MQ ASSOCIATES INC - 10-K Annual Report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the fiscal year ended: December 31, 2003

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the transition period from to

Commission file number: 333-101399

MQ ASSOCIATES, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware		22-3860764
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

4300 North Point Parkway Alpharetta, Georgia		30022
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code: (770) 300-0101

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

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 reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

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 definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes o No ý

At March 25, 2004, the number of shares outstanding of each of MQ Associates, Inc.’s classes of common equity were as follows: 72,100,000 shares of Class A common stock, $.001 par value per share, and 28,605,000 shares of common stock, $.001 par value per share. At March 25, 2004, the market value of the common equity of MQ Associates, Inc. held by non-affiliates was zero.

7 DOCUMENTS INCORPORATED BY REFERENCE: None

MQ Associates, Inc.

Form 10-K

Table of Contents

PART I

Item 1.	Business

Item 2.	Properties

Item 3.	Legal Proceedings

Item 4.	Submission of Matters to a Vote of Security Holders

PART II

Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities

Item 6.	Selected Financial Data

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A.	Quantitative and Qualitative Disclosures about Market Risk

Item 8.	Financial Statements and Supplementary Data

Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A.	Controls and Procedures

PART III

Item 10.	Directors and Executive Officers of the Registrant

Item 11.	Executive Compensation

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13.	Certain Relationships and Related Transactions

Item 14.	Principal Accountant Fees and Services

PART IV

Item 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K

PART I

Item 1. Business

In this report, “we,” “us” and “our” refer to MQ Associates, Inc. and its subsidiaries, and “MQ Associates” refers to MQ Associates, Inc.

General

We are a leading operator of independent, fixed-site, outpatient diagnostic imaging centers (each a “FIC”) in the United States. MedQuest, Inc. is a wholly-owned subsidiary of MQ Associates and MQ Associates directly or indirectly owns 100% of the capital stock of each of the operating subsidiaries, except for a joint venture in which MQ Associates indirectly owns 50% of the outstanding membership units. MQ Associates has no material assets or operations other than its ownership of 100% of the outstanding capital stock of MedQuest, Inc.

Our centers provide diagnostic imaging services using a variety of technologies including magnetic resonance imaging (MRI), computed tomography (CT), nuclear medicine, general radiology (fluoroscopy and x-ray), ultrasound and mammography. We currently operate a network of 89 centers in 13 states primarily throughout the southeastern and southwestern United States. Of our centers, 22 are multi-modality (MRI, CT and other technologies), 34 are dual modality (MRI and CT) and 33 are MRI only.

We believe that a key driver of our success is providing high quality service to referring physicians, patients and payors.

• We serve our referring physicians’ interests by providing them with: (i) convenient scheduling for their patients, (ii) fast turnaround times for procedure results, (iii) high quality images, and (iv) skilled and accessible radiologists.

• We focus on providing excellent service to our patients by offering: (i) flexible scheduling with extended operating hours, (ii) convenient center locations, (iii) short waiting times, and (iv) a patient-friendly, non-clinical environment.

• We provide a high level of service to our payors with: (i) geographic coverage in local markets and (ii) high quality images and radiologist reports.

Our organization is structured to provide high quality service tailored to each of our local markets. We empower our center managers to run our centers to meet the demands of local market conditions, while our corporate structure provides economies of scale, corporate training programs, standardized policies and procedures and sharing of best practices across our network. Each of our center managers is responsible for meeting our standards of patient service, managing relationships with local physicians and payors and maintaining profitability.

Business strategy

Our objective is to be the leading provider of outpatient diagnostic imaging services in the geographic markets we serve by:

Providing high quality service to our customers. Our business model is geared towards serving the needs of our three customers: (i) referring physicians; (ii) patients; and (iii) payors. Our staff is evaluated on customer service measures which include speed of procedure, accuracy and quality of images, customer experience “exit” surveys and financial performance.

Referring physicians: We recognize that by providing convenient scheduling for patients, fast turnaround times for procedure results, high quality images and skilled and accessible radiologists, we enable our referring physicians to improve the quality and efficiency of their individual medical practices.

We focus on developing relationships with referring physicians to increase patient volume and enable us to identify and respond quickly to local market needs. We also provide extended hours and extended days of operation to meet patient volume without significant delay. Our policy is to provide image turnaround and supporting radiologist reports within one business day after a procedure is performed.

Patients: We strive to make the process of undergoing a diagnostic imaging procedure convenient and comfortable for our patients. Our customer service approach includes features that address our patients’ needs, such as flexible scheduling with extended operating hours, convenient center locations, short waiting times and a patient-friendly, non-clinical environment.

Payors: We believe that payors value our high quality services, efficient operations, cost-effectiveness and scale. Our scale is particularly important to payors as it enables us to satisfy a significant number of their patients’ needs. We seek to improve and expand our relationships with every significant payor group within the local markets we serve.

Enhancing our local market presence. We build concentrated groups of centers in the local markets we serve in order to build local market share. These groupings enable us to: (i) build a strong referral base, (ii) establish stronger relationships with commercial payors, (iii) attract and retain highly qualified radiologists and (iv) provide our patients with convenient locations that offer a range of imaging services. We look to deepen and expand our network by adding centers in our existing or neighboring geographic markets through de novo development and/or acquisitions until we become a leading provider of outpatient diagnostic imaging services in these markets.

Growing our existing centers. We generate attractive same center growth within our existing centers. We do so by extending hours and days of operation, adding modalities (progressing from MRI only to MRI and CT to multi-modality centers) and increasing imaging capacity through equipment upgrades and additional machines to meet the needs of our local markets. We also increase the performance of our centers through our focus on improving customer service and by implementing local sales and marketing programs to expand our referral sources.

Expanding our network. We expand our network of centers through de novo development and acquisitions, using a disciplined approach for evaluating and entering new geographic markets. We perform extensive due diligence before developing a de novo center or acquiring an existing center, including surveying local referral sources and radiologists, as well as, examining the demographics, reimbursement environment, competitive landscape and intrinsic demand of the geographic market. We only enter markets where: (i) there is sufficient patient demand for outpatient diagnostic imaging services, (ii) we believe we can gain sufficient market share, (iii) we can build key local referral relationships, and (iv) payors are receptive to our entry into the market.

The 2002 recapitalization transaction

On August 15, 2002, we consummated a recapitalization transaction pursuant to an agreement dated July 16, 2002, as amended on August 8, 2002, among MQ Associates, its then existing stockholders and MQ Investment Holdings, LLC, which was a newly formed Delaware limited liability company, managed by a board of directors comprised of certain individual principals of J.P. Morgan Partners, LLC. The total consideration paid in the recapitalization was valued at $365.1 million, including transaction costs. As a result of the recapitalization, approximately 70.0% of the total capital stock of MQ Associates is owned by MQ Investment Holdings, LLC and approximately 30.0% of the total capital stock of MQ Associates is owned by the management stockholders, in each case, on a fully diluted basis. In connection with the recapitalization, the following transactions occurred:

• MQ Investment Holdings, LLC made an equity investment of $107.1 million in MQ Associates, Inc. and as a result of such investment received 72,100,000 shares of newly issued Class A Common Stock, par value $0.001 per share, and 35,000,000 shares of a new series of Series A Convertible Redeemable Preferred Stock, par value $0.001 per share, of MQ Associates;

• Immediately prior to the consummation of the recapitalization, the then outstanding shares of Series A Convertible Preferred Stock and Series C Convertible Preferred Stock of MQ Associates (all of which were owned by TA Associates, Inc. and other private investors) were converted in a series of transactions into 4,105,532 shares of Common Stock, 1,276,000 shares of the old series of Series A Redeemable Preferred Stock and 680,000 shares of the old series of Series B Redeemable Preferred Stock. As part of the recapitalization, MQ Associates (i) redeemed approximately 76.4% of the total outstanding shares of Common Stock and Class B Common Stock, including approximately 58.9% of the stock holdings of the management stockholders, for an aggregate redemption price of approximately $148.4 million (with $82.5 million received by TA Associates, Inc. and other private investors and $65.9 million received by the management stockholders) and (ii) redeemed 100% of the old series of Series A Redeemable Preferred Stock and 100% of the old series of Series B Redeemable Preferred Stock (all of which were held by TA Associates, Inc. and other private investors) for an aggregate redemption price of $19.6 million. In the management rollover equity transaction, management rolled over 100% of their remaining stock holdings, representing the remaining 23.6% of the total outstanding shares of Common Stock and Class B Common Stock. These management rollover shares were reclassified as (i) 28,605,000 shares of Common Stock, par value $0.001 per share (30,900,000 shares on a fully diluted basis), and (ii) 15,000,000 shares of a new series of Series B Redeemable Convertible Preferred Stock, par value $0.001 per share, which in the aggregate equals approximately 30.0% of the ownership of MQ Associates on a fully diluted basis after the consummation of the recapitalization;

• Immediately prior to the closing of the recapitalization, MQ Associates transferred 100% of the ownership interests in each of its subsidiaries to MedQuest, Inc.;

• MedQuest, Inc., as borrower, entered into an $80.0 million senior credit facility and issued $180.0 million of 11⁷/₈% senior subordinated notes to fund a portion of the recapitalization; and

• MQ Associates and all of the subsidiaries of MedQuest, Inc. became guarantors under the senior credit facility and the indenture governing the senior subordinated notes.

The senior credit facility was amended in September 2003 to allow for borrowings up to $60.0 million under a Tranche B term loan facility.

Company History

We were founded in 1993 by Gene Venesky, our Chief Executive Officer, and John K. Luke, our President, to provide high quality, fixed-site outpatient single and multi-modality diagnostic imaging services through both developing de novo centers and acquiring and integrating centers. We grew to 10 centers by the end of 1997, as we implemented and refined our business model. Since that time, we have selectively expanded our business, opening 48 de novo centers and acquiring and integrating 31 centers from 1998 to date. Our acquisitions have each generally consisted of one to three centers.

Facilities and equipment

We segregate our centers into three categories: (i) 22 centers that provide MRI, CT and other services (“multi-modality”), (ii) 34 centers that provide MRI and CT services (“dual-modality”) and (iii) 33 centers that provide MRI services only (“MRI only”). We have the ability to expand service capabilities at each of our centers by increasing the capacity of our existing machines through upgrades, adding machines and adding new modalities such as nuclear medicine, ultrasound and mammography. Additionally, we have 8 full-time equivalent mobile MRI machines which we use to conduct market testing, justify demand in CON states or to supplement capacity at our centers from time to time on an as needed basis.

Our centers operate 316 diagnostic imaging machines, of which we own 95.6%. Of these 316 machines, 93 are MRI machines, 61 are CT machines and 162 are other types of diagnostic imaging machines, including nuclear medicine, x-ray, fluoroscopy, ultrasound and mammography. In recent years, we have made a significant investment in new diagnostic imaging machines and equipment upgrades. As a result, the average age of our MRI machines is 3.4 years, as compared with the estimated useful life of seven years (excluding any upgrades which may extend the useful life), and the average age of our CT machines is 2.7 years as compared with the estimated useful life of seven years. This investment has enabled us to provide our patients with the latest imaging technology and invest a low percentage of our capital expenditures in equipment maintenance. Of the $32.6 million of our total capital expenditures for the year ended December 31, 2003, we invested approximately 19.9% in equipment replacement, 58.9% in de novo centers and expansions and 21.2% in acquisitions of centers.

We continue to evaluate the mix of our diagnostic imaging equipment in response to changes in technology and to demand in the marketplace. We upgrade our equipment on an ongoing basis as new technologies become available. The development of new imaging technologies is now more likely to involve software and hardware upgrades that improve image acquisition time and the number and types of scans a machine can perform, at a cost that is significantly less than the cost of buying new equipment. These upgrades usually extend the life of a machine for at least two to three years.

Personnel

As of December 31, 2003, we had 1,461 employees, of which approximately 72 are employed at our headquarters and the remainder are employed at our diagnostic imaging centers. None of our employees are represented by a labor organization, and we are not aware of any activity seeking such organization. We believe that our relationship with our employees is good. Approximately 205 radiologists read scans for our network of centers on either a full or part-time basis. Of these, 15 are employed by us and the remainder are independent contractors. Occasionally, in order to meet increased volume growth, vacation schedules, retirements or other unexpected events, we contract with independent radiologist physician practice groups to provide interim radiology services for our centers.

Systems

We have invested considerable resources towards upgrading our patient administration and billing systems with an overall plan of migrating to a fully integrated system by the end of fiscal 2005. Our plan envisions an integrated system that will allow for data input at various stages (patient scheduling, contact information, insurance information, billing, collections, etc.), with reporting and management information system capabilities.

We initiated this plan in fiscal 2001, with the implementation of a Wide Area Network (“WAN”). The WAN provides a base structure that allows for the transmission of data and images on a proprietary network and marked the beginning of a transition from a film-based environment to an image-based environment for our MRI and CT modalities.

We also initiated development of the Radiology Information System (“RIS”) in fiscal 2001. During fiscal 2001, 2002 and 2003, we were engaged in the development of the RIS, through the use of third-party and internal software developers, and spent $0.6 million, $1.1 million and $0.4 million, respectively, in relation to this development. During fiscal 2003, we successfully implemented certain phases of the RIS into a number of centers within our network.

As part of our ongoing evaluation process, we identified in fiscal 2003 certain third-party software packages that could be used to complete our RIS project in a more cost and time effective manner. As a result, during the fourth quarter of fiscal 2003, we elected to implement certain third-party software in place of developing like systems under the RIS framework. We spent $0.5 million in fiscal 2003 for these software packages.

than the end of fiscal 2005. We have budgeted $0.9 million for the year ending December 31, 2004 related to this implementation.

Roll-out of a fully integrated patient administration and billing system is dependent on (1) our ability to successfully complete development of the RIS system, and (2) suppliers of, among other things, bandwidth and the software and hardware elements of the systems. If we are unable to successfully implement and integrate this system, we could experience substantial delays in collection of net revenues.

Customer service

We provide high quality, diagnostic imaging services to our customers. Our philosophy of delivering high quality patient care and customer service permeates our entire organization and all levels of management. Our emphasis on customer service enables us to develop strong relationships with referral sources and to attract top radiologists. We focus on conveniently locating our centers, answering our phones in under three rings and reducing waiting times through extended and weekend hours. In addition, our policy is to provide the referring physicians with their patients’ scans within one business day after a procedure is performed. Each quarter, we randomly select a group of centers and conduct randomized or blind customer service tests. Our center managers are compensated based on their respective center’s performance against our best practices benchmarks.

Payors

Our revenue is generated by providing patient services at our diagnostic imaging centers. Patient services revenue is earned from services billed directly to patients or third-party payors (generally Medicare, Medicaid, commercial payors and workers compensation funds) on a fee-for-service basis. The following table illustrates our payor mix based on net revenue for the year ended December 31, 2003:

Payor type

Commercial			56.0	%
Government:			24.3	%
Medicare	18.8	%
Medicaid/Other	5.5	%
Workers Compensation			6.5	%
Other(1)			13.2	%

(1) Includes co-payments and direct payments by patients.

Our eligibility to provide service in response to a referral is often dependent on the existence of a contractual arrangement with the referred patient’s insurance carrier (primarily if the insurance is a managed care organization). We have over 160 different contracts with commercial payors, and no one commercial payor accounted for more than 5.0% of our net revenue during the year ended December 31, 2003. These contracts, which describe the negotiated fees to be paid by each payor for the diagnostic imaging services we provide, enable us to serve patients with insurance coverage through their applicable commercial payors. Each of our center managers is responsible for billing our payors in accordance with the terms of these contracts and with our corporate policies.

Marketing

Each of our centers typically has a marketing manager who is fully dedicated to marketing activities. Each center manager also spends a significant amount of time on marketing activities. We perform marketing activities at the local level in an effort to attract new patients, expand and maintain relationships with referring physicians and payors, grow revenue at our existing centers and maintain contractual relationships. Marketing activities include participating in health fairs, organizing and presenting educational programs on new applications and uses of diagnostic imaging technology,

developing and conducting customer service programs and calling managed care organizations and third-party insurance companies to solicit additional contracts. Each of our centers also has pamphlets describing the services offered at that center. Marketing activities principally focus on referring physicians and managed care entities, while general awareness programs are targeted to patients and referring physicians.

Suppliers

Several substantial companies are presently engaged in the manufacture of MRI (including Open MRI), CT and other diagnostic imaging equipment, including Philips Medical Systems, Inc., Siemens Medical Systems, Inc., GE Medical Systems, Inc., Hitachi Medical Systems America, Inc. and Toshiba American Medical. We purchase contrast agents, which are used in some of our procedures, and film from SourceOne or other distributors. The majority of the contrast agents and film are manufactured by Berlex Laboratories, Inc., Bracco Diagnostics, Inc, and Eastman Kodak Company. Most of our equipment is serviced through equipment servicing contracts with Philips and Hitachi as described below. We believe that we have good working relationships with all of our major suppliers.

In January 2003, we entered into a new service contract with Philips Medical Systems North America which requires them to service substantially all of our diagnostic imaging equipment on a twenty-four hour a day, seven day a week basis. This contract requires that we terminate existing contracts with other service providers where possible. The service contract has an initial term of five years and is priced at a fixed annual amount of $8.4 million, which is subject to increase based on our achieving certain levels of annual net patient revenue. The agreement provides that we are responsible for the cost of consumable items associated with the diagnostic imaging equipment covered by this agreement while Philips is responsible for the cost of labor and parts associated with repairs to such equipment. Our existing service contract with Hitachi Medical Systems America, Inc. requires them to provide planned preventative maintenance and remedial maintenance as needed on certain of our diagnostic imaging equipment. The service contract with Hitachi expires on December 31, 2004 and is priced at a fixed annual service cost for each MRI system covered under the service agreement. We are required to pay Hitachi an aggregate of $0.5 million per year under this service contract. The agreement provides that Hitachi is responsible for the cost of parts associated with maintenance of the equipment and for all authorized operating software enhancements. The agreement grants us discounts on parts and options not covered by the agreement.

Competition

The overall diagnostic imaging services market is competitive, with services being provided in multiple settings and by several different types of providers. We compete principally on the basis of our reputation for delivering high quality images and reports in a timely manner, the comfort and care we provide to patients in our centers and price. We compete with other FICs, groups of radiologists, hospitals, ambulatory surgery centers and non-radiologist physician practices, including equipment manufacturers and leasing companies that own and operate imaging equipment. Our major competitors in the FIC market include: HealthSouth Corporation, Radiologix, Inc., InSight Health Services Corp. and Alliance Imaging, Inc. Our competition also includes hospitals and medical clinics that provide diagnostic imaging services by leasing mobile diagnostic imaging equipment on a full or part-time basis.

We operate in the FIC market, which is highly fragmented and characterized by a small group of large competitors and a large number of small competitors. Many of these small competitors are either sole proprietorships or are part of radiology medical practices.

In addition, in the past some non-radiologist physician practices have refrained from establishing their own diagnostic imaging centers because of federal physician self-referral legislation. Final regulations issued in January 2001 clarify certain exceptions to the physician self-referral legislation, which may create opportunities for and encourage some physician practices to establish their own diagnostic imaging centers within their group practices, which may compete with us.

Environmental matters

We are subject to federal, state and local regulations governing the storage, use and disposal of hazardous materials and medical and radioactive waste products. Our diagnostic centers generate small amounts of medical wastes or other hazardous materials, and some of our imaging services involve the use of radioactive materials. Although we believe that our procedures for storing, handling and disposing of these hazardous materials comply with the standards prescribed by law and adequately provide for the safety of our patients, employees and the environment, we cannot completely eliminate the risk of accidental releases, contamination or injury associated with these materials. In the event of an accident, we could be held liable for any damages that result, and any liability could exceed the limits or fall outside the coverage of our insurance. We may not be able to maintain insurance on acceptable terms or at all. We could incur significant costs and the diversion of our management’s attention in order to comply with current or future environmental, health and safety laws and regulations. We have not had material expenses related to environmental, health and safety laws or regulations to date.

Insurance

We may be subject to professional liability claims including, without limitation, for improper use or malfunction of our diagnostic imaging equipment. We maintain insurance policies with coverage that we believe is appropriate in light of the risks attendant to our business and consistent with industry practice. However, adequate liability insurance may not be available to us in the future at acceptable costs or at all.

We maintain general liability, professional liability and umbrella coverage in commercially reasonable amounts. As of December 31, 2003, our aggregate policy limits for these insurance policies were $2.0 million, $3.0 million and $20.0 million, respectively. Additionally, we maintain workers’ compensation insurance on all employees. Coverage is placed on a statutory basis and responds to each state’s specific requirements. We have not assumed any material liabilities, known or unknown, of any of the centers we have acquired. However, claims may be asserted against us for events that occurred prior to our acquiring these acquisitions.

The radiologists at our centers may from time to time be subject to malpractice claims. To protect against possible professional liability, we maintain professional liability insurance. We also require all affiliated radiologists to obtain their own malpractice insurance policies at appropriate levels. Nevertheless, claims, suits or complaints relating to services provided by the radiologists at our centers may be asserted against us in the future, including malpractice.

Industry overview

Diagnostic imaging services are non-invasive procedures that generate representations of the internal anatomy and convert them to film or digital media. Diagnostic imaging systems facilitate the early diagnosis of injuries, diseases and disorders, often reducing the cost, the amount of care required and the need for costly and invasive diagnostic procedures. Diagnostic imaging procedures include MRI, CT, positron emission tomography (“PET”), nuclear medicine, ultrasound, mammography, x-ray and fluoroscopy.

Diagnostic imaging modalities

Magnetic Resonance Imaging or MRI. MRI involves the use of high-strength magnetic fields to produce computer-processed cross-sectional images of the body. Due to its superior image quality, MRI is the preferred imaging technology for evaluating soft tissue and organs, including the brain, spinal cord and other internal anatomy. With advances in MRI technology, MRI is increasingly being used for new applications such as imaging of the heart, chest and abdomen. Conditions that can be detected by MRI include multiple sclerosis, tumors, strokes, infections and injuries to the spine, joints, ligaments and tendons. Unlike x-rays and CT, MRI does not expose patients to radiation.

Computed Tomography or CT. In CT imaging, a computer analyzes the information received from an x-ray beam to produce multiple cross-sectional images of a particular organ or area of the body. CT imaging is used to detect tumors and other conditions affecting bones and internal organs. It is also used to detect the occurrence of strokes, hemorrhages and infections. CT provides higher resolution images than conventional X-rays, but generally not as well-defined as those produced by MRI.

Nuclear Medicine or Gamma Camera. Nuclear medicine, or gamma camera, utilizes short-lived radioactive isotopes that release small amounts of radiation that can be recorded by a gamma camera and processed by a computer to produce an image of various anatomical structures or to assess the function of various organs such as the heart, kidneys, thyroid and bones. Nuclear medicine is used primarily to study anatomic and metabolic functions.

Positron Emission Tomography or PET. PET utilizes a scanner to record signals emitted by compounds with signal-emitting tracers after these compounds are injected into a patient’s body. A scanner records the signals as they travel through the body and collect in the various organs targeted for examination. PET provides detection and tracking of cancers, coronary disease and neurological problems.

Ultrasound. Ultrasound imaging utilizes high-frequency sound waves to develop images of internal organs, fetuses and the vascular system. Ultrasound has widespread applications, particularly for procedures in obstetrics, gynecology and cardiology.

Mammography. Mammography is a specialized form of radiology utilizing low dosage x-rays to visualize breast tissue and is the primary screening tool for breast cancer.

General Fluoroscopy. Fluoroscopy utilizes ionizing radiation combined with a video viewing system for real time monitoring of organs.

General X-ray. X-rays utilize high-energy radiation to penetrate the body and record images of organs and structures on film. X-rays are used in low doses to treat disease or injury and in high doses to treat cancer.

Diagnostic imaging settings

Diagnostic imaging procedures are typically performed in hospitals, freestanding centers and mobile/shared-service units.

Hospitals and Clinics. Hospitals provide inpatient and outpatient diagnostic imaging services, typically on site. These inpatient and outpatient centers are owned and operated by the hospital/clinic and are primarily used by patients of the hospital or clinic. The hospital or clinic bills third-party payors, such as health insurers, Medicare or Medicaid.

FICs. Independent, fixed-site, outpatient, diagnostic imaging centers are not generally owned by hospitals or clinics. These centers depend upon physician referrals for their patient volume and generally do not maintain dedicated, contractual relationships with hospitals or clinics. FICs typically perform their own billing, sales and marketing functions. Freestanding diagnostic imaging centers are generally located in metropolitan areas with established demand for MRI and other imaging services.

Mobile providers. In contrast to FICs, mobile imaging operators operate diagnostic imaging systems in mobile trailers, providing their customers with shared-service or full-time diagnostic imaging services. Mobile providers target small to mid-size hospitals in non-urban areas in need of advanced imaging technologies but without the procedure volume or customer base to justify a fixed-site location. The mobile provider is paid directly by the hospital or the clinic.

Industry trends

Wider acceptance by physicians, payors and patients. Imaging modalities, in particular MRI, continue to gain widespread acceptance from both physicians and payors because of the enhanced diagnostic applications and reduced cost to the payor of early diagnosis of an ailment. We believe that favorable managed care trends, including the elimination of pre-authorization requirements, will increase utilization of imaging modalities. Patients have begun to demand faster service and improved access to imaging procedures because of the non-invasive benefits that imaging procedures provide. With physicians, payors and patients increasingly focused on high quality, easily accessible and more cost-effective care, we believe that the role that diagnostic imaging plays in the delivery of healthcare will continue to increase over the next decade.

Increasing number of applications. The use of imaging modalities such as MRI and CT has increased rapidly in recent years as these technologies enable physicians in a wide variety of specialties, including orthopedics, neurology, cardiology and internal medicine, to diagnose an increasing number of diseases and injuries quickly and accurately without exploratory surgery or other invasive procedures. For instance, whereas MRI has traditionally been used primarily for imaging of the spine, brain and bones, physicians are now utilizing MRI equipment to examine blockages in coronary arteries, a procedure that previously required exploratory surgery. Similarly, new CT applications include advanced chest and abdominal imaging.

Favorable demographic trends. According to the United States Census Bureau, the number of people in the United States over the age of 65 should more than double from its level of 35.1 million in 2000 to 70.3 million by 2030. Also, in the next ten years the most dramatic change in the demographic mix by age range should be in the 55 to 65 year-old age range. Utilization of diagnostic imaging services increases with age; therefore we believe the aging population and associated demographic trends should drive increased procedure volume. We believe that on average an individual in the 55 to 65 year-old range utilizes approximately 1.5 imaging procedures per year and an individual in the 65 and older age range utilizes approximately 2.5 imaging procedures per year, compared to individuals in the 25 to 35 age range who utilize approximately 0.5 imaging procedures per year.

Stable technology environment. The pace of technological innovation in diagnostic imaging has stabilized, reducing the risk of equipment obsolescence and the need for large capital expenditures. As the development of new imaging technologies has slowed, the diagnostic imaging services industry has increasingly utilized less expensive software and hardware upgrades to existing equipment that improve image, reduce image acquisition time and increase the volume of scans that can be performed. We believe this trend toward equipment upgrades will continue, as we do not foresee new imaging technologies on the horizon that will displace MRI or CT.

Increased role of preventive medicine. In addition, diagnostic imaging is increasingly being used as a screening tool for preventive care. We believe that future technological advances will continue to enhance the ability of radiologists to diagnose and influence treatment. For example, experimental MRI techniques, such as magnetic resonance spectroscopic imaging, are used to show the functions of the brain and to investigate how epilepsy, brain tumors, Alzheimer’s and other abnormalities affect the brain.

Regulation

Licensing and certification. Healthcare facility construction and operation is subject to federal, state and local laws relating to the adequacy of medical care, equipment, personnel, operating policies and procedures, maintenance of adequate records, compliance with building codes, and environmental protection laws. Diagnostic imaging centers must meet requirements under these laws in order to participate in government programs, including the Medicare and Medicaid programs.

In addition, free-standing diagnostic imaging centers that provide services independent of a physician’s office must be enrolled by Medicare as an independent diagnostic testing facility (an “IDTF”) to bill the Medicare program. Medicare carriers have discretion in applying the IDTF requirements and therefore the application of these requirements may vary from jurisdiction to jurisdiction.

Notwithstanding this complexity, we conduct our operations in compliance with federal, state and local laws and make every effort to satisfy the IDTF requirements or operate as a qualified physician’s office.

Certificates of need. The laws of some of the states in which we operate limit our ability to acquire new diagnostic imaging equipment or expand or replace our existing equipment at diagnostic imaging centers because these states require a certificate of need or similar regulatory approval prior to the acquisition of high-cost capital items including diagnostic imaging systems or provision of diagnostic imaging services by us or by those parties for whom we manage facilities. Five of the 13 states in which we operate require a CON and more states may adopt similar licensure frameworks in the future. In many cases, a limited number of these CONs are available in a given state. If we are unable to obtain the applicable CONs or additional certificates or approvals necessary to expand our operations, these regulations may limit or preclude our operations in the relevant jurisdictions.

Conversely, states in which we have obtained a certificate of need may repeal existing certificate of need regulations or liberalize exemptions from the regulations. For example, Missouri has liberalized exemptions from certificate of need programs. The repeal of certificate of need regulations in states in which we have obtained a certificate of need or a certificate of need exemption would lower barriers to entry for competition in those states and could adversely affect our business.

Our ability to obtain a CON (or exemption there from) in a particular state is not a definitive guarantee that our operations under the applicable CON law will be unchallenged. One or more parties may challenge our CON (or exemption there from) from time to time. While such challenges could be raised on a number of issues, they generally would be based upon the application or interpretation of certain financial formulae contained within the applicable CON statute and either: (i) our adherence to that formulae in the submission of our CON (or exemption there from) application or (ii) the applicable state agency’s interpretation or application of the CON statute in its review of our application. If we are unable to succeed against challenges to our CONs (or exemptions there from), we may be limited or precluded from continuing our operations in the relevant jurisdictions.

Fee-splitting; corporate practice of medicine. The laws of many states in which we maintain facilities prohibit unlicensed persons or business entities, including corporations, from employing physicians or engaging in certain financial arrangements, such as splitting professional fees between physicians and non-physicians. These laws and their interpretations vary from state to state and are enforced by state courts and regulatory authorities, each with broad discretion. Possible sanctions for violations of these restrictions include loss of a physician’s license, civil and criminal penalties and rescission of business arrangements that may violate these restrictions. We structure our relationships with these radiologists in a manner that we believe does not constitute the practice of medicine by us. Although we exercise care to structure our arrangements with healthcare providers to comply with the relevant state laws, and believe our current arrangements substantially comply with applicable laws, we cannot assure you that government officials charged with responsibility for enforcing these laws will not assert that we, or transactions in which we are involved, are in violation of such laws, or that such laws ultimately will be interpreted by the courts in a manner consistent with our interpretations.

Medicare and Medicaid reimbursement programs. Our revenue is derived through our ownership, operation and management of diagnostic imaging centers. During the year ended December 31, 2003, approximately 24.3% of our net revenue generated at our diagnostic imaging centers was derived from government sponsored healthcare programs (principally Medicare and Medicaid).

Medicare. The Medicare program is a social health insurance program that provides health care to Americans who either are sixty-five years of age or older or have certain qualifying conditions. There are three separate “Parts” to the Medicare program, with the services that we provide being reimbursed under Part B, which covers physician, outpatient ambulatory and ancillary services, such as diagnostic imaging services.

Under prior Medicare policy, imaging centers generally participated in the Medicare program as either medical groups or, subject to the discretion of individual Medicare carriers, independent physiological laboratories. However, in 1997, the Centers for Medicare and Medicaid Services (“CMS”)

created a new Medicare enrollment category entitled “Independent Diagnostic Treatment Facilities” (“IDTFs”). CMS has created one exception to IDTF enrollment, which applies to radiology group practices. While we generally have enrolled our imaging centers with the Medicare program as IDTFs, some of our centers are enrolled as radiology group practices.

The physician fee schedule is a statutory formula pursuant to which the Department of Health and Human Services assigns relative values to covered medical procedures based on the specific procedure’s ranking relative to the other procedures on the scale. The physician fee schedule is subject to annual updates which adjust the rates payable per procedure for inflation, subject to an adjustment that assures projected spending for the year meets allowed spending for that year. In 2001, the Medicare program announced a reduction in virtually all services reimbursed under the Medicare physician fee schedule (including the diagnostic imaging services we provide), resulting in an approximately 11.0% reduction in 2002 for the services that we render. Fee reimbursements were increased by 1.6% in February 2003 for procedures performed on or after March 1, 2003 and were subsequently increased by 4.5% effective January 1, 2004. Medicare reimbursement represented 18.8% of our net revenue for the year ended December 31, 2003.

Medicaid. The Medicaid program is a jointly-funded federal and state program providing coverage for low-income persons. In addition to federally-mandated basic services, the services offered and reimbursement methods vary from state to state although both the federal government and many states are currently considering significantly reducing Medicaid funding. In most states in which we operate, Medicaid reimbursement for diagnostic imaging services is lower than the reimbursement rates paid by other payors (including the Medicare program), and some states have established or are establishing payment methodologies intended to provide healthcare services to Medicaid patients through managed care arrangements. In two states in which we operate, the state Medicaid agencies have refused to authorize entities organized as free-standing diagnostic imaging centers to enroll in the Medicaid program. Medicaid represented 5.5% of our net revenue for the year ended December 31, 2003.

Federal Anti-Kickback and Stark Laws. Federal law prohibits the knowing and willful offer, payment, solicitation or receipt of any form of remuneration in return for, or to induce, (i) the referral of a person, (ii) the furnishing or arranging for the furnishing of items or services reimbursable under Medicare, Medicaid or other governmental programs or (iii) the purchase, lease or order or arranging or recommending purchasing, leasing or ordering of any item or service reimbursable under Medicare, Medicaid or other governmental programs.

The Office of Inspector General at the Department of Health and Human Services has published safe harbor regulations that outline categories of activities that are deemed protected from prosecution under the anti-kickback statute, provided all applicable criteria are met. The failure to meet all of the applicable safe harbor criteria does not mean, however, that the particular arrangements violate the anti-kickback statute. We have a variety of physician arrangements and, although we do not believe that these agreements violate the law, we cannot assure you that regulatory authorities will not determine otherwise or that all of our arrangements meet all of the applicable safe harbor criteria, especially as enforcement of this law historically has been a high priority for the federal government. Noncompliance with the federal anti-kickback legislation can result in exclusion from Medicare, Medicaid or other governmental programs as well as civil and criminal penalties, any of which could have an adverse effect on our business and results of operations.

The Social Security Act also includes a provision commonly known as the “Stark Law.” This law prohibits a physician from referring Medicare (and to some extent Medicaid) patients to an entity providing “designated health services,” including, without limitation, radiology services, in which the physician has an ownership or investment interest or with which the physician has entered into a compensation arrangement. The penalties for violating the Stark Law include a prohibition on payment by these governmental programs and civil penalties of as much as $15,000 for each violative referral and $100,000 for participation in a “circumvention scheme” as well as civil penalties of twice the dollar value of each service and exclusion from future participation in the Medicare and Medicaid programs.

On January 4, 2001, the Health Care Financing Administration, Department of Health and Human Services, now known as the Centers for Medicare and Medicaid Services (“CMS”), published final Phase I regulations to implement the Stark Law. Under these final regulations, radiology and certain other imaging services are included in the designated health services subject to the self-referral prohibition. Under the final regulations, such services include the professional and technical components of any diagnostic test or procedure using X-rays, ultrasound or other imaging services, computerized axial tomography, MRI, radiation therapy and diagnostic mammography services (but not screening mammography services). The final regulations, however, exclude from designated health services: (i) X-ray, fluoroscopy or ultrasonic procedures that require the insertion of a needle, catheter, tube or probe through the skin or into a body orifice; (ii) radiology procedures that are integral to the performance of, and performed during, non-radiological medical procedures; (iii) nuclear medicine procedures; and (iv) “invasive” or “interventional” radiology, because the radiology services in these procedures are merely incidental or secondary to another procedure that the physician has ordered.

The Stark Law provides that a request by a radiologist for diagnostic radiology services, if such services are furnished by or under the supervision of such radiologist or another radiologist in the same group practice pursuant to a consultation requested by a third party physician, does not constitute a “referral” by a “referring physician.” The effect of the Stark Law on the radiology practices, therefore, will depend on the precise scope of services furnished by each such practice’s radiologists and whether such services derive from consultations or are self-generated.

Although, we believe that we have structured our acquisitions of the assets of existing practices and our service agreements for management and administrative services so as to not violate the Stark Law and regulations, a determination of liability under the Stark law could have an adverse effect on our business, financial condition and results of operations.

Federal False Claims Act. The Federal False Claims Act provides, in part, that the federal government may bring a lawsuit against any person whom it believes has knowingly presented, or caused to be presented, a false or fraudulent request for payment from the federal government, or who has made a false statement or used a false record to get a claim approved. In addition, amendments in 1986 to the Federal False Claims Act have made it easier for private parties to bring “qui tam” whistleblower lawsuits against companies. Penalties include fines ranging from $5,500 to $11,000 for each false claim, plus three times the amount of damages sustained by the federal government.

In February 2003, we received a request for documents from the United States Department of Justice regarding our billing and other practices. While we believe that we are in material compliance with applicable governmental laws and regulations, in the event that the United States government believes that any wrongdoing has occurred, we could be subject to fines and penalties and could be excluded from government reimbursement programs. Any such result could have a material adverse effect on our financial position and results of operations.

State Fraud and Abuse Provisions. Most of the states in which our diagnostic imaging centers are located have adopted a form of anti-kickback law, almost all of those states have also adopted a form of Stark Law, and some have adopted separate false claims provisions. The scope of these laws and the interpretations of them vary from state to state and are enforced by state courts and regulatory authorities, each with broad discretion. Generally, state laws cover all referrals by all healthcare providers for all healthcare services. A determination of liability under such laws could result in fines and penalties and restrictions on our ability to operate in these jurisdictions.

In February 2003, a class action lawsuit was filed in the State Court of Fulton County in the State of Georgia against us, our subsidiaries, officers and directors, as well as various physician groups that conduct business with us (“Class Action”). The Class Action raises questions concerning the legality of the purchase service agreements under the Georgia Patient Self-Referral Act of 1993 (the “Georgia Act”). In the fourth quarter of fiscal 2003, the original assigned judge recused herself due to a conflict of interest and a new judge was assigned. Due to the continuing preliminary state of the Class Action and the fact that the complaint does not allege damages with any specificity, we are unable at this time to assess the probable outcome of the Class Action or the materiality of the risk of loss. However, we believe that

these agreements neither violate the Georgia Act nor are improper under Georgia law and will vigorously defend the Class Action. However, we can give no assurances of the ultimate impact on our financial position or results of operations.

Administrative Simplification Provisions of the Health Insurance Portability and Accountability Act of 1996. The Administrative Simplification Provisions of the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) required the Department of Health and Human Services to adopt standards to protect the security and privacy of health-related information. Although the Department of Health and Human Services issued proposed rules in 1998 concerning the security standards, final rules were not adopted until February 20, 2003. The security standards contained in the final rules do not require the use of specific technologies (e.g., no specific hardware or software is required), but instead require health plans, healthcare clearinghouses and healthcare providers to comply with certain minimum security procedures in order to protect data integrity, confidentiality and availability.

With respect to the privacy standards, the Department of Health and Human Services published final rules in December of 2000. However, on August 14, 2002, the Department of Health and Human Services published final modifications to the privacy standards. The final modifications eliminated the need for patient consent when the protected health information is disclosed for treatment payment issues or health care operations. In addition, the final modifications clarified the requirements related to authorizations, marketing and minimum necessary disclosures of information. All healthcare providers were required to be compliant with the new federal privacy requirements no later than April 14, 2003. We were compliant with this federal privacy requirement as of April 14, 2003.

The HIPAA privacy standards contain detailed requirements regarding the use and disclosure of individually identifiable health information. Improper use or disclosure of identifiable health information covered by the HIPAA privacy regulations can result in the following fines and/or imprisonment: (i) civil money penalties for HIPAA privacy violations are $100 per incident, up to $25,000, per person, per year, per standard violated; (ii) a person who knowingly and in violation of the HIPAA privacy regulations obtains individually identifiable health information or discloses individually identifiable health information to another person may be fined up to $50,000 and imprisoned up to one year, or both; (iii) if the offense is committed under false pretenses, the fine may be up to $100,000 and imprisonment for up to five years; and (iv) if the offense is done with the intent to sell, transfer, or use individually identifiable health information for commercial advantage, personal gain, or malicious harm, the fine may be up to $250,000 and imprisonment for up to ten years.

HIPAA also required the Department of Health and Human Services to adopt national standards establishing electronic transaction standards that all healthcare providers must use when submitting or receiving certain healthcare transactions electronically. Although these standards were to become effective October 2002, Congress extended the compliance deadline until October 2003 for organizations, such as ours, that submitted a request for an extension. We were compliant with these electronic transaction standards as of October 2003.

Compliance program. We have a program to monitor compliance with federal and state laws and regulations applicable to healthcare entities. Our program also monitors compliance with our Corporate Compliance Plan, which details our standards for: (1) business ethics, (2) compliance with applicable federal, state and local laws, (3) business conduct, and (4) quality of service. An important part of our compliance program consists of conducting periodic audits of various aspects of our operations. We also conduct mandatory educational programs designed to familiarize our employees with the regulatory requirements and specific elements of our compliance program. We believe that our compliance program has been structured in light of the guidance provided by the Office of Inspector General of the U.S. Department of Health and Human Services.

Internal Audit. We organized our internal audit function during the fourth quarter of fiscal 2003. This group has commenced the development of an internal audit function focused on monitoring compliance with our policies and procedures, including those related to billing and collections. The internal audit function is being developed within the framework dictated by the Institute of Internal

Auditor’s Standards for the Professional Practice of Internal Auditing and other relevant professional standards.

Item 2. Properties

We lease approximately 50,000 square feet of space in Alpharetta, Georgia for our executive and principal administrative offices. As of December 31, 2003, we operated 85 centers in 13 states as described in the following table:

State	Percentage of total revenues for the year ended December 31, 2003		Total number of centers		Number of de novo centers	Number of acquired centers

Georgia*	20.5	%	21		15	6
South Carolina*	14.9	%	13		7	6
North Carolina*	23.5	%	12	(1)	5	7
Arizona	13.5	%	7		2	5
Florida	4.4	%	6		4	2
Missouri	2.6	%	6		4	2
Alabama	3.7	%	4		3	1
Tennessee*	4.7	%	4		1	3
Virginia*	4.1	%	4		0	4
Texas	3.5	%	4		3	1
Wisconsin	0.9	%	2		1	1
New Mexico	3.0	%	1		0	1
Illinois	0.7	%	1		0	1
	100.0	%	85		45	40

* Indicates state where certificate of need is required.

(1) Includes a joint venture, in which we own 50% of the outstanding membership interests.

As of December 31, 2003, we owned one and leased 84 of the properties upon which our 85 centers were located. We lease certain of our properties from related parties (See Item 13).

Item 3. Legal proceedings

We are engaged from time to time in the defense of lawsuits and administrative proceedings arising in the ordinary course and conduct of our business and have insurance policies covering potential insurable losses where this coverage is cost-effective.

In the fourth quarter of fiscal 2003, the original assigned judge recused herself due to a conflict of interest and a new judge was assigned. Due to the continuing preliminary state of the Class Action and the fact that the complaint does not allege damages with any specificity, we are unable at this time to assess the probable outcome of the Class Action or the materiality of the risk of loss. However, we believe that these agreements neither violate the Georgia Act nor are improper under Georgia law and will vigorously defend the Class Action. However, we can give no assurances of the ultimate impact on our financial position or results of operations.

We believe that we have adequately reserved for those liabilities related to the aforementioned legal contingencies.

Item 4. Submission of Matters to a Vote of Security Holders

None

Part II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

There is no established public trading market for the Class A common stock and common stock of MQ Associates. There were six owners of record for each of the Class A common stock and common stock of MQ Associates at March 25, 2004. MQ Associates has not paid a dividend in relation to any class of its common stock and does not anticipate paying any dividends in the foreseeable future. In addition, the senior credit facility, as amended, and indenture related to the 11⁷/₈% senior subordinated notes of MedQuest, Inc. limits the ability of MedQuest, Inc. to pay dividends to MQ Associates.

As of December 31, 2003, the fourth amended and restated certificate of incorporation of MQ Associates authorized 385,000,000 shares of capital stock consisting of (i) 195,000,000 shares of Common Stock, par value $.001, (ii) 115,000,000 shares of Class A Common Stock, par value $.001 per share, and (iii) 75,000,000 shares of Preferred Stock, par value $.001, of which (a) 35,000,000 shares are designated as Series A Redeemable Preferred Stock (the “Series A Preferred Stock”) and (b) 15,000,000 shares are designated as Series B Redeemable Convertible Preferred Stock (the “Series B Preferred Stock”).

On August 15, 2002, in connection with the recapitalization of MQ Associates, (i) 28,605,000 shares of Common Stock, (ii) 72,100,000 shares of Class A Common Stock, (iii) 35,000,000 shares of Series A Preferred Stock and (iv) 15,000,000 shares of Series B Preferred Stock were issued. As part of the recapitalization, MQ Investment Holdings, LLC made an equity investment of $107.1 million in MQ Associates and received in return 72,100,000 shares of Class A Common Stock and 35,000,000 shares of Series A Preferred Stock. In addition, as part of the recapitalization, 23.6% of the outstanding Common Stock and Class B Common Stock, which equaled 41.1% of the total stock holdings of the management stockholders immediately prior to the recapitalization were reclassified as 28,605,000 shares of Common Stock and 15,000,000 shares of Series B Preferred Stock, which in the aggregate equaled approximately 30.0% of the ownership of MQ Associates on a fully diluted basis following the consummation of the recapitalization.

We believe that the foregoing issuances of our equity securities in the recapitalization transactions did not involve a public offering or sale of securities and were exempt from the registration requirements of the Securities Act pursuant to the exemption from registration afforded by Section 4(2) of the Securities Act. No underwriters, brokers or finders were involved in these transactions.

The Series A Preferred Stock is convertible, at the option of the holder, (i) immediately prior to a liquidation or sale of MQ Associates, into a total of 35,000,000 shares of Class A Common Stock, or (ii) immediately prior to the consummation of an underwritten public offering, into the number of shares resulting from dividing $35,000,000 by the underwritten public offering price per share. In the event of liquidation or sale of MQ Associates, the Series A Preferred Stock is entitled to an amount equal to the

greater of $1.00 per share or the amount to be paid, per share, as if the Series A Preferred Stock had been converted into Class A Common Stock immediately prior to the liquidation.

The Series B Preferred Stock (i) is convertible, at the option of the holder, immediately prior to a liquidation or sale of MQ Associates, into a total of 17,295,000 shares of Common Stock and (ii) immediately prior to the consummation of an underwritten public offering, will be deemed automatically converted into the number of shares resulting from dividing $15,000,000 by the underwritten public offering price per share, plus 2,295,000 shares of Common Stock. In the event of a liquidation or sale of MQ Associates, the Series B Preferred Stock is entitled to an amount equal to the greater of $1.00 per share or the amount to be paid, per share, as if the Series B Preferred Stock had been converted into Common Stock immediately prior to the liquidation.

The Series A Preferred Stock and Series B Preferred Stock may be redeemed at the option of the holder upon the consummation of an underwritten public offering at a redemption price of $35,000,000 for all of the Series A Preferred Stock and $15,000,000 for all of the Series B Preferred Stock. Additionally, in the case of such redemption, the holders of Series B Preferred Stock will receive 2,295,000 share of Common Stock. In the event that (i) MQ Associates and its underwriters determine that the redemption of the Series B Preferred Stock would adversely affect a planned underwritten public offering or (ii) the holders of shares of Series B Preferred Stock elect not to redeem share of Series B Preferred Stock, MQ Associates may convert all shares of Series B Preferred Stock into 17,295,000 shares of Common Stock.

The conversion provisions related to the Series A and Series B Preferred Stock are subject to adjustment for certain events. Upon the consummation of any liquidation or sale of MQ Associates, after payment of the preference to the holders of Series A Preferred Stock, the holders of Class A Common Stock will be entitled to receive out of the proceeds of such liquidation or sale, before any payment will be made to the holders of any capital stock ranking junior to the Class A Common Stock, an amount per share of Class A Common Stock equal to the original cost of such share. After payment has been made to the holders of Class A Common Stock of the full amount set forth in the preceding sentence, the holders of Common Stock will be entitled to receive out of the proceeds of such liquidation or sale an amount per share of Common Stock equal to the original cost of each such share of Common Stock pari passu with the payment of the preference to the holders of Series B Preferred Stock. After payment of the amounts set forth above, the holders of Common Stock and the holders of Class A Common Stock will share ratably in the remaining proceeds, if any, of such liquidation or sale.

Item 6. Selected Financial Data

The following table sets forth our selected historical consolidated financial data and other data. The summary consolidated historical financial data set forth below should be read in conjunction with and is qualified in its entirety by reference to “Management’s discussion and analysis of financial condition and results of operations,” the audited consolidated financial statements and the related notes included elsewhere in this Form 10-K. The selected consolidated financial data as of and for the fiscal years ended December 31, 2001, 2002 and 2003 have been derived from financial statements audited by PricewaterhouseCoopers, LLP. The selected consolidated financial data for the fiscal years ended December 31, 1999 and 2000 have been derived from financial statements audited by Elliott Davis, LLC.

	Fiscal year ended December 31,
(dollars in millions)	1999			2000			2001			2002			2003

Statement of operations data:
Net revenues from services	$	56.7		$	85.9		$	142.3		$	203.4		$	242.9
Costs and expenses
Operating expenses, excluding depreciation and amortization	25.0			35.6			61.0			89.4			105.1
Marketing, general and administrative expenses	17.3			25.6			55.6			61.5			76.4
Depreciation and amortization(1)	9.2			11.2			17.5			23.9			28.3

Income from operations	5.2			13.5			8.2			28.6			33.1
Interest expense, net	4.1			4.8			8.2			26.6			24.3

Income before provision for income taxes	1.1			8.7			0.0			2.0			8.8
Provision (benefit) for income taxes(2)	(0.3		)	3.4			4.0			0.8			3.6
Minority interest in net income of consolidated subsidiaries	—			0.1			0.1			—			—

Net income (loss)	$	1.4		$	5.2		$	(4.1	)	$	1.2		$	5.2

Other financial data (unaudited):
Net cash and cash equivalents provided by operating activities	$	7.1		$	12.0		$	20.3		$	16.2		$	30.7
Net cash and cash equivalents used in investing activities	(11.6		)	(15.0		)	(60.1		)	(50.6		)	(34.5		)
Net cash and cash equivalents provided by financing activities	3.6			3.0			42.9			32.3			7.3
Capital expenditures:
Replacement	0.6			0.8			1.3			2.5			6.5
Expansion and acquisition of centers and de novo centers	11.0			14.2			58.8			50.3			26.1
Ratio of earnings to fixed charges(3)	1.2		x	2.6		x	1.0		x	1.1		x	1.3		x
Balance sheet data (at period end):
Cash and cash equivalents	$	2.3		$	2.3		$	5.4		$	3.2		$	6.7
Working capital(4)	8.7			13.2			20.7			31.7			39.0
Total assets	51.4			72.9			137.3			198.4			223.5
Total debt	46.1			58.1			115.6			238.9			249.7
Redeemable preferred stock	18.8			79.3			105.3			50.0			50.0
Total stockholders’ deficit(5)	(20.6		)	(75.9		)	(105.4		)	(118.2		)	(111.8		)

Operating data (unaudited):
Number of centers:
Balance, beginning of period	20			33			43			66			77
Additional de novo	12			5			10			4			7
Additional acquired	1			5			13			7			1

Balance, end of period	33			43			66			77			85

(1) In adopting SFAS 142, effective January 1, 2002, we no longer amortize goodwill and certificates of need. There was no impairment to goodwill and certificates of need as a result of the impairment test performed. Amortization expense for

goodwill and certificates of need for the years ended December 31, 1999, 2000 and 2001 was $0.3 million, $0.6 million and $0.9 million, respectively.

(2) During 1999 we were an S-corporation from January 1st through October 7th. Therefore, no federal income taxes were provided for during this period.

(3) Earnings consist of income before income taxes plus fixed charges (excluding capitalized interest). Fixed charges consist of (i) interest, whether expensed or capitalized, (ii) amortization of debt issuance costs and discount on the notes and (iii) an allocation of one-third of the rental expense from operating leases, which management considers to be a reasonable approximation of the interest factor of operating lease payments.

(4) Working capital is defined as current assets, excluding cash and cash equivalents, minus current liabilities, excluding the current portion of long term debt and line of credit.

(5) On March 30, 2001, TA Associates, Inc. made its second equity purchase and first subordinated debt loan to us. As of March 31, 2001, none of these funds had been used to repurchase a portion of the shares from the two founders. The repurchase took place in April, 2001 and a portion of the shares held by our co-founders were repurchased for $18.8 million. Such repurchase was accounted for as a $19.9 million reduction to stockholders’ equity. The increase in 1999 and 2000 reflects accretion to the redemption value of the redeemable preferred stock of MQ Associates.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The purpose of this section is to discuss and analyze the consolidated financial condition, liquidity and capital resources and results of operations of MQ Associates. This analysis should be read in conjunction with the consolidated financial statements and notes which appear elsewhere in this report. This section contains certain “forward-looking statements” within the meaning of federal securities laws that involve risks and uncertainties, including statements regarding our plans, objectives, goals, strategies and financial performance. The actual results achieved by MQ Associates could differ materially from results anticipated in these forward-looking statements as a result of factors set forth under “Forward-looking statements” and elsewhere in this report.

Executive Overview

We are a leading operator of FICs in the United States. We currently operate a network of 89 centers in 13 states primarily throughout the southeastern and southwestern United States of America. From 2001 to 2003, on average, 72.2% of our net revenue was derived from MRI services and 14.2% of our net revenue was derived from CT services. The remainder of our revenue was derived from nuclear medicine, general radiology (fluoroscopy and x-ray), ultrasound and mammography services.

Our revenue is generated by providing patient services. Generally, we directly bill patients or third-party payors (e.g. Medicare, Medicaid, commercial payors and workers compensation funds) on a fee-for-service basis. For the year ended December 31, 2003, approximately 56.0% of our net revenue came from commercial payors, 24.3% from government payors, 6.5% from workers compensation and 13.2% from other sources, including payments made directly by patients. Additionally, we have entered into purchase service agreements with physicians through which we provide diagnostic imaging services to a physician’s patients for a set fee which is paid by the physician, who then directly bills payors. These purchase service agreements represented approximately 8.8% of our net revenue for the year ended December 31, 2003, and were accounted for as payments by commercial payors, workers compensation and other sources. We have over 160 different contracts with commercial payors, and no single commercial payor accounted for more than 5.0% of our net revenue for the year ended December 31, 2003. Each of these contracts is renegotiated every two years. These contracts describe the negotiated fees to be paid by each payor for the diagnostic imaging services we provide to their members (our patients).

The principal components of our operating costs, excluding depreciation and amortization, are compensation paid to radiologists, technologists and transcriptionists, annual equipment maintenance costs, medical supplies, real estate rental expenses and equipment rental costs (which include rental costs for mobile units and operating expenses for certain equipment). Operating costs excluding depreciation and amortization, as a percentage of net revenue, have increased from 42.9% for the year ended December 31, 2001 to 43.3% for the year ended December 31, 2003. This increase was primarily a result of an increase in our radiologists and technologists costs.

The principal components of our marketing, general and administrative (“MG&A”) expenses are compensation paid to center managers, marketing managers, billers, collectors and other administrative personnel, marketing costs, business development expenses, corporate overhead costs and bad debt expense. MG&A costs, as a percentage of net revenue, have decreased from 39.0% for the year ended December 31, 2001 to 31.4% for year ended December 31, 2003.

MG&A costs included certain one-time charges incurred in fiscal 2001 related to non-cash compensation and the InMed litigation. The InMed litigation relates to a judgment returned against us in the amount of $2.1 million during the year ended December 31, 2001. This judgment is currently under appeal, however, we were indemnified in this matter by the management stockholders as part of the recapitalization transaction.

After considering the effects of these one-time charges, MG&A costs increased by 0.4% between the comparison periods. This increase was primarily the result of an addition of certain middle management and other support level employees in the areas of finance, compliance, operations and information technology to support future anticipated revenue growth.

From 2001 to 2003, for our centers that were in operation for 24 months or longer preceding the end of the period, we have increased average daily scan volumes across all of our modalities by 40.8%. Our average daily scan volume per machine for our MRI machines and CT machines increased at compound annual growth rates of 5.0% and 15.3%, respectively.

The average fee per scan for MRI and CT increased by 5.0% and 1.7%, respectively, from fiscal 2002 to fiscal 2003 and declined by 3.8% and 1.8%, respectively, from fiscal 2001 to fiscal 2002, in each case due to pricing variations among the geographic markets we serve and competition. Medicare payments for most diagnostic imaging services covered by Medicare were increased for fiscal 2003 by 1.6% and decreased by approximately 11% for fiscal 2002. To the extent that commercial payors with which we contract base their payments for diagnostic imaging services on current Medicare reimbursement levels, any changes in Medicare reimbursement rates will result in a corresponding change in reimbursement from our commercial payors.

Our growth has come from same center revenue, de novo development and strategic acquisitions. We increase our same center revenue by attracting new referring physicians, extending hours of operations, managing our scan and payor mix and adding capacity and modalities to meet local market needs. De novo development generally comes through expansion within our local markets. Strategic acquisitions allow us to quickly enter new markets as well as round out our regional networks of existing centers.

Significant acquisition

On September 1, 2001, one of our subsidiaries purchased the centers owned and operated by AMI Outpatient Services, Ltd. for a total purchase price of $18.6 million. In addition, this subsidiary agreed to pay an earn-out to the extent that the net revenue at six of the centers acquired from AMI, less the amount of any contractual adjustments, refunds and bad debt expense, exceeds certain thresholds. Net revenue is calculated for the twelve month periods ending August 31, 2002, 2003 and 2004, respectively. The maximum earn-out payable for each applicable twelve month period is $0.7 million. The earn-out paid was $0.2 million and $0.5 million for the periods ended August 31, 2002 and 2003, respectively. The business acquired by us from AMI constitutes a “significant subsidiary” as that term is used in Regulation S-X based on the amount of our investment compared to our total assets.

Net revenues for AMI amounted to $26.1, $21.8 million and $6.5 million for the years ended December 31, 2003, 2002 and the four months ended December 31, 2001, respectively. These net revenue amounts represented 10.7%, 10.7% and 11.7% of our consolidated net revenues for the respective periods.

Operating income for AMI amounted to $7.3, $3.6 million and $1.0 million for the years ended December 31, 2003, 2002 and the four months ended December 31, 2001, respectively. These operating income amounts represented 11.0%, 12.5% and 20.6% of our consolidated operating income for the respective periods.

Net income (loss) for AMI amounted to $4.0, $(0.1) million and $0.3 million for the years ended December 31, 2003, 2002 and the four months ended December 31, 2001, respectively. These net income (loss) amounts represented 54.6%, (11.7)% and 58.0% of our consolidated net income for the respective periods. AMI’s net loss during the year ended December 31, 2002 was primarily a result of pre-payment penalties of $2.2 million that were incurred in connection with the recapitalization transaction.

Results of operations

The following table sets forth operating expenses, MG&A expenses, depreciation and amortization, net interest expense and other expenses, and these amounts as a percentage of net revenue for the periods indicated:

	Year ended December 31,
(dollars in millions)	2001					2002				2003

Net revenues from service	$	142.3		100.0	%	$	203.4	100.0	%	$	242.9	100.0	%
Operating expenses	61.0			42.9		89.4		44.0		105.1		43.3
MG&A expenses	55.6			39.0		61.5		30.2		76.4		31.4
Depreciation and amortization	17.5			12.3		23.9		11.7		28.3		11.7

Income from operations	8.2			5.8		28.6		14.1		33.1		13.6
Interest expense, net	8.2			5.8		26.6		13.1		24.3		10.0
Equity in earnings of unconsolidated joint venture	—			—		—		—		0.0		0.0
Minority interest in net income of consolidated subsidiaries	0.1			0.1		0.0		0.0		0.0		0.0
Provision for income taxes	4.0			2.8		0.8		0.4		3.6		1.5

Net income (loss)	$	(4.1	)	(2.9	)%	$	1.2	0.6	%	$	5.2	2.1	%

Year ended December 31, 2003 compared to year ended December 31, 2002

Net revenue was $242.9 million for the year ended December 31, 2003, representing an increase of $39.5 million, or 19.4%, from revenue of $203.4 million for the year ended December 31, 2002. This increase was primarily the result of an increase in the number of scans performed and an increase of 1.4% in average price per scan for year ended December 31, 2003, as compared to the year ended December 31, 2002. The increase in number of scans performed reflects an increase in the number of centers from 77 centers at December 31, 2002 to 85 centers at December 31, 2003. Scan volume also increased by 15.8% for those centers in existence at December 31, 2002 as a result of a continued maturing of these centers in fiscal 2003. The percentage increase in average price per scan primarily reflects an increase in the Medicare reimbursement rate of 1.6% which was effective in March 2003.

Operating expenses were $105.1 million for the year ended December 31, 2003, representing an increase of $15.7 million, or 17.6%, as compared to $89.4 million for the year ended December 31, 2002. Operating expenses, as a percentage of net revenue decreased to 43.3% for the year ended December 31, 2003, as compared to 44.0% for the year ended December 31, 2002. The decrease from the year ended December 31, 2002 to the year ended December 31, 2003 was primarily the result of decreases, as a percentage of net revenues, in repairs and maintenance costs and equipment rental costs which were partially offset by an increase, as a percentage of net revenues, in other operating costs.

Repair and maintenance expenses decreased, as a percentage of net revenues, as a result of a contract entered into with Philips Medical Systems North America in January 2003, which linked the level of repair and maintenance expenses to an operating factor. Equipment rental expenses decreased as a result a reduction in the number of mobile units under lease in fiscal 2003 as compared to fiscal 2002. There were also slight increases, as a percentage of net revenues, in radiologist, technologist and transcriptionist costs which were substantially offset by decreases, as a percentage of net revenues, in operating supplies and building costs.

MG&A expenses were $76.4 million for the year ended December 31, 2003, representing an increase of $14.9 million, or 24.2%, as compared to MG&A expenses of $61.5 million for the year ended December 31, 2002. MG&A expenses as a percentage of net revenue were 31.4% for the year ended December 31, 2003, as compared to 30.2% for the year ended December 31, 2002. The increase was primarily the result of an increase in wages and related expenses. Wages and related expenses increased as a result of the addition of certain middle management and other support level employees in the areas of finance, compliance, operations and information technology. These employees were added to address a need for an increased level of MG&A support as a result of future anticipated revenue growth. There were also slight increases in bad debt expenses and other general and administrative expenses that were substantially offset by decreases in marketing expenses and other income/expense.

Depreciation and amortization was $28.3 million, or 11.7% of net revenue, for the year ended December 31, 2003, as compared to $23.9 million, or 11.7% of net revenue, for the year ended December 31, 2002.

Interest expense, net, decreased to $24.3 million for the year ended December 31, 2003 from $26.6 million for the year ended December 31, 2002. The decrease in interest expense, net was comprised of several components including the payment in August 2002 of prepayment penalties of approximately $10.6 million, a slight decrease in interest rates during fiscal 2003 and an overall increase in the level of debt in fiscal 2003 as compared to the full year of fiscal 2002.

Income taxes were $3.6 million for the year ended December 31, 2003, as compared to $0.8 million for the year ended December 31, 2002. The effective tax rate was 41.1% for the year ended December 31, 2003 as compared to 39.2% for the year ended December 31, 2002. The effective tax rate was higher for the year ended December 31, 2003 as a result of a permanent financial reporting difference recognized in fiscal 2003 related to transaction costs incurred in connection with the recapitalization. There were Federal and state net operating loss carryforwards amounting to approximately $15.7 million and $40.3 million at December 31, 2003.

As a result of the foregoing factors, we had net income of $5.2 million for the year ended December 31, 2003, as compared to a net income of $1.2 million for the year ended December 31, 2002.

Year ended December 31, 2002 compared to year ended December 31, 2001

Net revenue was $203.4 million for the year ended December 31, 2002, representing an increase of $61.1 million, or 42.9%, from revenue of $142.3 million for the year ended December 31, 2001. This increase was primarily the result of an increase in the number of scans performed in the year ended December 31, 2002, as compared to the year ended December 31, 2001, which was partially offset by a decrease of 15.1% in average price per scan for the year ended December 31, 2002, as compared to the year ended December 31, 2001. This percentage decrease in average price per scan primarily reflects an increase in the number of multi-modality centers in operation at December 31, 2002 and a decrease in the average price per scan for MRI and CT. Multi-modality centers provide technologies in addition to MRI and CT for which the fee per scan is generally lower than the fee per scan for MRI and CT services, however, the lower fee per scan is substantially offset by higher scan volumes.

Operating expenses were $89.4 million for the year ended December 31, 2002, representing an increase of $28.4 million, or 46.6%, as compared to $61.0 million for the year ended December 31, 2001. Operating expenses, as a percentage of net revenue, increased to 44.0% for the year ended December 31,

2002, as compared to 42.9% for the year ended December 31, 2001. This increase was primarily the result of an increase in compensation costs for radiologists, technologists and transcriptionists in the amount of $16.7 million. We have experienced a general increase in relative compensation costs due to an increased level of demand in the industry for these types of professionals. There were also slight increases in repairs and maintenance and other operating expenses for the year ended December 31, 2002, as compared to the year ended December 31, 2001, however, these increases were substantially offset by slight decreases in other wages and related costs, operating supplies and equipment rentals for the same comparison periods.

MG&A expenses were $61.5 million for the year ended December 31, 2002, representing an increase of $5.9 million, or 10.6%, as compared to MG&A expenses of $55.6 million for the year ended December 31, 2001. MG&A expenses as a percentage of net revenue were 30.2% for the year ended December 31, 2002, as compared to 39.0% for the year ended December 31, 2001. MG&A expenses included certain one-time charges incurred in fiscal 2001 related to non-cash compensation and the InMed litigation.

The non-cash compensation charge related to variable plan accounting treatment of the purchase of restricted stock by certain executives from our co-founders. The InMed litigation related to a judgment returned against us in the amount of $2.1 million during the year ended December 31, 2001. This judgment is currently under appeal; however, we were indemnified in this matter by the management stockholders as part of the recapitalization transaction.

After considering the effects of the aforementioned one-time charges, MG&A expenses decreased as a percentage of revenue, by 1.0% during the comparison periods. MG&A expenses are relatively fixed in nature, therefore, as net revenue increases, MG&A as a percentage of net revenue decreases. The decrease from the year ended December 31, 2001 was primarily the result of this effect, as well as our continued cost containment efforts. There were slight increases in other general and administrative expenses from the year ended December 31, 2001 to the year ended December 31, 2002, however, these increases were substantially offset by decreases in wages and related costs and marketing expenses for the same comparison periods.

Depreciation and amortization was $23.9 million, or 11.7% of net revenue, for the year ended December 31, 2002, as compared to $17.5 million, or 12.3% of net revenue, for the year ended December 31, 2001. This decrease, as a percentage of net revenue, was primarily the result of significant increases in net revenue for the comparison periods and of discontinuing the amortization of goodwill as a result of adopting SFAS 142 in January 2002. The increase in depreciation and amortization during the year ended December 31, 2002, as compared to the year ended December 31, 2001 was principally due to the higher amount of depreciable assets associated with the addition of 11 new centers between December 31, 2001 and December 31, 2002. Depreciable assets at December 31, 2002 amounted to $151.7 million as compared to $110.3 million at December 31, 2001.

Interest expense, net, increased to $26.6 million for the year ended December 31, 2002 from $8.2 million for the year ended December 31, 2001. Interest expense, net, increased primarily due to the payment in August 2002 of prepayment penalties of approximately $10.6 million and an increased level of indebtedness as a result of the leveraged recapitalization transaction which was completed in August 2002. Indebtedness increased from $115.6 million at December 31, 2001 to $238.9 million at December 31, 2002.

Income taxes were $0.8 million for the year ended December 31, 2002, as compared to $4.0 million for the year ended December 31, 2001. The effective tax rate was 39.2% for the year ended December 31, 2002 as compared to 111.7% for the year ended December 31, 2001. The effective tax rate was substantially higher for the year ended December 31, 2001 as a result of the one-time non-cash compensation charge incurred in 2001, which was not deductible for income tax purposes. There were Federal and state net operating loss carryforwards amounting to approximately $0.4 million and $29.5 million at December 31, 2002.

As a result of the foregoing factors, we had net income of $1.2 million for the year ended December 31, 2002, as compared to a net loss of $4.1 million for the year ended December 31, 2001.

Liquidity and capital resources

The principal uses of our liquidity are to finance our capital expenditures and make acquisitions, as well as to fund our operations. We operate in a capital-intensive, high fixed cost industry that requires significant amounts of working capital to fund operations, particularly the initial start-up and development expenses of our de novo centers and the acquisition of additional centers.

Our primary sources of liquidity to fund our operations and capital expenditures and satisfy our debt service obligations are cash flow from operating activities and borrowings under our five-year revolving credit facility.

Net cash provided by operating activities was $30.7 million for the year ended December 31, 2003, representing an increase of $14.5 million from $16.2 million for the year ended December 31, 2002. The increase resulted primarily from an absence of prepayment penalties incurred in fiscal 2002 in relation to the recapitalization transaction in August 2002 and an increase in net income.

Net cash used in investing activities was $34.5 million for the year ended December 31, 2003, representing a decrease of $16.1 million from $50.6 million for the year ended December 31, 2002. This decrease resulted primarily from the completion of fewer acquisitions and openings of de novo centers during the year ended December 31, 2003 compared with the year ended December 31, 2002. There were an aggregate of 8 acquisitions and de novo center openings for the year ended December 31, 2003 as compared to an aggregate of 11 acquisitions and de novo center openings for the year ended December 31, 2002.

Net cash provided by financing activities was $7.3 million for the year ended December 31, 2003, representing a decrease of $25.0 million from $32.3 million for the year ended December 31, 2002. This decrease resulted primarily from a decrease in the amount of financing used for acquisitions during the year ended December 31, 2003, as compared to the year ended December 31, 2002.

Net cash provided by operating activities was $16.2 million for the year ended December 31, 2002, representing a decrease of $4.1 million from $20.3 million for the year ended December 31, 2001. This decrease resulted primarily from the increase in interest expense as a result of the recapitalization that occurred during the year ended December 31, 2002.

Net cash used in investing activities was $50.6 million for the year ended December 31, 2002, representing a decrease of $9.5 million from $60.1 million for the year ended December 31, 2001. This decrease resulted primarily from the completion of fewer acquisitions and openings of de novo centers during the year ended December 31, 2002 compared with the year ended December 31, 2001. There were a total of 11 acquisitions and de novo center openings for the year ended December 31, 2002 as compared to a total of 13 acquisitions and de novo center openings for the year ended December 31, 2001.

Net cash provided by financing activities was $32.3 million for the year ended December 31, 2002, representing a decrease of $10.6 million from $42.9 million for the year ended December 31, 2001. This decrease resulted primarily from a decrease in the amount of financing used for acquisitions during the year ended December 31, 2002, as compared to the year ended December 31, 2001.

At December 31, 2003, we had $249.7 million of indebtedness outstanding, as compared to $238.9 million at December 31, 2002. In addition, at December 31, 2003, we had a stockholders’ deficit of $111.8 million, as compared to our stockholders’ deficit of $118.2 million at December 31, 2002. Our indebtedness primarily consists of $180.0 million under the senior subordinated notes, $59.7 million under a Tranche B term facility and $8.0 million under our revolving credit facility. Further, at December 31, 2003, we would have been able to borrow an additional $70.9 million (after giving effect to $1.1 million of outstanding letters of credit) under the revolving credit facility to fund our working capital requirements and future acquisitions.

In September 2003, we amended our senior credit facility to allow for borrowings not to exceed $60.0 million under a Tranche B term facility. Concurrent with the amendment of the senior credit facility, we also borrowed $60.0 million under the Tranche B term facility and applied the net proceeds against the borrowings outstanding under the revolving credit facility.

The senior credit facility, as amended, provides for a revolving credit facility not to exceed $80.0 million and a Tranche B term facility of $60.0 million. The senior credit facility, as amended, is guaranteed by MQ Associates, Inc. and each of MedQuest, Inc.’s existing and future domestic subsidiaries and certain foreign subsidiaries. MedQuest’s obligations under the senior credit facility, as amended, and the guarantors’ obligations under the guarantees are collateralized by substantially all of the assets of MedQuest, Inc. and the guarantors.

Borrowings under the revolving credit facility accrue interest, at the option of MedQuest, Inc. as borrower, at either: (a) the greater of the prime rate or the Federal funds effective rate (subject to certain adjustments) plus an applicable margin of 1.75% per annum, or (b) the Eurodollar rate, plus an applicable margin of 2.75% per annum. Borrowings at December 31, 2003 were based upon the prime rate (4.0% at December 31, 2003). The revolving credit facility also provides for a commitment fee equal to ½ of 1% per annum. The margins related to the prime rate and Eurodollar rate borrowings and commitment fee are subject to adjustment based upon our consolidated leverage ratio, as defined.

Borrowings under the Tranche B term facility accrue interest at the option of MedQuest, at either: (a) the greater of the prime rate or the Federal funds effective rate (subject to certain adjustments) plus an applicable margin of 2.75% per annum, or (b) the Eurodollar rate, plus an applicable margin of 3.75% per annum. Borrowings were based upon the Eurodollar rate (1.16% at December 31, 2003) and amounted to $59,700 at December 31, 2003.

Under the Tranche B term facility, commencing with the fiscal year ending December 31, 2004, and annually thereafter, not more than 75% of excess cash flows, as defined, must be applied against certain outstanding borrowings under the senior credit facility, as amended.

In August 2002, MedQuest, Inc. issued $180.0 million of senior subordinated notes to fund, in part, our recapitalization. The senior subordinated notes bear interest at the rate of 11⁷/₈% per annum. Interest on the senior subordinated notes is payable semi-annually in cash on each February 15 and August 15. The senior subordinated notes mature on August 15, 2012. In February 2003, Medquest, Inc. registered an identical series of senior subordinated notes with the SEC and subsequently completed an exchange of all the unregistered $180.0 million aggregate principal amount senior subordinated notes for the registered senior subordinated notes. The senior subordinated notes are senior subordinated unsecured obligations of MedQuest, Inc., ranking junior in right of payment to all of its existing and future senior debt, and are guaranteed by MQ Associates, Inc. and each of MedQuest Inc.’s subsidiaries.

The senior credit facility, as amended, and the indenture governing the senior subordinated notes impose certain restrictions on us, including restrictions on our ability to incur indebtedness, pay dividends, make investments, grant liens, sell our assets and engage in certain other activities. In addition, the senior credit facility, as amended, requires us to maintain certain financial ratios. We were in compliance with all covenants under the senior credit facility, as amended, at December 31, 2003.

The following table sets forth the contractual obligations under our long-term debt and other material contractual commitments, including capital lease obligations and non-cancelable operating leases as of December 31, 2003 (in millions):

	Payment due by period
Contractual Obligations	Total		Less than 1 year		1-3 years		4-5 years		5 years or longer

(in millions)
Long-term debt obligations, excluding interest	$	244.2	$	0.6	$	1.2	$	37.4	$	205.0
Capital lease obligations	4.1		1.6		1.6		0.9		—
Operating lease obligations(a)	58.6		12.6		21.7		16.7		7.6
Purchase obligations	33.6		8.4		16.8		8.4		—

Total contractual obligations	$	340.5	$	23.2	$	41.3	$	63.4	$	212.6

(a) Primarily consists of real estate leases.

The Series A Preferred Stock and Series B Preferred Stock of MQ Associates may be redeemed at the option of the holder upon the consummation of an underwritten public offering at a redemption price of $35.0 million for all of the Series A Preferred Stock and $15.0 million for all of the Series B Preferred Stock. Additionally, in the case of such redemption, the holders of Series B Preferred Stock will receive 2,295,000 shares of Common Stock. In the event that (i) MQ Associates and its underwriters determine that the redemption of the Series B Preferred Stock would adversely affect the planned underwritten public offering or (ii) the holders of shares of Series B Preferred Stock elect not to redeem shares of Series B Preferred Stock, MQ Associates may convert all shares of Series B Preferred Stock into 17,295,000 shares of Common Stock. We have not accreted the fair value of the additional shares of Common Stock to be issued upon redemption of the Series B Preferred Stock because we do not believe that the redemption trigger is probable as of December 31, 2003.

Our high level of debt may make it more difficult for us to borrow funds in the future. Based on our current level of operations and anticipated growth, we believe that our cash flows from operations, together with future borrowings under our senior credit facility, as amended, will be sufficient over the next year to meet our liquidity requirements, including our debt service obligations, working capital needs and capital expenditures. However, there can be no assurance that this will be the case.

Our expansion and acquisition strategy may require substantial capital, and no assurance can be given that we will be able to raise any necessary funds in addition to those currently available to us through bank financing or the issuance of equity or debt securities on terms acceptable to us, if at all. Moreover, if we were to engage in one or more significant acquisition transactions, it may be necessary for us to restructure our existing credit arrangements.

Our ability to fund our working capital needs, planned capital expenditures and scheduled debt payments, to implement our expansion plans, to refinance our indebtedness and to comply with our financial covenants under the senior credit facility, as amended, depends on our future operating performance and cash flows from operations, which in turn are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond our control.

Capital expenditures

We incur capital expenditures for the purposes of:

• purchasing new equipment and incurring leasehold improvements for de novo centers,

• acquiring the assets of existing centers,

• upgrading existing equipment to increase volume and/or quality,

• replacing less advanced equipment, and

• upgrading information technology systems.

Capital expenditures (excluding acquisitions) totaled $25.7 million for the year ended December 31, 2003, compared to $36.4 million for the year ended December 31, 2002. Capital expenditures related to acquisitions amounted to $6.9 million for the year ended December 31, 2003, compared to $16.4 million for the year ended December 31, 2002. Capital expenditures, in the aggregate, amounted to $32.6 million for the year ended December 31, 2003 as compared to $52.8 million for the year ended December, 31 2002.

We believe that capital expenditures will range between $41.0 and $46.0 million for the year ended December 31, 2004, with $3.0 million to $4.0 million of these capital expenditures related to information technology. The amount of capital expenditures may vary based upon the level of unanticipated growth opportunities that present themselves during the fiscal year.

In January 2003, we entered into a new contract for the servicing of substantially all of our diagnostic imaging equipment with Philips Medical Systems North America. This contract has an initial term of five years and is priced at a fixed annual amount of $8.4 million, which amount is subject to increase based on our achieving certain levels of annual net patient revenue.

During fiscal 2001, 2002 and 2003, we were engaged in the development of the Radiology Information System, through the use of third-party and internal software developers, and spent $0.6 million, $1.1 million and $0.4 million, respectively, during fiscal 2001, 2002 and 2003 in relation to this development. During fiscal 2003, we successfully implemented certain phases of the RIS into a number of centers within our network.

We anticipate completion of a roll-out of the billing phase of our fully integrated system by the third quarter of fiscal 2004, with roll-out of the remaining phases of the system to be completed no later than the end of fiscal 2005. We have budgeted $0.9 million for the year ending December 31, 2004 related to this implementation.

We continuously evaluate acquisition opportunities, and from time to time we may enter into non-binding letters of intent. We are currently subject to a binding letter of intent with respect to an acquisition in the amount of $1.8 million.

Seasonality

We experience seasonality in our revenue. For example, our sales typically decline from our third fiscal quarter to our fourth fiscal quarter. Fourth quarter revenue is typically lower than revenue from the first, second and third quarters. Fourth quarter revenue is affected primarily by holidays, client and patient vacations and inclement weather, the results of which are fewer patient scans during the fourth quarter. As a result, our revenue may significantly vary from quarter to quarter, and our quarterly results may be below market expectations.

Critical accounting policies and estimates

The preparation of the consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingencies. We believe the critical accounting policies that most impact the consolidated

financial statements can be described below. A summary of our significant accounting policies can be found in Note 2 to the consolidated financial statements.

Allowance for doubtful accounts. We review our patient receivables and estimates of the allowance for doubtful accounts and contractual adjustments each period. The amount of the allowance includes management’s estimate of the amounts expected to be written off on specific accounts and for write-offs on other unidentified accounts. In estimating the write-offs and adjustments on specific accounts, management relies on a combination of in-house analysis and a review of contractual payment rates from private health insurance programs or under the federal Medicare program. In estimating the allowance for unidentified write-offs and adjustments, management relies on historical experience. Estimates of uncollectible amounts are revised each period, and changes are recorded in the period they become known. The amounts we will ultimately realize could differ materially from the amounts assumed in arriving at the allowance for doubtful accounts and contractual adjustments in the consolidated financial statements.

Contractual allowances. Our revenues include net patient service revenues. Net patient service revenues are reported at estimated net realizable amounts from patients, insurance companies, third-party payors (primarily Medicare and Medicaid) and others for services rendered. Revenues from third-party payors also include estimated adjustments under reimbursement agreements that are subject to final review and settlement by appropriate authorities. We estimate contractual adjustments from non-governmental third-party payors based on historical experience and the terms of payor contracts.

Long-lived Assets. Many of our facilities came to us through acquisitions. We determine the amortization period of the cost in excess of net asset value of purchased facilities based on an evaluation of the facts and circumstances of each individual purchase transaction. The evaluation includes an analysis of historic and projected financial performance, an evaluation of the estimated useful life of assets acquired, the indefinite useful life of certificates of need and licenses acquired, the competition within local markets and lease terms where applicable. We rely on management expertise in evaluating each of the factors noted above. With respect to the carrying value of the excess of cost over net asset value of individual purchased facilities and other intangible assets, we determine on an annual basis whether an impairment event has occurred by considering factors such as the market value of the asset, a significant adverse change in legal factors or in the business climate, adverse action by regulators, a history of operating losses or cash flow losses or a projection of continuing losses associated with an operating entity. The carrying value of excess cost over net asset value of purchased facilities and other intangible assets will be evaluated if the facts and circumstances suggest that it has been impaired. If this evaluation indicates that the value of the asset will not be recoverable, as determined based on the undiscounted cash flows of the entity acquired over the remaining amortization period, our carrying value of the asset will be reduced to the estimated fair market value. Fair value is determined based on the individual facts and circumstances of the impairment event, and the available information related to it. Such information might include quoted market prices, prices for comparable assets, estimated future cash flows discounted at a rate commensurate with the risks involved and independent appraisals. For purposes of analyzing impairment, assets are generally grouped at the individual operational facility level, which is the lowest level for which there are identifiable cash flows. If we acquired the group of assets being tested as part of a purchase business combination, any goodwill that arose as part of the transaction is included as part of the asset grouping.

Goodwill and Indefinite Lived Intangibles. Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangibles” requires the periodic testing of goodwill for impairment and testing upon the occurrence of triggering events, as defined, rather than a monthly amortization of the balance. This testing takes place in two steps: (i) the determination of the fair value of a reporting unit and (ii) the determination of the implied fair value of the goodwill. Reporting units are generally grouped at the individual operational facility level and their fair value is determined based upon estimated fair values of similar operational facilities in the marketplace. We adopted SFAS No. 142 on January 1, 2002. We evaluated goodwill and indefinite lived intangibles for impairment under SFAS No. 142 in the fourth quarter of 2003 and determined that no impairment write down was necessary.

Forward-looking statements

This report contains or may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, without limitation, statements regarding our future growth and profitability, growth strategy and trends in the industry in which we operate. These forward-looking statements are based on our current expectations and are subject to a number of risks, uncertainties and assumptions. We can give no assurance that such forward-looking statements will prove to be correct. Among the important factors that could cause our actual results to differ significantly from those expressed or implied by such forward-looking statements are general economic and business conditions, the effect of healthcare industry trends on third-party reimbursement rates and demand for our services, limitations and delays in reimbursement by third-party payors, changes in governmental regulations that affect our ability to do business, actions of our competitors, introduction of new technologies, risks associated with our acquisition strategy and integration costs and the additional factors and risks contained in our Post-Effective Amendment No. 1 to the Registration Statement on Form S-4 declared effective on April 23, 2003.

All forward-looking statements attributable to us or persons acting on our behalf apply only as of the date of this filing and are expressly qualified in their entirety by the cautionary statements included in this filing. We undertake no obligations to publicly update or revise forward-looking statements which may be made to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We sell our services exclusively in the United States and receive payment for our services exclusively in United States dollars. As a result, our financial results are unlikely to be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets.

The majority of our indebtedness bears interest at fixed rates. However, management may in its judgment determine that it is advisable to enter into interest rate swaps to convert a portion of the fixed interest rate debt to floating interest rate debt. To the extent management decides to do so, the interest expense payable or the floating rate portion of our indebtedness will be sensitive to changes in the general level of interest rates in the United States. The recorded carrying amount for $47.5 million of our long-term debt approximates fair value as these borrowings have variable rates, as a result of an interest rate swap agreement discussed below, that reflect currently available terms and conditions for similar debt.

Our interest income is sensitive to changes in the general level of interest rates in the United States, particularly because the majority of our investments are in short-term instruments.

The recorded carrying amounts of cash and cash equivalents approximate fair value due to their short-term maturities.

The table below provides information about our financial instruments that are sensitive to changes in interest rates. For long-term debt obligations, the table presents principal cash flows and related weighted average interest rates by expected (contractual) maturity dates. All amounts are in United States dollars (in millions). Under our current policies, we use interest rate derivative instruments to manage certain exposure to interest rate changes.

	Maturity dates
Long-term debt	2004			2005			2006			2007			2008			2009			2012			Total			Fair Value

Fixed rate	—			—			—			—			—			—			$	132.5		$	132.5		$	139.0
Average interest rate	—			—			—			—			—			—			11.875		%	11.875		%	10.70		%
Variable rate	$	0.6		$	0.6		$	0.6		$	8.6		$	28.8		$	28.5		$	47.5		$	115.2		$	115.2
Average interest rate	3.97		%	3.97		%	3.97		%	5.63		%	3.97		%	3.97		%	7.65		%	6.10		%	6.10		%

In August 2002, we entered into an interest rate swap agreement related to the fixed interest rate obligations on the senior subordinated notes. The agreement requires us to pay interest at a variable rate based on six-month LIBOR plus 6.525% on a notional amount of $47.5 million for a term of ten years. This derivative instrument has been accounted for as a fair value hedge of the fair market value of the senior subordinated notes and was 100% effective for the year ended December 31, 2003. As a result, the change in fair market value related to this derivative instrument has been entirely offset by the change in fair market value of the senior subordinated notes. The fair market value of this derivative instrument was $1.4 million at December 31, 2003 and has been presented as a component of Other Assets in the consolidated balance sheet at December 31, 2003.

Item 8. Financial Statements and Supplementary Data

Financial statements and supplementary data required by this Item 8 are set forth at the pages indicated in Item 15(a) below.

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures

None

Item 9a. Controls and Procedures

At the end of the period covered by this annual report on Form 10-K, the chief executive officer and chief financial officer (collectively, the “certifying officers”) of MQ Associates, Inc. (the “Company”) evaluated the effectiveness of the Company’s disclosure controls and procedures. These disclosure controls and procedures are designed to ensure that the information required to be disclosed by the Company in its periodic reports is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms, and that the information is communicated to the certifying officers on a timely basis.

Our management, including the certifying officers, does not expect that our disclosure controls or our “internal controls over financial reporting” (“Internal 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. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. 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; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

The certifying officers concluded, based on their evaluation, that the Company’s disclosure controls and procedures are effective.

There were no significant changes in the Company’s Internal Controls or in other factors that could significantly affect the Company’s Internal Controls subsequent to the date when internal controls were evaluated. In addition, there have been no changes in the Company’s Internal Controls that have occurred during the fourth quarter of fiscal 2003 that have materially affected, or are reasonably likely to materially affect, the Company’s Internal Controls.

Part III

Item 10. Directors and Executive Officers of the Registrant

The following table sets forth certain information with respect to persons who are the executive officers and directors of MQ Associates. Pursuant to the stockholders’ agreement with MQ Associates, the board of directors of MQ Associates consists of seven members, three of whom are designated by MQ Investment Holdings, LLC, one of whom is designated by a member of MQ Investment Holdings, LLC, one of whom is designated by a majority (which will not include shares held by Daniel J. Schaefer, Michael A. Villa and Thomas C. Gentry) of the stockholders of MQ Associates and two of whom are designated by our co-founders, Gene Venesky and John K. Luke (so long as Messrs. Venesky and Luke are at least 10% stockholders or are both members of senior management).

Name	Age	Position

Gene Venesky	52	Chief Executive Officer, Secretary, Treasurer and Director
John K. Luke	54	President and Director
Thomas C. Gentry	50	Chief Financial Officer, Assistant Secretary and Assistant Treasurer
Daniel J. Schaefer	56	Co-Chief Operating Officer
Michael A. Villa	34	Co-Chief Operating Officer
Bruce W. Elder	34	Vice President, Development
Evan P. Bakst	37	Director
Mitchell J. Blutt, M.D.	47	Director
Nancy-Ann DeParle	47	Director
Benjamin B. Edmands	33	Director
Donald C. Tomasso	58	Director

Gene Venesky is one of our co-founders and has served as our Chief Executive Officer since 1993 and as Chairman of the Board since 1993. Mr. Venesky has been Chief Executive Officer, Secretary, Treasurer and a director of MedQuest, Inc. since August 2002. Prior to our co-founding, Mr. Venesky spent over six years with Price Waterhouse and over ten years with Hillman Co., a nationally known investment holding company. Mr. Venesky is a graduate of St. Francis College and University of Virginia/Colgate Darden’s Executive Management Program. Pursuant to the stockholders’ agreement, Mr. Venesky is one of the co-founders’ designees to our board of directors.

John K. Luke is one of our co-founders and has served as our President since 1993 and as a director since 1993. Mr. Luke has been President and a director of MedQuest, Inc. since August 2002. Prior to our co-founding, Mr. Luke spent six years in commercial banking with Landmark Banking Corp. and Bankers Trust of South Carolina, two major southeast banks, and nine years in healthcare in product development, marketing and sales. Mr. Luke holds a B.A. from the University of Georgia and an M.B.A. from Clemson/Furman Universities. Pursuant to the stockholders’ agreement, Mr. Luke is one of the co-founders’ designees to our board of directors.

Thomas C. Gentry has served as our Chief Financial Officer since May 1999. Mr. Gentry has been Chief Financial Officer, Assistant Secretary and Assistant Treasurer of MedQuest, Inc. since August 2002. For the five years from 1994 to 1999, Mr. Gentry was a tax partner with Elliot & Davis Co. in Greenville, South Carolina. During those five years he was the partner in charge of the MQ Associates account relationship. From 1990 to 1994, Mr. Gentry worked with Coopers & Lybrand as a tax accountant. Mr. Gentry holds a B.A. and a Masters of Tax from Georgia State University.

Daniel J. Schaefer has served as one of our Co-Chief Operating Officers since January 1998. Mr. Schaefer has been a Co-Chief Operating Officer of MedQuest, Inc. since August 2002. Mr. Schaefer has over 20 years of experience in operations and sales/marketing and was a key executive for Span America Medical Systems from 1975 to 1987 and Alpha ProTech from 1991 to 1995, both publicly traded healthcare manufacturers. His responsibilities there included product development, sales and

marketing. He was instrumental in taking Span America Medical Systems public. Mr. Schaefer is a graduate of Southern Illinois University.

Michael A. Villa has served as one of our Co-Chief Operating Officers since February 1998. Mr. Villa has been a Co-Chief Operating Officer of MedQuest, Inc. since August 2002. Mr. Villa’s career has focused almost exclusively on the outpatient medical services industry. From 1990 to 1994, Mr. Villa syndicated limited partnerships in outpatient diagnostic imaging facilities. From 1994 to 1998, Mr. Villa served as Western Regional Manager for DVI Financial Services, Inc. and provided financial services to healthcare organizations including public and private companies with diagnostic imaging, hospital and HMO operations. Mr. Villa is a graduate of the University of Washington.

Bruce W. Elder has served as our Vice President of Development since January 2001. Mr. Elder has been the Vice President of Development for MedQuest, Inc. since August 2002. From May 1999 to December 2000, he served as a Strategy Consultant and Healthcare Client Director for iXL, Inc., a publicly traded internet consulting firm, primarily managing client relationships with early stage venture financed healthcare firms. Prior to joining iXL, Mr. Elder was Vice President of Development for Meridian Corporate Healthcare, Inc. from 1996 to 1999 and Coordinator of Business Development for Surgical Care Affiliates, Inc. from 1993 to 1996. Mr. Elder is a graduate of Vanderbilt University.

Evan P. Bakst has been one of our directors since August 2002. From July 2000 to the present, he has been a principal at J.P. Morgan Partners, LLC where he focuses primarily on healthcare. From August 1993 to July 2000, Mr. Bakst was a Managing Director at the Beacon Group, LLC, a boutique merchant bank. The companies for which Mr. Bakst is a director are Cadent Holdings, Inc., FundsXpress, Inc., Iasis Healthcare Corp., FHC Health Systems and National Surgical Care. Mr. Bakst holds a B.A. from the University of California, Berkeley and an M.B.A. from Harvard University. Pursuant to the stockholders’ agreement, Mr. Bakst is one of MQ Investment Holdings, LLC’s designees to our board of directors.

Mitchell J. Blutt, M.D. has been one of our directors since August 2002. He has been a consultant of J.P. Morgan Partners, LLC, since March 1, 2004. He was an Executive Partner of J.P. Morgan Partners, LLC or its predecessor, Chase Capital Partners, since 1992 and was a General Partner of Chase Capital Partners from 1988 to 1992. The companies for which Dr. Blutt is a director are DJ Orthopedics, Inc. and Ryko, Inc. He also serves on the Board of the Michael J. Fox Foundation for Parkinson’s Research and is an Adjunct Professor of Medicine at Weill Medical College and Graduate School of Medical Sciences of Cornell University. Dr. Blutt received his B.A. and M.D. degrees from the University of Pennsylvania. He received his M.B.A. at the Wharton School of the University of Pennsylvania. He is a member of the Board of Trustees of the University of Pennsylvania, a member of the Board of Overseers of the University of Pennsylvania’s School of Arts and Sciences, a member of the board of the Brearley School and a member of the Finance Committee and Board of Penn Medicine. He formerly served on the Board of the National Venture Capital Association. Pursuant to the stockholders’ agreement, Mr. Blutt is one of MQ Investment Holdings, LLC’s designees to our board of directors.

Nancy-Ann DeParle has been one of our directors since August 2002. From January 2001 to the present, she has been an independent health care consultant in Washington, D.C. and a Senior Advisor to J.P. Morgan Partners, LLC. From July 2001 to the present, she has been an Adjunct Professor of Health Care Systems at the Wharton School of the University of Pennsylvania. From August 2002 to the present, she has been a member of the Medicare Payment Advisory Commission (MedPAC). From October 2000 through January 2001, she was a Fellow at the Institute of Politics and the Interfaculty Health Policy Forum at Harvard University. From November 1997 until October 2000, Ms. DeParle served as Administrator of the Health Care Financing Administration (HCFA), recently renamed the Centers for Medicare and Medicaid Services (CMS). She was also a key health policy advisor to the Secretary of Health and Human Services and the President of the United States. Before joining HHS, Ms. DeParle served as Associate Director for Health and Personnel at the White House Office of Management and Budget (OMB), where she oversaw budget and policy matters relating to all Federal health programs. From 1987 to 1989, Ms. DeParle served as the Tennessee Commissioner of Human Services under Governor Ned McWherter. She administered a 6,000-employee agency that provided food stamps, welfare, rehabilitation and child protective services. The companies for which Ms. DeParle is a director are Accredo Health, Inc., Cerner Corporation, DaVita, Inc., Guidant Corporation, Specialty

Laboratories, Inc. and Triad Hospitals, Inc. Ms. DeParle received a B.A. from the University of Tennessee and a J.D. from Harvard Law School. She also received an M.A. in Politics and Economics from Balliol College of Oxford University, which she attended as a Rhodes Scholar. Pursuant to the stockholders’ agreement, Ms. DeParle is the designee of a member of MQ Investment Holdings, LLC to our board of directors.

Benjamin B. Edmands has been one of our directors since August 2002. He is currently a principal at J.P. Morgan Partners, LLC where he focuses on investments in the healthcare infrastructure sector. Mr. Edmands has been with J.P. Morgan Partners, LLC, formerly known as Chase Capital Partners, since 1993. Prior to joining J.P. Morgan Partners, LLC, Mr. Edmands held positions in Chemical Bank’s Acquisition Finance Group. The companies for which Mr. Edmands is a director are Big Rock Sports, Inc., DonJoy Orthopedics and VeriCare, Inc. Mr. Edmands holds a B.A. with Honors from Colgate University and an M.B.A. with Honors from Columbia Business School. Pursuant to the stockholders’ agreement, Mr. Edmands is one of MQ Investment Holdings, LLC’s designees to our board of directors.

Donald C. Tomasso has been one of our directors since December 2002. From April 2000 to the present, he has been the Chairman of Metro Offices, Inc., a provider of workplace solutions for entrepreneurs, small to medium-sized corporations and the mobile workforce of large corporations. From 1998 to the present, Mr. Tomasso has also been the President and a co-founder of Scarlet Oak Investments, LLC, a private equity investment firm. From 1991 to 1998, Mr. Tomasso was President of Manor Care Health Services, Inc., a provider of skilled nursing care, assisted living facilities and senior support services, while also serving as Chairman and Chief Executive Officer of Vitalink Pharmacy Services, Inc. from 1991 to 1996. Prior to joining Manor Care Health Services, Inc., Mr. Tomasso had held various positions with Marriott Corporation, most recently serving as Executive Vice President and General Manager of Marriott’s Roy Rogers Restaurant business unit from 1986 to 1990. Mr. Tomasso is a director of Medical Office Properties, Inc. and he is also a member of the Board of Trustees of Drexel University LeBow College of Business and the Washington College Presidents Advisory Council. Mr. Tomasso received his B.S. in Commerce and Engineering, his Masters Degree in Environmental Engineering and his M.B.A. from Drexel University. Pursuant to the stockholders’ agreement, Mr. Tomasso is the designee of the majority of the stockholders of MQ Associates.

Audit Committee Financial Expert

Our Board of Directors does not include an “audit committee financial expert” as that term is defined in SEC regulations. Our securities are not listed on any national securities exchange and we are not required to have an independent audit committee. We are presently engaged in a search for an additional independent director and we intend that one or more of the candidates for such independent director will qualify as an audit committee financial expert.

Code of Ethics

We have a code of ethics for all employees, including the chief executive officer and chief financial officer, known as the Corporate Compliance Plan. The Corporate Compliance plan is attached hereto as Exhibit 10.18 and is available, without charge, upon written request to:

MQ Associates, Inc.

4300 North Point Parkway

Alpharetta, Georgia 30022

Attn: Thomas C. Gentry

Item 11. Executive Compensation

Summary compensation table

The following summary compensation table sets forth information about compensation earned in the fiscal years ended December 31, 2003, 2002 and 2001 by the Chief Executive Officer and each of the other five most highly compensated executive officers of MQ Associates (the “named executive officers”). None of the persons who became executive officers of MedQuest, Inc. upon consummation of the recapitalization transaction received any compensation directly from us relating to any period prior to the consummation of the recapitalization transaction.

		Annual Compensation							Long-Term Compensation
		Awards
Name and principal position	Year	Salary ($)		Bonus ($)		Other Annual Compensation		Securities Underlying Options/SARs (#)		All Other Compensation (2)

Gene Venesky Chief Executive Officer, Secretary And Treasurer	2003	$	500,000	$	125,000	$	12,313			$	2,000
	2002	500,000		250,000		12,245				1,700
	2001	500,000		290,000		12,245				—

John K. Luke President	2003	500,000		125,000		12,313				2,000
	2002	500,000		250,000		12,245				1,700
	2001	500,000		290,000		12,245				1,700

Thomas C. Gentry Chief Financial Officer, Assistant Secretary and Assistant Treasurer	2003	175,000		145,491		12,381				2,000
	2002	175,000		154,708		12,245				1,700
	2001	173,653		145,557		12,245				1,700

Daniel J. Schaefer Co-Chief Operating Officer	2003	250,000		145,338		12,313				2,000
	2002	250,000		147,375		12,245				1,700
	2001	246,923		161,830		12,245				1,700

Michael A. Villa Co-Chief Operating Officer	2003	225,000		145,338		12,313				2,000
	2002	225,000		147,375		12,245				1,700
	2001	221,885		161,830		12,245				1,700

Bruce W. Elder Vice President, Development	2003	148,077		29,000		6,293		200,000		2,000
	2002	129,231		39,000		12,245				251,700		(1)
	2001	104,923		15,000		12,245				1,700

(1) In connection with the recapitalization transaction, Mr. Elder received success fees of $250,000.

(2) All other compensation consists of contributions by MQ Associates, on behalf of each respective executive officer, to the defined contribution retirement plan.

MQ Associates granted the following stock options to named executive officers during the year ended December 31, 2003:

Individual Grants									Potential Realizable Value At Assumed Annual Rates Of Stock Price Appreciation For Option Term
Name (a)	Number Of Securities Underlying Option/SARS Granted (#) (b)	Percent Of Total Options/ SARS Granted To Employees In Fiscal Year (c)		Exercise Or Base Price ($/Sh) (d)		Expiration Date (c)	5% ($) (f)		10% ($) (g)

Bruce W. Elder	200,000	6.6	%	$	1.00	December 2012	$	126,000	$	319,000

In connection with the recapitalization transaction, we paid “success fees” to certain of our executive officers, in the aggregate amount of $2.3 million. Gene Venesky, our Chief Executive Officer, Secretary and Treasurer, and John K. Luke, our President, each received success fees of approximately $1.0 million. These amounts were treated as a reduction of additional paid-in capital. The total amount of the success fees and the specific amounts paid to Messrs. Venesky and Luke were determined through negotiations among TA Associates, Inc. and Messrs. Venesky and Luke, as the principal selling stockholders in the recapitalization. All other success fees paid by us were made solely at the discretion of Messrs. Venesky and Luke.

Compensation Committee Interlocks and Insider Participation

The determinations regarding executive compensation are made by the Compensation Committee of the board of directors of MQ Associates, which is comprised of Messrs. Edmands, Bakst and Luke. Mr. Luke is President of MQ Associates, MedQuest, Inc. and is also President of each of our subsidiaries.

The Company had the following transactions with Mr. Luke requiring disclosure under Item 404 of Regulation S-K:

(a) We currently rent office space for 19 of our 89 centers and our headquarters through rental agreements with Image Properties, LLC, a company affiliated with us through common ownership. Gene Venesky, our Chief Executive Officer and co-founder, and John K. Luke, our President and co-founder, are the owners of Image Properties, LLC. The rental agreements with Image Properties, LLC provide for rental payments in amounts ranging from $6,000 to $77,000 monthly. The rental agreements are typically for ten years with five year renewal options and expire at various dates through 2012. We made total rental payments under these agreements of $2.7 million, $3.7 million and $3.7 million in 2001, 2002 and 2003, respectively. MQ Associates guarantees all real estate leases between its subsidiaries and Image Properties, LLC. See Note 15 to the consolidated financial statements of MQ Associates, Inc. for the future minimum payments to be made to Image Properties, LLC under these leases.

(b) MQ Associates had a related party receivable balance of $1.0 million and $0.8 million at December 31, 2002 and 2003, respectively. These related party receivables represent our advances to Image Properties, LLC for building and leasehold improvements made on our behalf. We earn interest income on the receivable balance at a rate of approximately 6% per annum of the outstanding receivable balance.

(c) MQ Associates incurred expenses related to certain aviation services during the year ended December 31, 2003, including expenses of $0.5, related to services provided by Image Aviation, LLC, a company owned by two of the Company’s stockholders who also are the Chief Executive Officer and President.

(d) In connection with the recapitalization transaction, we paid “success fees” to certain of our executive officers, in the aggregate amount of $2.3 million. Gene Venesky, our Chief Executive Officer, Secretary and Treasurer, and John K. Luke, our President, each received success fees of approximately $1.0 million. The total amount of the success fees and the specific amounts paid to Messrs. Venesky and Luke were determined through negotiations among TA Associates, Inc. and Messrs. Venesky and Luke, as the principal selling stockholders in the recapitalization.

No member of our compensation committee serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as members of the board of directors or compensation committee of MQ Associates.

Stock options and restricted stock

On October 8, 1999, we adopted a stock option and grant plan authorizing the issuance of options exercisable for up to 870,000 shares of Class B non-voting common stock. As of March 30, 2001, the number of shares of Class B non-voting common stock authorized for issuance pursuant to the option and grant plan was lowered to 750,000 in the aggregate. The option and grant plan provided that qualified and non-qualified options could be issued. The 1999 stock option and grant plan was terminated as of the closing of the recapitalization transaction.

In addition, on December 31, 1999, MQ Associates and certain of our executive officers executed a restricted stock agreement and issued promissory notes payable to us totaling approximately $1.4 million for the purchase of 750,000 shares of Class B non-voting common stock. Under the restricted stock agreements, the shares began vesting December 15, 2000, and vested ratably over a 60 month period. The shares of restricted Class B non-voting common stock vested immediately prior to the consummation of the recapitalization transaction. There were no authorized, issued or outstanding shares of Class B Common Stock after the effective date of the recapitalization transaction.

In April 2003, MQ Associates adopted an employee stock option plan (“2003 Stock Option Plan”) that provides for the issuance of incentive stock options and non-qualified stock options for the purchase of 16,999,999 shares of MQ Associates’ common stock. The 2003 Stock Option Plan was adopted with an effective date of January 1, 2003 and terminates ten years from the effective date, unless terminated sooner. Options vest ratably over four and five year periods on successive grant date anniversaries and may be issued at a grant price at no less than fair market value on the date of grant. Options were initially issued under the 2003 Stock Option Plan in July 2003. There were no vested options at December 31, 2003.

Certain of the named executive officers were granted incentive stock options under the 2003 Stock Option Plan in January 2004. These executive officers were granted 1,215,971 stock options with exercise prices ranging from $1.50 to $3.00 and a four year vesting period. These stock options were issued with a vesting date beginning on January 1, 2003.

Employment agreements

We have entered into employment agreements with each of Messrs. Venesky, Luke, Gentry, Schaefer, Villa and Elder, which agreements expire on August 15, 2007. The employment agreements provide for the payment of a base salary plus a bonus, and include a non-compete provision for up to two years following the executive officer’s termination of employment with us. The annual base salaries during the entire term of the employment agreements for each of Messrs. Venesky, Luke, Gentry, Schaefer, Villa and Elder are $500,000, $500,000, $175,000, $250,000, $225,000 and $130,000, respectively. Each employment agreement provides for bonus eligibility or other performance-based compensation arrangements to be determined by the Board of Directors, in its discretion, reasonably based in substantive part on the successful completion and profitability of center acquisitions or new center development projects. In addition, the Board’s determination of bonus awards will be based on the achievement of financing and performance targets calculated consistently with historical practices. The

employment agreements provide that if the executive officer is terminated without cause, such executive officer will be entitled to receive payments of his base salary for a specified period of time, which could be up to 24 months, depending on the executive officer.

Compensation of directors

Our directors who are non-employees of MQ Associates or J.P. Morgan Partners, LLC receive annual compensation for their services in the form of cash fees and stock options. The level of compensation is dependent upon level of experience and degree of risk associated with the various board positions. The Company also reimburses it non-employee directors for all out-of-pocket expenses incurred in the performance of their duties as directors.

The Company paid director fees to Donald Tomasso and Nancy-Ann Deparle in the amount of $35,000 each for the year ended December 31, 2003. The Company also awarded Donald Tomasso 10,000 non-qualified stock options and Nancy-Ann Deparle 100,000 non-qualified stock options during the year ended December 31, 2003. These options were granted under the 2003 Stock Option Plan, with an exercise price of $1.00, representing fair market value at the grant date, and a five year vesting schedule.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table sets forth information with respect to the ownership of the Class A common stock and common stock of MQ Associates as of December 31, 2003 by:

• each person known to own beneficially more than 5% of the common stock and Class A common stock,

• each of our directors,

• each of the executive officers named in the summary compensation table above, and

• all of our executive officers and directors as a group.

The Class A Common Stock and common stock vote together as a single class. Notwithstanding the beneficial ownership of Class A Common Stock and common stock presented below, the stockholders’ agreement with MQ Associates governs the stockholders’ exercise of their voting rights with respect to election of directors and certain other material events. The parties to the stockholders’ agreement have agreed to vote their shares to elect the board of directors as set forth therein.

The amounts and percentages of shares beneficially owned are reported on the basis of SEC regulations governing the determination of beneficial ownership of securities. Under SEC rules, a person is deemed to be a “beneficial owner” of a security if that person has or shares voting power or investment power, which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Securities that can be so acquired are deemed to be outstanding for purposes of computing such person’s ownership percentage, but not for purposes of computing any other person’s percentage. Under these rules, more than one person may be deemed to be a beneficial owner of the same securities and a person may be deemed to be a beneficial owner of securities as to which such person has no economic interest.

Except as otherwise indicated in these footnotes, each of the beneficial owners listed has, to our knowledge, sole voting and investment power with respect to the indicated shares of common stock.

Name of beneficial owner	Number of shares of Common Stock and Class A Common Stock beneficially owned	Percent of class

MQ Investment Holdings, LLC(1)(2)	72,100,000	71.6	%
Gene Venesky(3)	10,083,278	10.0	%
John K. Luke(4)	10,083,278	10.0	%
Thomas C. Gentry(5)	2,914,146	2.9	%
Daniel J. Schaefer(6)	2,914,146	2.9	%
Michael A. Villa(7)	2,914,146	2.9	%
Bruce W. Elder(8)	40,000	*
Evan P. Bakst(2)	72,100,000	71.6	%
Mitchell J. Blutt, M.D.(2)	—	—
Donald Tomasso(9)	2,000	*
Nancy-Ann DeParle(10)	20,000	*
Benjamin B. Edmands(2)	72,100,000	71.6	%
All directors and executive officers as a group(2)(11)	101,115,993	100.0	%

* Less than 1%

(1)		The address of MQ Investment Holdings, LLC is 1221 Avenue of the Americas, New York, New York 10020.

(2)		Reflects shares held of record by MQ Investment Holdings, LLC. Each of Messrs. Bakst and Edmands may be deemed the beneficial owner of the shares of Class A Common Stock owned by MQ Investment Holdings, LLC due to their status as principal of J.P. Morgan Partners, LLC, which controls MQ Investment Holdings, LLC. Each such person disclaims beneficial ownership of any such shares in which he does not have a pecuniary interest.

(3)		Reflects beneficial ownership of 71,528 exercisable stock options at December 31, 2003, representing vested portion of total grant of 286,112 stock options.

(4)		Reflects beneficial ownership of 71,528 exercisable stock options at December 31, 2003, representing vested portion of total grant of 286,112 stock options.

(5)		Reflects beneficial ownership of 53,646 exercisable stock options at December 31, 2003, representing vested portion of total grant of 214,584 stock options.

(6)		Reflects beneficial ownership of 53,646 exercisable stock options at December 31, 2003, representing vested portion of total grant of 214,584 stock options.

(7)		Reflects beneficial ownership of 53,646 exercisable stock options at December 31, 2003, representing vested portion of total grant of 214,584 stock options.

(8)		Reflects beneficial ownership of 40,000 exercisable stock options at December 31, 2003, representing vested portion of total grant of 200,000 stock options.

(9)		Reflects beneficial ownership of 2,000 exercisable stock options at December 31, 2003, representing vested portion of total grant of 10,000 stock options.

(10)		Reflects beneficial ownership of 20,000 exercisable stock options at December 31, 2003, representing vested portion of total grant of 100,000 stock options.

(11)		Reflects beneficial ownership of 365,994 exercisable stock options at December 31, 2003, representing vested portion of total grant of 1,525,976 stock options to directors and executive officers as a group

Item 13. Certain Relationships and Related Transactions

Transactions with stockholders prior to the consummation of the recapitalization transaction

We currently rent office space for 19 of our 89 centers and our headquarters through rental agreements with Image Properties, LLC, a company affiliated with us through common ownership. Gene Venesky, our Chief Executive Officer and co-founder, and John K. Luke, our President and co-founder, are the owners of Image Properties, LLC. The rental agreements with Image Properties, LLC provide for rental payments in amounts ranging from $6,000 to $77,000 monthly. The rental agreements are typically for ten years with five year renewal options and expire at various dates through 2012. We made total rental payments under these agreements of $2.7 million, $3.7 million and $3.7 million in 2001, 2002 and 2003, respectively. MQ Associates guarantees all real estate leases between its subsidiaries and Image Properties, LLC. See Note 15 to the consolidated financial statements of MQ Associates, Inc. for the future minimum payments to be made to Image Properties, LLC under these leases.

MQ Associates had a related party receivable balance of $1.0 million and $0.8 million at December 31, 2002 and 2003, respectively. These related party receivables represent our advances to Image Properties, LLC for building and leasehold improvements made on our behalf. We earn interest income on the receivable balance at a rate of approximately 6% per annum of the outstanding receivable balance.

We incurred expenses related to certain aviation services during the year ended December 31, 2003, including expenses of $0.5, related to services provided by Image Aviation, LLC, a company owned by Gene Venesky, our Chief Executive Officer and co-founder, and John K. Luke, our President and co-founder.

On March 30, 2001, we issued $8.8 million aggregate principal amount senior subordinated convertible notes due 2004 to TA Associates, Inc. and its affiliate partners. At that time, TA Associates, Inc. owned approximately 33.4% of our common stock. The senior subordinated convertible notes had a fixed 12% per annum interest rate with interest paid quarterly in arrears. The principal balance with any outstanding accrued and unpaid interest was due on October 8, 2004. As part of the recapitalization transaction, we repurchased the senior subordinated convertible notes at a purchase price of approximately $8.9 million.

On July 16, 2002, MQ Associates entered into a consulting agreement with William T. Carlson, Jr., then a director of MQ Associates. The initial term of the consulting agreement is four years, and automatically renews on the anniversary date of each subsequent year thereafter for a one year term. Pursuant to the consulting agreement, Mr. Carlson has agreed to provide legal services to us in areas such as corporate law matters, government regulatory and compliance matters and mergers and acquisitions. Mr. Carlson is being paid a fee of $30,000 per month, and is also eligible for bonus compensation at the sole discretion of the board of directors of MQ Associates. If Mr. Carlson is terminated without cause, such termination will be effective twelve months after MQ Associates gives notice to Mr. Carlson of his termination. During such twelve month period, Mr. Carlson will continue to receive the fee of $30,000 per month so long as he continues to fulfill his duties under such consulting agreement. In January 2004, the fee paid to Mr. Carlson was reduced to $21,667 per month by mutual agreement. Prior to the closing of the recapitalization transaction, Mr. Carlson resigned as a director of MQ Associates.

On July 1, 2001, MQ Associates entered into a retainer agreement with one of its then directors, Mr. Carlson. Pursuant to this retainer agreement, Mr. Carlson was paid $30,000 per month, and also received an acquisition fee calculated as a percentage of the acquisition cost each time Mr. Carlson represented MQ Associates in connection with an acquisition. MQ Associates paid Mr. Carlson $391,900 and $345,091 under this agreement in 2001 and during the period from January 1, 2002 through July 16, 2002, respectively. Effective July 16, 2002, this retainer agreement was terminated.

On December 15, 1999, MQ Associates loaned $455,000 to each of Thomas C. Gentry, Michael A. Villa and Daniel J. Schaefer for the purchase of restricted stock of MQ Associates. Such loans were each secured by the pledge of the newly purchased shares of restricted stock. Each of

Messrs. Gentry, Villa and Schaefer entered into restricted stock purchase agreements under the MQ Associates 1999 stock option and grant plan pursuant to which each purchased 250,000 shares of Class B common stock of MQ Associates. Each also executed a promissory note for the benefit of MQ Associates. Interest payable on each loan accrued at an annual rate of 6.08%. Immediately prior to the consummation of the recapitalization transaction, the aggregate principal amount of the loans outstanding, including accrued but unpaid interest, was $1.6 million. These loans were repaid in connection with the recapitalization transaction.

In connection with the recapitalization transaction, we paid “success fees” to certain of our executive officers, other employees and a consultant in the aggregate amount of $2.9 million. Gene Venesky, our Chief Executive Officer, Secretary and Treasurer, and John K. Luke, our President, each received success fees of approximately $1.0 million. Bruce W. Elder, our Vice President of Development, and William T. Carlson, our former director and a current consultant, received success fees of approximately $0.3 million. The total amount of the success fees and the specific amounts paid to Messrs. Venesky and Luke were determined through negotiations among TA Associates, Inc. and Messrs. Venesky and Luke, as the principal selling stockholders in the recapitalization. All other success fees paid by us were made solely at the discretion of Messrs. Venesky and Luke.

In connection with the consummation of the recapitalization transaction, we entered into an indemnification agreement with the then non-management stockholders of our parent, including TA/Advent VIII, L.P., TA/Advent II Atlantic and Pacific IV, L.P., TA Investors LLC and TA Executives Fund LLC, each an affiliate of TA Associates, Inc. and agreed to indemnify them against liabilities arising under the purchase agreement with the initial purchasers of the senior subordinated notes or otherwise in connection with the sale of the senior subordinated notes.

Transactions with stockholders in connection with the recapitalization transaction

Pursuant to the recapitalization agreement, the management stockholders of MQ Associates agreed to assume and direct the appeal of the InMed litigation matter. In connection with this litigation, MQ Associates has placed approximately $2.1 million in escrow. If the appeal is resolved adversely to MQ Associates, the management stockholders of MQ Associates will indemnify MQ Associates for all liabilities or obligations of MQ Associates in excess of the escrowed funds. However, if the appeal is resolved in favor of MQ Associates, the management stockholders of MQ Associates will be entitled to receive from MQ Associates the amount of the escrowed funds in excess of any liabilities or obligations of MQ Associates incurred in connection with the litigation, as well as any additional amounts awarded to MQ Associates.

Pursuant to the recapitalization agreement, the former stockholders of MQ Associates agreed to indemnify MQ Investment Holdings, LLC, MQ Associates and their affiliates for breaches of representations, warranties and covenants made by MQ Associates and such stockholders, as well as for other specified matters. Generally, subject to certain limited exceptions, these indemnification obligations with respect to breaches of representations and warranties are not effective until the aggregate amount of losses suffered by any indemnified party exceeds $2.0 million. Additionally, certain of the aforementioned indemnification obligations are limited to $20.0 million of recovery by the indemnified party from the indemnifying party. Generally, subject to several exceptions of greater duration, indemnification obligations with respect to representations and warranties survive until November 15, 2003.

Transactions with stockholders following consummation of the recapitalization transaction

Stockholders’ agreement. MQ Associates entered into a stockholders’ agreement with MQ Investment Holdings, LLC, Gene Venesky, John K. Luke, Thomas C. Gentry, Daniel J. Schaefer and Michael A. Villa. The stockholders’ agreement contains the following provisions:

• Certain transfers. Pursuant to the stockholders’ agreement, each stockholder agrees not to transfer any shares to any person without the prior consent of MQ Associates and MQ

Investment Holdings, LLC unless that person is already a party to the stockholders’ agreement (or executes a joiner to become a party to the stockholders’ agreement).

• Co-sale rights. Any stockholder who proposes to transfer shares must provide a sale notice to all other stockholders offering to the other holders the option to participate in the transfer with the same terms and conditions. Any other stockholder may give a tag along notice within 20 days of the receipt of such sale notice stating that he or she wishes to participate in the proposed transfer. If such notice is given, the transferring stockholder must use all reasonable efforts to cause the prospective transferees to acquire all such shares.

• Right of first refusal. In the event that a stockholder receives a written offer to purchase all or a portion of his or her shares, such stockholder will deliver to MQ Associates and each other stockholder a written notice, offering all of the shares proposed to be transferred first to MQ Associates or its designees and then to other stockholders. In the event that MQ Associates, its designees and the stockholders decline the offer, the stockholder who originally received the offer to purchase his or her shares may transfer to the proposed transferee the number of shares not accepted for purchase.

• Drag-along right. If a sale of MQ Associates is approved by the board of directors of MQ Associates and the holders of a majority of the outstanding common stock of MQ Associates, each stockholder will consent and raise no objections against the approved sale and shall waive any dissenters rights, appraisal rights or similar rights in connection with such sale and agree to sell his or her shares on the terms and conditions approved.

• Repurchase right of MQ Associates. If a management stockholder’s employment is terminated for any reason, MQ Associates or its designee will have the right to repurchase at any time any or all of the shares owned by such management stockholder.

• Right of first offer. If MQ Investment Holdings, LLC desires to transfer any of its shares, MQ Investment Holdings, LLC must first inform the management stockholders in writing of its intent to transfer such shares, and the management stockholders will have ten business days to inform MQ Investment Holdings, LLC whether they desire to purchase the shares of MQ Investment Holdings, LLC proposed to be transferred.

• Election of directors and observation rights. Pursuant to the stockholders’ agreement, each holder of shares covenants and agrees to cause seven directors to be on the board of directors of MQ Associates, three of whom will be designated by MQ Investment Holdings, LLC, one of whom will be designated by a member of MQ Investment Holdings, LLC, one of whom shall be designated by a majority (which will not include shares held by Daniel J. Schaefer, Michael A. Villa and Thomas C. Gentry) of the stockholders of MQ Associates and two of whom shall be designated by Gene Venesky and John K. Luke, so long as Messrs. Venesky and Luke collectively hold at least 10% of the common stock of MQ Associates or are both members of its senior management. If Messrs. Venesky and Luke’s aggregate ownership falls below 10%, the number of management designees to the board of directors will be reduced to one so long as either Mr. Venesky or Mr. Luke is still a member of senior management or otherwise will be reduced to zero. In addition, MQ Investment Holdings, LLC will have the right to designate one person to serve as an observer at all meetings at the board of directors.

• Termination. The stockholders’ agreement will terminate upon the earlier of (a) the twentieth anniversary of the closing date of the recapitalization transaction, (b) the sale, dissolution or liquidation of MQ Associates, (c) the consummation of an underwritten public equity offering that raises gross proceeds of at least $50.0 million and (d) the mutual agreement of MQ Associates and the majority stockholders of MQ Associates.

Registration rights agreement. MQ Associates entered into a registration rights agreement with MQ Investment Holdings, LLC, Gene Venesky, John K. Luke, Thomas C. Gentry, Daniel J. Schaefer and Michael A. Villa. The registration rights agreement contains the following provisions:

• Demand registration. Pursuant to the registration rights agreement, at the request of MQ Investment Holdings, LLC, MQ Associates will be required to use its best efforts to register under the Securities Act such shares held by MQ Investment Holdings, LLC. MQ Investment Holdings, LLC will be entitled to request up to two registrations on Form S-1.

• Piggyback registration. If MQ Associates proposes to register shares for its own account or otherwise, it must give written notice to each of its stockholders of its intention to register and upon written request, MQ Associates must use its best efforts to cause all shares requested to be included in such registration on the same terms and conditions as the securities otherwise being sold.

• Registration on Form S-3. When MQ Associates will have qualified for the use of Form S-3, MQ Investment Holdings, LLC and the management stockholders will have the right to request that MQ Associates effect a registration under the Securities Act using Form S-3. The management stockholders, collectively, will be permitted to make up to two requests on Form S-3, except that not more than one request may be made in any twelve-month period. MQ Associates will not be obligated to effect any such registration if the anticipated gross offering price of all shares to be registered would be less than $2,500,000, or MQ Associates will have effected four or more registration statements on Form S-3 during the 12 month period prior to the date of such request for registration.

Senior credit facility, senior subordinated notes offering and interim financing commitment

JPMorgan Chase Bank or one of its affiliates is a lender under the senior credit facility, as amended. In addition, JPMorgan Chase Bank or its affiliates in conjunction with each of the other initial purchasers or their affiliates agreed to provide us with senior subordinated financing in an aggregate amount of $180.0 million in the event that the offering of the senior subordinated notes was not consummated. J.P. Morgan Securities Inc. was an initial purchaser of the senior subordinated notes and both J.P. Morgan Securities Inc. and JPMorgan Chase Bank are affiliates of MQ Investment Holdings, LLC, which owns approximately 70.0% of our parent’s outstanding capital stock (on a fully diluted basis) and has the right under the stockholders’ agreement to appoint at least a majority of our directors. MQ Investment Holdings, LLC is an affiliate of J.P. Morgan Partners, LLC. Mitchell J. Blutt, M.D., a consultant of J.P. Morgan Partners, LLC, and Evan P. Bakst and Benjamin B. Edmands, principals of J.P. Morgan Partners, LLC, serve as three of our directors.

Item 14. Principal Accountant Fees and Services

Fees for each of the last two fiscal years for professional services rendered by PricewaterhouseCoopers, LLP were as follows:

	December 31,
	2003		2002

Audit Fees	$	149,100	$	100,500
Audit-Related Fees	—		—
Tax Fees	298,297		12,376
All Other Fees	49,785		267,600

Total Fees	$	497,182	$	380,476

Audit fees include fees related to the audit of the consolidated financial statements for the years ended December 31, 2003 and 2002 and the reviews of the three quarters ended for each of the respective

years then ended. Tax fees for 2003 related to tax compliance and consulting services while the 2002 tax fees related to consulting services. All other fees were incurred in relation to the recapitalization completed in fiscal 2002 and the registration statement filed on Form S-4 completed in February 2003.

The Company’s independent auditors meet on a regular basis with the audit committee throughout the fiscal year. Annual audit and tax fees are approved in advance by the audit committee during its meeting with the independent auditors in the fourth quarter of every fiscal year.

Part IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

Financial Statements

Report of independent auditors

Consolidated financial statements

Consolidated balance sheets December 31, 2003 and 2002

Consolidated statements of operations Years ended December 31, 2003, 2002 and 2001

Consolidated statements of stockholders’ deficit Years ended December 31, 2003, 2002 and 2001

Consolidated statements of cash flows Years ended December 31, 2003, 2002 and 2001

Notes to consolidated financial statements

(a)(3) Exhibits

EXHIBIT NUMBER		EXHIBITS

2.1(1)		Recapitalization Agreement by and among MQ Investment Holdings, LLC, MQ Associates, the Stockholders of MQ Associates and David Lang and Gene Venesky, as Stockholders’ Representatives dated as of July 16, 2002.
2.2(1)		Amendment No. 1, dated as of August 8, 2002, to Recapitalization Agreement by and among MQ Investment Holdings, LLC, MQ Associates, the Stockholders of MQ Associates and David Lang and Gene Venesky, as Stockholders’ Representatives dated as of July 16, 2002.
3.1(1)		Certificate of Incorporation of MedQuest, Inc.
3.2(1)		By-laws of MedQuest, Inc.
3.3(1)		Fourth Amended and Restated Certificate of Incorporation of MQ Associates.
3.4(1)		Second Amended and Restated By-laws of MQ Associates.
4.1(1)		Indenture by and among MedQuest, Inc., MQ Associates, as guarantor, the subsidiary guarantors parties thereto, and Wachovia Bank, National Association, as Trustee dated as of August 15, 2002.
4.2(1)		Form of Senior Subordinated Note, Series B, due 2012 (included as exhibit B to the Indenture filed as Exhibit 4.1).
4.3(1)		Registration Rights Agreement by and among MedQuest, Inc., the guarantors listed therein, J.P. Morgan Securities Inc., UBS Warburg LLC and Wachovia Securities, Inc. dated as of August 15, 2002.
4.4(1)		First Supplemental Indenture, dated as of November 13, 2002, by and among MedQuest, Inc., MQ Associates, as guarantor, the subsidiary guarantors party to the Indenture, Town & Country Open MRI, LLC, Clayton Open MRI, LLC, Wisconsin Diagnostic Imaging, Inc., Vienna Diagnostic Imaging, Inc., and Wachovia Bank, National Association, as Trustee.
4.5(2)		Second Supplemental Indenture, dated as of December 20, 2002, by and among MedQuest, Inc., MQ Associates, as guarantor, the subsidiary guarantors party to the Indenture, as supplemented, Brunswick Diagnostic Imaging, LLC, and Wachovia Bank, National Association, as Trustee.
4.6(3)		Third Supplemental Indenture, dated as of June 19, 2003, by and among MedQuest, Inc., MQ Associates, Inc., as guarantor, the subsidiary guarantors party to the Indenture, Illinois Diagnostic Imaging, Inc. and Wachovia Bank, National Association, as Trustee
4.7		Fourth Supplemental Indenture, dated as of December 17, 2003, by and among MedQuest, Inc., MQ Associates, Inc., as guarantor, the subsidiary guarantors party to the Indenture, Medical Scheduling of Missouri, LLC and Wachovia Bank, National Association, as Trustee.
4.8		Fifth Supplemental Indenture, dated as of January 14, 2004, by and among MedQuest, Inc., MQ Associates, Inc., as guarantor, the subsidiary guarantors party to the Indenture, William S. Witt, Inc. and Wachovia Bank, National Association, as Trustee.
10.1(1)		Credit Agreement by and among MQ Associates, MedQuest, Inc., as Borrower, the Several Lenders from time to time parties thereto and Wachovia Bank, National Association, as Administrative Agent dated as of August 15, 2002.
10.2(1)		Guarantee and Collateral Agreement by and among MQ Investment Holdings, LLC, MedQuest, Inc., as Borrower and certain of its subsidiaries in favor of Wachovia Bank, National Association, as Administrative Agent dated as of August 15, 2002.
10.3(1)		Registration Rights Agreement by and among MQ Associates and each of its stockholders dated August 15, 2002.
10.4(1)		Amended and Restated Employment Agreement by and between J. Kenneth Luke and MedQuest, Inc. dated as of August 15, 2002.
10.5(1)		Amended and Restated Employment Agreement by and between Gene Venesky and MedQuest, Inc. dated as of August 15, 2002.
10.6(1)		Amended and Restated Employment Agreement by and between Thomas C. Gentry and MedQuest, Inc. dated as of August 15, 2002.
10.7(1)		Amended and Restated Employment Agreement by and between Michael Villa and MedQuest, Inc. dated as of August 15, 2002.

10.8(1)		Amended and Restated Employment Agreement by and between Daniel J. Schaefer and MedQuest, Inc. dated as of August 15, 2002.
10.9(1)		Employment Agreement by and between Bruce W. Elder and MedQuest, Inc. dated as of August 15, 2002.
10.10(1)		Stockholders’ Agreement by and among MQ Associates and each of the stockholders named on Schedule I thereto dated August 15, 2002.
10.11(1)		Land and Building Lease by and between Image Properties, LLC and Palmetto Imaging, Inc. dated as of February 17, 1995 including Schedule I, which identifies substantially similar documents omitted and material differences in omitted documents from the agreement filed as Exhibit 10.11.
10.12(1)		Personal Guaranty by and between Image Properties, LLC and Palmetto Imaging, Inc. dated as of February 17, 1995 including Schedule I, which identifies substantially similar documents omitted and material differences in omitted documents form the agreement filed as Exhibit 10.12.
10.13(2)		Retainer Agreement by and between MQ Associates and William T. Carlson, Jr., dated as of July 1, 2001.
10.14(2)		Consulting Agreement by and between MQ Associates and William T. Carlson, Jr., dated as of July 16, 2002.
10.15(2)		Multi-Vendor Program Agreement by and between MedQuest Associates, Inc. and Philips Medical Systems North America, dated as of January 24, 2003. (A request for confidential treatment of certain omitted provisions of this exhibit has been submitted pursuant to Rule 406 of the Securities Act of 1933. The entire agreement has been filed separately with the Securities and Exchange Commission.)
10.16(2)		Service Maintenance Agreement by and between MQ Associates and Hitachi Medical Systems America, Inc., dated as of January 1, 2001.
10.17(4)		2003 Stock Option Plan.
10.18		Corporate Compliance Plan.
12.1		Statement re: computation of ratios of earning to fixed charges.
21.1		List of subsidiaries of MQ Associates.
31.1		Certification of Gene Venesky pursuant to Rule 15d-14(a) of the Securities Exchange Act of 1934.
31.2		Certification of Thomas C. Gentry pursuant to Rule 15d-14(a) of the Securities Exchange Act of 1934.
32.1		Certification of Thomas C. Gentry pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of Gene Venesky pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(1) Incorporated by reference to the exhibit of the same exhibit number as filed as an exhibit to Form S-4 as filed with the Commission on November 22, 2002 (Commission file number 333-101399)

(2) Incorporated by reference to the exhibit of the same exhibit number as filed as an exhibit to Amendment No. 1 to Form S-4 as filed with the Commission on December 31, 2002 (Commission file number 333-101399)

(3) Incorporated by reference to Exhibit 4.1 as filed as an exhibit to Form 10-Q for the quarter ended June 30, 2003.

(4) Incorporated by reference to Exhibit 10.1 as filed as an exhibit to Form 10-Q for the quarter ended June 30, 2003.

(b) We filed Form 8-K during the quarter ended December 31, 2003 as follows:

(1) Form 8-K related to press release dated November 5, 2003

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	MQ Associates, Inc.

	By:	/s/ Gene Venesky
		Gene Venesky
		Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date

/s/ Gene Venesky	Chief Executive Officer,	March 26, 2004
Gene Venesky	Secretary, Treasurer and Director (Principal Executive Officer)

/s/ Thomas C. Gentry	Chief Financial Officer, Assistant	March 26, 2004
Thomas C. Gentry	Secretary, Assistant Treasurer (Principal Financial and Accounting Officer)

/s/ John K. Luke	President and Director	March 26, 2004
John K. Luke

/s/ Evan P. Bakst	Director	March 26, 2004
Evan P. Bakst

/s/ Mitchell J. Blutt, M.D.	Director	March 26, 2004
Mitchell J. Blutt, M.D.

/s/ Nancy-Ann DeParle	Director	March 26, 2004
Nancy-Ann DeParle

/s/ Benjamin B. Edmands	Director	March 26, 2004
Benjamin B. Edmands

/s/ Donald C. Tomasso	Director	March 26, 2004
Donald C. Tomasso

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT.

No annual report to security holders covering MQ Associates, Inc.’s last fiscal year or proxy statement, form of proxy or other proxy soliciting material has been sent to security holders covering the 2003 fiscal year or will be sent to security holders subsequent to the filing of this report.

Report of Independent Auditors

To Board of Directors and Stockholders of
MQ Associates, Inc. and Subsidiaries

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders’ deficit and cash flows present fairly, in all material respects, the financial position of MQ Associates, Inc. and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. 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 of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 and Note 6 to the Consolidated Financial Statements, effective January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”

/s/ PricewaterhouseCoopers LLP

March 8, 2004
Atlanta, Georgia

MQ ASSOCIATES, INC. & SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2003 and 2002

(in thousands, except share data)

	2003		2002

ASSETS

Current assets
Cash and cash equivalents	$	6,731	$	3,230
Patient receivables, net of allowance for doubtful accounts of $1,685 and $1,269	61,490		46,157
Related party receivables	782		1,000
Income taxes receivable	—		2,676
Other receivables	2,049		965
Prepaid expenses and other	2,619		2,854
Deferred income taxes	594		498

Total current assets	74,265		57,380

Property and equipment, net	82,107		83,655
Goodwill	33,855		32,662
Intangible assets, net	10,722		7,268
Debt issue costs, net	13,384		12,182
Other	9,148		5,279

	$	223,481	$	198,426

The accompanying notes are an integral part of these consolidated financial statements.

MQ ASSOCIATES, INC. & SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2003 and 2002

(in thousands, except share data)

	2003			2002
LIABILITIES AND STOCKHOLDERS’ DEFICIT

Current liabilities
Accounts payable	$	6,596		$	4,292
Accrued payroll and related taxes	5,371			3,528
Other accrued expenses	14,958			13,631
Current portion of long-term debt	600			—
Current portion of obligations under capital leases	1,584			922
Total current liabilities	29,109			22,373

Long-term debt	244,966			235,213
Obligations under capital leases	2,517			2,729
Deferred income taxes	8,174			6,258
Other long-term liabilities	499			73
Total liabilities	285,265			266,646

Commitments and contingencies

Redeemable preferred stock
Series A Convertible, $.001 par value; nonvoting; 35,000,000 shares authorized issued and outstanding	35,000			35,000
Series B Convertible, $.001 par value; nonvoting; 15,000,000 shares authorized issued and outstanding	15,000			15,000
	50,000			50,000

Stockholders’ deficit
Class A common stock, $.001 par value; voting; 115,000,000 shares authorized; 72,100,000 issued and outstanding	72			72
Common stock, $.001 par value; voting; 195,000,000 shares authorized; 28,605,000 shares issued and outstanding	29			29
Additional paid-in capital	63,389			62,113
Accumulated deficit	(175,274		)	(180,434		)
Total stockholders’ deficit	(111,784		)	(118,220		)
	$	223,481		$	198,426

The accompanying notes are an integral part of these consolidated financial statements.

MQ ASSOCIATES, INC. & SUBSIDIARIES

Consolidated Statements of Operations

Years Ended December 31, 2003, 2002 and 2001

(in thousands)

	2003			2002			2001

Net revenues from services	$	242,912		$	203,411		$	142,322

Costs and expenses
Operating expenses, excluding depreciation	105,062			89,358			61,014
Marketing, general and administrative expenses	76,453			61,474			55,554
Depreciation and amortization	28,286			23,950			17,488

Income from operations	33,111			28,629			8,266

Interest expense	24,383			26,721			8,560
Interest income	(18		)	(101		)	(330		)
Equity in earnings of unconsolidated joint venture	(22		)	—			—

Income before provisions for income taxes	8,768			2,009			36

Provision for income taxes	3,608			788			4,020

Minority interest in net income of consolidated subsidiaries	—			40			110

Net income (loss)	$	5,160		$	1,181		$	(4,094	)

The accompanying notes are an integral part of these consolidated financial statements.

MQ ASSOCIATES, INC. & SUBSIDIARIES

Consolidated Statements of Stockholders’ Deficit

Years Ended December 31, 2003, 2002 and 2001

(in thousands, except share data)

							Old Series of Common Stock										Notes Receivable, Stockholders			Additional Paid-in Capital			Accumulated Deficit			Total Stockholders’ Deficit
	Class A Common Stock			Common Stock			Old Series of Common Stock					Class B Common Stock
	Shares	Amount		Shares	Amount		Shares		Amount			Shares		Amount
Balance, December 31, 2000	—	$	—	—	$	—	5,830,000		$	58		750,000		$	8		$	(1,448	)	$	1,357		$	(75,889	)	$	(75,914	)

Common stock purchased and retired							(894,001	)	(9		)												(18,541		)	(18,550		)
Beneficial conversion feature on issuance of Series C convertible redeemable preferred stock																				6,704						6,704
Capital contribution																				100						100
Stock compensation expense																				9,388						9,388
Accretion of Series C convertible redeemable preferred stock																				(6,704		)	(16,244		)	(22,948		)
Accrued interest on notes receivable, stockholders																	(83		)							(83		)
Net loss																							(4,094		)	(4,094		)

Balance, December 31, 2001	—	—		—	—		4,935,999		49			750,000		8			(1,531		)	10,845			(114,768		)	(105,397		)

Conversion of shares							4,105,393		41											85,681						85,722
Redemption of shares							(7,407,963	)	(74		)	(49,959	)	(1		)				(96,525		)	(51,841		)	(148,441		)
Sale of common stock	72,100,000	72																		72,028						72,100
Stock issuance fees																				(9,916		)				(9,916		)
Reclassification of shares				28,605,000	29		(1,633,429	)	(16		)	(700,041	)	(7		)							(15,006		)	(15,000		)
Settlement of notes receivable, stockholders																				1,531						1,531
Net income																							1,181			1,181
Balance, December 31, 2002	72,100,000	72		28,605,000	29		—		—			—		—			—			62,113			(180,434		)	(118,220		)

Income tax effect of stock issuance costs																				1,276						1,276
Net income																							5,160			5,160
Balance, December 31, 2003	72,100,000	$	72	28,605,000	$	29	—		$	—		—		$	—		$	—		$	63,389		$	(175,274	)	$	(111,784	)

MQ ASSOCIATES, INC. & SUBSIDIARIES

Consolidated Statements of Cash Flows

Years Ended December 31, 2003, 2002 and 2001

(in thousands)

	2003			2002			2001
Cash flows from operating activities
Net income (loss)	$	5,160		$	1,181		$	(4,094	)
Adjustments to reconcile net income (loss) to net cash and cash equivalents provided by operating activities
Depreciation and amortization	28,286			23,950			17,488
Amortization of bond discount	148			145			—
Amortization of debt issuance costs	1,713			574			—
Stock compensation expense	—			—			9,388
Bad debt expense	9,593			7,295			4,866
Deferred income taxes	3,096			2,693			1,649
Equity in earnings of unconsolidated joint venture	(22		)	—			—
Minority interest in net income of consolidated subsidiaries	—			40			110
Accrued interest on notes receivable, stockholders	—			—			(83		)
Loss (gain) on disposal of property and equipment	96			(73		)	—
Changes in operating assets and liabilities
Patient receivables	(24,708		)	(21,433		)	(17,038		)
Related party and other receivables	2,628			(2,087		)	(357		)
Prepaid expenses and other current assets	232			(661		)	(146		)
Other assets	(1,453		)	6			(36		)
Accounts payable	2,304			(1,229		)	2,274
Accrued payroll and related taxes	1,843			1,198			1,419
Other accrued expenses	1,756			4,592			4,902
Net cash and cash equivalents provided by operating activities	30,672			16,191			20,342

Cash flows from investing activities
Purchase of property and equipment	(22,999		)	(32,889		)	(25,900		)
Acquisitions of businesses	(6,922		)	(17,385		)	(34,232		)
Proceeds from loan repayments	133			103			—
Investment in unconsolidated joint venture	(809		)	—			—
Proceeds from stockholders loan repayments	—			1,531			—
Proceeds from sale of property and equipment	138			—			—
Other	(4,030		)	(2,000		)	—
Net cash and cash equivalents used for investing activities	(34,489		)	(50,640		)	(60,132		)

Cash flows from financing activities
Proceeds from notes payable	—			18,909			62,870
Proceeds from (payments on) line of credit	—			(2,350		)	6,000
Payments on notes payable	—			(12,317		)	(13,421		)
Payments on capital leases	(1,467		)	(3,770		)	(3,853		)
Proceeds from issuance of convertible preferred stock, net of transaction costs	—			—			9,719
Purchase of common stock from stockholders	—			—			(18,550		)
Sale of preferred stock	—			35,000			—
Sale of common stock	—			72,100			—
Payment of debt issuance costs	(2,915		)	(12,756		)	—
Proceeds from senior credit facility	37,188			56,000			—
Payments on senior credit facility	(85,188		)	—			—
Proceeds from senior subordinated debt, net of bond discount	—			176,167			—
Repayment of notes, line of credit and leases	—			(116,778		)	—
Redemption of preferred and common stock	—			(168,001		)	—
Payment of stock issuance fees	—			(9,916		)	—
Capital contribution	—			—			100
Proceeds from long-term debt	60,000			—			—
Payments on long-term debt	(300		)	—			—
Net cash and cash equivalents provided by financing activities	7,318			32,288			42,865
Net increase (decrease) in cash and cash equivalents	3,501			(2,161		)	3,075
Cash and cash equivalents, beginning of year	3,230			5,391			2,316
Cash and cash equivalents, end of year	$	6,731		$	3,230		$	5,391
Supplemental disclosure of cash flow information
Cash paid for interest	$	22,875		$	18,853		$	9,648
Cash paid for taxes	$	141		$	1,918		$	3,017
Supplemental schedule of noncash investing and financing activities Acquisition of businesses
Fair value of assets acquired	$	6,922		$	17,427		$	34,842
Less liabilities assumed	—			(42		)	(610		)
	$	6,922		$	17,385		$	34,232
Equipment acquired through capital lease	$	1,917		$	4,335		$	5,303

MQ ASSOCIATES, INC. & SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share date)

1. Business

MQ Associates, Inc. and subsidiaries (the “Company”) operate eighty-five outpatient diagnostic imaging centers in locations throughout the southeastern and southwestern United States of America. The outpatient diagnostic imaging centers provide medical imaging services to patients referred by physicians and extend credit to governmental, national and local insurance carriers, as well as individual patients who reside in the respective service areas. The Company operates in one reportable segment.

2. Summary of Significant Accounting Policies

Principles of consolidation

MedQuest, Inc. (“MedQuest”) is a wholly-owned subsidiary of MQ Associates, Inc. (“MQA”). MQA has no material assets or operations other than its ownership of 100% of the outstanding capital stock of MedQuest. The consolidated financial statements of the Company include the assets, liabilities, revenues and expenses of all majority owned subsidiaries over which the Company exercises direct or indirect control, and for which control is other than temporary. The Company uses the equity method of accounting for its investment in a joint venture at December 31, 2003. All intercompany transactions have been eliminated in consolidation.

Cash and cash equivalents

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company routinely has deposits at financial institutions which substantially exceed federal depository insurance coverage. Management believes any risks associated with these excess deposits are mitigated by maintaining the deposits at large, reputable banks.

Property and equipment

Property and equipment are carried at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over estimated useful lives. Leasehold improvements are classified as property and equipment and are amortized using the straight-line method over the shorter of lease terms or the economic useful lives of the assets. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in operations for the period. The cost of maintenance and repairs is charged to operations as incurred. Significant renewals and betterments are capitalized. Deposits made on equipment are recorded as non-current other assets until the equipment is installed and accepted, as which time it is reclassified into property and equipment.

Intangible assets and goodwill

Intangible assets are stated at cost, net of accumulated amortization, and consist of non-compete agreements and certificates of need.

In January 2002, the Company adopted Statement of Financial Standards No. 142 (“SFAS 142”), which requires the discontinuance of amortization of goodwill and certain intangible assets with indefinite useful lives. SFAS 142 requires that goodwill and intangible assets deemed to have an indefinite life be reviewed for impairment upon the initial adoption of SFAS 142 and annually thereafter. The Company performed its initial impairment review in January 2002 and annually performs its impairment review in the fourth quarter of every year. Other intangibles with finite lives will continue to be amortized over their estimated useful lives.

Under SFAS 142, goodwill and certificates of need are not subject to amortization. Certificates of need are required by certain states prior to the acquisition of high-cost capital items, including diagnostic imaging systems, or provision of diagnostic imaging services. Certificates of need generally have an indefinite life, however, the useful life may be affected by repeal or liberalization of existing certificate of need regulations. The Company

periodically assesses the useful lives of certificates of need to account for changes, if any, in certificate of need regulations.

Prior to the adoption of SFAS 142, goodwill was amortized on a straight-line basis over fifteen years and all other intangibles were amortized over estimated useful lives that ranged from two to fifteen years.

Long-lived assets

Long-lived assets are analyzed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The recoverability test is performed at the lowest level at which net cash flows can be directly attributable to long-lived assets and is performed on an undiscounted basis. For any assets identified as impaired, the Company measures the impairment as the amount by which the carrying value of the asset exceeds the fair value of the asset. In estimating the fair value of the asset, management utilizes a valuation technique based on the present value of expected future cash flows.

Revenue recognition

Revenue is recognized as services are rendered. Revenues are reported at the estimated net realizable amounts from patients, third-party payors and others for services rendered including estimated contractual adjustments under reimbursement agreements with third-party payors. The Company provides for an estimate of bad debts for accounts receivable balances that will ultimately become uncollectible and also provides for specific accounts that have been identified as uncollectible. This estimate of bad debts is approximately 2.5% to 3.0% of gross revenue and is based upon the Company’s historical bad debt experience.

The components of the allowance for doubtful accounts for the years ended December, 31 2003, 2002 and 2001 are as follows:

	2003			2002			2001

Beginning balance	$	1,269		$	987		$	485
Bad debt expense	9,593			7,295			4,866
Write-offs	(9,177		)	(7,013		)	(4,364		)
Ending balance	$	1,685		$	1,269		$	987

Operating expenses, excluding depreciation

Operating expenses, excluding depreciation, consists of compensation related to radiologists, technicians and transcriptionists, combined with supplies, building rental, utilities and other expenses directly related to generating service revenue.

Advertising expense

The Company expenses all advertising costs as incurred. Advertising expense was $2,622, $2,415 and $1,707 for the years ended December 31, 2003, 2002 and 2001, respectively.

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 their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Income tax expense (benefit) is comprised of the tax payable (receivable) for the period and the change in deferred income tax assets and liabilities during the period. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.

Concentrations of credit risk

The Company grants credit without collateral to its patients, most of who are residents of areas surrounding the centers and are insured under third-party payor agreements. The mix of receivables from patients and third-party payors was as follows:

	December 31,
	2003		2002

Blue Cross/Blue Shield	21	%	19	%
Medicare	19		18
Managed Care	18		26
Other third-party payors	15		10
Commercial	9		6
Workers Compensation	7		7
Medicaid	5		6
HMO	4		5
Patients	2		3

	100	%	100	%

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities 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.

Fair value of financial instruments

The carrying value of cash and cash equivalents, patient receivables, accounts payable and accrued expenses approximate their fair value based on the short-term nature of these accounts. Borrowings under the revolving credit facility, Tranche B term facility, and $47,500 of the senior subordinated notes, which is linked to an interest rate swap agreement, bear interest at variable rates, which approximates market. The remaining $132,500 of long-term debt bears interest at a fixed rate and its fair value was estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. The estimated fair value of the fixed rate portion of the Company’s long-term debt was $6,525 above its carrying value at December 31, 2003 and approximated fair value at December 31, 2002.

Derivative financial instruments

The Company may, from time to time, use derivative financial instruments to reduce exposure to adverse fluctuations in interest rates. When entered into, the Company formally designates and documents the financial instrument as a hedge of a specific underlying exposure, as well as the risk management objectives and strategies for undertaking the hedge transactions. The Company formally considers both at the inception and at least quarterly thereafter, whether the financial instruments that are used in hedging transactions are effective at offsetting changes in either the fair value or cash flows of the related underlying exposure. Because of the high degree of effectiveness between the hedging instrument and the underlying exposure being hedged, fluctuations in the value of the derivative instruments are generally offset by changes in the fair value or cash flows of the underlying exposure being hedged. Any ineffective portion of a financial instrument’s change in fair value is immediately recognized in earnings.

Reclassifications

Certain reclassifications have been made to the consolidated financial statements for the year ended December 31, 2002 to conform to the presentation for the year ended December 31, 2003.

3. The Recapitalization

On August 15, 2002, MQA consummated a recapitalization pursuant to an agreement dated July 16, 2002, as amended on August 8, 2002, among MQA, its then existing stockholders and MQ Investment Holdings LLC, an affiliate of J.P. Morgan Partners, LLC. The total consideration paid in the recapitalization was approximately $365,100.

As a result of the recapitalization, approximately 70.0% of the total capital stock of MQA is owned by MQ Investment Holdings, LLC, with the remaining approximately 30.0% owned by certain management stockholders, in each case, on a fully diluted basis.

In connection with the recapitalization the following transactions occurred:

•		MQ Investment Holdings, LLC made an equity investment of $107,100 in MQA and as a result of such investment received 72,100,000 shares of Class A Common Stock, par value $0.001 per share, and 35,000,000 shares of Series A Redeemable Preferred Stock, par value $0.001 per share, of MQA;

•		Immediately prior to the consummation of the recapitalization, the then outstanding shares of Series A Convertible Preferred Stock and Series C Convertible Preferred Stock of MQA were converted in a series of transactions into 4,105,393 shares of the old series of Common Stock, 1,276,000 shares of the old series Series A Redeemable Preferred Stock and 680,000 shares of the old series of Series B Redeemable Preferred Stock. As part of the recapitalization, MQA (i) redeemed approximately 76.4% of the total outstanding shares of the old series of Common Stock and Class B Common Stock, including approximately 58.9% of the stock holdings of the management stockholders, for an aggregate redemption price of approximately $148,441 and (ii) redeemed 100% of the old series of Series A Redeemable Preferred Stock and 100% of the old series of Series B Redeemable Preferred Stock for an aggregate redemption price of $19,560. The remaining 23.6% of the outstanding old series of Common Stock and the Class B Common Stock, which equaled the 41.1% of the then remaining stock holdings of the management stockholders, was reclassified as (i) 28,605,000 shares of Common Stock, par value $0.001 per share (30,900,000 shares on a fully diluted basis), and (ii) 15,000,000 shares of Series B Preferred Stock, par value $0.001 per share, which in the aggregate equaled approximately 30.0% of the ownership (on a fully diluted basis) of MQA after the consummation of the recapitalization;

•		Immediately prior to the closing of the recapitalization, MQA transferred 100% of the ownership interests in each of its subsidiaries to MedQuest; and

•		MedQuest, as borrower, entered into an $80,000 senior credit facility and issued $180,000 in 11⁷/₈% senior subordinated notes to fund a portion of the recapitalization transaction. MQA and all of the subsidiaries of MedQuest are guarantors under the senior credit facility and the senior subordinated notes.

4. Acquisitions

During the years ended December 31, 2003 and 2002, the Company acquired two and seven entities that provide medical diagnostic imaging services to patients. Each acquisition was accounted for using the purchase method of accounting and the results of operations for each entity have been included in the consolidated financial statements as of the effective date of the acquisition.

The following table summarizes the estimated fair values of the assets acquired and the aggregate purchase price during the years ended December 31:

	2003		2002
Accounts receivable	$	218	$	1,202
Property and equipment	1,600		4,795
Non-compete agreements	115		635
Certificates of need	3,796		4,511
Goodwill	717		5,798
Other assets	—		9
Liabilities assumed	—		(42		)

Aggregate purchase price	$	6,446	$	16,908

The Company also made adjustments to intangibles during the years ended December 31, 2003 and 2002 for acquisitions completed during the year ended December 31, 2001 amounting to $476 and $477, respectively.

The goodwill acquired in relation to the above transactions is expected to be deductible for tax purposes. All of the acquisitions made during the years ended December 31, 2003 and 2002 were consummated in order to expand market share. The weighted average amortization period for acquired intangibles subject to amortization was 30 months and 31 months for acquisitions made during the years ended December 31, 2003 and 2002, respectively.

The unaudited pro forma results of operations for the years ended December 31, 2003 and 2002, reflect operations as if MQA and the entities described above had been combined as of January 1, 2002. The unaudited pro forma results include estimates and assumptions which management believes are reasonable. However, pro forma results do not include any anticipated cost savings or other effects of the planned integration of these entities, and are not necessarily indicative of the results which would have occurred if the business combinations had been in effect on the dates indicated, or which may result in the future.

	Unaudited pro forma Year ended December 31,
	2003		2002

Net revenues from services	$	244,782	$	205,848

Net income	$	5,901	$	1,357

5. Property and Equipment

Property and equipment, including assets held under capital leases, consisted of the following:

		December 31,
	Useful lives in years	2003		2002

Technical equipment	5	$	128,905	$	113,593
Leasehold improvements	5 to 39	30,274		24,596
Office equipment and other	7	7,373		5,047
Computer equipment	3	7,373		4,855
Furniture and fixtures	7	4,089		3,639

		178,014		151,730

Less accumulated depreciation		95,907		68,075

		$	82,107	$	83,655

Depreciation expense amounted to $27,829, $23,665 and $16,555 for the years ended December 31, 2003, 2002 and 2001, respectively.

6. Goodwill and Intangible Assets

Information related to intangibles subject to amortization and intangibles not subject to amortization is as follows:

	December 31,
	2003			2002

Intangibles subject to amortization

Non-compete agreements:

Gross carrying amount	$	2,157		$	2,042
Accumulated amortization	(1,602		)	(1,145		)

	$	555		$	897

	December 31,
	2003		2002

Intangibles not subject to amortization

Certificates of need:

Gross carrying amount	$	10,167	$	6,371

The changes in the carrying amount of goodwill are as follows:

	Years ended December 31,
	2003		2002

Beginning balance, net	$	32,662	$	26,387

Acquired	717		5,798
Impairment losses	—		—
Adjustments	476		477

Ending balance, net	$	33,855	$	32,662

The results for the year ended December 31, 2001 on a historical basis do not reflect the provisions of SFAS 142. If the Company had adopted SFAS 142 on January 1, 2001, the historical amounts would have been changed to the adjusted amounts as follows:

	Year ended December 31, 2001

Net loss, as reported	$	(4,094	)

Add: Goodwill amortization, net of tax	423

Net loss, as adjusted	$	(3,671	)

Based on the current amount of intangible assets subject to amortization, the estimated amortization expense for each of the succeeding five years is as follows:

Year ending December 31,	Estimated amortization expense

2004	$	266
2005	144
2006	82
2007	51
2008	12

Amortization expense amounted to $457, $293 and $933 for the years ended December 31, 2003, 2002 and 2001, respectively.

7. Other Accrued Expenses

Other accrued expenses consisted of the following:

	December 31,
	2003		2002

Accrued interest payable	$	7,278	$	7,632
Accrued radiologist fees and bonuses	3,359		3,324
Other	3,090		1,368
Accrued operating costs	1,231		1,307

	$	14,958	$	13,631

8. Obligations under Capital Lease

The Company leases technical equipment under capital lease agreements that expire in December 2006. The Company records the asset and related liability at the net present value of the lease payments using an imputed interest rate of 5% at December 31, 2003.

Future minimum capital lease payments are as follows:

Year
2004	$	1,698
2005	1,654
2006	1,038

Total minimum lease payments	4,390

Less interest portion	289

Present value of minimum lease payments, including current portion of $1,584	$	4,101

Property and equipment held under capital lease obligations was $3,880 and $3,468, net of accumulated depreciation of $2,371 and $867 at December 31, 2003 and 2002, respectively.

9. Long-Term Debt

Long-term debt consisted of the following:

	December 31,
	2003		2002

Revolving credit facility, due August 2007	$	8,000	$	56,000

Tranche B term facility, due through September 2009	59,700		—

11⁷/₈% senior subordinated notes, net of discount of $3,538 and $3,687, due August 2012	176,462		176,313

	244,162		232,313
Fair value adjustment related to 11⁷/₈% senior subordinated notes	1,404		2,900
Less current portion of long-term debt	600		—

	$	244,966	$	235,213

Senior credit facility

In September 2003, the Company amended its senior credit facility to allow for borrowings not to exceed $60,000 under a Tranche B term facility. Concurrent with the amendment of the senior credit facility, the Company also borrowed $60,000 under the Tranche B term facility and applied the net proceeds against the borrowings outstanding under the senior credit facility.

The senior credit facility, as amended, (“Senior Credit Facility”) provides for a revolving credit facility not to exceed $80,000 and a Tranche B term facility of $60,000. The Senior Credit Facility is guaranteed by MQ Associates, Inc. and each of MedQuest’s existing and future domestic subsidiaries and certain foreign subsidiaries. MedQuest’s obligations under the Senior Credit Facility and the guarantors’ obligations under the guarantees are collateralized by substantially all of the assets of MedQuest and the guarantors.

The Senior Credit Facility has certain financial covenants related to the maintenance of minimum/maximum levels of consolidated leverage, senior leverage and fixed charge coverage ratios. The Company was in compliance with all covenants under the Senior Credit Facility at December 31, 2003.

Revolving credit facility

Borrowings under the revolving credit facility accrue interest at the option of MedQuest, at either: (a) the greater of the prime rate or the Federal funds effective rate (subject to certain adjustments) plus an applicable margin of 1.75% per annum, or (b) the Eurodollar rate, plus an applicable margin of 2.75% per annum. Borrowings at December 31, 2003 are based upon the prime rate (4.00% at December 31, 2003). The revolving credit facility also provides for a commitment fee equal to ½ of 1% per annum. The margins related to the prime rate and Eurodollar rate borrowings and commitment fee are subject to adjustment based upon the Company’s consolidated leverage ratio, as defined. Borrowings available under the revolving credit facility, net of $1,118 in letters of credit, amount to $70,882 at December 31, 2003.

Tranche B term facility

Borrowings under the Tranche B term facility accrue interest at the option of MedQuest, at either: (a) the greater of the prime rate or the Federal funds effective rate (subject to certain adjustments) plus an applicable margin of 2.75% per annum, or (b) the Eurodollar rate, plus an applicable margin of 3.75% per annum. Borrowings are based upon the Eurodollar rate (1.16% at December 31, 2003) and amounted to $59,700 at December 31, 2003.

Commencing with the fiscal year ending December 31, 2004, and annually thereafter, not more than 75% of excess cash flows, as defined, must be applied against certain outstanding borrowings under the Senior Credit Facility. Management does not anticipate excess cash flows, as defined, for the year ending December 31, 2004.

Senior subordinated notes

The 11⁷/₈% senior subordinated notes (“Notes”), due in August of 2012, were issued in the aggregate principal amount of $180,000, net of a discount of $3,832, which is being amortized as interest expense over the life of the Notes. The Notes also provide for an optional early redemption by MedQuest upon a change in control, as defined, prior to August 15, 2007 at 100% of the principal amount, or on or after August 15, 2007 at the redemption prices expressed as a percentage of the principal amount, plus accrued and unpaid interest as follows:

Twelve months beginning August 15,	Optional Redemption Percentage
2007	105.938	%
2008	103.958	%
2009	101.979	%
2010 and thereafter	100.000	%

Prior to August 15, 2005, MedQuest may also redeem up to 35% of the Notes with the net cash proceeds of one or more equity offerings at a redemption price of 111.875% of the principal amount thereof, plus accrued and unpaid interest, provided that at least 65% of the original principal amount of the Notes remains outstanding after such redemptions and the redemptions occur within 120 days of the closing of the equity offerings.

The Notes are fully and unconditionally, jointly and severally guaranteed by MQ Associates, Inc. and each of MedQuest’s domestic subsidiaries. The Notes contain certain covenants, including covenants limiting the Company’s ability to incur additional indebtedness and make restricted payments.

Debt issuance costs amounting to $19,169, with respect to the Senior Credit Facility, and Notes, were capitalized and are being amortized into interest expense over the lives of the related debt instruments.

Future maturities of long-term debt, including the effects of the bond discount, are as follows:

Year ending December 31,	Amount

2004	$	600
2005	600
2006	600
2007	8,600
2008	28,800
2009	28,500
Thereafter	176,462

	$	244,162

10. Preferred Stock

Series A and Series B convertible and redeemable preferred stock

The Series A Preferred Stock is convertible, at the option of the holder, (i) immediately prior to a liquidation or sale of MQA, into a total of 35,000,000 shares of Class A Common Stock or (ii) immediately prior to the consummation of an underwritten public offering (“UPO”), into the number of shares resulting from dividing $35,000 by the UPO price per share. In the event of a liquidation or sale of MQA, the Series A Preferred Stock is entitled to an amount equal to the greater of $1.00 per share or the amount to be paid, per share, as if the Series A Preferred Stock had been converted into Class A Common Stock immediately prior to the liquidation.

The Series B Preferred Stock is convertible, at the option of the holder, immediately prior to a liquidation or sale of MQA, into 17,295,000 shares of Common Stock and immediately prior to the consummation of a UPO, will be deemed automatically converted into the number of shares resulting from dividing $15,000 by the UPO price per share, plus 2,295,000 shares of Common Stock. In the event of a liquidation or sale of MQA, the Series B Preferred Stock is entitled to an amount equal to the greater of $1.00 per share or the amount to be paid, per share, as if the Series B Preferred Stock had been converted into Common Stock immediately prior to the liquidation.

The Series A Preferred Stock and Series B Preferred Stock may be redeemed at the option of the holder upon the consummation of a UPO at a redemption price of $35,000 for all of the Series A Preferred Stock and $15,000 for all of the Series B Preferred Stock. Additionally, in the case of such redemption, the holders of Series B Preferred Stock will receive 2,295,000 shares of Common Stock. In the event that (i) MQA and its underwriters determine that the redemption of the Series B Preferred Stock would adversely affect the planned UPO or (ii) the holders of shares of Series B Preferred Stock elect not to redeem shares of Series B Preferred Stock, MQA may convert all shares of Series B Preferred Stock into 17,295,000 shares of Common Stock. The Company has not accreted to the fair value of the additional shares of Common Stock to be issued upon redemption of the Series B Preferred Stock because the Company does not believe that the redemption trigger is probable as of December 31, 2003.

The conversion provisions related to the Series A Preferred Stock and Series B Preferred Stock are subject to adjustments for certain events. Upon the consummation of any liquidation or sale of MQA, after payment of the preference to the holders of Series A Preferred Stock, the holders of Class A Common Stock will be entitled to receive out of the proceeds of such liquidation or sale, before any payment will be made to the holders of any capital stock ranking junior to the Class A Common Stock, an amount per share of Class A Common Stock equal to the original cost of such share. After payment has been made to the holders of Class A Common Stock of the full amount set forth in the preceding sentence, the holders of Common Stock will be entitled to receive out of the

proceeds of such liquidation or sale an amount per share of Common Stock equal to the original cost of each such share of Common Stock pari passu with the payment of the preference to the holders of Series B Preferred Stock. After payment of the amounts set forth above, the holders of Common Stock and the holders of Class A Common Stock will share ratably in the remaining proceeds, if any, of such liquidation or sale.

Convertible preferred stock

The Company had four classes of convertible preferred stock prior to the recapitalization transaction as follows:

(a) The Series A Convertible had one vote per share on all matters and carried a liquidation preference of $5.70 per share plus any declared and unpaid dividends (“Series A Liquidation”) ($18,800 at December 31, 2001). At the option of the holder, all or none of the Series A Convertible was redeemable, on or after October 31, 2004 or upon a qualified public offering as defined in the articles of incorporation, at the greater of the Series A Liquidation or fair market value ($79,321 at December 31, 2001). All or none of the Series A Convertible was convertible, at the option of the holder on or after October 31, 2001, into Series B convertible redeemable preferred stock (“Series B Convertible”) on a one for one basis, plus 1,276,000 shares of Series A redeemable preferred stock (“Series A Redeemable”). The Series A Convertible ranked equal to all other issuances of redeemable preferred stock and senior to all issuances of common stock in liquidation.

As a result of the recapitalization transaction, the Series A Convertible and Series C Convertible were converted into shares of old series of Common Stock, old series of Series A redeemable preferred stock and old series of Series B redeemable preferred stock, and then ultimately redeemed (see Note 3).

(b) The Series B Convertible had one vote per share on all matters if there were no shares of Series A Convertible issued and outstanding. The Series B Convertible was non-cumulative, par value $.01 per share, and carried a liquidation preference of $1.83 per share plus any declared and unpaid dividends (“Series B Liquidation”) ($6,040 if issued and outstanding at December 31, 2001). At the option of the holders, on or after October 8, 2004 or upon a qualified public offering as defined in the articles of incorporation, all or none of the Series B Convertible was redeemable for the greater of the Series B Liquidation or fair market value. All or none of the Series B Convertible was convertible at any time, at the option of the holder, on a one for one basis into shares of the old series of Common Stock. At December 31, 2001, there were 3,300,000 shares of Series B Convertible authorized and no shares issued and outstanding. The Series B Convertible ranked equal to all other issuances of redeemable preferred stock and senior to all issuances of common stock in liquidation.

There were no authorized, issued or outstanding shares of Series B Convertible after the effective date of the recapitalization transaction.

(c) In March 2001, an unaffiliated investment firm contributed $9,719, net of transaction costs of $281, to the Company in return for 805,532 shares of non-cumulative Series C convertible redeemable preferred stock (the “Series C Convertible”). In March 2001, the Company recorded a $6,704 beneficial conversion feature related to the issuance of these shares. The Series C Convertible had one vote per share on all matters and carried a liquidation preference of $12.41 per share plus any declared and unpaid dividends (“Series C Liquidation”) ($10,000 at December 31, 2001). At the option of the holder, on or after October 31, 2004 or upon a qualified public offering as defined in the articles of incorporation, all or none of the Series C Convertible was redeemable at the greater of the Series C Liquidation or fair market value ($25,692 at December 31, 2001). All or none of the Series C Convertible was convertible, at the option of the holder on or after October 31, 2001, into Series D convertible redeemable preferred stock (“Series D Convertible”) on a one for one basis, plus 680,000 shares of Series B redeemable preferred stock (“Series B Redeemable”). In the event of liquidation, the Series C

Convertible ranked equal to all other issuances of redeemable preferred stock and senior to all issuances of common stock.

(d) The Series D convertible preferred stock (“Series D Convertible”) had one vote per share on all matters if there were no shares of Series C Convertible issued and outstanding. The Series D Convertible was non-cumulative, par value $.01 per share, and carried a liquidation preference of $3.98 per share plus any declared and unpaid dividends (“Series D Liquidation”)($3,206 if issued and outstanding at December 31, 2001). At the option of the holder, on or after October 8, 2004 or upon a qualified public offering as defined in the articles of incorporation, all or none of the Series D Convertible were redeemable for the greater of the Series D Liquidation or fair market value. All or none of the Series D Convertible was convertible at any time, at the option of the holder, on a one for one basis into the old series of Common Stock. At December 31, 2001 and 2000, there were 805,532 shares of Series D Convertible authorized and no shares issued and outstanding. The Series D Convertible ranked equal to all other issuances of redeemable preferred stock and senior to all issuances of common stock in liquidation.

There were no authorized, issued or outstanding shares of Series D Convertible after the effective date of the recapitalization transaction.

Old series of redeemable preferred stock

The Company had the following classes of old series of redeemable preferred stock prior to the recapitalization transaction:

The old series of Series A Redeemable (“Series A”) carried a liquidation preference of $10 per share plus any accumulated dividends (“Series A Redeemable Liquidation”) ($12,760 if issued and outstanding at December 31, 2001) and was redeemable (all or none) at the Series A Redeemable Liquidation plus interest, if applicable, on or after October 8, 2004 or upon a qualified public offering as defined in the articles of incorporation. Holders of the Series A were entitled to receive annual cumulative dividends equal to 3% of the Series A Redeemable Liquidation whether or not they have been declared and whether or not there were profits, surplus or other funds of the Company legally available for the payment of such dividends. The Series A ranked equal to all other issuances of redeemable preferred stock and senior to all issuances of common stock in liquidation. At December 31, 2001, there were 1,276,000 shares of Series A Redeemable authorized and no shares issued and outstanding.

The Company issued 1,276,000 shares of Series A immediately prior to the recapitalization transaction and redeemed these shares as a result of the recapitalization transaction (see Note 3). There were no authorized, issued or outstanding shares of Series A after the effective date of the recapitalization transaction.

The old series of Series B Redeemable (“Series B”) carried a liquidation preference of $10 per share plus any accumulated dividends (“Series B Redeemable Liquidation”) ($6,800 if issued and outstanding at December 31, 2001) and was redeemable (all or none) at the Series B Redeemable Liquidation plus interest, if applicable, on or after October 8, 2004 or upon a qualified public offering as defined in the articles of incorporation. Holders of the Series B were entitled to receive annual cumulative dividends equal to 3% of the Series B Redeemable Liquidation whether or not they have been declared and whether or not there were profits, surplus or other funds of the Company legally available for the payment of such dividends. The Series B ranked equal to all other

issuances of redeemable preferred stock and senior to all issuances of common stock in liquidation. At December 31, 2001, there were 680,000 shares of Series B Redeemable authorized and no shares issued and outstanding.

The Company issued 680,000 shares of Series B immediately prior to the recapitalization transaction and redeemed these shares as a result of the recapitalization transaction (see Note 3). There were no authorized, issued or outstanding shares of Series B after the effective date of the recapitalization transaction.

11. Capital Structure

As a condition of the recapitalization, MQA amended its articles of incorporation to effect a change in its capital structure. The amended articles of incorporation authorize 385,000,000 shares of capital stock consisting of (i) 195,000,000 shares of Common Stock, par value $.001, (ii) 115,000,000 shares of Class A common stock, $.001 par value, and (iii) 75,000,000 shares of Preferred Stock, par value $.001, of which (a) 35,000,000 shares are designated as Series A Convertible Redeemable Preferred Stock, (b) 15,000,000 shares are designated as Series B Convertible Redeemable Preferred Stock, and (c) 25,000,000 shares are not designated at December 31, 2003.

The Class A common stock is convertible, on a one-for-one basis, into Common Stock at the option of the holder or upon the occurrence of an underwritten public offering, as defined. The Class A common stock and Common Stock have identical rights, except that the Class A common stock ranks senior to the Common Stock in the event of a liquidation or sale of MQA.

12. Common Stock Transactions

(a) In March 2001, certain executives of the Company (the “Executives”) executed a Stock Purchase and Voting Agreement (“Stock Purchase Agreement”) and issued promissory notes payable to the principal stockholders totaling $5,400 for the purchase of 583,800 shares of the old series of Common Stock from the principal stockholders of the Company. Compensation expense related to the Stock Purchase Agreement of $9,388 for the year ended December 31, 2001 is reflected as marketing, general and administrative expenses in the accompanying consolidated statement of operations.

During the year ended December 31, 2001, the Company repurchased and retired 894,001 shares of the old series of Common Stock from the principal stockholders for $18,550. There were no authorized, issued or outstanding shares of the old series of Common Stock after the effective date of the recapitalization transaction.

(b) In December 1999, the Executives executed a Restricted Stock Agreement (“Agreement”) and issued promissory notes payable to the Company totaling $1,365 (“Notes Receivable, Stockholders”) for the purchase of 750,000 shares of Class B Common Stock. Under the Agreement, the shares began vesting December 15, 2000, and were to vest ratably over a sixty month period. There were 220,588 vested shares of Class B Common Stock at December 31, 2001.

The Class B Common Stock was convertible, upon a qualified public offering as defined in the Agreement, into an equal amount of old series of Common Stock. Under the provisions of the Agreement, the Company had the option to repurchase all or any portion of the Class B Common Stock held by the Executives upon their termination of employment with the Company at $1.83 per share. Upon the bankruptcy of the Executives, the Company had the option to repurchase all or any portion of the Class B Common Stock held by the Executives at a price equal to their fair market value ($20.47 per share at December 31, 2001). With respect to the vested shares of Class B Common Stock, the Company’s repurchase option applied only to a termination of employment or bankruptcy of the Executives prior to a Liquidity Event. There were no authorized, issued or outstanding shares of Class B Common Stock after the effective date of the recapitalization transaction.

In 2001, the Notes Receivable, Stockholders are reflected in the accompanying consolidated balance sheets in equity as a reduction of stockholders’ equity. The notes were to mature on December 15, 2005 and interest was payable to the Company at a rate of 6.08% per year. The principal balance, which was $1,365 at December 31, 2001, was payable upon maturity. Accrued interest on these notes amounted to $166 at December 31, 2001. The Notes Receivable, Stockholders were satisfied in full, as a result of the recapitalization transaction completed in August 2002.

13. Derivative Financial Instrument

In August 2002, MedQuest entered into an interest rate swap agreement related to the fixed interest obligations on the 11⁷/₈% senior subordinated notes. The agreement requires MedQuest to pay interest at a variable rate based on six-month LIBOR plus 6.525% on a notional amount of $47,500 for a term of ten years. This derivative instrument has been accounted for as a fair value hedge of the fair market value of the Notes and was 100% effective for the year ended December 31, 2003. As a result, the change in fair market value related to this derivative instrument has been entirely offset by the change in fair market value of the Notes. The fair market value of this derivative instrument in the amount of $1,404 and $2,900 has been presented as a component of Other Assets in the consolidated balance sheet at December 31, 2003 and 2002.

14. Commitments and Contingencies

(a) The Company leases office space and radiology equipment under non-cancelable operating lease agreements and has certain other maintenance agreements for its various centers. The leases and maintenance agreements expire at various dates through 2017. Certain of the leases for office space are with related parties (see Note 15).

The future minimum payments under lease agreements are as follows:

Year	Related Party		Non-related Party		Total

2004	$	3,732	$	8,833	$	12,565
2005	3,732		7,835		11,567
2006	3,732		6,436		10,168
2007	3,732		5,580		9,312
2008	3,732		3,662		7,394
Thereafter	—		7,556		7,556

	$	18,660	$	39,902	$	58,562

Rent expense for non-related party leases, which includes short-term equipment rentals, was $9,830, $9,252, and $6,581 for the years ended December 31, 2003, 2002 and 2001, respectively. The Company’s maintenance expense related to the non-cancelable maintenance agreements was $8,481, $5,787 and $4,509 for the years ended December 31, 2003, 2002 and 2001, respectively. Rent expense for related party leases was $3,676, $3,725 and $2,687 for the years ended December 31, 2003, 2002 and 2001, respectively.

(b) The Company has employment agreements with the its executive officers that provide for the payment of a base salary plus a bonus, and include non-compete provisions for up to two years following the executive officer’s termination of employment. The employment agreements have terms that expire in August 2007 and provide that if the executive officer is terminated without cause, such executive officer is entitled to receive payments equal to the base salary amount for a specified period time, which could extend up to 24 months,

depending upon the executive officer. The base salaries provided for during the entire term of the employment agreements amounts to $1,780 per year.

(c) In February 2003, the Company received a request for documents from the United States Department of Justice regarding the Company’s billing and other practices. While management believes that it is in material compliance with applicable governmental laws and regulations, in the event that the United States government believes that any wrongdoing has occurred, the Company could be subject to fines and penalties and could be excluded from government reimbursement programs. Any such result could have a material adverse affect on the Company’s financial position and results of operations.

(d) In February 2003, a class action lawsuit was filed in the State Court of Fulton County in the State of Georgia against the Company, its subsidiaries, officers and directors, as well as various physician groups that conduct business with the Company (“Class Action”). The Class Action raises questions concerning the legality of the purchase service agreements. In October 2003, the original assigned judge recused herself due to a conflict of interest and a new judge was assigned. Due to the continuing preliminary state of the Class Action and the fact that the complaint does not allege damages with any specificity, management is unable at this time to assess the probable outcome of the Class Action or the materiality of the risk of loss. However, management believes that these agreements neither violate the Georgia Act nor are improper under Georgia law and will vigorously defend the Class Action. However, management can give no assurances of the ultimate impact on the Company’s financial position or results of operations.

(e) From time to time, MQA or its subsidiaries are defendants in legal actions involving claims arising in the normal course of business. The Company believes that, as a result of its legal defenses and insurance arrangements, it is remote that the ultimate resolution of these actions will have a material effect on the financial condition, results of operations or cash flows of the Company taken as a whole.

Management believes that it has adequately reserved for those liabilities related to the aforementioned legal contingencies.

15. Related Party Transactions

The Company rents office space for 19 of its centers and its headquarters through rental agreements with Image Properties, L.L.C. (“Image”), a company owned by two of the Company’s shareholders who also are the Chief Executive Officer and President. The rental agreements provide for rental payments in amounts ranging from $6 to $77 monthly. The rental agreements typically are for ten-year terms with five-year renewal options. The leases expire at various dates through 2008 (see Note 14).

The Company makes advances to Image for building and leasehold improvements made on behalf of the Company. The Company also regularly rents properties from Image. MQA had related party receivables of $782 and $1,000 at December 31, 2003 and 2002, for costs incurred on behalf of Image. The Company earns interest income on the balance at a rate of approximately 6% per annum of the outstanding receivable balance.

The Company incurred expenses related to certain aviation services during the year ended December 31, 2003, including expenses of $510, related to services provided by Image Aviation, LLC, a company owned by two of the Company’s stockholders who also are the Chief Executive Officer and President.

In connection with the recapitalization, the Company paid “success fees” to certain executive officers, other employees and a consultant in the aggregate amount of $2.9 million. The Chief Executive Officer and President both received success fees of approximately $1.0 million. An executive officer also received success fees of

approximately $0.3 million. The total amount of the success fees and the specific amounts paid were determined by the significant stockholders of MQA.

16. Income Taxes

The provision for federal and state income taxes is as follows:

	Year ended December 31,
	2003		2002			2001
Current tax expense
Federal	$	—	$	(2,515	)	$	1,867
State	512		610			504

	512		(1,905		)	2,371

Deferred tax expense
Federal	2,903		3,329			1,401
State	193		(636		)	248

	3,096		2,693			1,649

	$	3,608	$	788		$	4,020

Deferred income taxes are primarily the result of reporting depreciation and amortization, and the accrual of certain expenses differently for income tax and financial reporting purposes and the benefit from unused operating loss carryforwards. The net operating loss carryforwards, which expire during the years 2006 to 2023, are approximately $15,695 and $40,341 for federal and state income tax purposes. Management has recorded a valuation allowance for a portion of these carryforwards based on expected utilization. The tax effects of temporary differences that give rise to deferred tax assets and liabilities are:

	December 31,
	2003			2002

Deferred tax assets
Loss carryforwards	$	7,881		$	1,887
Other accrued expenses	594			498

	8,475			2,385

Valuation allowance	(124		)	(124		)

Total deferred tax assets	8,351			2,261

Deferred tax liabilities
Depreciation and amortization	$	(15,931	)	$	(8,021	)

Total deferred tax liabilities	$	(15,931	)	$	(8,021	)

The tax provision differs from the amount that would be calculated by applying the federal statutory rate of 34% to income before income taxes as follows:

	Year ended December 31,
	2003		2002			2001

Federal statutory rate	$	2,981	$	683		$	12
State income taxes	531		105			525
Valuation allowance	—		45			79
Minority interest in net income of consolidated subsidiaries	—		(13		)	(37		)
Nondeductible stock compensation expense	—		—			3,191
Other, net	96		(32		)	250

Provision for income taxes	$	3,608	$	788		$	4,020

17. Retirement Plan

The Company maintains a defined contribution plan (the “Plan”) for all eligible employees. Under the Plan, employees who have completed nine months of service and have met certain other eligibility requirements may make voluntary contributions to the retirement program in the form of salary reductions. The Company, at the discretion of the Board of Directors, may make contributions to the Plan equal to a percentage of each employee’s wages. Employer contributions for the years ended December 31, 2003, 2002 and 2001 amounted to $182, $161 and $110, respectively.

18. Stock Option Plan

In April 2003, the Company adopted an employee stock option plan (“2003 Stock Option Plan”) that provides for the issuance of incentive stock options and non-qualified stock options for the purchase of 16,999,999 shares of the Company’s common stock. The 2003 Stock Option Plan was adopted with an effective date of January 1, 2003 and terminates ten years from the effective date, unless terminated sooner. Options vest ratably over either four or five year periods on successive grant date anniversaries and may be issued at a grant price of no less than fair market value on the date of grant.

The following table summarizes information about stock options issued during the year ended December 31, 2003:

	Options	Exercise Price		Weighted Average Exercise Price
Outstanding, January 1, 2003	—	—		—
Granted	3,016,000	$	1.00	$	1.00
Forfeited	55,000	1.00		1.00
Cancelled	—	—		—
Outstanding, December 31, 2003	2,961,000	$	1.00	$	1.00
Exercisable, December 31, 2003	—
Shares available for future grants	14,038,999

The Company uses the intrinsic-value method of accounting for stock-based awards granted to employees and, accordingly, does not currently recognize compensation expense for its stock-based awards to employees.

The following table reflects pro forma net income as if the Company had elected to adopt the fair value approach of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”:

	Year ended December 31, 2003

Net income:

As reported	$	5,160

Fair value based compensation cost, net of taxes	51

Pro forma	$	5,109

The pro forma amounts may not be representative of future disclosures since the estimated fair value of the stock options is amortized to expense over the vesting period and additional options my be granted in future years.

The weighted average fair value of options at their grant date, where the exercise price equaled the market price, amounted to $445 for the year ended December 31, 2003. The estimated fair value of stock options granted was calculated using the Black-Scholes option-pricing model. The weighted average assumptions were as follows:

Risk-free interest rate	3.26	%
Expected dividend yield	0.0	%
Expected lives (in years)	5

The Company used the minimum value method in determining the expected volatility of the common stock underlying the stock options.

In January 2004, the Company issued 1,533,471 stock options under the 2003 Stock Option Plan. Of these issuances, 1,215,971 stock options, in the aggregate, were issued to certain executive officers of the Company. These options were issued as incentive stock options with exercise prices ranging from $1.50 to $3.00 and a four year vesting period. The remaining 317,500 stock options were issued as non-qualified stock options with an exercise price of $1.05 and a five year vesting period.

19. Results of Quarterly Operations (unaudited)

The following table presents certain unaudited quarterly consolidated statements of operations data for each of the eight quarters beginning January 1, 2002 and ending December 31, 2003. Such information, in the opinion of management, includes all adjustments necessary for a fair presentation of that information. The results of operations for any quarter are not necessarily indicative of the results to be expected for any future quarter.

	First Quarter		Second Quarter		Third Quarter, as restated		Fourth Quarter			Total
2003
Net revenues from service	$	55,747	$	59,613	$	63,803	$	63,749		$	242,912
Operating expenses	24,579		25,815		27,305		27,363			105,062
MG&A expenses	17,697		18,922		19,416		20,418			76,453
Depreciation and amortization	6,881		7,301		6,739		7,365			28,286

Income from operations	6,590		7,575		10,343		8,603			33,111

Interest expense, net	5,810		6,057		6,174		6,324			24,365
Equity in earnings of unconsolidated joint venture	—		—		—		(22		)	(22		)
Provision for income taxes	312		608		1,677		1,011			3,608

Net Income	$	468	$	910	$	2,492	$	1,290		$	5,160

	First Quarter		Second Quarter		Third Quarter			Fourth Quarter		Total
2002
Net revenues from service	$	46,143	$	50,289	$	52,689		$	54,290	$	203,411
Operating expenses	19,293		22,226		23,255			24,584		89,358
MG&A expenses	13,958		15,503		15,572			16,441		61,474
Depreciation and amortization	5,358		5,613		6,002			6,977		23,950

Income from operations	7,534		6,947		7,860			6,288		28,629

Interest expense, net	3,106		2,982		14,450			6,082		26,620
Provision for income taxes	1,755		1,586		(2,636		)	83		788
Minority interest in net income of consolidated subsidiaries	40		—		—			—		40

Net Income	$	2,633	$	2,379	$	(3,954	)	$	123	$	1,181

The Company’s interim consolidated financial statements for the three months and nine months ended September 30, 2003 have been restated from amounts previously reported to correct the accounting for income tax treatment of certain costs incurred in relation to the recapitalization transaction. The tax effects were previously recorded as a reduction of income tax expense and were overstated in part. The revised tax effects have now been reflected as an increase in additional paid-in capital. The following table reflects those amounts that have been restated in the Company’s consolidated balance sheet and statement of operations:

	Three Months Ended September 30, 2003									Nine Months Ended September 30, 2003
	As reported			Restatement			As restated			As reported			Restatement			As restated

Income Taxes	$	(177	)	$	1,854		$	1,677		$	743		$	1,854		$	2,597

Net Income	4,346			(1,854		)	2,492			5,725			(1,854		)	3,871

Deferred Income Tax Liabilities	6,258			578			6,836			6,258			578			6,836

Additional paid-in capital	62,113			1,276			63,389			62,113			1,276			63,389

Accumulated Deficit	$	(174,709	)	$	(1,854	)	$	(176,563	)	$	(174,709	)	$	(1,854	)	$	(176,563	)

20. Consolidating Financial Statements

The following tables present consolidating financial information as required for the years ended December 31, 2001, 2002 and 2003 for: 1) MQA (parent); 2) MedQuest, Inc. (issuer); 3) the guarantors (on a combined basis) of MedQuest, Inc.’s notes (which represent all of MedQuest, Inc.’s subsidiaries) and 4) all eliminating adjustments. The consolidating financial statements presented reflect the legal entity compositions at the respective dates. Separate financial statements of MedQuest, Inc., as issuer of the notes, and the subsidiary guarantors are not presented because: 1) each subsidiary guarantor is 100% owned by MQA, 2) all guarantees are full and unconditional, and 3) all guarantees are joint and several.

The senior credit facility and the indenture governing the notes impose certain restrictions on the Company, including restrictions on the Company’s ability to incur indebtedness, pay dividends, make investments, grant liens, sell assets and engage in certain other activities. In addition, the senior credit facility requires the Company to maintain certain financial ratios. The Company’s indebtedness under the senior credit facility is secured by substantially all of the Company’s assets, including inventory, accounts receivable, real and personal property, intellectual property and other intangibles, and is guaranteed by MQA and all of MedQuest, Inc.’s domestic subsidiaries.

	December 31, 2002
	MQ Associates, Inc.		MedQuest, Inc.		Guarantor subsidiaries	Eliminations		Consolidated
ASSETS
Current Assets
Cash and cash equivalents	$	—	794		2,436			$	3,230
Patient receivables, net of allowance for doubtful accounts					46,157			46,157
Related party receivables					1,000			1,000
Income tax receivable					2,676			2,676
Other receivables					965			965
Prepaid expenses and other					2,854			2,854
Deferred income taxes					498			498
Total current assets			794		56,586			57,380

Property and equipment, net					83,655			83,655
Goodwill					32,662			32,662
Intangible assets, net					7,268			7,268
Investment in subsidiary	2,980		12,843			(15,823	)
Debt issue costs			12,182					12,182
Other			2,901		2,378			5,279
Total assets	2,980		28,720		182,549	(15,823	)	198,426

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities
Accounts payable					4,292			4,292
Accrued payroll and related taxes					3,528			3,528
Other accrued expenses			7,632		5,999			13,631
Current portion of obligations under capital leases					922			922
Total current liabilities			7,632		14,741			22,373

Intercompany payable	71,200		(217,105	)	145,905			—
Long-term debt			235,213					235,213
Obligations under capital leases					2,729			2,729
Other long-term liabilities					73			73
Deferred income taxes					6,258			6,258
Total liabilities	$	71,200	25,740		169,706	—		$	266,646

The accompanying notes are an integral part of the consolidated financial statements.

	December 31, 2002
	MQ Associates, Inc.			MedQuest, Inc.	Guarantor Subsidiaries	Eliminations		Consolidated

Commitments and contingencies

Redeemable preferred stock
Series A redeemable, $.001 par value; nonvoting; 35,000,000 shares authorized, issued and outstanding	$	35,000						$	35,000
Series B redeemable, $.001 par value; nonvoting; 15,000,000 shares authorized, issued and outstanding	15,000							15,000
	50,000							50,000

Stockholders’ deficit
Class A Common stock, $.001 par value; voting; 115,000,000 shares authorized; 72,100,000 shares issued and outstanding	72							72
Common stock; $.001 par value; voting; 195,000,000 shares authorized; 28,605,000 issued and outstanding	29							29
Additional paid-in capital	62,113							62,113
Accumulated deficit	(180,434		)	2,980	12,843	(15,823	)	(180,434		)
Total stockholders’ deficit	(118,220		)	2,980	12,843	(15,823	)	(118,220		)
Total liabilities and stockholders’ deficit	$	2,980		28,720	182,549	(15,823	)	$	198,426

The accompanying notes are an integral part of the consolidated financial statements

	December 31, 2003
	MQ Associates, Inc.		MedQuest, Inc.		Guarantor Subsidiaries	Eliminations		Consolidated
ASSETS
Current Assets
Cash and cash equivalents	$	—			6,731			$	6,731
Patient receivables, net of allowance for doubtful accounts					61,490			61,490
Related party receivables					782			782
Refundable income taxes					—			—
Other receivables					2,049			2,049
Prepaid expenses and other					2,619			2,619
Deferred income taxes					594			594
Total current assets					74,265			74,265

Property and equipment, net					82,107			82,107
Goodwill					33,855			33,855
Intangible assets, net					10,722			10,722
Investment in subsidiary	11,138		42,130			(53,268	)
Debt issue costs			13,384					13,384
Other			1,404		7,744			9,148
Total assets	11,138		56,918		208,693	(53,268	)	223,481

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities
Accounts payable					6,596			6,596
Accrued payroll and related taxes					5,371			5,371
Other accrued expenses			7,278		7,680			14,958
Equipment line of credit
Current portion of long-term debt			600					600
Current portion of obligations under capital leases					1,584			1,584
Total current liabilities			7,878		21,231			29,109

Intercompany payable	72,922		(207,064	)	134,142			—
Long-term debt			244,966					244,966
Obligations under capital leases					2,517			2,517
Other long-term liabilities					499			499
Deferred income taxes					8,174			8,174
Total liabilities	$	72,922	45,780		166,563	—		$	285,265

The accompanying notes are an integral part of the consolidated financial statements.

	December 31, 2003
	MQ Associates, Inc.			MedQuest, Inc.	Guarantor Subsidiaries	Eliminations		Consolidated

Commitments and contingencies

Redeemable preferred stock
Series A redeemable, $.001 par value; nonvoting; 35,000,000 shares authorized, issued and outstanding	$	35,000						$	35,000
Series C redeemable, $.001 par value; nonvoting; 15,000,000 shares authorized, issued and outstanding	15,000							15,000
	50,000							50,000

Stockholders’ deficit
Class A Common stock, $.001 par value; voting; 115,000,000 shares authorized; 72,100,000 shares issued and outstanding	72							72
Common stock; $.001 par value; voting; 195,000,000 shares authorized; 28,605,000 issued and outstanding	29							29
Additional paid-in capital	63,389							63,389
Accumulated deficit	(175,274		)	11,138	42,130	(53,268	)	(175,274		)
Total stockholders’ deficit	(111,784		)	11,138	42,130	(53,268	)	(111,784		)
Total liabilities and stockholders’ Deficit	$	11,138		56,918	208,693	(53,268	)	$	223,481

The accompanying notes are an integral part of the consolidated financial statements.

	Year Ended December 31, 2001
	MQ Associates, Inc.			MedQuest, Inc.	Guarantor subsidiaries		Eliminations	Consolidated

Net revenues from services	$	—			142,322			$	142,322
Costs and expenses
Operating expenses, excluding depreciation					61,014			61,014
Marketing, general and administrative expenses					55,554			55,554
Depreciation and amortization					17,488			17,488
Income from operations					8,266			8,266

Interest expense	443				8,117			8,560
Interest income					(330	)		(330		)
Income (loss) before provision for income taxes	(443		)		479			36
Provision (benefit) for income taxes					4,020			4,020
Minority interest in net income of consolidated subsidiaries					110			110
Equity in earnings of consolidated subsidiaries	(3,651		)				3,651
Net income (loss)	$	(4,094	)		(3,651	)	3,651	$	(4,094	)

The accompanying notes are an integral part of the consolidated financial statements.

	Year Ended December 31, 2002
	MQ Associates, Inc.			MedQuest,Inc.		Guarantor Subsidiaries		Eliminations		Consolidated

Net revenues from services	$	—				203,411				$	203,411
Costs and expenses
Operating expenses, excluding depreciation						89,358				89,358
Marketing, general and administrative expenses						61,474				61,474
Depreciation and amortization						23,950				23,950
Income from operations						28,629				28,629

Interest expense	1,799			8,215		16,707				26,721
Interest income						(101	)			(101		)
Income (loss) before provision for income taxes	(1,799		)	(8,215	)	12,023				2,009
Provision (benefit) for income taxes						788				788
Minority interest in net income of consolidated subsidiaries						40				40
Equity in earnings	2,980			11,195				(14,175	)	—
Net income (loss)	$	1,181		2,980		11,195		(14,175	)	$	1,181

The accompanying notes are an integral part of the consolidated financial statements.

	Year Ended December 31, 2003
	MQ Associates, Inc.			MedQuest, Inc.		Guarantor Subsidiaries		Eliminations		Consolidated

Net revenues from services	$	—				242,912				$	242,912
Costs and expenses
Operating expenses, excluding depreciation						105,062				105,062
Marketing, general and administrative expenses						76,453				76,453
Depreciation and amortization						28,286				28,286
Income from operations						33,111				33,111

Interest expense	2,998			21,129		256				24,383
Interest income						(18	)			(18		)
Equity in earnings of unconsolidated joint venture						(22	)			(22		)
Income (loss) before provision for income taxes	(2,998		)	(21,129	)	32,895				8,768
Provision (benefit) for income taxes						3,608				3,608
Equity in earnings	8,158			29,287				(37,445	)	—
Net income (loss)	$	5,160		8,158		29,287		(37,445	)	$	5,160

The accompanying notes are an integral part of the consolidated financial statements.

	Year Ended December 31, 2001
	MQ Associates, Inc.			MedQuest, Inc.	Guarantor subsidiaries		Eliminations		Consolidated
Cash flows from operating activities
Net income (loss)	$	(4,094	)	—	(3,651	)	3,651		$	(4,094	)
Adjustments to reconcile net income (loss) to net cash and cash equivalents provided by operating activities:
Depreciation and amortization					17,488				17,488
Stock compensation expense					9,388				9,388
Bad debt expense					4,866				4,866
Deferred income taxes					1,649				1,649
Minority interest in income of consolidated subsidiaries					110				110
Equity in earnings of consolidated subsidiaries	3,651						(3,651	)	—
Accrued interest on notes receivable, stockholder					(83	)			(83		)
Changes in operating assets and liabilities
Patient receivables					(17,038	)			(17,038		)
Intercompany payable	443						(443	)	—
Intercompany receivable					(443	)	443		—
Related party and other receivables					(357	)			(357		)
Prepaid expenses and other current assets					(146	)			(146		)
Other assets					(36	)			(36		)
Accounts payable					2,274				2,274
Accrued payroll and related taxes					1,419				1,419
Other accrued expenses					4,902				4,902
Net cash and cash equivalents provided by operating Activities					20,342				20,342
Cash flows from investing activities:
Purchases of property and equipment					(25,900	)			(25,900		)
Acquisitions of businesses, net of cash acquired					(34,232	)			(34,232		)
Net cash and cash equivalents used in investing Activities					(60,132	)			(60,132		)
Cash flows from financing activities:
Proceeds from notes payable	4,460				58,410				62,870
Proceeds from (payments on) line of credit	6,000								6,000
Payments on notes payable	(1,305		)		(12,116	)			(13,421		)
Payments on capital leases	$	—			(3,853	)			$	(3,853	)

	Year Ended December 31, 2001
	MQ Associates, Inc.			MedQuest,Inc.	Guarantor subsidiaries			Eliminations		Consolidated

Intercompany payable	$	19,855			20,179			(40,034	)	$	—
Intercompany receivable	(20,179		)		(19,855		)	40,034		—
Proceeds from issuance of convertible preferred stock, net of transaction costs	9,719									9,719
Purchase of common stock from stockholders	(18,550		)							(18,550		)
Capital contribution					100					100
Net cash and cash equivalents provided by financing activities					42,865					42,865

Net (decrease) increase in cash and cash equivalents					3,075					3,075

Cash and cash equivalents, beginning of period					2,316					2,316
Cash and cash equivalents, end of period					5,391					5,391

Supplemental disclosure of cash flow information
Cash paid for interest					9,648					9,648
Cash paid for taxes					3,017					3,017

Acquisition of businesses
Fair value of assets acquired					34,842					34,842
Less liabilities assumed					(610		)			(610		)
					34,232					34,232

Equipment acquired through capital leases	$	—				5,303				$	5,303

The accompanying notes are an integral part of the consolidated financial statements.

	Year Ended December 31, 2002
	MQ Associates, Inc.			MedQuest, Inc.		Guarantor subsidiaries		Eliminations		Consolidated
Cash flows from operating activities Net income (loss)	$	1,181		2,980		11,195		(14,175	)	$	1,181
Adjustments to reconcile net income (loss) to net cash and cash equivalents
Used in operating activities
Depreciation and amortization						23,950				23,950
Interest amortization of bond discount				145						145
Interest amortization of debt issuance costs				574						574
Bad debt expense						7,295				7,295
Minority interest in income of consolidated subsidiaries						40				40
Gain on disposal of property and equipment						(73	)			(73		)
Equity earnings of consolidated subsidiaries	(2,980		)	(11,195	)			14,175		—
Deferred income taxes						2,693				2,693
Changes in operating assets and liabilities
Patient receivables						(21,433	)			(21,433		)
Related party and other receivables						(2,087	)			(2,087		)
Intercompany receivable						(1,799	)	1,799		—
Intercompany payable	1,799							(1,799	)	—
Prepaid expenses and other current assets						(661	)			(661		)
Other assets						6				6
Accounts payable						(1,229	)			(1,229		)
Accrued payroll and related taxes						1,198				1,198
Other accrued expenses				7,632		(3,040	)			4,592
Net cash and cash equivalents provided by operating activities				136		16,055				16,191
Cash flows from investing activities
Purchases of property and equipment						(32,889	)			(32,889		)
Acquisitions of businesses, net of cash acquired						(17,385	)			(17,385		)
Proceeds from loan repayments						103				103
Proceeds from stockholder loan repayments	1,531									1,531
Intercompany receivable						1,531		(1,531	)	—
Intercompany payable	(1,531		)					1,531		—
Other	$	—				(2,000	)			$	(2,000	)

	Year Ended December 31, 2002
	MQ Associates, Inc.			MedQuest, Inc.		Guarantor subsidiaries		Eliminations		Consolidated
Net cash and cash equivalents used in investing activities	$	—		—		(50,640	)	—		$	(50,640	)

Cash flows from financing activities:
Proceeds from notes payable	1,835					17,074				18,909
Proceeds from (payments on) line of credit	(2,350		)							(2,350		)
Payments on notes payable	(953		)			(11,364	)			(12,317		)
Payments on capital leases						(3,770	)			(3,770		)
Intercompany receivable	(108,935		)	(325,853	)	(181,546	)	616,334		—
Intercompany payable	191,462			107,100		317,772		(616,334	)	—
Sale of preferred stock	35,000									35,000
Sale of common stock	72,100									72,100
Payment of debt issuance costs				(12,756	)					(12,756		)
Proceeds from senior credit facility				56,000						56,000
Proceeds from senior subordinated debt, net of bond discount				176,167						176,167
Repayment of notes and leases	(10,242		)			(106,536	)			(116,778		)
Redemption of preferred and common stock	(168,001		)							(168,001		)
Payment of stock issuance fees	(9,916		)							(9,916		)
Net cash and cash equivalents provided by financing activities				658		31,630				32,288

Net (decrease) increase in cash and cash equivalents				794		(2,955	)			(2,161		)

Cash and cash equivalents, beginning of period						5,391				5,391
Cash and cash equivalents, end of period				794		2,436				3,230

Supplemental disclosure of cash flow information
Cash paid for interest						18,853				18,853
Cash paid for taxes	$	—				1,918				$	1,918

	Year Ended December 31, 2002
	MQ Associates, Inc.		MedQuest, Inc.	Guarantor subsidiaries		Eliminations	Consolidated

Acquisition of businesses
Fair value of assets acquired	$	—		17,395			$	17,395
Less liabilities assumed				(10	)		(10		)
				17,385			17,385

Equipment acquired through capital leases	$	—		4,335			$	4,335

The accompanying notes are an integral part of the consolidated financial statements.

	Year Ended December 31, 2003
	MQ Associates, Inc.			MedQuest, Inc.		Guarantor subsidiaries		Eliminations		Consolidated
Cash flows from operating activities
Net income (loss)	$	5,160		8,158		29,287		(37,445	)	$	5,160
Adjustments to reconcile net income (loss) to net cash and cash equivalents provided by operating activities
Depreciation and amortization						28,286				28,286
Interest amortization of bond discount				148						148
Interest amortization of debt issuance costs				1,713						1,713
Bad debt expense						9,593				9,593
Loss on disposal of property and equipment						96				96
Equity in earnings of unconsolidated joint venture						(22	)			(22		)
Equity earnings of consolidated subsidiaries	(8,158		)	(29,287	)			37,445		—
Deferred income taxes						3,096				3,096
Changes in operating assets and liabilities
Patient receivables						(24,708	)			(24,708		)
Related party and other receivables						2,628				2,628
Intercompany receivable				(3,798	)	(24,127	)	27,925		—
Intercompany payable	2,998			21,129		3,798		(27,925	)	—
Prepaid expenses and other current assets						232				232
Other assets				1,497		(2,950	)			(1,453		)
Accounts payable						2,304				2,304
Accrued payroll and related taxes						1,843				1,843
Other accrued expenses				(354	)	2,110				1,756
Net cash and cash equivalents provided by operating activities				(794	)	31,466				30,672
Cash flows from investing activities
Purchases of property and equipment						(22,999	)			(22,999		)
Acquisitions of businesses						(6,922	)			(6,922		)
Proceeds from loan repayments						133				133
Investment in unconsolidated joint venture						(809	)			(809		)
Proceeds from sale of property and equipment						138				138
Other	$	—				(4,030	)			$	(4,030	)

	Year Ended December 31, 2003
	MQ Associates, Inc.		MedQuest, Inc.		Guarantor subsidiaries		Eliminations		Consolidated
Net cash and cash equivalents used for investing activities	$	—	—		(34,489	)	—		$	(34,489	)

Cash flows from financing activities:
Payments on capital leases					(1,467	)			(1,467		)
Intercompany receivable			(97,188	)	(88,403	)	185,591		—
Intercompany payable			88,403		97,188		(185,591	)	—
Payment of debt issuance costs			(2,915	)					(2,915		)
Proceeds from senior credit facility			37,188						37,188
Payment on senior credit facility			(85,188	)					(85,188		)
Proceeds from long-term debt			60,000						60,000
Payment on long-term debt			(300	)					(300		)
Net cash and cash equivalents provided by financing activities					7,318				7,318

Net (decrease) increase in cash and cash equivalents			(794	)	4,295				3,501

Cash and cash equivalents, beginning of year			794		2,436				3,230
Cash and cash equivalents, end of year					6,731				6,731

Supplemental disclosure of cash flow information
Cash paid for interest					22,875				22,875
Cash paid for taxes					141				141

Acquisition of businesses
Fair value of assets acquired					6,922				6,922
Less liabilities assumed
					6,922				6,922

Equipment acquired through capital leases	$	—			1,917				$	1,917

The accompanying notes are an integral part of the consolidated financial statements.