity had approved a separate management plan to
close and/or merge several redundant customer service centers in order to reduce
costs and improve operating efficiencies. The plan was completed during 1998 and
included the cost of exiting certain facilities, primarily related to
non-cancelable leases, the disposition of fixed assets and employee severance
costs. During 2001, we revised our accrual estimates and $430,000 of the
restructure accruals were reversed in connection with the revision. At December
31, 2001, the accrual had been fully utilized.
Equity in losses of investee. As a result of our increased ownership in
A-Life to 28.1% in January 2002, we were required to reflect this investment
under the equity method of accounting. As a result, for 2002 we recognized a
loss on investment of $895,000. This loss was the result of $333,000 of
amortization related to $1 million of the investment being allocated to acquire
software and $562,000 related to our share of A-Life's operating loss. Our
equity in the losses for 2001 was $994,000. We increased our ownership in A-Life
to 31.6% and 33.6% on June 28, 2002 and November 1, 2002, respectively.
Interest income. We had net interest income of $3.7 million in 2001 and
$1.2 million in 2002. The decrease is due to decreased rates of return on cash
and cash equivalents.
Income taxes. The income tax provision decreased from $27.9 million or
39.0% of pre-tax income in 2001 to $27.5 million or 38.5% of pre-tax income in
2002. The decrease in tax resulted from decreased pre-tax earnings in 2002.
12
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Revenues. Revenues increased 11.3% from $364.1 million in 2000 to
$405.3 million in 2001. The $41.2 million increase resulted from increased sales
to existing customers, sales to new customers and strategic partners and
additional revenue from acquisitions. The $41.2 million increase resulted from
$13.6 million of core growth and $27.6 million from large acquisitions.
Costs of Revenues, excluding depreciation. Cost of revenues increased
12.5% from $265.8 million in 2000 to $299.1 million in 2001. As a percentage of
revenues, cost of revenue increased from 73.0% in 2000 to 73.8% in 2001 due
primarily to an increase in payroll expense in 2001.
Selling, General and Administrative. Selling, general and
administrative expenses increased 18.4% from $11.1 million in 2000 to $13.1
million in 2001. As a percentage of revenue, selling, general and administrative
costs increased from 3.0% in 2000 to 3.2% in 2001. The increase primarily
resulted from increased spending to support our existing and new business.
Depreciation. Depreciation increased 15.5% from $14.7 million in 2000
to $17.0 million in 2001. As a percentage of revenue, depreciation increased
from 4.0% in 2000 to 4.2% in 2001. The increase resulted from increased capital
expenditures and fixed assets acquired in purchase business acquisitions in 2000
and 2001.
Amortization of Intangible Assets. Amortization of intangible assets
was $7.3 million in 2000 compared to $9.4 million in 2001. The increase is
attributable to the amortization of intangible assets associated with the
Company's acquisitions, which were accounted for using the purchase method in
2000 and 2001.
Other (Income) Expense. During 2001, we settled a lawsuit, in our
favor, for a non-recurring gain of $3.0 million, net of legal expenses.
Equity in losses of investee. As a result of our increased ownership in
A-Life to 28.1% in January 2002, we were required to reflect this investment
under the equity method of accounting, for prior periods, using our 19.2%
ownership percentage prior to January 2002. As a result we recognized a loss on
investment of $929,000 and $994,000 for 2000 and 2001, respectively.
Income Taxes. The income tax provision decreased from $28.8 million or
43.2% of pre-tax income in 2000 to $27.9 million or 39.0% of pre-tax income in
2001. The decrease primarily resulted from the majority of the tender offer
costs incurred in 2000 not being deductible for tax purposes, and state tax
planning.
Liquidity and Capital Resources
At December 31, 2002, we had working capital of $141.9 million,
including $103.4 million of cash and cash equivalents. During the year ended
December 31, 2002, our operating activities provided cash of $82.7 million and
during the year ended December 31, 2001 our operating activities provided cash
of $82.2 million. The increase resulted from increased collections from accounts
receivable and an increase in accounts payable, partially offset by a decrease
in other current assets.
During the year ended December 31, 2002, we used cash in investing
activities of $66.0 million, consisting of $16.4 million of capital
expenditures, $932 thousand of investments in A-Life Medical, Inc. and $48.7
million for acquisitions accounted for under the purchase method. During the
year ended December 31, 2001, we used cash in investing activities of $93.5
million, consisting of $14.1 million of capital expenditures, $1.7 million of
investments in A-Life Medical, Inc. securities and $77.7 million for
acquisitions accounted for under the purchase method.
During the year ended December 31, 2002, net cash provided by financing
activities was $245 thousand, consisting of $2.4 million in proceeds from the
issuance of common stock including option exercises and issuances in connection
with employee benefit plans, partially offset by $2.1 million for repayment of
long-term debt. During the year ended December 31, 2001, net cash provided by
financing activities was $231,000 consisting of $1.2 million in proceeds from
the issuance of common stock including option exercises and issuances in
connection with employee benefit plans, partially offset by $938,000 for
repayment of long-term debt.
13
In April 2000, we made a $6.0 million investment in A-Life Medical,
Inc., a leader in advanced natural language processing technology for the
medical industry. In 2001, we advanced A-Life Medical, Inc. $1.0 million as a
prepayment on a license agreement and we advanced $674,000 to A-Life Medical,
Inc. in connection with an additional investment which closed in January 2002.
In 2002, we invested an additional $892,000 in A-Life Medical, Inc. and
purchased shares from six investors for $40,000. Our investment in A-Life
Medical, Inc. is inherently risky due to the nature of its early stage
development technology and related uncertain near term opportunities. We will
continue to monitor this investment on a periodic basis. In the event the
carrying value of the investment exceeds the fair value of the investment and
the decline is determined to be other-than-temporary, an impairment charge will
be recorded. Fair value for A-Life Medical, Inc. is based on estimates and
assumptions used in forecasted financial models. In order to determine whether a
decline in value is other-than-temporary, we evaluate, among other factors: the
duration and extent to which the fair value has been less than carrying value;
the financial condition of the company, including key operational and cash flow
metrics; current market conditions, future projections and the business outlook
for the company; and our intent and ability to retain the investment for a
period of time sufficient to allow for any anticipated recovery in fair value.
We have previously accounted for the investment in A-Life under the
cost method. As a result of our increased ownership percentage from the January
2002 financing transaction, we began to account for the investment under the
equity method. The 2001 and 2000 consolidated financial statements have been
restated to reflect the change in accounting method.
We believe that our cash and cash equivalent on hand, cash flow
generated from operations and our ability to leverage the company will be
sufficient to meet our current working capital and capital expenditure
requirements.
Impact of New Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 requires the Company to record the fair
value of an asset retirement obligation as a liability in the period in which it
incurs a legal obligations associated with the retirement of tangible long-lived
assets that result from the acquisition, construction, development, and/or
normal use of the assets. The Company also records a corresponding asset that is
depreciated over the life of the asset. Subsequent to the initial measurement of
the asset retirement obligation, the obligation will be adjusted at the end of
each period to reflect the passage of time and changes in the estimated future
cash flows underlying the obligation. The Company is required to adopt SFAS No.
143 on January 1, 2003. The adoption of SFAS No. 143 is not expected to have a
material effect on the Company's consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". SFAS No. 145 amends existing guidance on reporting gains and
losses on the extinguishment of debt to prohibit the classification of the gain
or loss as extraordinary, as the use of such extinguishments have become part of
the risk management strategy of many companies. SFAS No. 145 also amends SFAS
No. 13 to require sale-leaseback accounting for certain lease modifications that
have economic effects similar to sale-leaseback transactions. The provisions of
the Statement related to the rescission of Statement No. 4 is applied in fiscal
years beginning after May 15, 2002. Earlier application of these provisions is
encouraged. The provisions of the Statement related to Statement No. 13 were
effective for transactions occurring after May 15, 2002, with early application
encouraged. The adoption of SFAS No. 145 is not expected to have a material
effect on the Company's consolidated financial statements.
14
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity". The provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. The adoption of SFAS No. 146 is not expected to have a material
effect on the Company's consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34". This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after December
31, 2002 and are not expected to have a material effect on the Company's
consolidated financial statements. The disclosure requirements are effective for
financial statements of interim and annual periods ending after December 31,
2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123". This Statement amends FASB Statement No. 123, "Accounting
for Stock-Based Compensation", to provide alternative methods of transition for
a voluntary change to the fair value method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of Statement No. 123 to require prominent disclosures in both
annual and interim financial statements. Certain of the disclosure modifications
are required for fiscal years ending after December 15, 2002 and are included in
the notes to these consolidated financial statements.
In November 2002, the EITF finalized its tentative consensus on EITF
Issue 00-21, "Revenue Arrangements with Multiple Deliverables", which provides
guidance on the timing and method of revenue recognition for sales arrangements
that include the delivery of more than one product or service. EITF 00-21 is
effective prospectively for arrangements entered into in fiscal periods
beginning after June 15, 2003. The Company is currently evaluating the impact of
the adoption of this consensus on the Company's consolidated financial
statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities, an interpretation of ARB No. 51". This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. For nonpublic enterprises, with a variable
interest in a variable interest entity created before February 2, 2003, the
Interpretation is applied to the enterprise no later than the end of the first
annual reporting period beginning after June 15, 2003. The Company is currently
evaluating the impact of the adoption of this interpretation on the Company's
consolidated financial statements. The Interpretation requires certain
disclosures in financial statements issued after January 31, 2003 if it is
reasonably possible that the Company will consolidate or disclose information
about variable interest entities when the Interpretation becomes effective.
Quantitative And Qualitative Disclosure About Market Risk
We generally do not use derivative financial instruments in our
investment portfolio. We make investments in instruments that meet credit
quality standards, as specified in our investment policy guidelines; the policy
also limits the amount of credit exposure to any one issue, and type of
instrument. We do not expect any material loss with respect to our investment
portfolio.
15
Inflation
We believe that the effects of inflation and changing prices generally
do not have a material adverse effect on our results of operations or financial
condition.
Forward-Looking Statements
Some of the information in this Form 10-K contains forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Securities Exchange Act. We also may have referred you to this note
in other written or oral disclosures we have made, such as our quarterly
earnings conference calls. These statements include forward-looking language
such as "will likely result," "may," "are expected to," "is anticipated,"
"estimated," "projected," "intends to" or other similar words. Our actual
results are likely to differ, and could differ materially, from the results
expressed in, or implied by, these forward-looking statements. There are many
factors that could cause these forward-looking statements to be incorrect,
including but not limited to the following risks: risks associated with (1) our
ability to recruit and retain qualified transcriptionists and other employees;
(2) inability to complete and assimilate acquisitions of businesses, especially
acquisitions of non-medical transcription businesses, because we have no prior
experience in such businesses; (3) dependence on our senior management team and
new senior management from non-medical transcription acquisitions; (4) the
impact of new services or products on the demand for our existing services; (5)
our current dependence on medical transcription for substantially all of our
business; (6) our ability to expand our customer base; (7) our ability to
maintain our current growth rate in revenue and earnings; (8) the volatility of
our stock price; (9) our ability to compete with others; (10) changes in law,
including, without limitation, the impact the Health Information Portability and
Accountability Act ("HIPAA") will have on our business; (11) infringement on the
proprietary rights of others; (12) our failure to comply with confidentiality
requirements; and (13) risks inherent in diversifying into other businesses,
such as from the acquisition of DVI (digital dictation equipment) and entering
into the medical record coding reimbursement business. When considering these
forward-looking statements, you should keep in mind these risk factors and the
other cautionary statements we may make in connnection with any such statements,
and you should recognize that those forward-looking statements speak only as of
the date made. MedQuist does not undertake any obligation to update any
forward-looking statement included in this Form 10-K or elsewhere.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements. The information called for
by this Item is set forth on Pages F-1 through F-35.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL
DISCLOSURE
A change in independent auditors from Arthur Andersen LLP to KPMG LLP
was reported in a Current Report on Form 8-K dated July 16, 2002.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to
the Company's Proxy Statement to be filed with the Commission in connection with
the 2003 Annual Meeting.
Item 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the Company's Proxy Statement to be filed with the Commission in connection with
the 2003 Annual Meeting.
16
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
the Company's Proxy Statement to be filed with the Commission in connection with
the 2003 Annual Meeting.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the Company's Proxy Statement to be filed with the Commission in connection with
the 2003 Annual Meeting.
Item 14. CONTROLS AND PROCEDURES
Quarterly evaluation of the Company's Disclosure Controls. Within the
90 days prior to the filing date of this Annual Report on Form 10-K, the Company
evaluated the effectiveness of the design and operation of its "disclosure
controls and procedures" ("Disclosure Controls"). Disclosure Controls are
procedures that are designed with the objective of ensuring that information
required to be disclosed in our reports filed under the Securities Exchange Act
of 1934 (the "Exchange Act"), such as this Annual Report, is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's (SEC) rules and forms. Disclosure Controls
are also designed with the objective of ensuring that such information is
accumulated and communicated to our management, including the CEO and CFO, as
appropriate to allow timely decisions regarding required disclosure.
The Company's management, including the CEO and CFO, does not expect
that our Disclosure Controls will prevent all error and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or mistake. The
design of any system of controls also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions.
Based upon our controls evaluation, our CEO and CFO have concluded
that, subject to the limitations noted above, our Disclosure Controls are
effective to ensure that the information required to be disclosed by the Company
in its periodic reports is accumulated and communicated to our management,
including the CEO and CFO, as appropriate to allow timely decisions regarding
disclosure and is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms.
Changes in internal controls. There have been no significant changes in
the Company's internal controls or in other factors that could significantly
affect these controls subsequent to the date of the Disclosure Controls
evaluation.
17
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Exhibit No Description
- ---------- -----------
3.1 Amended and Restated Certificate of Incorporation of the Company
[incorporated by reference to Exhibit 1 of the Company's Current
Report on Form 8-K filed August 15, 1997].
3.2 By-Laws of the Company [incorporated by reference to Exhibit 3.2
of the Company's 1993 Annual Report on Form 10-K (the "1993
10-K")].
3.3 Certificate of Designation of Terms of Preferred Stock
[incorporated by reference to Exhibit 3.3 of the Company's 1992
Annual Report on Form 10-K (the "1992 10-K)].
4.1 Specimen Stock Certificate [incorporated by reference to Exhibit
4.1 of the Company's Registration Statement (No. 333-3050) on
Form S-1 (the "1996 Registration Statement")].
*10.1 Agreement between the Company and Richard J. Censits, dated
January 29, 1996 [incorporated by reference to Exhibit 10.1 of
the 1996 Registration Statement].
*10.2 Incentive Stock Option Plan of the Company, dated January 1988
[incorporated by reference to Exhibit 10.2 of the Company's
Registration Statement (No. 33-95968) on Form S-1 (the "1992
Registration Statement")].
*10.3 Stock Option Plan of the Company, dated January 1992, as amended
[incorporated by reference to Exhibit 10.3 of the 1996
Registration Statement].
*10.4 Nonstatutory Stock Option Plan for Non-Employee Directors of the
Company, dated January 1992 [incorporated by reference to Exhibit
10.4 of the 1992 Registration Statement].
10.5 Governance Agreement, dated as of May 22, 2000. Filed as an
exhibit to the Solicitation/Recommendation Statement on Schedule
14D-9, dated June 1, 2000, as amended, of Registrant and
incorporated herein by reference.
10.6 Licensing Agreement, dated as of May 22, 2000. Filed as an
exhibit to the Solicitation/Recommendation Statement on Schedule
14D-9, dated June 1, 2000, as amended, of Registrant and
incorporated herein by reference.
10.6.1 Amendment No. 1 to Licensing Agreement, dated as of January 1,
2002 [incorporated by reference to Exhibit 10.6.1 of the
Company's 2001 Annual Report on Form 10-K (the "2001 10-K"].
10.6.2 Amendment No. 2 to Licensing Agreement, dated as of February 23,
2003 [filed herewith].
*10.7 Shareholder Agreement, dated as of May 22, 2000, between MedQuist
and David A. Cohen. Filed as an exhibit to the
Solicitation/Recommendation Statement on Schedule 14D-9, dated
June 1, 2000, as amended, of Registrant and incorporated herein
by reference.
*10.8 Shareholder Agreement, dated as of May 22, 2000, between MedQuist
and John A. Donohoe, Jr. Filed as an exhibit to the
Solicitation/Recommendation Statement on Schedule 14D-9, dated
June 1, 2000, as amended, of Registrant and incorporated herein
by reference.
*10.9 Shareholder Agreement, dated as of May 22, 2000, between MedQuist
and John M. Suender. Filed as an exhibit to the
Solicitation/Recommendation Statement on Schedule 14D-9, dated
June 1, 2000, as amended, of Registrant and incorporated herein
by reference.
*10.10 Shareholder Agreement, dated as of May 22, 2000, between MedQuist
and Ronald A. Scarpone. Filed as an exhibit to the
Solicitation/Recommendation Statement on Schedule 14D-9, dated
June 1, 2000, as amended, of Registrant and incorporated herein
by reference.
18
*10.11 Shareholder Agreement, dated as of May 22, 2000, between MedQuist
and Ethan Cohen. Filed as an exhibit to the
Solicitation/Recommendation Statement on Schedule 14D-9, dated
June 1, 2000, as amended, of Registrant and incorporated herein
by reference.
*10.12 Shareholder Agreement, dated as of May 22, 2000, between MedQuist
and John W. Quaintance. Filed as an exhibit to the
Solicitation/Recommendation Statement on Schedule 14D-9, dated
June 1, 2000, as amended, of Registrant and incorporated herein
by reference.
*10.13 Employment Agreement, dated as of May 22, 2000, between MedQuist
and David A. Cohen. Filed as an exhibit to the
Solicitation/Recommendation Statement on Schedule 14D-9, dated
June 1, 2000, as amended, of Registrant and incorporated herein
by reference.
*10.14 Employment Agreement, dated as of March 15, 2002, between
MedQuist and John A. Donohoe, Jr. [incorporated by reference to
Exhibit 10.14 of the 2001 10-K].
*10.15 Employment Agreement, dated as of May 22, 2000, between MedQuist
and John M. Suender. Filed as an exhibit to the
Solicitation/Recommendation Statement on Schedule 14D-9, dated
June 1, 2000, as amended, of Registrant and incorporated herein
by reference.
*10.16 Employment Agreement, dated as of May 22, 2000, between MedQuist
and Ronald A. Scarpone. Filed as an exhibit to the
Solicitation/Recommendation Statement on Schedule 14D-9, dated
June 1, 2000, as amended, of Registrant and incorporated herein
by reference.
*10.17 Employment Agreement, dated as of May 22, 2000, between MedQuist
and Ethan Cohen. Filed as an exhibit to the
Solicitation/Recommendation Statement on Schedule 14D-9, dated
June 1, 2000, as amended, of Registrant and incorporated herein
by reference.
*10.18 Employment Agreement, dated as of October 16, 2000 between the
Company and Brian J. Kearns [incorporated by reference to Exhibit
10.18 of the 2001 10-K].
10.23 Registration Rights Agreement among the Company, David A. Cohen
and Edward Forstein, dated September 30, 1996, [incorporated by
reference to Exhibit 10.30.4 of the 9/30/95 10-Q].
10.28 Form of Employee Stock Purchase Plan [incorporated by reference
to Exhibit 10.33 of the 1996 Registration Statement].
*10.29.1 Employment Agreement, dated December 22, 2000 between Lanier
Healthcare, LLC and Dennis Mahoney, as amended July 1, 2002
[incorporated by reference to Exhibit 10.29.1 of Company's Form
10Q for the quarterly period ended September 30, 2002 (the "Q3
2002 10-Q")].
*10.29.2 Confidentiality and Non-Solicitation Agreement, dated as of July
1, 2002, between MedQuist Transcriptions, Ltd. and Dennis Mahoney
[incorporated by reference to Exhibit 10.29.2 of the Q3 2002
10-Q].
*10.30 Employment Agreement, dated as of August 19, 1998 between Signal
Transcription Network, Inc. and Robin R. Stults [incorporated by
reference to Exhibit 10.30 of the Q3 2002 10Q].
10.31 2002 Stock Option Plan of the Company [incorporated by reference
to Exhibit 4.1 of the Company's Form 10Q for the quarterly period
ended June 30, 2002].
22.1 Subsidiaries [filed herewith].
23.1 Consent of KPMG LLP filed herewith.
23.2 Information Regarding Consent of Arthur Andersen LLP
99.1 Certification of CEO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of CFO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Financial Statements and Financial Statement Schedule
1 The consolidated financial statements of the Company and its
subsidiaries filed as part of this Report are listed on the
attached Index to Consolidated Financial Statements. See page
F-1.
19
2 Information required in various Schedules is included in the
notes to the Consolidated Financial Statements.
(c) Reports on Form 8-K
* Management contract or compensatory plan or arrangement.
During the fourth quarter of 2002, the Company filed the following Reports on
Form 8-K;
October 23, 2002 relating to the Company's earnings release for the
quarter ended September 30, 2002.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) Securities Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereto duly authorized, in the City of Marlton, State of New
Jersey, on March 18, 2003.
MedQuist Inc.
By: /s/ David A. Cohen
---------------------------------------
David A. Cohen, Chief Executive Officer and
Chairman of the Board
20
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons as of March
18, 2003.
Each person below, in so signing, also makes, constitutes and appoints
David A. Cohen his true and lawful attorney-in-fact, with full power and
substitution and resubstitution, in his name, place and stead to execute and
cause to be filed with the Securities and Exchange Commission any or all
amendments to this Report.
Signatures Title
/s/ David A. Cohen Chairman and Chief Executive Officer (principal executive officer)
- ---------------------------
David A. Cohen
/s/ Brian J. Kearns Senior Vice President, Treasurer and Chief Financial Officer (principal
- --------------------------- financial officer and principal accounting officer)
Brian J. Kearns
Director
- ---------------------------
Hans M. Barella
/s/ Belinda W. Chew Director
- ---------------------------
Belinda W. Chew
/s/ William E. Curran Director
- ---------------------------
William E. Curran
/s/ Stephen H. Rusckowski Director
- ---------------------------
Stephen H. Rusckowski
/s/ A. Fred Ruttenberg Director
- ---------------------------
A. Fred Ruttenberg
/s/ Richard H. Stowe Director
- ---------------------------
Richard H. Stowe
Director
- ---------------------------
John H. Underwood
Director
- ---------------------------
Scott M. Weisenhoff
/s/ Erik J. Westerink Director
- ---------------------------
Erik J. Westerink
21
I, David A. Cohen, Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of MedQuist Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluations as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 18, 2003
/s/ David A. Cohen
- -----------------------
David A. Cohen
Chief Executive Officer
22
I, Brian J. Kearns, Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K of MedQuist Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluations as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 18, 2003
/s/ Brian J. Kearns
- -----------------------
Brian J. Kearns
Chief Financial Officer
23
MedQuist Inc. and Subsidiaries
Consolidated Financial Statements
December 31, 2002 and 2001
(With Independent Auditors' Report Thereon)
MedQuist Inc. and Subsidiaries
Index to Consolidated Financial Statements
Page
Independent Auditors' Report F-2
Report of Independent Public Accountants F-3
Consolidated Balance Sheets, December 31, 2002 and 2001 F-4
Consolidated Statements of Operations, Years ended December 31, 2002, 2001, and 2000 F-5
Consolidated Statements of Shareholders' Equity, Years ended December 31, 2002, 2001,
and 2000 F-6
Consolidated Statements of Cash Flows, Years ended December 31, 2002, 2001, and 2000 F-7
Notes to Consolidated Financial Statements F-8
F-1
Independent Auditors' Report
The Board of Directors
MedQuist Inc.:
We have audited the 2002 consolidated financial statements of MedQuist Inc. and
subsidiaries as listed in the accompanying index. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit. The 2001 and 2000
consolidated financial statements of MedQuist Inc. and subsidiaries as listed in
the accompanying index were audited by other auditors who have ceased
operations. Those auditors expressed an unqualified opinion on those financial
statements, before the revision and restatement described in Notes 6 and 7,
respectively, to the financial statements, in their report dated January 30,
2002.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 2002 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MedQuist
Inc. and subsidiaries as of December 31, 2002, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
As discussed above, the 2001 and 2000 financial statements of MedQuist Inc. and
subsidiaries as listed in the accompanying index, were audited by other auditors
who have ceased operations. As described in Note 6, these financial statements
have been revised to include the transitional disclosures required by Statement
of Financial Accounting Standards No. 142, Goodwill and Other Intangibles, which
was adopted by the Company as of January 1, 2002. In addition, as described in
Note 7, these financial statements have been restated to include changes from
the cost method of accounting for an investment to the equity method in
connection with an increase in the level of ownership as required by Accounting
Principles Board Opinion No. 18, The Equity Method of Accounting for Investments
in Common Stock. We audited the adjustments that were applied to revise and
restate the 2001 and 2000 financial statements. In our opinion, the transitional
disclosures for 2001 and 2000 in Note 6 and the adjustments of the 2001 and 2000
financial statements for the change in method of accounting for the investment
(Note 7) are appropriate and have been appropriately applied. However, we were
not engaged to audit, review, or apply any procedures to the 2001 and 2000
financial statements of MedQuist Inc. and subsidiaries other than with respect
to such disclosures and adjustments, and, accordingly, we do not express an
opinion or any other form of assurance on the 2001 and 2000 financial statements
taken as a whole.
/s/ KPMG LLP
Philadelphia, PA
March 3, 2003
F-2
The following report is a copy of a previously issued Arthur Andersen LLP
("Andersen") report and the report has not been reissued by Andersen. The
Andersen report refers to the Balance Sheet as of December 31, 2000, which is no
longer included in the accompanying financial statements.
Report of Independent Public Accountants
To MedQuist Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of MedQuist Inc. (a
New Jersey corporation) and Subsidiaries as of December 31, 2001 and 2000, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of MedQuist Inc. and Subsidiaries
as of December 31, 2001 and 2000, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Philadelphia, Pennsylvania
January 30, 2002
F-3
MEDQUIST INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2002 and 2001
(In thousands)
Assets 2002 2001
-------- --------
Current assets:
Cash and cash equivalents $103,392 86,334
Accounts receivable, net 86,465 78,429
Prepaid expenses and other 3,673 1,374
Inventories 4,563 340
Deferred income taxes 6,238 6,178
-------- --------
Total current assets 204,331 172,655
Property and equipment, net 37,804 34,167
Goodwill, net 136,127 110,584
Other Intangible assets, net 73,798 57,219
Deferred income taxes 15,524 20,197
Other 7,287 7,292
-------- --------
$474,871 402,114
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt $ 31 1,067
Accounts payable 9,908 4,562
Accrued expenses 33,701 30,990
Deferred revenue 18,789 333
-------- --------
Total current liabilities 62,429 36,952
-------- --------
Long-term debt 54 1,088
-------- --------
Other long-term liabilities 1,427 1,187
-------- --------
Commitments and contingencies (note 11) Shareholders' equity:
Common stock, no par value. Authorized 60,000 shares;
issued and outstanding 37,091 and 36,889 shares, respectively 229,149 225,503
Retained earnings 181,216 137,361
Deferred compensation -- (31)
Accumulated other comprehensive income 596 54
-------- --------
Total shareholders' equity 410,961 362,887
-------- --------
$474,871 402,114
======== ========
See accompanying notes to consolidated financial statements
F-4
MEDQUIST INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2002, 2001, and 2000
(In thousands, except per-share amounts)
2002 2001 2000
--------- ------- -------
Revenues $ 486,166 405,308 364,149
--------- ------- -------
Costs and expenses:
Cost of revenues, excluding depreciation 365,096 299,102 265,817
Selling, general, and administrative 22,253 13,117 11,078
Research and development 2,736 -- --
Depreciation 18,829 17,001 14,720
Amortization of intangible assets 6,827 9,398 7,335
Restructuring charges (credits) (576) 868 (1,013)
Other (income) expense -- (3,000) 6,255
--------- ------- -------
Total costs and expenses 415,165 336,486 304,192
--------- ------- -------
Operating income 71,001 68,822 59,957
Gain on sale of securities -- -- 3,672
Share in net loss of A-Life Medical, Inc. (895) (994) (929)
Interest income, net 1,202 3,754 3,874
--------- ------- -------
Income before income taxes 71,308 71,582 66,574
Income taxes provision 27,453 27,940 28,773
--------- ------- -------
Net income $ 43,855 43,642 37,801
========= ======= =======
Basic net income per common share $ 1.18 1.18 1.05
========= ======= =======
Diluted net income per common share $ 1.16 1.16 1.02
========= ======= =======
See accompanying notes to consolidated financial statements
F-5
MEDQUIST INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended December 31, 2002, 2001, and 2000
(In thousands)
Accumulated
Common stock other
------------------- Retained Deferred comprehensive
Shares Amount earnings compensation income Total
------ --------- -------- ------------ ------------- -------
Balance, December 31, 1999 35,917 $ 200,205 55,918 (291) 704 256,536
-------
Comprehensive income:
Net income (see Note 7) -- -- 37,801 -- -- 37,801
Change in unrealized gain on available for sale
securities, net of tax -- -- -- -- (704) (704)
------ --------- ------- ---- ---- -------
Total comprehensive income -- -- 37,801 -- (704) 37,097
Exercise of common stock options, including
tax benefit 1,381 37,025 -- -- -- 37,025
Shares repurchased retired (600) (15,466) -- -- -- (15,466)
Amortization of deferred compensation -- -- -- 163 -- 163
Issuance of common stock 71 1,522 -- -- -- 1,522
------ --------- ------- ---- ---- -------
Balance, December 31, 2000 (see Note 7) 36,769 223,286 93,719 (128) -- 316,877
-------
Comprehensive income:
Net income (see Note 7) -- -- 43,642 -- -- 43,642
Cumulative translation adjustments -- -- -- -- 54 54
------ --------- ------- ---- ---- -------
Total comprehensive income -- -- 43,642 -- 54 43,696
Exercise of common stock options, including
tax benefit 51 909 -- -- -- 909
Amortization of deferred compensation -- -- -- 97 -- 97
Issuance of common stock 69 1,308 -- -- -- 1,308
------ --------- ------- ---- ---- -------
Balance, December 31, 2001 (see Note 7) 36,889 225,503 137,361 (31) 54 362,887
-------
Comprehensive income:
Net income -- -- 43,855 -- -- 43,855
Cumulative translation adjustments -- -- -- -- 542 542
------ --------- ------- ---- ---- -------
Total comprehensive income -- -- 43,855 -- 542 44,397
Exercise of common stock options, including
tax benefit 168 2,781 -- -- -- 2,781
Amortization of deferred compensation -- -- -- 31 -- 31
Issuance of common stock 34 865 -- -- -- 865
------ --------- ------- ---- ---- -------
Balance, December 31, 2002 37,091 $ 229,149 181,216 -- 596 410,961
====== ========= ======= ==== ==== =======
See accompanying notes to consolidated financial statements
F-6
MEDQUIST INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2002, 2001, and 2000
(In thousands)
2002 2001 2000
--------- ------ ------
Operating activities:
Net income $ 43,855 43,642 37,801
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 25,656 26,399 22,055
Gain on sale of securities -- -- (3,672)
Equity in Loss of A-Life Medical, Inc. 895 994 929
Amortization of deferred compensation 31 97 163
Deferred income tax provision 650 57 2,797
Pension contribution payable in common stock 277 941 867
Stock-based compensation to members of
board of directors -- -- 311
Tax benefit from exercise of employee stock options 882 239 17,720
Changes in assets and liabilities excluding
effects of acquisitions:
Accounts receivable, net 8,827 6,763 1,071
Prepaid expenses and other 386 5,782 (6,349)
Inventories (473) 5 --
Other assets 45 (571) 437
Accounts payable 1,071 (2,770) (1,141)
Deferred revenue 1,936 (152) (128)
Accrued expenses (1,621) 244 (12,240)
Other long-term liabilities 240 483 (85)
--------- ------ ------
Net cash provided by operating activities 82,657 82,153 60,536
--------- ------ ------
Investing activities:
Purchases of property and equipment (16,448) (14,058) (17,492)
Acquisitions, net of cash acquired (48,657) (77,737) (8,102)
Purchase of investments -- -- (728)
Investment in/advances to A-Life Medical, Inc. (932) (1,674) (6,051)
Proceeds from sale of investments -- -- 4,403
--------- ------ ------
Net cash used in investing activities (66,037) (93,469) (27,970)
--------- ------ ------
Financing activities:
Repayments of long-term debt (2,142) (938) (1,568)
Proceeds from exercise of common stock options 1,899 670 19,305
Proceeds from issuance of common stock 488 499 504
Purchase and retirement of common stock -- -- (15,466)
--------- ------ ------
Net cash provided by financing activities 245 231 2,775
--------- ------ ------
Effect of exchange rate changes 193 54 --
--------- ------ ------
Net increase (decrease) in cash, cash equivalents,
and cash equivalent with related party 17,058 (11,031) 35,341
Cash, cash equivalents, and cash equivalent with related party,
beginning of year 86,334 97,365 62,024
--------- ------ ------
Cash, cash equivalents, and cash equivalent with related party,
end of year $ 103,392 86,334 97,365
========= ====== ======
See accompanying notes to consolidated financial statements
F-7
MEDQUIST INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(In thousands, except per share amounts)
(1) Background and Summary of Significant Accounting Policies
(a) Background
MedQuist Inc. (the Company or MedQuist) is a comprehensive
provider of health information services and solutions. Over the
past two years, MedQuist began offering coding reimbursement
services, as well as on site solutions to the healthcare
industry's document management needs. The Company currently
manages its business in two segments (see note 1(s)).
The Company is a majority-owned subsidiary of Koninklijke Philips
Electronics N.V. (Philips) (see note 14).
(b) Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of MedQuist and its subsidiaries. All material
intercompany balances and transactions have been eliminated in
consolidation.
(c) Translation of Foreign Currency
In 2002 and 2001, the Company established foreign subsidiaries in
the United Kingdom and Canada, both of which use the local
currency as its functional currency. Assets and liabilities of
these subsidiaries are translated at exchange rates in effect at
the balance sheet date, and income and expense accounts and cash
flow items are translated at average exchange rates during the
period. The resulting translation adjustments are recorded as a
component of accumulated other comprehensive income within
shareholders' equity. Foreign exchange rate gains and losses
included in operating results are not material in 2002 and 2001.
(d) Use of Estimates and Assumptions
The preparation of financial statements in accordance with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect
the reported assets and liabilities and contingency disclosures at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
(e) Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid
investments purchased with an original maturity of three months or
less, and consist primarily of cash on deposit with banks. At
times, cash balances held at financial institutions are in excess
of federally insured limits. The Company places its temporary cash
investments with high-credit, quality financial institution.
Management believes that no significant concentration of credit
risk exists with respect to these cash investments.
F-8
MEDQUIST INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(In thousands, except per share amounts)
Interest income earned on investments in cash equivalents was
$1,245, $3,524, and $3,915 for the years ended December 31, 2002,
2001, and 2000, respectively.
(f) Cash Equivalent with Related Party
Cash equivalent with related party consisted of cash deposited
with Philips for the purpose of optimizing income from temporary
excess cash. In the fourth quarter of 2000, the Company began
participating in a deposit facility established by Philips which
allowed investments up to $100 million to earn interest at LIBOR
less 0.125%, for periods up to 365 days. The Company withdrew all
funds invested in this related-party deposit facility in the
second quarter of 2001 and, at December 31, 2002 and 2001 the
Company had no such investment.
Interest income earned on cash deposited with Philips was $0, $403
and $44 for the years ended December 31, 2002, 2001 and 2000,
respectively.
(g) Investments in Marketable Securities
Investments in marketable securities are accounted for in
accordance with Statement of Financial Accounting Standards (SFAS)
No. 115, Accounting for Certain Investments in Debt and Equity
Securities. As such, the securities were carried at fair value,
based on quoted market prices, with unrealized gains and losses
reported as a component of accumulated other comprehensive income
within shareholder's equity.
During 2000, the Company sold the marketable securities resulting
in a gain of $3,672. No investments in marketable securities were
held at in 2002 and 2001.
(h) Inventories
Inventories are valued at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method.
(i) Bad Debt Expense
The Company estimates allowances for doubtful accounts receivables
based on historical experience and evaluation of the financial
condition of the customers. Historically, the estimates have been
adequate to cover accounts receivable exposure. If circumstances
related to the estimates change, the Company may need to record
additional allowances.
(j) Property and Equipment
Property and equipment are recorded at cost. Depreciation and
amortization are provided using the straight-line method over the
estimated useful lives of the assets, which range from three to
seven years for furniture, equipment and software, and the lesser
of the lease term or useful life for leasehold improvements.
Repairs and maintenance costs are charged to expense as incurred,
while additions and betterments are capitalized. Gains or losses
on disposals are charged to operations.
F-9
MEDQUIST INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(In thousands, except per share amounts)
(k) Goodwill and Other Intangible Assets
Goodwill represents the excess of costs over fair value of assets
of businesses acquired. The Company adopted the provisions of SFAS
No. 142, Goodwill and Other Intangible Assets, as of January 1,
2002. Goodwill and intangible assets acquired in a purchase
business combination and determined to have an indefinite useful
life are not amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS No. 142. SFAS
No. 142 also requires that intangible assets with estimable useful
lives be amortized over their respective estimated useful lives to
their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets.
In connection with SFAS No. 142's transitional goodwill impairment
evaluation, the Statement required the Company to perform an
assessment of whether there was an indication that goodwill is
impaired as of the date of adoption. To accomplish this, the
Company was required to identify its reporting units and determine
the carrying value of each reporting unit by assigning the assets
and liabilities, including the existing goodwill and intangible
assets, to those reporting units as of January 1, 2002. The
Company was required to determine the fair value of each reporting
unit and compare it to the carrying amount of the reporting unit
within six months of January 1, 2002. To the extent the carrying
amount of a reporting unit exceeded the fair value of the
F-10
MEDQUIST INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(In thousands, except per share amounts)
reporting unit, the Company would be required to perform the
second step of the transitional impairment test, as this is an
indication that the reporting unit goodwill may be impaired. The
second step was required for each reporting unit. However, the
Company had only one reporting unit at that time. In this step,
the Company compared the implied fair value of the reporting unit
goodwill with the carrying amount of the reporting unit goodwill,
both of which were measured as of the date of adoption. The
implied fair value of goodwill was determined by allocating the
fair value of the reporting unit to all of the assets (recognized
and unrecognized) and liabilities of the reporting unit in a
manner similar to a purchase price allocation, in accordance with
SFAS No. 141, Business Combinations. The residual fair value after
this allocation was the implied fair value of the reporting unit
goodwill. The implied fair value of the reporting unit exceeded
its carrying amount and the Company was not required to recognize
an impairment loss.
Prior to the adoption of SFAS No. 142, goodwill was amortized on a
straight-line basis over the expected periods to be benefited,
ranging from 20 to 40 years, and assessed for recoverability by
determining whether the amortization of the goodwill balance over
its remaining life could be recovered through undiscounted future
operating cash flows of the acquired operation. All other
intangible assets were amortized on a straight-line basis from
three to five years. The amount of goodwill and other intangible
asset impairment, if any, was measured based on projected
discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds. There were no
Goodwill and other intangible asset impairment charges for the
years ended December 31, 2002, 2001 and 2000.
(l) Impairment of Long-Lived Assets
SFAS No. 144 provides a single accounting model for long-lived
assets to be disposed. SFAS No. 144 also changes the criteria for
classifying an asset as held for sale; and broadens the scope of
businesses to be disposed of that qualify for reporting as
discontinued operations and changes the timing of recognizing
losses on such operations. The Company adopted SFAS No. 144 on
January 1, 2002. The adoption of SFAS No. 144 did not affect the
Company's consolidated financial statements.
F-11
MEDQUIST INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(In thousands, except per share amounts)
In accordance with SFAS No. 144, long-lived assets, such as
property, plant, and equipment, and purchased intangibles subject
to amortization, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized by the
amount by which the carrying amount of the asset exceeds the fair
value of the asset. Assets to be disposed of would be separately
presented in the balance sheet and reported at the lower of the
carrying amount or fair value less costs to sell, and are no
longer depreciated. The assets and liabilities of a disposed group
classified as held for sale would be presented separately in the
appropriate asset and liability sections of the balance sheet.
Goodwill and intangible assets not subject to amortization are
tested annually for impairment, and are tested for impairment more
frequently if events and circumstances indicate that the asset
might be impaired. An impairment loss is recognized to the extent
that the carrying amount exceeds the asset's fair value.
Prior to the adoption of SFAS No. 144, the Company accounted for
long-lived assets in accordance with SFAS No. 121, Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of. There were no impairments of Long-Lived Assets in the
years ended December 31, 2002, 2001 and 2000.
(m) Revenue Recognition
A substantial portion of the Company's revenue is derived from
providing medical transcription services, which are recognized
when the services are rendered. These services are based primarily
on contracted rates. A portion of the revenue is derived from the
sale and implementation of voice-capture and document management
solutions and maintenance service of these products. Revenue and
profit on sales and implementation are recognized utilizing the
percentage of completion method. With regard to service contracts,
which are arranged separate from the product sale, the typical
arrangement spans 12 months. Revenue on the service contracts is
recognized on a straight line method over the term of the
underlying service contract. Deferred revenues represent cash
received from customers in advance of revenues being recognized
for the related payment.
(n) Research and Development and Advertising Costs
Research and development and advertising costs are charged to
expense as incurred. Research and development expense was $2,736,
$0 and $0 for the years ended December 31, 2002, 2001 and 2000,
respectively. Advertising costs were $1,618, $857, and $626 for
the years ended December 31, 2002, 2001, and 2000, respectively.
(o) Income Taxes
The Company accounts for income taxes in accordance with SFAS No.
109, Accounting for Income Taxes. Deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and the
respective tax bases. The Company has recorded a valuation
F-12
MEDQUIST INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(In thousands, except per share amounts)
allowance to reduce deferred tax assets to the amount that is more
likely than not to be realized. Management has considered future
taxable income and prudent and feasible tax planning strategies in
determining the need for a valuation allowance. In the event
management were to determine that the Company could not realize
all or part of the net deferred tax assets in the future, an
adjustment to the deferred tax assets would be charged to earnings
in the period such determination is made. Likewise, if management
later determines that it is more likely than not that the net
deferred tax assets would be realized, the previously provided
valuation reserve would be reversed.
(p) Earnings Per Share
Basic earnings per share is calculated by dividing net income by
the weighted average number of shares of common stock outstanding
for the period. Diluted earnings per share is calculated by
dividing net income by the weighted average number of shares of
common stock outstanding for the period as adjusted for the
dilutive effect of common stock equivalents, which consist
primarily of stock options, using the treasury stock method.
(q) Fair Value of Financial Instruments
Cash and cash equivalents, cash equivalent with related party,
accounts receivable, accounts payable, and accrued expenses are
reflected in the accompanying consolidated financial statements at
fair value due to the short-term nature of these instruments. The
carrying amount of debt obligations approximates fair value at the
balance sheet dates.
(r) Comprehensive Income
The Company's comprehensive income consists of net income,
unrealized holding gains on available-for-sale securities and
currency translation adjustments. The Company's comprehensive
income is presented within the accompanying Consolidated
Statements of Shareholders' Equity. At December 31, 2002 and 2001,
the Company had a currency translation adjustments of $596 and $54
relating to its foreign subsidiaries in the United Kingdom and
Canada, which are net of related deferred income taxes.
(s) Segment Information
The Company manages its business in two segments; services and
solutions. While the two segments are closely related, the
services segment is largely comprised of transcription and coding
services, while the solutions segment is comprised of the sale and
service of voice products. See Note 19 for disclosure of certain
financial information by segment.
(t) Statements of Cash Flow Information
For the years ended December 31, 2002, 2001, and 2000, the Company
paid interest of $160, $86, and $46, respectively, and income
taxes of $22,811, $21,222 and $17,007, respectively.
F-13
MEDQUIST INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(In thousands, except per share amounts)
The following table displays the noncash financing activities
resulting from the Company's business acquisitions (see note 2).
Year ended December 31
----------------------------------
2002 2001 2000
------- ------- -------
Noncash net assets acquired $48,657 79,837 8,102
Less seller notes and payables -- (2,100) --
------- ------- -------
Net cash paid for
business acquisitions $48,657 77,737 8,102
======= ======= =======
(u) Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 requires the Company to
record the fair value of an asset retirement obligation as a
liability in the period in which it incurs a legal obligation
associated with the retirement of tangible long-lived assets that
result from the acquisition, construction, development, and/or
normal use of the assets. The Company also records a corresponding
asset that is depreciated over the life of the asset. Subsequent
to the initial measurement of the asset retirement obligation, the
obligation will be adjusted at the end of each period to reflect
the passage of time and changes in the estimated future cash flows
underlying the obligation. The Company is required to adopt SFAS
No. 143 on January 1, 2003. The adoption of SFAS No. 143 is not
expected to have a material effect on the Company's consolidated
financial statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13,
and Technical Corrections. SFAS No. 145 amends existing guidance
on reporting gains and losses on the extinguishment of debt to
prohibit the classification of the gain or loss as extraordinary,
as the use of such extinguishments have become part of the risk
management strategy of many companies. SFAS No. 145 also amends
SFAS No. 13 to require sale-leaseback accounting for certain lease
modifications that have economic effects similar to sale-leaseback
transactions. The provisions of the Statement related to the
rescission of Statement No. 4 is applied in fiscal years beginning
after May 15, 2002. Earlier application of these provisions is
encouraged. The provisions of the Statement related to Statement
No. 13 were effective for transactions occurring after May 15,
2002, with early application encouraged. The adoption of SFAS No.
145 is not expected to have a material effect on the Company's
consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146
addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies Emerging Issues
Task Force (EITF) Issue 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity.
The provisions of this Statement are effective for exit or
disposal activities that are initiated after December 31, 2002,
with early application encouraged. The adoption of SFAS No. 146 is
not expected to have a material effect on the Company's financial
statements.
F-14
MEDQUIST INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(In thousands, except per share amounts)
In November 2002, the FASB issued Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness to Others, an
interpretation of FASB Statements No. 5, 57 and 107 and a
rescission of FASB Interpretation No. 34. This Interpretation
elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations
under guarantees issued. The Interpretation also clarifies that a
guarantor is required to recognize, at inception of a guarantee, a
liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified
after December 31, 2002 and are not expected to have a material
effect on the Company's consolidated financial statements. The
disclosure requirements are effective for financial statements of
interim and annual periods ending after December 31, 2002.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment
of FASB Statement No. 123. This Statement amends FASB Statement
No. 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the
fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure
requirements of Statement No. 123 to require prominent disclosures
in both annual and interim financial statements. Certain of the
disclosure modifications are required for fiscal years ending
after December 15, 2002 and are included in the notes to these
consolidated financial statements.
In November 2002, the EITF finalized its tentative consensus on
EITF Issue 00-21, "Revenue Arrangements with Multiple
Deliverables", which provides guidance on the timing and method of
revenue recognition for sales arrangements that include the
delivery of more than one product or service. EITF 00-21 is
effective prospectively for arrangements entered into in fiscal
periods beginning after June 15, 2003. The Company is currently
evaluating the impact of the adoption of this consensus on the
Company's consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities, an interpretation of
ARB No. 51. This Interpretation addresses the consolidation by
business enterprises of variable interest entities as defined in
the Interpretation. The Interpretation applies immediately to
variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest
entities obtained after January 31, 2003. For nonpublic
enterprises, with a variable interest in a variable interest
entity created before February 2, 2003, the Interpretation is
applied to the enterprise no later than the end of the first
annual reporting period beginning after June 15, 2003. The Company
is currently evaluating the impact of the adoption of this
Interpretation on the Company's consolidated financial statements.
The Interpretation requires certain disclosures in financial
statements issued after January 31, 2003 if it reasonably possible
that the Company will consolidate or disclose information about
variable interest entities when the Interpretation becomes
effective.
F-15
MEDQUIST INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(In thousands, except per share amounts)
(v) Stock Options
The Company applies the intrinsic-value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related
interpretations, to account for its fixed-plan stock options.
Under this method, compensation expense is recorded on the date of
grant only if the current market price of the underlying stock
exceeded the exercise price. SFAS No. 123, Accounting for
Stock-Based Compensation, established accounting and disclosure
requirements using a fair-value-based method of accounting for
stock-based employee compensation plans. As allowed by SFAS No.
123, as amended in SFAS No. 148, the Company has elected to
continue to apply the intrinsic-value-based method of accounting
described above, and has adopted only the disclosure requirements
of SFAS No. 123.
Had compensation cost for the Company's common stock options been
determined based upon the fair value of the options at the date of
grant, as prescribed under SFAS No. 123, as amended by SFAS No.
148, Accounting for Stock-Based Compensation, the Company's net
income and net income per share would have been reduced to the
following pro forma amounts:
Year ended December 31
------------------------------------------
2002 2001 2000
-------- -------- --------
Net income:
As reported $ 43,855 43,642 37,801
Add stock-based employee compensation
expense included in reported net income,
net of tax 19 59 93
Impact of total stock-based compensation
expense determined under fair-value
based method for all rewards, net of tax (8,342) (8,702) (4,283)
-------- -------- --------
Pro forma $ 35,532 34,999 33,611
======== ======== ========
Basic net income per share:
As reported $ 1.18 1.18 1.05
======== ======== ========
Pro forma $ 0.96 0.95 0.93
======== ======== ========
Diluted net income per share:
As reported $ 1.16 1.16 1.02
======== ======== ========
Pro forma $ 0.93 0.93 0.91
======== ======== ========
The above pro forma amounts may not be indicative of future
amounts because option grants prior to January 1, 1995 have not
been included and because future option grants are expected.
F-16
MEDQUIST INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(In thousands, except per share amounts)
The fair value of the options granted is estimated using the
Black-Scholes option-pricing model with the following weighted
average assumptions:
Year ended December 31
----------------------------------------------
2002 2001 2000
------ ------ ------
Risk-free interest rate 4.33% 5.92% 6.17%
Volatility 57% 56% 55%
Expected dividend yield 0% 0% 0%
Expection option life 5 years 5 years 5 years
(2) Acquisitions
In 2002, the Company completed five acquisitions for an aggregate
purchase price of $48,657, which were all cash transactions. In addition,
one of the acquisitions provides for an earn-out of up to $1,350. The
acquisitions in 2002 were accounted for under the purchase method of
accounting. Four of the acquisitions were made to expand the Company's
coding business while the other acquisition, which was the most
significant acquisition completed during the year, enables the Company to
provide clients with onsite solutions to their document management needs.
Additionally, this acquisition has provided the Company with a formal,
professional sales force.
In 2001, the Company completed seven acquisitions for an aggregate
purchase price of $79,837, consisting primarily of $77,737 in net cash
payments and $2,100 in notes due to the sellers. The acquisitions in 2001
were accounted for under the purchase method of accounting.
In 2000, the Company completed eight acquisitions for an aggregate
purchase price of $8,102, which were all cash transactions. The
acquisitions in 2000 were accounted for under the purchase method of
accounting.
F-17
MEDQUIST INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(In thousands, except per share amounts)
A summary of the final allocation of the purchase price to net assets
acquired is as follows:
Year ended December 31
----------------------------------
2002 2001 2000
-------- -------- --------
Purchase price:
Cash paid for acquisition including
transaction costs $ 48,657 77,737 8,102
Notes due to sellers -- 2,100 --
-------- -------- --------
$ 48,657 79,837 8,102
======== ======== ========
Purchase price allocation:
Accounts receivable $ 16,863 10,037 238
Inventories 3,750 -- --
Prepaid and other 2,685 955 --
Property and equipment 6,016 2,097 526
Deposits 5 109 2
Deferred taxes -- 24,018 --
Goodwill 22,774 38,244 --
Other Intangible assets 23,406 15,549 7,427
Accounts payable (4,275) (3,100) --
Deferred revenue (16,520) (247) --
Accrued expenses (5,975) (7,287) (50)
Debt (72) (538) (41)
-------- -------- --------
$ 48,657 79,837 8,102
======== ======== ========
Included in the 2002 acquisitions was the acquisition of Lanier
Healthcare, LLC. (Lanier) on July 1, 2002, for approximately $38,000 in
cash. The following unaudited proforma information is presented as if the
Lanier acquisition had been completed on January 1, 2001. All other
acquisitions in 2002 were not material to the Company. Prior to 2001,
Lanier was part of a consolidated company and separate financial
statements are not available. Therefore, unaudited proforma information
for the year ended December 31, 2000 is not presented.
Year ended December 31
---------------------------
2002 2001
---------- ----------
Revenue $ 526,950 484,328
Net Income 43,775 43,687
Basic net income per share 1.18 1.19
Diluted net income per share 1.16 1.16
F-18
MEDQUIST INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(In thousands, except per share amounts)
(3) Restructuring Charges
In December 2001, management approved a restructuring plan associated
with the rollout of a new transcription platform. The plan included the
closure of several operating facilities in order to improve operating
efficiencies. Costs associated with the plan of approximately $1,468 were
recognized in 2001. The components of the restructuring charge consist of
$1,343 for remaining payments on noncancelable leases and $125 for
severance of 28 individuals.
As of December 31, 2002, the Company had paid $547 of the noncancelable
leases and $44 of the severance in connection with the new transcription
platform plan. In 2002, management revised the estimate of required
reserves based on negotiated settlements with various landlords and or
negotiated sublease arrangements and reversed $319 of the accrual related
to noncancelable leases.
In November 2001, the Company completed the purchase of a medical
transcription company. In connection with this acquisition, the Company
established a restructuring reserve of $1,790. The reserve consists of
$1,599 for remaining payments on noncancelable leases and $191 for
severance of 10 individuals.
As of December 31, 2002, the Company had paid $777 of the noncancelable
leases and $181 of the severance related to the acquisition restructure
reserve. Also in 2002, management revised the estimate of required
reserves and reversed $296 related to noncancelable leases.
In December 1998, the Company's board of directors approved management's
restructuring plan associated with the merger with another entity, that
merger transaction was accounted for as a pooling-of-interests. The plan
related primarily to the closure of several redundant operating
facilities as well as certain corporate offices in order to improve
operating efficiencies. Costs associated with the plan of approximately
$6,539 were recognized in 1998. The significant components of the
restructuring charge consist of $3,835 for remaining payments on
noncancelable leases, $1,618 for severance and $1,086 for noncancelable
contracts and other exit costs. The severance costs are attributable to
41 individuals from various levels of operational and senior management.
From the date the restructuring charge was recorded in 1998 through
December 31, 2002, the Company paid costs of $1,500 for noncancelable
leases, $1,310 for severance and $427 for noncancelable contracts and
other exit costs.
In 1999, management revised the estimate of the required reserves and
reversed $2,333 of the 1998 restructuring charges relating to $1,492 of
noncancelable leases, $182 for severance and $659 for noncancelable
contracts and other exit costs. In 2000 and 2001, management further
revised the estimate of the required reserves and reversed $471 and $170,
respectively, of the 1998 restructuring charge. All of the reversal in
2000 relates to noncancelable leases as well as $44 in 2001, while the
remaining reversal in 2001 of $126 relates to severance. In 2002,
management again revised the estimate of the required reserves and
reversed $257 related to noncancelable leases based on negotiated
settlements with landlords and or negotiated sublease arrangements.
F-19
MEDQUIST INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(In thousands, except per share amounts)
In 1997, an acquired entity had approved a separate management plan to
close and/or merge several redundant operating facilities in order to
reduce costs and improve operating efficiencies. The plan was completed
during 1998 and included the cost of exiting certain facilities,
primarily related to noncancelable leases, the disposition of fixed
assets and employee severance costs. Costs associated with the plan of
approximately $2,075 were recognized in 1997 in accordance with EITF
94-3. Included in this amount is approximately $705 for the disposal of
assets and approximately $800 in severance and employee contract
buy-outs. The balance is primarily related to noncancelable lease costs.
The severance costs are attributable to eight individuals from various
levels of operational and senior management. In 2001 and 2000, management
revised its estimate of the required reserves and reversed $430 and $542,
respectively, of the 1997 restructuring charge. At December 31, 2001, the
accrual had been fully utilized.
The following is a summary of activity in the restructuring accruals:
December 31
--------------------------------
2002 2001 2000
-------- -------- --------
Restructuring accruals:
Balance at beginning of year $ 3,844 1,449 3,055
-------- -------- --------
Provision -- 1,468 --
Adjustments:
2001 restructuring (318) -- --
1998 restructuring (257) (170) (471)
1997 restructuring -- (430) (542)
-------- -------- --------
Net charge to operations (575) 868 (1,013)
-------- -------- --------
Acquisition (296) 1,790 --
Charges:
2001 restructuring (1,465) (85) --
1998 restructuring (342) (165) (576)
1997 restructuring -- (13) (17)
-------- -------- --------
Total charges (1,807) (263) (593)
-------- -------- --------
Balance at end of year $ 1,166 3,844 1,449
======== ======== ========
F-20
MEDQUIST INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(In thousands, except per share amounts)
The restructuring accruals at December 31, 2002 consist of the following
components:
-----------------------------------
2001 1998 Total
------- ------- -------
Severance $ 91 -- 91
Noncancelable leases 1,004 71 1,075
------- ------- -------
$ 1,095 71 1,166
======= ======= =======
(4) Inventories:
Inventories consist of the following:
December 31
--------------------------
2002 2001
--------- ---------
Raw materials $ 1,237 --
Finished goods 3,326 340
--------- ---------
Total $ 4,563 340
========= =========
(5) Property and Equipment
December 31
--------------------------
2002 2001
--------- ---------
Furniture, equipment and software $ 117,262 95,845
Leasehold improvements 4,072 3,673
--------- ---------
121,334 99,518
Less accumulated depreciation and amortization (83,530) (65,351)
--------- ---------
$ 37,804 34,167
========= =========
Depreciation and amortization expense was $18,829, $17,001 and $14,720
for the years ended December 31, 2002, 2001, and 2000, respectively.
F-21
MEDQUIST INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(In thousands, except per share amounts)
(6) Goodwill and Other Intangible Assets
Amortization expense related to goodwill and other intangible assets was
$6,827, $9,398 and $7,335 for the years ended December 31, 2002, 2001 and
2000 respectively. The following tables reconcile previously reported net
income and earnings per share as if the provisions of SFAS No. 142 were
in effect from January 1, 2000:
Year ended December 31
----------------------
2001 2000
-------- --------
Reported net income $ 43,642 37,801
Add back:
Goodwill amortization, net of tax 2,073 1,648
-------- --------
Adjusted net income $ 45,715 39,449
======== ========
Year ended December 31
----------------------
2001 2000
-------- --------
Reported basic net income per share $ 1.18 1.05
Add back:
Impact of goodwill amortization, net of tax 0.06 0.05
-------- --------
Adjusted basic net income per common share $ 1.24 1.10
======== ========
Year ended December 31
----------------------
2001 2000
-------- --------
Reported diluted net income per share $ 1.16 1.02
Add back:
Impact of goodwill amortization, net of tax 0.05 0.04
-------- --------
Adjusted diluted net income per common share $ 1.21 1.06
======== ========
F-22
MEDQUIST INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(In thousands, except per share amounts)
The carrying amount of acquired intangible assets is as follows:
December 31, 2002
----------------------------------------------------------------
Weighted
average
amortization Accumulated Net book
period Cost amortization value
------------- --------- ------------ ---------
Amortizable intangible assets:
Customer lists 21 years $ 76,960 (13,235) 63,725
Noncompete agreements 4 years 11,218 (8,080) 3,138
Other 4 years 10,804 (6,569) 4,235
--------- --------- ---------
17 years 98,982 (27,884) 71,098
--------- --------- ---------
Nonamortizable intangible asset:
Tradename -- 2,700 -- 2,700
--------- --------- ---------
Total $ 101,682 (27,884) 73,798
========= ========= =========
During 2002, the Company recorded the following intangible assets in
connection with acquisitions completed during the year. The acquired
intangible assets include the following:
Cost
--------
Amortizable intangible assets:
Customer lists $ 17,051
Noncompete agreements 555
Other 3,100
--------
20,706
--------
Nonamortizable intangible asset:
Tradename 2,700
--------
Total $ 23,406
========
Estimated amortization expense for amortizable intangible assets for the
next five years is: $6,896 in 2003, $5,985 in 2004, $5,511 in 2005,
$4,131 in 2006 and $3,768 in 2007.
The changes in the carrying amount of goodwill for the year ended
December 31, 2002 are as follows:
F-23
MEDQUIST INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(In thousands, except per share amounts)
Balance as of January 1, 2002 $ 110,584
Additional goodwill related to acquisitions 22,774
Deferred income tax for previously completed stock acquisitions 2,769
---------
Balance as of December 31, 2002 136,127
=========
Upon adoption of SFAS No. 142, the Company was required to evaluate its
existing intangible assets and goodwill that were acquired in purchase
business combinations, and to make any necessary reclassifications in
order to conform with the new classification criteria in SFAS No. 141 for
recognition separate from goodwill. The Company was also required to
reassess the useful lives and residual values of all intangible assets
acquired, and make any necessary amortization period adjustments by the
end of the first interim period after adoption. For intangible assets
identified as having indefinite useful lives, the Company was required to
test those intangible asset for impairment in accordance with the
provisions of SFAS No. 142 within the first interim period. Impairment
was measured as the excess of carrying value over the fair value of an
intangible asset with an indefinite life. The results of this analysis
did not require the Company to recognize an impairment loss.
The carrying amount of goodwill by segment as of December 31, 2002 is as
follows:
Services Solutions Consolidated
---------- ---------- ------------
Goodwill $ 121,309 14,818 136,127
========== ========== ============
The goodwill related to the Solutions segment was recorded in connection
with the Lanier acquisition completed on July 1, 2002.
(7) Investment
On April 6, 2000, the Company made a $6,051 investment in A-Life Medical,
Inc. (A-Life), a privately held entity that is a leader in advanced
natural language processing technology for the medical industry. The
investment was initially recorded under the cost method of accounting as
the Company owned 19.5% of A-Life's outstanding voting shares and had no
control of this entity.
In September 2001, the Company advanced $1,000 to A-Life as a prepayment
on a license agreement. In December 2001 and January 2002, the Company
advanced an aggregate of $783 to A-Life in connection with an additional
equity investment that closed in January 2002. The initial investment and
the subsequent advances have been classified as other assets in the
accompanying consolidated balance sheets.
As a result of the financing that closed in January 2002, the Company's
investment increased to 28.1% of the outstanding voting shares of A-Life
and, as such, the investment has been accounted for under the equity
method of accounting. In accordance with Accounting Principles Board
Opinion No. 18, the prior year financial statements have been
retroactively adjusted. The previously reported net income for the years
ended December 31, 2001 and 2000 has been decreased by $994 and $929,
F-24
MEDQUIST INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(In thousands, except per share amounts)
respectively, to reflect the equity in losses of A-Life Medical, Inc. The
impact of the retroactive adjustments is to decrease previously reported
diluted earnings per share by $0.02 and $0.02, respectively. The carrying
amount of the investment in A-Life has also been adjusted to reflect the
percentage ownership in the losses incurred by A-Life during the period
the Company maintained the cost basis investment. Accordingly, the
investment was reduced by $1,923 with a corresponding offset to retained
earnings. In addition, because A-Life had a negative book value at the
time of the change to the equity basis of accounting, the entire
remaining adjusted investment was allocated to intangible assets, of
which $1,000 was allocated to acquired software. The acquired software is
being amortized over three years. The remaining amount was recorded as
goodwill, which has a book value of $4,200 as of December 31, 2002.
In 2002, the ownership interest in A-Life was further increased to 33.6%.
The Company received approximately $29 and $16 of services from A-Life
during the years ended December 31, 2002 and 2001, respectively.
(8) Accrued Expenses
December 31
----------------------------
2002 2001
-------- --------
Payroll, benefits and related taxes $ 18,639 15,764
Restructuring charges 1,166 3,844
Income taxes payable 3,143 1,271
Other employee related expenses 2,318 2,318
Other 8,435 7,793
-------- --------
$ 33,701 30,990
======== ========
(9) Valuation Account
December 31
---------------------------------------
2002 2001 2000
---------- ---------- ----------
Allowance for doubtful accounts:
Balance at beginning of year $ 5,148 4,674 4,668
Provision 926 940 1,015
Acquisitions (note 2) 647 541 --
Charges (1,115) (1,007) (1,009)
---------- ---------- ----------
Balance at end of year $ 5,606 5,148 4,674
========== ========== ==========
F-25
MEDQUIST INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(In thousands, except per share amounts)
(10) Long-Term Debt
December 31
-----------------------
2002 2001
------ -------
Seller notes $ 75 2,100
Capital lease obligations -- 15
Other 10 40
------ -------
85 2,155
Less current portion (31) (1,067)
------ -------
$ 54 1,088
====== =======
Interest expense on debt obligations was $43, $173 and $85 for the years
ended December 31, 2002, 2001, and 2000, respectively.
Long-term debt as of December 31, 2002, matures as follows:
2003 $ 31
2004 29
2005 25
------
$ 85
======
(11) Commitments and Contingencies
Rent expense for operating leases was $9,436, $8,233 and $6,969 for the
years ended December 31, 2002, 2001, and 2000, respectively. Minimum
annual rental commitments for noncancelable operating leases having terms
in excess of one year as of December 31, 2002, are as follows:
2003 $ 7,046
2004 3,997
2005 2,265
2006 1,463
2007 709
2008 and thereafter 1,123
--------
$ 16,603
========
The Company has an employment agreement, as amended, with a former chief
executive officer. The agreement entitles this individual to receive
retirement benefits of $75 per year for life plus certain other benefits,
as defined. Included in other long term liabilities is $674 and $629 at
December 31, 2002 and 2001, respectively, related to these retirement
benefits. The employment agreement also requires the Company to loan the
former chief executive officer's estate the necessary funds to exercise
any options owned by the individual at the time of his death.
F-26
MEDQUIST INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(In thousands, except per share amounts)
The Company has employment agreements with nine executive officers, which
expire at various times through June 2003, subject to renewal. These
agreements provide an aggregate base compensation of $1,958 both in the
years ended December 31, 2002 and 2003, plus incentive compensation based
on a percentage of the executive's salary. These agreements also provide
for certain other fringe benefits and payments upon termination of the
agreements.
The Company has severance agreements with certain executive officers that
provide for one-time payments in the event of a change in control, as
defined, if the officer is terminated within 12 months of the change. The
payments range from 12-18 months of cash compensation paid to the
executive officers in the fiscal year immediately prior to the change in
control event. If the change in control had occurred on December 31,
2002, and the executive officers had been terminated, the payments would
have aggregated $2,937.
In the normal course of business, the Company is party to various claims
and legal proceedings. Although the ultimate outcome of these matters if
presently not determinable, management of the Company, after consultation
with legal counsel, does not believe that the resolution of these matters
will have material effect upon the Company's consolidated financial
position, results of operations, and liquidity.
(12) Shareholder's Equity
During the year ended December 31, 2000, the Company repurchased 600
shares of outstanding common stock for $15,466 at an average of $25.78
per share. All common stock acquired was subsequently retired.
In 2000, the Company issued 22 shares of common stock to members of the
board of directors. The fair value of the stock grants was $311.
The Company also has a plan whereby certain nonemployee members of the
board of directors have been granted common stock but the shares will not
be issued until the directors terminate membership on the Board. Stock
granted in 2002, 2001 and 2000 were 2, 3, and 1, respectively, with a
fair value at the date of grant of $54, $54, and $36. Total accrued costs
for this plan are $224 and $170 at December 31, 2002 and 2001,
respectively.
In 2002, 2001 and 2000, the Company issued a total of 34, 69 and 49
shares of common stock with a value of $865, $1,308 and $1,211,
respectively, under Company sponsored savings and stock purchase plans
(see Note 17).
(13) Stock Option Plans
The Company has six stock option plans that provide for the granting of
options to purchase shares of common stock to eligible employees
(including officers) and nonemployee directors of the Company. Options
may be issued at the fair market value of the common stock on the date of
grant or at a price determined by a committee of the Company's board of
directors. The stock options vest and are exercisable over periods
determined by the committee.
F-27
MEDQUIST INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(In thousands, except per share amounts)
In February 1998, an entity acquired by the Company, which acquisition
was accounted for as a pooling-of-interests, issued 165 stock options to
employees with exercise prices below the fair market value of the common
stock on the date of grant. Accordingly, deferred compensation totaling
$1,078 was recorded, of which $31, $97, and $163 was amortized to expense
in 2002, 2001 and 2000, respectively. The deferred compensation was fully
amortized at December 31, 2002.
Information with respect to the Company's common stock options is as
follows:
Exercise price Aggregate
Shares per share proceeds
-------- -------------- ---------
Outstanding, December 31, 1999 3,169 $ 1.34 - 31.19 $ 42,905
Granted 2,056 17.06 - 70.00 105,380
Exercised (1,381) 1.67 - 44.00 (19,305)
Canceled (244) 5.21 - 70.00 (7,295)
-------- -------------- ---------
Outstanding, December 31, 2000 3,600 2.17 - 70.00 121,685
Granted 1,190 16.00 - 43.50 26,675
Exercised (51) 5.21 - 24.94 (670)
Canceled (165) 10.48 - 70.00 (7,410)
-------- -------------- ---------
Outstanding, December 31, 2001 4,574 2.17 - 70.00 140,280
Granted 1,252 26.90 - 29.25 36,484
Exercised (168) 2.17 - 24.94 (1,899)
Canceled (39) 16.00 - 70.00 (1,372)
-------- -------------- ---------
Outstanding, December 31, 2002 5,619 $ 2.17 - 70.00 $ 173,493
======== ============== =========
At December 31, 2002, there were 2,548 exercisable options with an
aggregate exercise price of $65,207 and 1,734 additional options
available for grant under the plans. Exercisable options at December 31,
2001 and 2000 were 2,037 and 1,523 with an aggregate exercise price of
$42,032 and $21,024, respectively.
F-28
MEDQUIST INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(In thousands, except per share amounts)
A summary of outstanding options and exercisable options at December 31,
2002 is as follows:
Options outstanding Options exercisable
------------------------------------------- ----------------------------
Weighted
average Weighted Weighted
remaining average average
Number of contractual exercise Number of exercise
Range of exercise prices shares life price shares price
- -------------------------- --------- ------------ ----------- --------- ------------
$0.00 - $2.17 7 1.4 $ 2.17 7 $ 2.17
2.18 - 5.43 317 2.7 3.23 317 3.23
5.44 - 13.53 545 3.7 7.46 530 7.38
13.54 - 33.83 3,284 7.6 25.03 1,075 22.63
33.84 - 70.00 1,466 7.4 58.73 619 57.94
------- ------
5,619 6.9 $ 30.88 2,548 $ 25.59
======= ======
(14) Other Income (Expense)
In the first quarter of 2001, the Company received net proceeds of $3,000
in connection with the settlement of a lawsuit.
In the third quarter of 2000, Philips completed a tender offer in which
it acquired approximately 60% of the Company's outstanding Common stock
for $51.00 per share. In connection with this tender offer, the Company
incurred approximately $6,255 of costs, primarily related to investment
banker fees. Since July 2000, Philips has purchased additional shares in
the open market, at various prices, thereby increasing its ownership in
the Company to approximately 70%.
(15) Income Taxes
For financial reporting purposes, earnings from operations before income
taxes include the following components:
Year ended December 31
---------------------------------------------
Earnings before income taxes: 2002 2001 2000
-------- -------- --------
United States 71,383 72,188 66,574
International (75) (606) --
-------- -------- --------
$ 71,308 71,582 66,574
======== ======== ========
F-29
MEDQUIST INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(In thousands, except per share amounts)
The income tax provision consists of the following:
Year ended December 31
------------------------------------------
2002 2001 2000
-------- -------- --------
Current:
Federal $ 23,107 24,784 22,780
State and local 3,475 3,099 3,196
International 221 -- --
-------- -------- --------
26,803 27,883 25,976
-------- -------- --------
Deferred:
Federal 1,198 (405) 2,534
State and local (452) 462 263
International (96) -- --
-------- -------- --------
650 57 2,797
-------- -------- --------
$ 27,453 27,940 28,773
======== ======== ========
A reconciliation of the statutory federal income tax rate to the
Company's effective income tax rate is as follows:
Year ended December 31
---------------------------
2002 2001 2000
---- ---- ----
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 2.5 3.4 3.5
Other 1.0 0.6 4.7
---- ---- ----
38.5% 39.0% 43.2%
==== ==== ====
F-30
MEDQUIST INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(In thousands, except per share amounts)
The tax affected temporary differences that give rise to deferred income
taxes are as follows:
December 31
-------------------------
2002 2001
-------- --------
Deferred tax assets:
Intangibles $ 15,802 22,372
Investment in A-Life 1,096 740
Foreign net operating loss carryforwards 2,996 2,049
Domestic net operating loss carryforwards 2,870 2,870
Restructuring accruals 464 822
Accruals and reserves 4,184 2,728
Vacation accrual 1,270 688
Deferred compensation 662 526
Other 675 557
-------- --------
Total deferred tax assets 30,019 33,352
-------- --------
Deferred tax liabilities:
Fixed assets (386) --
Cumulative translation adjustments (397) --
-------- --------
Total deferred tax liabilities (783) --
-------- --------
Valuation allowance (7,474) (6,977)
-------- --------
Net deferred tax assets $ 21,762 26,375
======== ========
In connection with a purchase business combination completed in November
2001, the Company acquired $28,048 in net deferred tax assets. Management
believes that $6,378 of these deferred tax assets will not be realized.
Accordingly, the Company recorded a valuation allowance for this amount.
This allowance was established in purchase accounting. A valuation
allowance of $1,096 was recorded related to the deferred tax asset
associated with the Company's investment in A-Life.
F-31
MEDQUIST INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(In thousands, except per share amounts)
In prior years, the Company completed two acquisitions that were
accounted for as poolings-of-interest for financial reporting purposes
and as taxable purchase transactions for income tax purposes. Deferred
tax assets were recognized upon consummation of these transactions with
an offsetting credit to equity. The Company is deducting the amortization
of the intangible assets recorded for tax purposes and recording a
reduction of current taxes payable and the deferred tax assets previously
recorded.
Realization of the Company's remaining net deferred tax assets is
dependent on future taxable income. Management believes that such assets
will be realized; however, ultimate realization could be negatively
impacted by market conditions and other variables not known or
anticipated at this time.
(16) Earnings Per Share
The table below sets forth the reconciliation of the numerators and
denominators of the Company's basic and diluted income per share
computations for the years ended December 31, 2002, 2001, and 2000.
Per share
Net income Shares amount
---------- ------ ---------
2002:
Basic $43,855 37,013 $ 1.18
Effect of dilutive securities -- 862
------- -------
Diluted $43,855 37,875 1.16
======= =======
2001:
Basic $43,642 36,842 1.18
Effect of dilutive securities -- 876
------- -------
Diluted $43,642 37,718 1.16
======= =======
2000:
Basic $37,801 36,154 1.05
Effect of dilutive securities -- 1,015
------- -------
Diluted $37,801 37,169 1.02
======= =======
For the years ended December 31, 2002, 2001, and 2000, 2,247, 2,608 and
2,055 common stock options, respectively, were excluded from the diluted
computation because the effect would be anti-dilutive.
(17) Employee Benefit Plans
(a) Savings Plan
The Company offers a savings plan under Section 401(k) of the
Internal Revenue Code. This savings plan allows eligible employees
to contribute up to 15% of their compensation on a pretax basis.
The Company matches 50% of the participant's contribution, up to
F-32
MEDQUIST INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(In thousands, except per share amounts)
5% of the participant's total compensation. The matching
contribution is made on a quarterly basis using the Company's
common stock. The charge to operations for the Company's matching
contributions was $1,280, $941 and $867 in 2002, 2001, and 2000,
respectively. The Company issued 14 shares in 2002, 34 shares in
2001, and 27 in 2000, in connection with the Company's matching
contribution, with a value of $377, $809 and $707, respectively.
Effective in the second quarter of 2002, the Company no longer
issues new shares in connection with the match feature of the
401(k) savings plan. Instead, these shares are now purchased on
the open market. During 2002, the Company purchased 34 shares on
the open market for $810.
(b) Stock Purchase Plan
All full-time employees except those who own 5% or more of the
common stock of the Company, are eligible to participate in the
Company's Employee Stock Purchase Plan (SPP). The SPP provides
that participants may authorize the Company to withhold up to 10%
of their earnings for the purchase of the stock. The purchase
price of the common stock is determined by the Compensation
Committee but shall not be less than 85% of the fair market value
of the Common stock. Through the SPP, 20, 35 and 22 Common shares
were purchased in 2002, 2001, and 2000 at a total purchase price
of $488, $499, and $504, respectively.
(18) Related-Party Transactions
In the fourth quarter of 2000, the Company began participating in a
deposit facility established by Philips which allowed investments up to
$100 million to earn interest at LIBOR less 0.125 percent, for up to 365
days. The Company withdrew all funds invested in this related party
deposit facility in the second quarter of 2001 and, at December 31, 2001,
the Company had no such investment. The facility terminated in February
2002. Interest income earned on cash deposited with Philips was $402 for
the year ended December 31, 2001, all of which was earned in the six
months ended June 30, 2001.
MedQuist incurred costs of $1,933 with Philips in the year ended December
31, 2001, related to a licensing agreement entered into to provide for
the integration and use of certain Philips speech recognition technology.
This agreement was amended in January 2002, which required a $150 up
front payment in addition to a fee based on a per payroll line basis. For
the year ended December 31, 2002, the $150 was paid and there have been
no fees incurred on a payroll line basis. The agreement expires on May
22, 2005.
In addition to the revision to the license agreement, the Company entered
into a consulting agreement with Philips. This agreement calls for
Philips to aid the Company with the integration of its speech and
transcription technologies. Under this agreement, MedQuist has incurred
costs of $468 for the year ended December 31, 2002.
Presently, all business insurance coverages with the exception of
workers' compensation, are provided by Philips. For the years ended
December 31, 2002 and 2001, the Company incurred $133 and $0 in premiums
with Philips under these policies.
Philips also sells dictation related equipment to MedQuist and for the
year ended December 31, 2002, the Company has incurred $851 in costs for
such equipment.
F-33
MEDQUIST INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(In thousands, except per share amounts)
A member of the Company's board of directors is a partner in a law firm
that has engaged to act as special counsel in certain matters. During the
years ended December 31, 2002, 2001, and 2000, the Company paid this firm
$29, $1,055 and $373, respectively.
MedQuist also participates in a group purchasing agreement with Philips
which allows MedQuist to participate in Philips' discounts on supplies.
For the year ended December 31, 2002, the Company paid Philips $55 to
participate in this program.
Management believes that all related party transactions are on an
arms-length basis.
(19) Segment Financial Data
Segment information is presented based on a management approach, which
requires segmentation based on the Company's internal organization and
disclosure of revenue and operating income based on internal accounting
methods. The Company's financial reporting systems present various data
for management to run the businesses, including profit and loss
statements.
Year ended December 31, 2002
Intersegment
Services Solutions Corporate items Total
-------- --------- --------- ------------ -------
Revenue $ 448,856 37,915 -- (605) 486,166
Cost of revenue 340,740 24,641 -- (285) 365,096
Depreciation and
Amortization 22,927 1,583 1,146 -- 25,656
Operating income 85,746 1,183 (15,614) (314) 71,001
---------- ------ ------- ---- -------
Total assets $ 400,329 66,256 8,741 (455) 474,871
========== ====== ======= ==== =======
Year ended December 31, 2001
Intersegment
Services Solutions Corporate items Total
-------- --------- --------- ------------ -------
Revenue $ 405,308 -- -- -- 405,308
Cost of revenue 299,102 -- -- -- 299,102
Depreciation and
amortization 25,464 -- 935 -- 26,399
Operating income 81,939 -- (13,117) -- 68,822
---------- ------ ------- ---- -------
Total assets $ 393,841 -- 8,273 -- 402,114
========== ====== ======= ==== =======
F-34
MEDQUIST INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(In thousands, except per share amounts)
Year ended December 31, 2000
Intersegment
Services Solutions Corporate Items Total
--------- --------- --------- ------------ --------
Revenue $ 364,149 -- -- -- 364,149
Cost of revenue 265,817 -- -- -- 265,817
Depreciation and
Amortization 21,554 -- 501 -- 22,055
Operating income 71,035 -- (11,078) -- 59,957
--------- --------- --------- --------- ---------
Total assets $ 341,132 -- 7,841 -- 348,973
========= ========= ========= ========= =========
(20) Quarterly Supplemental Financial Data (Unaudited)
The following tables present certain unaudited consolidated quarterly
financial information for each of the eight quarters in the period ended
December 31, 2002.
Three months ended
-----------------------------------------------------------
March 31 June 30 September 30 December 31
--------- --------- ------------ ------------
Year ended December 31, 2002:
Revenues $ 113,974 113,631 129,750 128,811
Income before income taxes 19,458 20,061 15,510 16,279
Net income 11,966 12,338 9,539 10,012
Basic net income per common share 0.32 0.33 0.26 0.27
Diluted net income per common 0.32 0.33 0.25 0.27
share
Year ended December 31, 2001:
Revenues $ 95,099 97,978 102,695 109,536
Income before income taxes 20,628 17,023 17,409 16,522
Net income 12,573 10,364 10,612 10,093
Basic net income per common share 0.34 0.28 0.29 0.27
Diluted net income per common
share 0.34 0.27 0.28 0.27
The Company recorded a pretax gain of $3,000 in the first quarter of 2001
in connection with the settlement of a lawsuit (see note 14) and recorded
a pretax restructuring charge of $1,468 in the fourth quarter of 2001
(see note 3). In the third quarter of 2000 the Company recorded pretax
tender offer costs of $6,255 (see note 14). Based on the increase in the
ownership percentage of A-Life and the resulting change to the equity
method of accounting (see Note 7), the Company retroactively recorded its
share in the net loss of A-Life Medical of $294, $274, $248 and $178 in
the first, second, third and fourth quarters of 2001 respectively.
F-35