SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
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For the quarterly period ended March 31, 2004 |
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OR |
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
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For the transition period from to |
Commission File Number 333-101399
MQ ASSOCIATES, INC.
(Exact name of company as specified in its charter)
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Delaware |
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52-2148018 |
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(State or other jurisdiction of |
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(I.R.S. Employer |
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4300
North Point Parkway |
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30022 |
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(Address of principal executive offices) |
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(Zip code) |
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Company’s telephone number, including area code: 770-300-0101 |
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(Former name, former address and former fiscal year, if changed since last report) |
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Indicate by check mark whether MQ Associates, Inc. (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 MQ Associates, Inc. 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).Yes o No ý
Indicate the number of shares outstanding of each of MQ Associates, Inc.’s classes of common stock, as of the latest practicable date.
At May 17, 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 shares, and 28,605,000 shares of common stock, $.001 par value per share.
MQ ASSOCIATES, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
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Consolidated Balance Sheets as of March 31, 2004 (unaudited) and December 31, 2003 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MQ ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
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March 31, |
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December 31, |
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(unaudited) |
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(derived from |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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$ |
973 |
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$ |
6,731 |
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Patient receivables, net of allowance for doubtful accounts of $1,819 and $1,685 |
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68,176 |
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61,490 |
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Related party receivables |
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751 |
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782 |
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Other receivables |
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2,205 |
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2,049 |
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Prepaid expenses and other |
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4,488 |
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2,619 |
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Deferred income taxes |
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594 |
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594 |
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Total current assets |
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77,187 |
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74,265 |
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Property and equipment, net |
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84,224 |
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82,107 |
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Goodwill |
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33,864 |
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33,855 |
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Intangible assets, net |
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11,548 |
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10,722 |
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Debt issuance costs, net |
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12,925 |
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13,384 |
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Other |
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7,523 |
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9,148 |
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Total assets |
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$ |
227,271 |
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$ |
223,481 |
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The accompanying notes are an integral part of the consolidated financial statements.
3
MQ ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
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March 31, |
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December 31, |
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(unaudited) |
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(derived from |
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LIABILITIES AND STOCKHOLDERS’ DEFICIT |
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Current liabilities |
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Accounts payable |
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$ |
8,275 |
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$ |
6,596 |
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Accrued payroll and related taxes |
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4,199 |
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5,371 |
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Accrued interest |
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2,478 |
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7,278 |
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Accrued radiologist fees |
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3,836 |
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3,359 |
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Income taxes payable |
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1,068 |
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849 |
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Other accrued expenses |
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6,852 |
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3,472 |
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Current portion of long-term debt |
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600 |
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600 |
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Current portion of obligations under capital leases |
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1,503 |
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1,584 |
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Total current liabilities |
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28,811 |
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29,109 |
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Long-term debt |
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246,922 |
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244,966 |
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Obligations under capital leases |
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2,131 |
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2,517 |
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Deferred income taxes |
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8,604 |
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8,174 |
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Other long-term liabilities |
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690 |
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499 |
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Total liabilities |
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287,158 |
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285,265 |
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Commitments and contingencies |
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Redeemable preferred stock |
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Series A Convertible, $.001 par value; nonvoting; 35,000,000 shares authorized, issued and outstanding |
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35,000 |
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35,000 |
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Series B Convertible, $.001 par value; nonvoting; 15,000,000 shares authorized, issued and outstanding |
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15,000 |
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15,000 |
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50,000 |
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50,000 |
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Stockholders’ deficit |
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Class A common stock, $.001 par value; voting; 115,000,000 shares authorized; 72,100,000 issued and outstanding |
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72 |
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72 |
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Common stock, $.001 par value; voting; 195,000,000 shares authorized; 28,605,000 issued and outstanding |
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29 |
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29 |
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Additional paid-in capital |
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63,389 |
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63,389 |
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Accumulated deficit |
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(173,377 |
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(175,274 |
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Total stockholders’ deficit |
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(109,887 |
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(111,784 |
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Total liabilities and stockholders’ deficit |
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$ |
227,271 |
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$ |
223,481 |
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The accompanying notes are an integral part of the consolidated financial statements.
4
MQ ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands)
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Three months ended |
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2004 |
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2003 |
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Net revenues from services |
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$ |
67,020 |
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$ |
55,747 |
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Costs and expenses |
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Operating expenses, excluding depreciation |
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28,055 |
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24,579 |
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Marketing, general and administrative expenses |
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21,713 |
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17,697 |
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Depreciation and amortization |
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7,697 |
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6,881 |
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Income from operations |
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9,555 |
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6,590 |
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Interest expense |
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6,458 |
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5,814 |
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Interest income |
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(13 |
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(4 |
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Equity in earnings of unconsolidated joint venture |
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(52 |
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— |
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Income before provision for income taxes |
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3,162 |
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780 |
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Provision for income taxes |
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1,265 |
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312 |
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Net income |
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$ |
1,897 |
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$ |
468 |
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The accompanying notes are an integral part of the consolidated financial statements.
5
MQ ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
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Three months ended March 31, |
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2004 |
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2003 |
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Cash flows from operating activities |
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Net income |
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$ |
1,897 |
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$ |
468 |
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Adjustments to reconcile net income to net cash and cash equivalents provided by (used in) operating activities |
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Depreciation and amortization |
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7,697 |
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6,881 |
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Amortization of bond discount and debt issue costs |
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546 |
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380 |
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Bad debt expense |
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3,162 |
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2,023 |
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Equity in earnings of unconsolidated joint venture |
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(52 |
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— |
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Changes in operating assets and liabilities |
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Patient receivables |
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(9,847 |
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(6,084 |
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Related party and other receivables |
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(231 |
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(601 |
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Prepaid expenses and other current assets |
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(1,763 |
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(608 |
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Other assets |
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(147 |
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(6 |
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Accounts payable |
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1,679 |
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(215 |
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Accrued payroll and related taxes |
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(1,172 |
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(810 |
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Other accrued expenses |
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(105 |
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(3,291 |
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Net cash and cash equivalents provided by (used in) operating activities |
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1,664 |
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(1,863 |
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Cash flows from investing activities |
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Purchases of property and equipment |
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(9,763 |
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(4,522 |
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Acquisitions of businesses, net of cash acquired |
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(885 |
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(3,045 |
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Proceeds from loan repayments |
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24 |
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32 |
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Other |
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2,848 |
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(23 |
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Net cash and cash equivalents used in investing activities |
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(7,776 |
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(7,558 |
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Cash flows from financing activities |
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Payments on capital leases |
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(467 |
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(192 |
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Payment of debt issuance costs |
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(29 |
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(229 |
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Payments on long-term debt |
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(150 |
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— |
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Proceeds from senior credit facility |
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15,000 |
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13,688 |
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Payments on senior credit facility |
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(14,000 |
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(5,500 |
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Net cash and cash equivalents provided by financing activities |
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354 |
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7,767 |
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Net decrease in cash and cash equivalents |
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$ |
(5,758 |
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$ |
(1,654 |
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Cash and cash equivalents, beginning of period |
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$ |
6,731 |
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$ |
3,230 |
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Cash and cash equivalents, end of period |
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$ |
973 |
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$ |
1,576 |
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Supplemental disclosure of cash flow information |
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Cash paid for interest |
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$ |
10,711 |
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$ |
10,511 |
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Cash paid for taxes |
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$ |
616 |
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$ |
219 |
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Supplemental schedule of non-cash investing and financing activities Acquisition of businesses |
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Fair value of assets acquired |
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$ |
885 |
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$ |
5,045 |
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Less deposit paid in prior year |
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— |
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(2,000 |
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$ |
885 |
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$ |
3,045 |
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The accompanying notes are an integral part of the consolidated financial statements.
6
MQ Associates, Inc.
Notes to Consolidated Financial Statements
(unaudited)
(in thousands, except share data)
1. Basis of Presentation, Principles of Consolidation, Use of Estimates and Reclassifications
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared by MQ Associates, Inc. and its subsidiaries (collectively, the “Company”) in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the consolidated financial statements do not include all information and notes required by generally accepted accounting principles for complete financial statements. The accompanying consolidated financial statements should be read in conjunction with the annual consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2004, are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2004.
Principles of Consolidation
MedQuest, Inc. (“MedQuest”) is a wholly-owned subsidiary of MQ Associates, Inc. MQ Associates, Inc. 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, revenue and expenses of all majority owned subsidiaries over which the company exercises direct or indirect control. All intercompany transactions have been eliminated in consolidation.
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 reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the consolidated balance sheet at December 31, 2003 to conform to the presentation at March 31, 2004.
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2. Long-Term Debt
Long-term debt consists of the following:
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March 31, |
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December 31,
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Revolving credit facility, due August 2007 |
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$ |
9,000 |
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$ |
8,000 |
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Tranche B term facility, due through September 2009 |
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59,550 |
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59,700 |
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117/8% senior subordinated notes, net of discount of $3,480 and $3,538, due August 2012 |
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176,520 |
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176,462 |
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245,070 |
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244,162 |
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Fair value adjustment related to 117/8% senior subordinated notes |
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2,452 |
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1,404 |
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Less current portion |
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600 |
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600 |
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$ |
246,922 |
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$ |
244,966 |
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Future maturities of long-term debt, including the effects of the bond discount, are as follows:
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Year ending December 31, |
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Amount |
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2004 |
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$ |
450 |
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2005 |
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600 |
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2006 |
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600 |
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2007 |
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9,600 |
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2008 |
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28,800 |
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Thereafter |
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205,020 |
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$ |
245,070 |
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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 (as amended, the “Senior Credit 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 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 MQ Associates’ and 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 March 31, 2004.
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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 1.50% per annum, or (b) the Eurodollar rate, plus an applicable margin of 2.50% per annum. Borrowings at March 31, 2004 are based upon the Eurodollar rate (i.e. 1.16% at March 31, 2004) and amounted to $9.0 million at March 31, 2004. 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 $618 in letters of credit, amount to $70,382 at March 31, 2004.
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 were based upon the Eurodollar rate (i.e. 1.16% at March 31, 2004) and amounted to $59,550 at March 31, 2004.
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.
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:
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Twelve months |
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Optional |
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2007 |
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105.938 |
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2008 |
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103.958 |
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2009 |
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101.979 |
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2010 and thereafter |
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100.000 |
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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 (See note 6). The Notes contain certain covenants, including covenants limiting the Company’s ability to incur additional indebtedness and make restricted payments. The Company was in compliance with all covenants under the Senior Credit Facility at March 31, 2004.
9
Debt issuance costs amounting to $19,198, with respect to the Senior Credit Facility and Notes, were capitalized and are being amortized using the straight line method into interest expense over the lives of the related debt instruments.
3. Related Party Transactions
The Company had the following related party transactions:
(a) The Company incurred expenses related to certain aviation services during the three months ended March 31, 2004 and 2003, including expenses of $72 and $66, respectively, 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.
(b) 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, and expire at various dates through 2008. Rent expense for related party leases was $933 and $882 for the three months ended March 31, 2004 and 2003, respectively.
(c) The Company makes advances to Image for building and leasehold improvements made on behalf of the Company. The Company had related party receivables of $751 and $782 at March 31, 2004 and December 31, 2003, 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.
4. Commitments and Contingencies
We were 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.
(a) 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.
(b) 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.
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5. 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 at no less than fair market value on the date of grant.
The following table summarizes information about stock options granted during the quarter ended March 31, 2004:
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Options |
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Exercise Price |
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Weighted |
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Outstanding, December 31, 2003 |
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|
|
|
|
|
|
|
|
|
|
|
2,961,000 |
|
$ |
1.00 |
|
$ |
1.00 |
|
|
Granted |
|
5,201,384 |
|
1.05 – 3.00 |
|
2.06 |
|
||
|
Forfeited |
|
55,000 |
|
1.00 – 1.05 |
|
1.01 |
|
||
|
|
|
|
|
|
|
|
|
||
|
Outstanding, March 31, 2004 |
|
8,107,384 |
|
$ |
1.00 – 3.00 |
|
$ |
1.67 |
|
|
|
|
|
|
|
|
|
|
||
|
Exercisable, March 31, 2004 |
|
1,799,172 |
|
$ |
1.00 – 3.00 |
|
$ |
1.76 |
|
|
|
|
|
|
|
|
|
|
||
|
Shares available for future grants |
|
8,892,615 |
|
|
|
|
|
||
The following table sets forth the Company’s outstanding options and options exercisable by groups of similar price and grant date as of March 31, 2004:
|
|
|
Options Outstanding |
|
Options Exercisable |
|
||||
|
Exercise |
|
Number of |
|
Weighted
Average |
|
Number of Options |
|
||
|
$ |
1.00 |
|
|
2,916,000 |
|
8.76 |
|
583,200 |
|
|
1.05 |
|
|
327,500 |
|
9.76 |
|
— |
|
|
|
1.50 |
|
|
2,431,942 |
|
9.76 |
|
607,986 |
|
|
|
2.50 |
|
|
1,215,971 |
|
9.76 |
|
303,993 |
|
|
|
3.00 |
|
|
1,215,971 |
|
9.76 |
|
303,993 |
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
8,107,384 |
|
9.40 |
|
1,799,172 |
|
||
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”:
11
|
|
|
Three
months |
|
|
|
|
|
|
|
|
|
Net income: |
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
1,897 |
|
|
|
|
|
|
|
|
Fair value based compensation cost, net of taxes |
|
14 |
|
|
|
|
|
|
|
|
|
Pro forma |
|
$ |
1,883 |
|
No options were granted during the three month period ended March 31, 2003, and accordingly pro forma net income is not applicable for that period.
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 may be granted in future years.
The weighted average grant date fair value of options granted during the three months ended March 31, 2004, when the exercise price equaled the market price on the grant date, was $44. The estimated fair value of stock options granted was calculated using the Black-Scholes option-pricing model. The weighted average assumptions were as follows for the three months ended March 31, 2004:
|
Risk-free interest rate |
|
2.63 |
% |
|
|
|
|
|
|
Expected dividend yield |
|
0.0 |
% |
|
Expected lives (in years) |
|
3-5 |
|
The Company used the minimum value method in determining the expected volatility of the common stock underlying the stock options.
12
6. Consolidating Financial Statements
The following tables present consolidating financial information for the three months ended March 31, 2004 and 2003 for: 1) MQ Associates, Inc. (parent); 2) MedQuest, Inc. (issuer); 3) the guarantors (on a combined basis) of MedQuest, Inc.’s notes (which represent all of MedQuest’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 MQ Associates, Inc., 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 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’s domestic subsidiaries.
13
MQ
ASSOCIATES, INC.
CONSOLIDATING BALANCE SHEETS
(in thousands, except share data)
(unaudited)
March 31, 2004
|
|
|
MQ |
|
MedQuest, |
|
Guarantor |
|
Eliminations |
|
Consolidated |
|
||
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
||
|
Current Assets |
|
|
|
|
|
|
|
|
|
|
|
||
|
Cash and cash equivalents |
|
$ |
— |
|
409 |
|
564 |
|
|
|
$ |
973 |
|
|
Patient receivables, net of allowance for doubtful accounts |
|
|
|
|
|
68,176 |
|
|
|
68,176 |
|
||
|
Related party receivables |
|
|
|
|
|
751 |
|
|
|
751 |
|
||
|
Other receivables |
|
|
|
|
|
2,205 |
|
|
|
2,205 |
|
||
|
Prepaid expenses and other |
|
|
|
|
|
4,488 |
|
|
|
4,488 |
|
||
|
Deferred income taxes |
|
|
|
|
|
594 |
|
|
|
594 |
|
||
|
Total current assets |
|
|
|
409 |
|
76,778 |
|
|
|
77,187 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Property and equipment, net |
|
|
|
|
|
84,224 |
|
|
|
84,224 |
|
||
|
Goodwill |
|
|
|
|
|
33,864 |
|
|
|
33,864 |
|
||
|
Intangible assets, net |
|
|
|
|
|
11,548 |
|
|
|
11,548 |
|
||
|
Intercompany receivable |
|
15,903 |
|
46,889 |
|
|
|
(62,792 |
) |
|
|
||
|
Debt issuance costs, net |
|
|
|
12,925 |
|
|
|
|
|
12,925 |
|
||
|
Other |
|
|
|
2,452 |
|
5,071 |
|
|
|
7,523 |
|
||
|
Total assets |
|
15,903 |
|
62,675 |
|
211,485 |
|
(62,792 |
) |
227,271 |
|
||
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT |
|
|
|
|
|
|
|
|
|
|
|
||
|
Current Liabilities |
|
|
|
|
|
|
|
|
|
|
|
||
|
Accounts payable |
|
|
|
|
|
8,275 |
|
|
|
8,275 |
|
||
|
Accrued payroll and related taxes |
|
|
|
|
|
4,199 |
|
|
|
4,199 |
|
||
|
Accrued interest |
|
|
|
2,478 |
|
|
|
|
|
2,478 |
|
||
|
Accrued radiologist fees |
|
|
|
|
|
3,836 |
|
|
|
3,836 |
|
||
|
Income taxes payable |
|
|
|
|
|
1,498 |
|
|
|
1,498 |
|
||
|
Other accrued expenses |
|
|
|
|
|
6,852 |
|
|
|
6,852 |
|
||
|
Current portion of long-term debt |
|
|
|
600 |
|
|
|
|
|
600 |
|
||
|
Current portion of obligations under capital leases |
|
|
|
|
|
1,503 |
|
|
|
1,503 |
|
||
|
Total current liabilities |
|
|
|
3,078 |
|
26,163 |
|
|
|
29,241 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Intercompany payable |
|
75,790 |
|
(203,228 |
) |
127,438 |
|
|
|
|
|
||
|
Long-term debt |
|
|
|
246,922 |
|
|
|
|
|
246,922 |
|
||
|
Obligations under capital leases |
|
|
|
|
|
2,131 |
|
|
|
2,131 |
|
||
|
Other long-term liabilities |
|
|
|
|
|
690 |
|
|
|
690 |
|
||
|
Deferred income taxes |
|
|
|
|
|
8,174 |
|
|
|
8,174 |
|
||
|
Total liabilities |
|
$ |
75,790 |
|
46,772 |
|
164,596 |
|
|
|
$ |
287,158 |
|
The accompanying notes are an integral part of the consolidated financial statements.
14
|
|
|
MQ |
|
MedQuest, |
|
Guarantor |
|
Eliminations |
|
Consolidated |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Redeemable preferred stock |
|
|
|
|
|
|
|
|
|
|
|
||
|
Series A, $.001 par value; nonvoting; 35,000,000 shares authorized, issued and outstanding |
|
$ |
35,000 |
|
|
|
|
|
|
|
$ |
35,000 |
|
|
Series B, $.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 issued and outstanding |
|
29 |
|
|
|
|
|
|
|
29 |
|
||
|
Additional paid-in capital |
|
63,389 |
|
|
|
|
|
|
|
63,389 |
|
||
|
Accumulated deficit |
|
(173,377 |
) |
15,903 |
|
46,889 |
|
(62,792 |
) |
(173,377 |
) |
||
|
Total stockholders’ deficit |
|
(109,887 |
) |
15,903 |
|
46,889 |
|
(62,792 |
) |
(109,887 |
) |
||
|
Total liabilities and stockholders’ deficit |
|
$ |
15,903 |
|
62,675 |
|
211,485 |
|
(62,792 |
) |
$ |
227,271 |
|
The accompanying notes are an integral part of the consolidated financial statements
15
MQ
ASSOCIATES, INC.
CONSOLIDATING BALANCE SHEETS
(in thousands, except share data)
(unaudited)
December 31, 2003
|
|
|
MQ |
|
MedQuest, |
|
Guarantor |
|
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.
16
|
|
|
MQ |
|
MedQuest, |
|
Guarantor |
|
Eliminations |
|
Consolidated |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Redeemable preferred stock |
|
|
|
|
|
|
|
|
|
|
|
||
|
Series A, $.001 par value; nonvoting; 35,000,000 shares authorized, issued and outstanding |
|
$ |
35,000 |
|
|
|
|
|
|
|
$ |
35,000 |
|
|
Series B, $.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 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
17
MQ ASSOCIATES, INC.
CONSOLIDATING STATEMENTS OF OPERATIONS
(unaudited)
(in thousands)
Three months ended March 31, 2004
|
|
|
MQ Associates, Inc. |
|
MedQuest, Inc. |
|
Guarantor |
|
Eliminations |
|
Consolidated |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Net revenues from services |
|
$ |
— |
|
|
|
67,020 |
|
|
|
$ |
67,020 |
|
|
Costs and expenses |
|
|
|
|
|
|
|
|
|
|
|
||
|
Operating expenses, excluding depreciation |
|
|
|
|
|
28,055 |
|
|
|
28,055 |
|
||
|
Marketing, general and administrative expenses |
|
|
|
|
|
21,713 |
|
|
|
21,713 |
|
||
|
Depreciation and amortization |
|
|
|
|
|
7,697 |
|
|
|
7,697 |
|
||
|
Income from operations |
|
|
|
|
|
9,555 |
|
|
|
9,555 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Interest expense |
|
958 |
|
5,449 |
|
51 |
|
|
|
6,458 |
|
||
|
Interest income |
|
|
|
|
|
(13 |
) |
|
|
(13 |
) |
||
|
Equity in earnings of unconsolidated joint venture |
|
|
|
|
|
(52 |
) |
|
|
(52 |
) |
||
|
Income (loss) before provision for income taxes (benefit |
|
(958 |
) |
(5,449 |
) |
9,569 |
|
|
|
3,162 |
|
||
|
Provision for income taxes (benefit) |
|
|
|
|
|
1,265 |
|
|
|
1,265 |
|
||
|
Equity in earnings of consolidated subsidiaries |
|
2,855 |
|
8,304 |
|
|
|
(11,159 |
) |
|
|
||
|
Net income (loss) |
|
$ |
1,897 |
|
2,855 |
|
8,304 |
|
(11,159 |
) |
$ |
1,897 |
|
The accompanying notes are an integral part of the consolidated financial statements.
18
MQ ASSOCIATES, INC.
CONSOLIDATING STATEMENTS OF OPERATIONS
(unaudited)
(in thousands)
Three months ended March 31, 2003
|
|
|
MQ Associates, Inc. |
|
MedQuest, Inc. |
|
Guarantor |
|
Eliminations |
|
Consolidated |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Net revenues from services |
|
$ |
— |
|
|
|
55,747 |
|
|
|
$ |
55,747 |
|
|
Costs and expenses |
|
|
|
|
|
|
|
|
|
|
|
||
|
Operating expenses, excluding depreciation |
|
|
|
|
|
24,579 |
|
|
|
24,579 |
|
||
|
Marketing, general and administrative expenses |
|
|
|
|
|
17,697 |
|
|
|
17,697 |
|
||
|
Depreciation and amortization |
|
|
|
|
|
6,881 |
|
|
|
6,881 |
|
||
|
Income from operations |
|
|
|
|
|
6,590 |
|
|
|
6,590 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Interest expense |
|
684 |
|
5,094 |
|
36 |
|
|
|
5,814 |
|
||
|
Interest income |
|
|
|
|
|
(4 |
) |
|
|
(4 |
) |
||
|
Income (loss) before provision for income taxes |
|
(684 |
) |
(5,094 |
) |
6,558 |
|
|
|
780 |
|
||
|
Provision for income taxes |
|
|
|
|
|
312 |
|
|
|
312 |
|
||
|
Equity in earnings of consolidated subsidiaries |
|
1,152 |
|
6,246 |
|
|
|
(7,398 |
) |
|
|
||
|
Net income (loss) |
|
$ |
468 |
|
1,152 |
|
6,246 |
|
(7,398 |
) |
$ |
468 |
|
The accompanying notes are an integral part of the consolidated financial statements.
19
MQ ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands)
Three months ended March 31, 2004
|
|
|
MQ
Associates, |
|
MedQuest, Inc. |
|
Guarantor |
|
Eliminations |
|
Consolidated |
|
||
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
||
|
Net income (loss) |
|
$ |
1,897 |
|
2,855 |
|
8,304 |
|
(11,159 |
) |
$ |
1,897 |
|
|
Adjustments to reconcile net income (loss) to net cash and cash equivalents provided by (used in) operating activities |
|
|
|
|
|
|
|
|
|
|
|
||
|
Depreciation and amortization |
|
|
|
|
|
7,697 |
|
|
|
7,697 |
|
||
|
Amortization of bond discount |
|
|
|
58 |
|
|
|
|
|
58 |
|
||
|
Amortization of debt issuance costs |
|
|
|
488 |
|
|
|
|
|
488 |
|
||
|
Bad debt expense |
|
|
|
|
|
3,162 |
|
|
|
3,162 |
|
||
|
Loss on disposal of property and equipment |
|
|
|
|
|
|
|
|
|
|
|
||
|
Equity in earnings of unconsolidated joint venture |
|
|
|
|
|
(52 |
) |
|
|
(52 |
) |
||
|
Equity in earnings of consolidated subsidiaries |
|
(2,855 |
) |
(8,304 |
) |
|
|
11,159 |
|
|
|
||
|
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
|
|
|
||
|
Patient receivables |
|
|
|
|
|
(9,847 |
) |
|
|
(9,847 |
) |
||
|
Related party and other receivables |
|
|
|
|
|
(231 |
) |
|
|
(231 |
) |
||
|
Intercompany receivable |
|
|
|
(137 |
) |
(6,407 |
) |
6,544 |
|
|
|
||
|
Intercompany payable |
|
958 |
|
5,449 |
|
137 |
|
(6,544 |
) |
|
|
||
|
Prepaid expenses and other current assets |
|
|
|
|
|
(1,763 |
) |
|
|
(1,763 |
) |
||
|
Other assets |
|
|
|
|
|
(147 |
) |
|
|
(147 |
) |
||
|
Accounts payable |
|
|
|
|
|
1,679 |
|
|
|
1,679 |
|
||
|
Accrued payroll and related taxes |
|
|
|
|
|
(1,172 |
) |
|
|
(1,172 |
) |
||
|
Other accrued expenses |
|
|
|
|
|
(105 |
) |
|
|
(105 |
) |
||
|
Net cash and cash equivalents provided by (used in) operating activities |
|
|
|
409 |
|
1,255 |
|
|
|
1,664 |
|
||
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
||
|
Purchases of property and equipment |
|
|
|
|
|
(9,763 |
) |
|
|
(9,763 |
) |
||
|
Acquisitions of businesses, net of cash acquired |
|
|
|
|
|
(885 |
) |
|
|
(885 |
) |
||
|
Proceeds from sale of real estate |
|
|
|
|
|
24 |
|
|
|
24 |
|
||
|
Other |
|
|
|
|
|
2,848 |
|
|
|
2,848 |
|
||
|
Net cash and cash equivalents used in investing activities |
|
|
|
|
|
(7,776 |
) |
|
|
(7,776 |
) |
||
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
||
|
Payments on capital leases |
|
|
|
|
|
(467 |
) |
|
|
(467 |
) |
||
|
Intercompany receivable |
|
$ |
— |
|
(15,000 |
) |
(14,179 |
) |
29,179 |
|
$ |
— |
|
20
|
|
|
MQ
Associates, |
|
MedQuest, Inc. |
|
Guarantor |
|
Eliminations |
|
Consolidated |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Intercompany payable |
|
$ |
— |
|
14,179 |
|
15,000 |
|
(29,179 |
) |
$ |
— |
|
|
Payment of debt issuance costs |
|
|
|
(29 |
) |
|
|
|
|
(29 |
) |
||
|
Proceeds from senior credit facility |
|
|
|
15,000 |
|
|
|
|
|
15,000 |
|
||
|
Payments on senior credit facility |
|
|
|
(14,000 |
) |
|
|
|
|
(14,000 |
) |
||
|
Payment on long-term debt |
|
|
|
(150 |
) |
|
|
|
|
(150 |
) |
||
|
Net cash and cash equivalents used in financing activities |
|
|
|
|
|
354 |
|
|
|
354 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Net (decrease) increase in cash and cash equivalents |
|
|
|
409 |
|
(6,167 |
) |
|
|
(5,758 |
) |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Cash and cash equivalents, beginning of period |
|
|
|
|
|
6,731 |
|
|
|
6,731 |
|
||
|
Cash and cash equivalents, end of period |
|
|
|
409 |
|
564 |
|
|
|
973 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Supplemental disclosure of cash flow information |
|
|
|
|
|
|
|
|
|
|
|
||
|
Cash paid for interest |
|
|
|
|
|
|
|
|
|
|
|
||
|
Cash paid for taxes |
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Supplemental schedule of non-cash investing and financing activities |
|
|
|
|
|
|
|
|
|
|
|
||
|
Acquisition of businesses |
|
|
|
|
|
|
|
|
|
|
|
||
|
Fair value of assets acquired |
|
|
|
|
|
885 |
|
|
|
885 |
|
||
|
Less deposit paid in prior year |
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
$ |
— |
|
|
|
885 |
|
|
|
$ |
885 |
|
The accompanying notes are an integral part of the consolidated financial statements.
21
MQ ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands)
Three months ended March 31, 2003
|
|
|
MQ
Associates, |
|
MedQuest, Inc. |
|
Guarantor |
|
Eliminations |
|
Consolidated |
|
||
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
||
|
Net income (loss) |
|
$ |
468 |
|
1,152 |
|
6,246 |
|
(7,398 |
) |
$ |
468 |
|
|
Adjustments to reconcile net income (loss) to net cash and cash equivalents provided by operating activities |
|
|
|
|
|
|
|
|
|
|
|
||
|
Depreciation and amortization |
|
|
|
|
|
6,881 |
|
|
|
6881 |
|
||
|
Amortization of bond discount |
|
|
|
(18 |
) |
|
|
|
|
(18 |
) |
||
|
Amortization of debt issuance costs |
|
|
|
398 |
|
|
|
|
|
398 |
|
||
|
Bad debt expense |
|
|
|
|
|
2,023 |
|
|
|
2,023 |
|
||
|
Equity in earnings of consolidated subsidiaries |
|
(1,152 |
) |
(6,246 |
) |
|
|
7,398 |
|
|
|
||
|
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
|
|
|
||
|
Patient receivables |
|
|
|
|
|
(6,084 |
) |
|
|
(6,084 |
) |
||
|
Related party and other receivables |
|
|
|
|
|
(601 |
) |
|
|
(601 |
) |
||
|
Intercompany receivable |
|
|
|
|
|
(684 |
) |
684 |
|
|
|
||
|
Intercompany payable |
|
684 |
|
|
|
|
|
(684 |
) |
|
|
||
|
Prepaid expenses and other current assets |
|
|
|
|
|
(608 |
) |
|
|
(608 |
) |
||
|
Other assets |
|
|
|
|
|
(6 |
) |
|
|
(6 |
) |
||
|
Accounts payable |
|
|
|
|
|
(215 |
) |
|
|
(215 |
) |
||
|
Accrued payroll and related taxes |
|
|
|
|
|
(810 |
) |
|
|
(810 |
) |
||
|
Other accrued expenses |
|
|
|
2,551 |
|
(5,842 |
) |
|
|
(3,291 |
) |
||
|
Net cash and cash equivalents (used in) provided by operating activities |
|
|
|
(2,163 |
) |
300 |
|
|
|
(1,863 |
) |
||
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
||
|
Purchases of property and equipment |
|
|
|
|
|
(4,545 |
) |
|
|
(4,545 |
) |
||
|
Acquisitions of businesses, net of cash acquired |
|
|
|
|
|
(3,045 |
) |
|
|
(3,045 |
) |
||
|
Proceeds from loan repayments |
|
|
|
|
|
32 |
|
|
|
32 |
|
||
|
Net cash and cash equivalents used in investing activities |
|
$ |
— |
|
|
|
(7,558 |
) |
|
|
$ |
(7,558 |
) |
22
|
|
|
MQ
Associates, |
|
MedQuest, Inc. |
|
Guarantor |
|
Eliminations |
|
Consolidated |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
||
|
Payments on capital leases |
|
|
|
|
|
(192 |
) |
|
|
(192 |
) |
||
|
Intercompany receivable |
|
$ |
— |
|
(13,688 |
) |
(5,729 |
) |
19,417 |
|
$ |
— |
|
|
Intercompany payable |
|
|
|
5,729 |
|
13,688 |
|
(19,417 |
) |
|
|
||
|
Payment of debt issuance costs |
|
|
|
(229 |
) |
|
|
|
|
(229 |
) |
||
|
Proceeds from senior credit facility |
|
|
|
13,688 |
|
|
|
|
|
13,688 |
|
||
|
Proceeds from senior credit facility |
|
|
|
(5,500 |
) |
|
|
|
|
(5,500 |
) |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Net cash and cash equivalents provided by financing activities |
|
|
|
|
|
7,767 |
|
|
|
7,767 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Net (decrease) increase in cash and cash equivalents |
|
|
|
(2,163 |
) |
509 |
|
|
|
(1,654 |
) |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Cash and cash equivalents, beginning of period |
|
|
|
|
|
3,230 |
|
|
|
3,230 |
|
||
|
Cash and cash equivalents, end of period |
|
|
|
(2,163 |
) |
3,739 |
|
|
|
1,576 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Supplemental disclosure of cash flow information |
|
|
|
|
|
|
|
|
|
|
|
||
|
Cash paid for interest |
|
|
|
|
|
10,511 |
|
|
|
10,511 |
|
||
|
Cash paid for taxes |
|
|
|
|
|
219 |
|
|
|
219 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Supplemental schedule of non-cash investing and financing activities |
|
|
|
|
|
|
|
|
|
|
|
||
|
Acquisition of businesses |
|
|
|
|
|
|
|
|
|
|
|
||
|
Fair value of assets acquired |
|
|
|
|
|
5,045 |
|
|
|
5,045 |
|
||
|
Less deposit paid in prior year |
|
|
|
|
|
(2,000 |
) |
|
|
(2,000 |
) |
||
|
|
|
$ |
— |
|
|
|
3,045 |
|
|
|
$ |
3,045 |
|
The accompanying notes are an integral part of the consolidated financial statements.
23
Item 2. 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, Inc. This analysis should be read in conjunction with the consolidated financial statements and notes which appear elsewhere in this Form 10-Q. 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 Associate, Inc. could differ materially from the results anticipated in these forward-looking statements as a result of factors set forth below under “Cautionary Statement for Forward-Looking Statements.”
Overview
We are a leading independent operator of fixed-site, outpatient diagnostic imaging centers (each a “FIC”) 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. For the three months ended March 31, 2004, approximately 70.5% of our net revenue was derived from magnetic resonance imaging (“MRI”) services and approximately 16.3% was derived from computed tomography (“CT”) services. The remainder of our revenue was derived from nuclear medicine, general radiology (fluoroscopy and x-ray), ultrasound, and mammography.
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 three months ended March 31, 2004, approximately 58.8% of net revenue came from commercial payors, 23.9% from government payors, 7.6% from workers compensation and 9.7% 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 7.2% of the Company’s net revenue for the three months ended March 31, 2004, and were reflected as revenue from 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% of net revenue for the three months ended March 31, 2004. 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 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, as a percentage of net revenue, decreased from 44.0% for the three months ended March 31, 2003 to 41.9% for the three months ended March 31, 2004. The decrease was primarily the result of a decrease, as a percentage of net revenues, in radiologist and technologist expenses.
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, increased from 31.8% for three months ended March 31, 2003 to 32.4% for the three months ended March 31, 2004.
From January 2001 to December 2003, for 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 modalities by 40.8%. Average daily scan volume per machine for MRI machines and CT machines increased at compound annual growth rates of 5.0% and 15.3%, respectively.
24
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 by 4.5% for fiscal 2004, increased by 1.6% for services performed after March 1, 2003 and decreased by approximately 11.0% 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.
Results of operations
The following table sets forth operating expenses, MG&A, depreciation and amortization, net interest expense and other expenses, and these amounts as a percentage of net revenue for the periods indicated:
|
|
|
Three months ended March 31, |
|
||||||||
|
(in millions) |
|
2004 |
|
% |
|
2003 |
|
% |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Net revenues from services |
|
$ |
67.0 |
|
100.0 |
|
$ |
55.7 |
|
100.0 |
|
|
Operating expenses, excluding depreciation |
|
28.1 |
|
41.9 |
|
24.5 |
|
44.0 |
|
||
|
Marketing, general and administrative expenses |
|
21.7 |
|
32.4 |
|
17.7 |
|
31.8 |
|
||
|
Depreciation and amortization |
|
7.7 |
|
11.5 |
|
6.9 |
|
12.4 |
|
||
|
Income from operations |
|
9.5 |
|
14.2 |
|
6.6 |
|
11.8 |
|
||
|
Interest expense, net |
|
6.4 |
|
9.6 |
|
5.8 |
|
10.4 |
|
||
|
Equity in earnings of unconsolidated joint venture |
|
(0.1 |
) |
(0.1 |
) |
— |
|
— |
|
||
|
Provision for income taxes |
|
1.3 |
|
1.9 |
|
0.3 |
|
0.5 |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Net income |
|
$ |
1.9 |
|
2.8 |
|
$ |
0.5 |
|
0.9 |
|
Three months ended March 31, 2004 compared to three months ended March 31, 2003
Net revenue was $67.0 million for the three months ended March 31, 2004, representing an increase of $11.3 million, or 20.3%, from revenues of $55.7 million for the three months ended March 31, 2003. The increase was the result of growth in the number of scans performed at existing centers and an increase in the number of centers from 78 at March 31, 2003 to 89 at March 31, 2004.
Operating expenses, excluding depreciation, were $28.1 million for the three months ended March 31, 2004, representing an increase of $3.6 million, or 14.7%, as compared to $24.5 million for the three months ended March 31, 2003. Operating expenses, excluding depreciation, as a percentage of net revenues decreased to 41.9% for the three months ended March 31, 2004, as compared to 44.0% for the three months ended March 31, 2003. The decrease, as a percentage of net revenues, was due primarily to the effects of the semi-fixed portion of radiologist and technologist costs given the increase in net revenues for the comparison periods. There were also decreases, as a percentage of net revenues, in operating supplies and building costs. Operating supplies
25
decreased, as a percentage of net revenues, due to the continued effects of cost containment measures and building costs decreased, as a percentage of net revenues, due to the fixed nature of these costs given the increase in net revenues for the comparison period.
MG&A expenses were $21.7 million for the three months ended March 31, 2004, representing an increase of $4.0 million, or 22.6%, as compared to $17.7 million for the three months ended March 31, 2003. MG&A expenses, as a percentage of net revenues were 32.4% for the three months ended March 31, 2004, as compared to 31.8% for the three months ended March 31, 2003. There were increases, as a percentage of net revenues, in wages and related expenses and bad debt expenses that were substantially offset by decreases, as a percentage of net revenues, in other general and administrative expenses and other income/expense. The changes related to wages and related expenses and other general and administrative expenses primarily related to the transfer of certain billing center costs from an external provider to an internal provider.
Depreciation and amortization, was $7.7 million, or 11.5% of net revenues, for the three months ended March 31, 2004 as compared to $6.9 million, or 12.4% of net revenues, for the three months ended March 31, 2003. This decrease, as a percentage of net revenues, was primarily the result of the significant increases in revenues for the comparison periods.
Interest expense, net, increased to $6.4 million for the three months ended March 31, 2004 from $5.8 million for the three months ended March 31, 2003. Interest expense, net, increased primarily due to an increased level of indebtedness as a result of an amendment to our Senior Credit Facility in September 2003, allowing us to borrow an additional $60.0 million under a Tranche B term facility. Total debt at March 31, 2004 amounted to $251.2 million as compared to $246.4 million at March 31, 2003.
Income taxes were $1.3 million for the three months ended March 31, 2004, as compared to $0.3 million for the three months ended March 31, 2003. The effective tax rate was 40.0% for the three months ended March 31, 2004 and the three months ended March 31, 2003. Income taxes are provided for on an interim basis using an approximate tax rate of 40.0%, which represents our effective tax rate. There were Federal and State net operating loss carryforwards amounting to approximately $15.7 million and $40.3 million at March 31, 2004.
As a result of the foregoing factors, we had net income of $1.9 million for the three months ended March 31, 2004, as compared to net income of $0.5 million for the three months ended March 31, 2003.
Liquidity and Capital Resources
The principal uses of 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 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 $1.7 million for the three months ended March 31, 2004, representing an increase of $3.6 million from net cash used in operating activities of $1.9 million for the three months ended March 31, 2003. This increase resulted primarily from an increase in net income for the three months ended March 31, 2004.
Net cash used in investing activities was $7.8 million for the three months ended March 31, 2004, representing an increase of $0.2 million from $7.6 million for the three months ended March 31, 2003. This increase is primarily the result of a rise in capital expenditures off-set by a reduction in equipment deposits in the three months ended March 31, 2004. Capital expenditures were $7.6 million for the three months ended March 31, 2003 as compared to capital expenditures of $10.6 million for the three months ended March 31, 2004.
26
Net cash provided by financing activities was $0.4 million for the three months ended March 31, 2004, representing a decrease of $7.4 million from $7.8 million provided by financing activities for the three months ended March 31, 2003. This decrease resulted primarily from an increase in principal payments on the Senior Credit Facility during the three months ended March 31, 2004, as compared to the three months ended March 31, 2003.
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 borrowings outstanding under our revolving credit facility.
The Senior Credit Facility 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 is guaranteed by MQ Associates, Inc. and each of MQ Associates, Inc.’s and our existing and future subsidiaries, with limited exceptions for 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, Inc. and the guarantors.
At March 31, 2004, we had $251.2 million of indebtedness outstanding, as compared to $249.7 million at December 31, 2003. Our indebtedness at March 31, 2004 primarily consisted of $180 million due under our 117/8% notes and $59.6 million due under our Tranche B term loan. At March 31, 2004, we would have been able to borrow an additional $70.4 million (after giving effect to $0.6 million in outstanding letters of credit) under our revolving credit facility to fund our working capital requirements and future acquisitions.
Borrowings under the revolving credit facility accrue interest, at our option, at either: (a) in the case of loans where the rate of interest is based on the ABR rate, an applicable margin of 1.50% per annum plus the higher of (i) Wachovia Bank’s prime rate and (ii) the Federal funds effective rate plus ½ of 1.0%, or (b) in the case of loans where the rate of interest is based on the Eurodollar rate, the Eurodollar rate plus an applicable margin of 2.50 % per annum. Borrowings under the revolving credit facility at March 31, 2004 were based upon the Eurodollar rate (i.e. 1.16% at March 31, 2004) and amounted to $9.0 million at March 31, 2004. The revolving credit facility also provides for a commitment fee, payable quarterly in arrears on any unused commitments hereunder, equal to ½ of 1% per annum. The margins related to the prime rate and Eurodollar rate borrowings under the revolving credit facility and the commitment fee are subject to adjustment based upon our consolidated leverage ratio, as defined in the Senior Credit Facility.
Borrowings under the Tranche B term facility accrue interest at our option at either: (a) in the case of loans where the rate of interest is based on the ABR rate, an applicable margin of 2.75% per annum plus the higher of (i) Wachovia Bank’s prime rate and (ii) the Federal funds effective rate plus ½ of 1% or (b) in the case of loans where the rate of interest is based on the Eurodollar rate plus an applicable margin of 3.75% per annum. Borrowings were based upon the Eurodollar rate (i.e. 1.16% at March 31, 2004) and amounted to $59.6 million at March 31, 2004.
Commencing with the fiscal year ending December 31, 2004, and annually thereafter, we are required to prepay outstanding term loans (or if all outstanding term loans are paid in full, to reduce commitments under the revolving credit facility) with 75% (or if we meet a certain consolidated total leverage ratio, 50%) of our “Excess Cash Flow”, as defined in the Senior Credit Facility for such fiscal year. Notwithstanding the foregoing, we may use up to $20 million of net cash proceeds from certain asset dispositions and up to $20 million of Excess Cash Flow, in each case that we would otherwise have to use to prepay term loans, to prepay outstanding loans under the revolving credit facility (without a corresponding reduction in commitments). We do not anticipate excess cash flows, as defined, for the year ending December 31, 2004.
27
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 on each February 15 and August 15. The senior subordinated notes mature on August 15, 2012. In February 2003, MedQuest registered an identical series of senior subordinated notes with the Securities and Exchange Commission and subsequently exchanged the unregistered $180 million principal amount senior subordinated notes for registered senior subordinated notes.
The Senior Credit Facility and the indenture governing the 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 requires us to maintain certain financial ratios. We were in compliance with all covenants under the Senior Credit Facility at March 31, 2004. Our indebtedness under the Senior Credit Facility is collateralized by substantially all of our assets, including our inventory, accounts receivable, real and personal property, intellectual property and other intangibles, and guaranteed by all of our domestic subsidiaries. The notes are senior subordinated unsecured obligations of MedQuest, 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’s subsidiaries.
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 March 31, 2004.
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, 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 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;
28
• upgrading existing equipment to increase volume and/or quality;
• replacing less advanced equipment; and
• upgrading information technology systems.
Capital expenditures (excluding acquisitions) totaled $9.7 million for the three months ended March 31, 2004, and $4.5 million for the three months ended March 31, 2003. Capital expenditures related to acquisitions amounted to $0.9 million for the three months ended March 31, 2004, compared to $5.0 million for the three months ended March 31, 2003 including a $2.0 million deposit paid in 2002. Capital expenditures, in the aggregate, amounted to $10.6 million for the three months ended March 31, 2004 as compared to $9.5 million for the three months ended March 31, 2003.
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.
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.
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.
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.
In January 2003, we entered into a 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.
We continuously evaluate acquisition opportunities, and from time to time we may enter into non-binding letters of intent. On April 30, 2004, we completed an acquisition in the amount of $3.1 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 holiday and client and patient vacation schedules 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 quarterly results may be below market expectations.
Cautionary Statement for Forward-Looking Statements
This quarterly 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
29
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 Registration Statement on Form S-1 declared effective on May 14, 2004.
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 3. Quantitative and Qualitative Disclosures About Market Risk
We sell our services exclusively in the United States and receive payment for 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, 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.
|
Long-term debt |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2012 |
|
Total |
|
Fair Value |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Fixed rate |
|
— |
|
— |
|
— |
|
— |
|
— |
|
$ |
132.5 |
|
$ |
132.5 |
|
$ |
140.5 |
|
|||||
|
Average interest rate |
|
— |
|
— |
|
— |
|
— |
|
— |
|
11.875 |
% |
11.875 |
% |
10.51 |
% |
||||||||
|
Variable rate |
|
$ |
0.6 |
|
$ |
0.6 |
|
$ |
9.6 |
|
$ |
28.8 |
|
$ |
28.5 |
|
$ |
47.5 |
|
$ |
115.6 |
|
$ |
115.6 |
|
|
Average interest rate |
|
4.91 |
% |
4.91 |
% |
3.95 |
% |
4.91 |
% |
4.91 |
% |
7.68 |
% |
5.94 |
% |
5.94 |
% |
||||||||
In August 2002, we entered into an interest rate swap agreement related to the fixed interest rate obligations on the 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
30
fair value hedge of the fair market value of the notes and was 100% effective for the three months ended March 31, 2004. 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 was $2.5 million at March 31, 2004 and $1.4 million at December 31, 2003 and has been presented as a component of Other Assets in the consolidated balance sheets at March 31, 2004 and December 31, 2004, respectively.
Item 4. Controls and Procedures
At the end of the period covered by this quarterly report on Form 10-Q, 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 most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s Internal Controls.
PART II. OTHER INFORMATION
Item 1. 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 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
31
programs. Any such result could have a material adverse effect on our financial position and results of operations.
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.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
|
Number |
|
Description of Exhibits |
|
|
|
|
|
31.1 |
|
Certification of Gene Venesky pursuant to 18 U.S.C. Section 1350, as approved pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
31.2 |
|
Certification of Thomas C. Gentry pursuant to 18 U.S.C. Section 1350, as approved pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
32.1 |
|
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 |
|
|
|
|
|
32.2 |
|
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 |
(b) Reports on Form 8-K. The registrant filed the following Current Report on Form 8-K during the first quarter of 2004:
(1) Report dated March 2, 2004, announcing the registrant’s earnings for the quarters and year ended December 31, 2003 and 2002.
32
Pursuant to the requirements of the Securities and Exchange 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. |
|
|
|
|
|
|
|
|
|
|
Date: May 17, 2004 |
By: |
/s/ Gene Venesky |
|
|
|
Gene Venesky |
|
|
|
Chairman and Chief Executive Officer |
|
|
|
|
|
Date: May 17, 2004 |
By: |
/s/ Thomas C. Gentry |
|
|
|
Thomas C. Gentry |
|
|
|
Chief Financial Officer |
33