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EX-10.5 - EX-10.5 - MEDQUIST INC | w78445exv10w5.htm |
EX-32.1 - EX-32.1 - MEDQUIST INC | w78445exv32w1.htm |
EX-31.1 - EX-31.1 - MEDQUIST INC | w78445exv31w1.htm |
EX-10.4 - EX-10.4 - MEDQUIST INC | w78445exv10w4.htm |
EX-31.2 - EX-31.2 - MEDQUIST INC | w78445exv31w2.htm |
EX-32.2 - EX-32.2 - MEDQUIST INC | w78445exv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2010.
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-13326
MEDQUIST INC.
(Exact name of registrant as specified in its charter)
New Jersey | 22-2531298 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
1000 BISHOPS GATE BOULEVARD | ||
SUITE 300 | ||
MOUNT LAUREL, NEW JERSEY | 08054-4632 | |
(Address of principal executive offices) | (Zip Code) |
(856) 206-4000
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The number of registrants shares of common stock, no par value, outstanding as of May 5, 2010
was 37,555,893.
MEDQUIST INC.
INDEX
INDEX
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MedQuist Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share amounts)
Unaudited
Consolidated Statements of Operations
(In thousands, except per share amounts)
Unaudited
Three months ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Net revenues |
$ | 73,981 | $ | 78,944 | ||||
Operating costs and expenses: |
||||||||
Cost of revenues |
49,833 | 53,868 | ||||||
Selling, general and administrative |
8,797 | 9,438 | ||||||
Research and development |
2,281 | 2,416 | ||||||
Depreciation |
1,910 | 2,552 | ||||||
Amortization of intangible assets |
1,820 | 1,511 | ||||||
Cost of legal proceedings and settlements |
1,043 | 1,924 | ||||||
Acquisition related charges |
894 | | ||||||
Restructuring charges |
60 | | ||||||
Total operating costs and expenses |
66,638 | 71,709 | ||||||
Operating income |
7,343 | 7,235 | ||||||
Equity in income of affiliated company |
514 | 72 | ||||||
Interest income (expense), net |
(146 | ) | 46 | |||||
Income before income taxes |
7,711 | 7,353 | ||||||
Income tax provision |
367 | 499 | ||||||
Net income |
$ | 7,344 | $ | 6,854 | ||||
Net income per share: |
||||||||
Basic |
$ | 0.20 | $ | 0.18 | ||||
Diluted |
$ | 0.20 | $ | 0.18 | ||||
Weighted average shares outstanding: |
||||||||
Basic |
37,556 | 37,556 | ||||||
Diluted |
37,556 | 37,556 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
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MedQuist Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands)
Unaudited
Consolidated Balance Sheets
(In thousands)
Unaudited
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 21,726 | $ | 25,216 | ||||
Accounts receivable, net of allowance of $2,984 and $3,159, respectively |
43,897 | 43,627 | ||||||
Income tax receivable |
283 | 772 | ||||||
Other current assets |
5,299 | 4,940 | ||||||
Total current assets |
71,205 | 74,555 | ||||||
Property and equipment, net |
10,758 | 11,772 | ||||||
Goodwill |
40,723 | 40,813 | ||||||
Other intangible assets, net |
36,032 | 36,307 | ||||||
Deferred income taxes |
1,312 | 1,396 | ||||||
Other assets |
17,769 | 9,818 | ||||||
Total assets |
$ | 177,799 | $ | 174,661 | ||||
Liabilities and Shareholders Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 7,544 | $ | 8,687 | ||||
Accrued expenses |
22,634 | 22,848 | ||||||
Accrued compensation |
10,495 | 12,432 | ||||||
Deferred income taxes |
4 | 4 | ||||||
Deferred revenue |
10,112 | 10,854 | ||||||
Total current liabilities |
50,789 | 54,825 | ||||||
Deferred income taxes |
3,424 | 3,240 | ||||||
Other non-current liabilities |
1,745 | 1,848 | ||||||
Commitments and contingencies (Note 8) |
||||||||
Shareholders equity: |
||||||||
Common stock no par value; authorized 60,000 shares;
37,556 and 37,556 shares issued and outstanding, respectively |
237,896 | 237,848 | ||||||
Accumulated deficit |
(118,510 | ) | (125,854 | ) | ||||
Accumulated other comprehensive income |
2,455 | 2,754 | ||||||
Total shareholders equity |
121,841 | 114,748 | ||||||
Total liabilities and shareholders equity |
$ | 177,799 | $ | 174,661 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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MedQuist Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Unaudited
Consolidated Statements of Cash Flows
(In thousands)
Unaudited
Three months ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Operating activities: |
||||||||
Net income |
$ | 7,344 | $ | 6,854 | ||||
Adjustments to reconcile net income to cash
provided by
operating activities: |
||||||||
Depreciation and amortization |
3,730 | 4,063 | ||||||
Equity in income of affiliated company |
(514 | ) | (72 | ) | ||||
Deferred income tax provision |
182 | 309 | ||||||
Stock option expense |
48 | 48 | ||||||
Provision for (recovery of) doubtful accounts |
779 | (105 | ) | |||||
Loss on disposal of property and equipment |
| 24 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(1,035 | ) | 3,920 | |||||
Income tax receivable |
483 | (20 | ) | |||||
Other current assets |
(166 | ) | 923 | |||||
Other non-current assets |
65 | (18 | ) | |||||
Accounts payable |
(819 | ) | 392 | |||||
Accrued expenses |
(482 | ) | (1,739 | ) | ||||
Accrued compensation |
(1,938 | ) | 930 | |||||
Deferred revenue |
(766 | ) | (1,424 | ) | ||||
Other non-current liabilities |
(84 | ) | 63 | |||||
Net cash provided by operating activities |
$ | 6,827 | $ | 14,148 | ||||
Investing activities: |
||||||||
Purchase of property and equipment |
(1,737 | ) | (1,393 | ) | ||||
Capitalized software |
(925 | ) | (766 | ) | ||||
Deposit for Spheris Acquisition |
(7,500 | ) | | |||||
Net cash used in investing activities |
(10,162 | ) | (2,159 | ) | ||||
Financing activities: |
||||||||
Debt issuance costs |
(195 | ) | | |||||
Net cash used in financing activities |
(195 | ) | | |||||
Effect of exchange rate changes |
40 | (53 | ) | |||||
Net increase (decrease) in cash and cash equivalents |
(3,490 | ) | 11,936 | |||||
Cash and cash equivalents beginning of period |
25,216 | 39,918 | ||||||
Cash and cash equivalents end of period |
$ | 21,726 | $ | 51,854 | ||||
Supplemental cash flow information: |
||||||||
Cash paid (recovered) for income taxes |
$ | (695 | ) | $ | (131 | ) | ||
Accommodation payments paid with credits |
$ | | $ | 61 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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MedQuist Inc. & Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
1. Basis of Presentation
The consolidated financial statements and footnotes thereto are unaudited. Certain
information and footnote disclosures normally included in financial statements prepared in
accordance with U.S. generally accepted accounting principles (GAAP) have been omitted pursuant to
such rules and regulations although we believe that the disclosures are adequate to make the
information presented not misleading. The consolidated financial statements include our accounts
and the accounts of all of our wholly-owned subsidiaries. All significant inter-company accounts
and transactions have been eliminated in consolidation.
These statements reflect all normal recurring adjustments that, in the opinion of
management, are necessary for the fair presentation of our results of operation, financial position
and cash flows. Interim results are not necessarily indicative of results for a full year. The
information in this Form 10-Q should be read in conjunction with our 2009 Annual Report on Form
10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission (SEC)
on March 12, 2010.
Recent Developments On April 22, 2010, we and our majority shareholder, CBay Inc.
(together with us, the Purchasers), completed the acquisition (the Acquisition) of substantially
all of the assets of Spheris, Inc. (Spheris) and certain of its affiliates (collectively with
Spheris, the Sellers), pursuant to the terms of the Stock and Asset Purchase Agreement (the
Agreement) entered into between the Purchasers and Sellers on April 15, 2010. See Note 11 for a
description of the transaction.
Recent Accounting Pronouncements
In September 2009, the Financial Accounting Standards Board (FASB) ratified two consensuses
affecting revenue recognition:
The first consensus, Revenue RecognitionMultiple-Element Arrangements, sets forth
requirements that must be met for an entity to recognize revenue from the sale of a delivered item
that is part of a multiple-element arrangement when other items have not yet been delivered. One of
those current requirements is that there be objective and reliable evidence of the standalone
selling price of the undelivered items, which must be supported by either vendor-specific objective
evidence (VSOE) or third-party evidence (TPE).
This consensus eliminates the requirement that all undelivered elements have VSOE or TPE
before an entity can recognize the portion of an overall arrangement fee that is attributable to
items that already have been delivered. In the absence of VSOE or TPE of the standalone selling
price for one or more delivered or undelivered elements in a multiple-element arrangement, entities
will be required to estimate the selling prices of those elements. The overall arrangement fee will
be allocated to each element (both delivered and undelivered items) based on their relative selling
prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are based on the
entitys estimated selling price. Application of the residual method of allocating an overall
arrangement fee between delivered and undelivered elements will no longer be permitted.
The
second consensus, Software-Revenue Recognition, addresses the accounting for transactions
involving software to exclude from its scope tangible products that contain both software and
non-software and not-software components that function together to deliver a products
functionality.
The consensuses are effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010. We are evaluating the
potential impact of these requirements on our financial statements.
2. Comprehensive income
Comprehensive income was as follows:
Three months ended March 31, | ||||||||
2010 | 2009 | |||||||
Net income |
$ | 7,344 | $ | 6,854 | ||||
Foreign currency translation adjustment |
(299 | ) | (265 | ) | ||||
Comprehensive income |
$ | 7,045 | $ | 6,589 | ||||
3. Net Income per Share
Basic net income per share is computed by dividing net income by the weighted average
number of shares outstanding during each period. Diluted net income per share is computed by
dividing net income by the weighted average shares outstanding, as adjusted for the dilutive effect
of common stock equivalents, which consist only of stock options, using the treasury stock method.
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MedQuist Inc. & Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
The following table reflects the weighted average shares outstanding used to compute
basic and diluted net income per share:
Three months ended March 31, | ||||||||
2010 | 2009 | |||||||
Net income |
$ | 7,344 | $ | 6,854 | ||||
Weighted average shares outstanding: |
||||||||
Basic |
37,556 | 37,556 | ||||||
Effect of dilutive shares |
| | ||||||
Diluted |
37,556 | 37,556 | ||||||
Net income per share: |
||||||||
Basic |
$ | 0.20 | $ | 0.18 | ||||
Diluted |
$ | 0.20 | $ | 0.18 |
For the three months ended March 31, 2010 and 2009, 1,152 and 1,582 options,
respectively, were excluded from the computation of diluted earnings per share as the options
exercise price was greater than the average market price of the common stock during the respective
period.
4. Accrued Expenses
Accrued expenses consisted of the following:
March 31, 2010 | December 31, 2009 | |||||||
Customer accommodations |
$ | 11,477 | $ | 11,635 | ||||
Other (no item exceeds 5% of current liabilities) |
11,157 | 11,213 | ||||||
Total accrued expenses |
$ | 22,634 | $ | 22,848 | ||||
In November 2003, one of our employees raised allegations that we had engaged in
improper billing practices. In response, our board of directors undertook an independent review of
these allegations (Review). In response to our customers concern over the public disclosure of
certain findings from the Review, we made the decision in the fourth quarter of 2005 to take action
to try to avoid litigation and preserve and solidify our customer business relationships by
offering a financial accommodation to certain of our customers.
In connection with our decision to offer financial accommodations to certain of our
customers (Accommodation Customers), we analyzed our historical billing information and the
available report-level data (Managements Billing Assessment) to develop individualized
accommodation offers to be made to Accommodation Customers (Accommodation Analysis). Based on the
Accommodation Analysis, our board of directors authorized management to make cash or credit
accommodation offers to Accommodation Customers in the aggregate amount of $75,818. By accepting
our accommodation offer, the customer agreed, among other things, to release us from any and all
claims and liability regarding the billing related issues. We are unable to predict how many
customers, if any, may accept the outstanding accommodation offers on the terms proposed by us, nor
are we able to predict the timing of the acceptance of any outstanding accommodation offers. Until
any offers are accepted, we may withdraw or modify the terms of the accommodation program or any
outstanding offers at any time. In addition, we are unable to predict how many future offers, if
made, will be accepted on the terms proposed by us. We regularly evaluate whether to proceed with,
modify or withdraw the accommodation program or any outstanding offers.
The following is a summary of the financial statement activity related to the customer
accommodation.
Three months ended | Year ended | |||||||
March 31, 2010 | December 31, 2009 | |||||||
Beginning balance |
$ | 11,635 | $ | 12,055 | ||||
Payments and other adjustments |
(158 | ) | (317 | ) | ||||
Credits |
| (103 | ) | |||||
Ending balance |
$ | 11,477 | $ | 11,635 | ||||
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MedQuist Inc. & Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
2009 Restructuring Plan
During the third and fourth quarters of 2009, as a result of managements continued planned
process improvement and technology development investments we committed to an exit and disposal
plan which includes projected employee severance for planned reduction in headcount. Because of
plan development in late 2009 and execution of the plan over multiple quarters in 2009 and 2010,
not all personnel affected by the plan know of the plan or its impact. The plan includes costs
of $2.5 million for employee severance and $0.4 million for vacating operating leases. The table
below reflects the financial statement activity related to the 2009 restructuring plan:
Three Months Ended | Year Ended | |||||||
March 31, 2010 | December 31, 2009 | |||||||
Beginning balance |
$ | 2,064 | $ | | ||||
Charge |
60 | 2,810 | ||||||
Cash paid |
(495 | ) | (746 | ) | ||||
Ending balance |
$ | 1,629 | $ | 2,064 | ||||
The charge for the three months ended March 31, 2010 reflected costs related to vacating
facilities.
5. Cost of Legal Proceedings and Settlements
The following is a summary of the amounts recorded as Cost of legal proceedings and
settlements, in the accompanying consolidated statements of operations:
Three months ended March 31, | ||||||||
2010 | 2009 | |||||||
Legal fees |
$ | 1,043 | $ | 1,894 | ||||
Other professional fees |
| 30 | ||||||
Total |
$ | 1,043 | $ | 1,924 | ||||
Other professional fees represent document search and retrieval costs.
6. Income Taxes
Our consolidated income tax expense consists principally of an increase in deferred tax
liabilities related to goodwill amortization deductions for income tax purposes during the
applicable period as well as state and foreign income taxes. We recorded a valuation allowance to
reduce our net deferred tax assets to an amount that is more likely than not to be realized in
future years.
We expect that our consolidated income tax expense for the year ended December 31, 2010,
similar to the year ended December 31, 2009, will consist principally of an increase in deferred
tax liabilities related to goodwill amortization deductions for income tax purposes during the
applicable year as well as state and foreign income taxes. We regularly assess the future
realization of deferred taxes and whether the valuation allowance against the majority of domestic
deferred tax assets is still warranted. To the extent sufficient positive evidence, including past
results and future projections, exists to benefit all or part of these benefits, the valuation
allowance will be released accordingly.
We classify penalties and interest related to uncertain tax positions as part of income
tax expense. There were no material changes to our uncertain tax positions, including penalties and
interest for the three months ended March 31, 2010.
7. Credit Agreement
In August 2009, we entered into a five-year $25 million revolving credit agreement (the
Wells Fargo Credit Agreement) with Wells Fargo Foothill, LLC. Subject to certain terms and
conditions, the Wells Fargo Credit Agreement provided committed revolving funding through
August 2014 and included an option whereby we could increase our maximum credit to $40 million. The
amount available for borrowings was based upon a percentage of eligible accounts receivable. At
March 31, 2010, $21.0 million was available
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MedQuist Inc. & Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
under the Wells Fargo Credit Agreement. At March 31, 2010 and December 31, 2009, there
were no borrowings outstanding under the Wells Fargo Credit Agreement.
The Wells Fargo Credit Agreement terminated April 22, 2010 when we acquired substantially all
of the assets of Spheris, Inc. and entered into a credit agreement with General Electric Capital
Corporation, CapitalSource Bank, and Fifth Third Bank, as described in Note 11. Pursuant to its
terms, we paid a fee of $576 to terminate the Wells Fargo Credit Agreement.
8. Commitments and Contingencies
Customer Litigation
Kaiser Litigation
On June 6, 2008, plaintiffs Kaiser Foundation Health Plan, Inc., Kaiser Foundation
Hospitals, The Permanente Medical Group, Inc., Kaiser Foundation Health Plan of the Mid-Atlantic
States, Inc., and Kaiser Foundation Health Plan of Colorado (collectively, Kaiser) filed suit
against MedQuist Inc. and MedQuist Transcriptions, Ltd. (collectively, MedQuist) in the Superior
Court of the State of California in and for the County of Alameda. The action is entitled
Foundation Health Plan Inc., et al v. MedQuist Inc. et al., Case No. CV-078-03425 PJH. The
complaint asserts five causes of action, for common law fraud, breach of contract, violation of
California Business and Professions Code section 17200, unjust enrichment, and a demand for an
accounting. More specifically, Kaiser alleges that we fraudulently inflated the payable units of
measure in medical transcription reports generated by us for Kaiser pursuant to the contracts
between the parties. The damages alleged in the complaint include an estimated $7 million in
compensatory damages, as well as punitive damages, attorneys fees and costs, and injunctive
relief. We contend that we did not breach the contracts with Kaiser, or commit the fraud alleged,
and we intend to defend the suit vigorously. The parties participated in private mediation on
July 24, 2008, but the case was not settled. We removed the case to the United States District
Court for the Northern District of California, and we filed motions to dismiss Kaisers complaint
and to transfer venue of the case to the United Stated District Court for the District of New
Jersey. Kaiser stipulated to transfer, and the case was transferred to the United States District
Court for the District of New Jersey on or about August 26, 2008
The parties exchanged initial disclosures on October 6, 2008 and appeared before the court for
an initial scheduling conference on October 14, 2008. Kaisers initial disclosures claim damages,
including compensatory damages, punitive damages, and prejudgment interest, in excess of $12
million. Following the scheduling conference, the court ordered the parties to mediation. The
parties participated in court-ordered mediation on February 27, 2009 but the case was not settled.
The court heard argument on our motion to dismiss on March 19, 2009. On April 8, 2009, the court
entered an order denying our motion to dismiss, except that our motion to dismiss plaintiffs claim
under the fraudulent prong of the California Unfair Competition Law was granted. The court issued a
scheduling order on April 17, 2009, setting a pretrial schedule. We filed our answer to plaintiffs
complaint on April 23, 2009.
Kaiser served an initial set of discovery requests on May 7, 2009. On May 20, 2009, the court
temporarily stayed discovery to address allegations of ethical misconduct by Kaisers trial
counsel, Greenberg Traurig, LLP. On July 1, 2009, the court granted us leave to conduct limited
written discovery regarding Greenberg Traurigs alleged ethical misconduct and continued the
temporary stay of all other discovery. On July 14, 2009, we moved for sanctions against Greenberg
Traurig for breach of the New Jersey Rules of Professional Conduct, and we moved to stay the
litigation pending resolution of the motion for sanctions. Discovery is presently stayed pending
resolution of our motion to stay. No hearing date has been set for any of the pending motions. On
February 24, 2010, the court granted our motion to stay pending resolution of the motion for
sanctions and entered a scheduling order setting oral arguments on the pending motion for sanctions
for March 16, 2010. On March 31, 2010, the court granted our motion to disqualify Greenberg Traurig
as counsel for Kaiser. In its order, the court gave Kaiser until May 31, 2010 to obtain new
counsel and set an in-person status conference for June 9, 2010.
Kahn Putative Class Action
On January 22, 2008, Alan R. Kahn, one of our shareholders, filed a shareholder putative
class action lawsuit against us, Koninklijke Philips Electronics N.V. (Philips), our former
majority shareholder, and four of our former non-independent directors, Clement Revetti, Jr.,
Stephen H. Rusckowski, Gregory M. Sebasky and Scott Weisenhoff. The action, entitled Alan R. Kahn
v. Stephen H. Rusckowski, et al., Docket No. BUR-C-000007-08, was venued in the Superior Court of
New Jersey, Chancery Division,
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MedQuist Inc. & Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
Burlington County. In the action, plaintiff purports to bring the
action on his own behalf and on behalf of all current holders of our common stock. The original
complaint alleged that defendants breached their fiduciary duties of good faith, fair dealing,
loyalty, and due care by purportedly agreeing to and initiating a process for our sale or a change
of control transaction which will allegedly cause harm to plaintiff and members of the putative
class. Plaintiff sought damages in an unspecified amount, plus costs and interest, a
judgment declaring that defendants breached their fiduciary duties and that any proposed
transactions regarding our sale or change of control are void, an injunction preventing our sale or
any change of control transaction that is not entirely fair to the class, an order directing us to
appoint three independent directors to our board of directors, and attorneys fees and expenses.
On June 12, 2008, plaintiff filed an amended class action complaint against us, eight of our
current and former directors, and Philips in the Superior Court of New Jersey, Chancery Division.
In the amended complaint, plaintiff alleged that our current and former directors breached their
fiduciary duties of good faith, fair dealing, loyalty, and due care by not providing our public
shareholders with the opportunity to decide whether they wanted to participate in a share purchase
offer with non-party CBaySystems Holdings Ltd. (CBaySystems Holdings) that would have allowed the
public shareholders to sell their shares of our common stock for an amount above market price.
Plaintiff further alleged that CBaySystems Holdings made the share purchase offer to Philips and
that Philips breached its fiduciary duties by accepting CBaySystems Holdings offer. Based on these
allegations, plaintiff sought declaratory, injunctive, and monetary relief from all defendants.
Plaintiff claimed that we were only named as a party to the litigation for purposes of injunctive
relief.
On July 14, 2008, we moved to dismiss plaintiffs amended class action complaint, arguing
(1) that plaintiffs amended class action complaint did not allege that we engaged in any
wrongdoing which supported a breach of fiduciary duty claim and (2) that a breach of fiduciary duty
claim is not legally cognizable against a corporation. Plaintiff filed an opposition to our motion
to dismiss on July 21, 2008.
On November 21, 2008, the Court granted our motion and the motions filed by the other
defendants and dismissed plaintiffs amended class action complaint with prejudice. On December 31,
2008, plaintiff filed an appeal of the trial courts dismissal order with the New Jersey Appellate
Division. Thereafter, the parties briefed all the issues raised in plaintiffs appeal. In our
opposition brief, we opposed all the arguments plaintiff raised with respect to the dismissal of
the claims against us.
On September 24, 2009, the Appellate Division held oral argument on the issues that are
the subject of plaintiffs appeal. We are now waiting for the Appellate Division to issue a
decision.
Reseller Arbitration Demand
On October 1, 2007, we received from counsel to nine current and former resellers of our
products (Claimants), a copy of an arbitration demand filed by the Claimants, initiating an
arbitration proceeding styled Diskriter, Inc., Electronic Office Systems, Inc., Milner Voice &
Data, Inc., Nelson Systems, Inc., NEO Voice and Communications, Inc., Office Business Systems,
Inc., Roach-Reid Office Systems, Inc., Stiles Office Systems, Inc., and Travis Voice and Data, Inc.
v. MedQuist Inc. and MedQuist Transcriptions, Ltd. (collectively MedQuist) (filed on September 27,
2007, AAA, 30-118-Y-00839-07). The arbitration demand purports to set forth claims for breach of
contract; breach of covenant of good faith and fair dealing; promissory estoppel;
misrepresentation; and tortious interference with contractual relations. The Claimants allege that
we breached our written agreements with the Claimants by: (i) failing to provide reasonable
training, technical support, and other services; (ii) using the Claimants confidential information
to compete against the Claimants; (iii) directly competing with the Claimants territories; and
(iv) failing to make new products available to the Claimants. In addition, the Claimants allege
that we made false oral representations that we: (i) would provide new product, opportunities and
support to the Claimants; (ii) were committed to continuing to use Claimants; (iii) did not intend
to create our own sales force with respect to the Claimants territory; and (iv) would stay out of
Claimants territories and would not attempt to take over the Claimants business and relationships
with the Claimants customers and end-users. The Claimants assert that they are seeking
damages in excess of $24.3 million. We also moved to dismiss MedQuist Inc. as a party to the
arbitration since MedQuist Inc. is not a party to the Claimants agreements, and accordingly, has
never agreed to arbitration. The AAA initially agreed to rule on these matters, but then decided to
defer a ruling to the panel of arbitrators selected pursuant to the parties agreements (Panel). In
response, we informed the Panel that a court, not the Panel, should rule on these issues. When it
appeared that the Panel would rule on these issues, we initiated a lawsuit in the Superior Court of
DeKalb County (the Court) and requested an injunction enjoining the Panel from deciding these
issues. The Court denied the request, and indicated that a new motion could be filed if the Panels
ruling was adverse to MedQuist Inc. or MedQuist Transcriptions, Ltd. On May 6, 2008, the Panel
dismissed MedQuist Inc. as a party, but ruled against our opposition to a consolidated arbitration.
We asked the Court to stay the arbitration in order to review that decision. The Court initially
granted the stay, but later lifted the stay. The Court did not make any substantive rulings
regarding consolidation, and in fact, left that
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Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
decision and others to the assigned judge, who was unable to hear those motions. Accordingly,
until further order of the Court, the arbitration will proceed forward.
We filed an answer and counterclaim in the arbitration, which generally denied liability. In
the lawsuit, the defendants filed a motion to dismiss alleging that our complaint failed to state
an actionable claim for relief. On July 25, 2008, we filed our response which opposed the motion to
dismiss in all respects. On September 10, 2008, the Court heard argument on defendants motion to
dismiss. The Court did not issue a decision, but rather, took the matter under advisement.
During discovery in the arbitration,
Claimants repeatedly modified the individual damage
claims and asserted two alternative damage theories. Claimants did
not specify what the two alternative damage theories were, but stated that they were seeking
alternative damage amounts for each Claimant. The Panel issued a Revised Scheduling Order, which
tentatively scheduled the arbitration to begin in February 2010.
On March 31, 2010, the parties entered into a Settlement Agreement and Release pursuant to
which we paid the Claimants $500 on April 1, 2010 to resolve all claims. Under the Settlement
Agreement and Release, (i) the parties exchanged mutual releases, (ii) the arbitration and related
state court litigation were dismissed with prejudice and (iii) we did not admit to any liability or
wrongdoing. We accrued the entire amount of this settlement as of December 31, 2009.
SEC Investigations of Former Officers
With respect to our historical billing practices, the SEC is pursuing civil litigation
against our former chief financial officer, whose employment with us ended in July 2004. Pursuant
to our bylaws, we have indemnification obligations for the legal fees for our former chief
financial officer. In February 2010, one of our current employees, who was our former controller
but who does not currently serve in a senior management or financial reporting oversight role,
reached a settlement with the SEC in connection with the civil litigation that the SEC had brought
against him in connection with our historical billing practices.
9. Related Party Transactions
From time to time, we enter into transactions in the normal course of business with
related parties. Since August 6, 2008, CBaySystems Holdings and affiliated entities own
approximately 69.5% ownership interest in MedQuist. The Audit Committee of our board of directors
has been charged with the responsibility of approving or ratifying all related party transactions.
In any situation where the Audit Committee sees fit to do so, any related party transaction, is
presented to disinterested members of our board of directors for approval or ratification. All of
the agreements with CBay Systems & Services, Inc. and CBay Inc. described below have been reviewed
and approved by our Audit Committee.
On April 3, 2009, we entered into a transcription services agreement (Transcription
Services Agreement) with CBay Systems, pursuant to which we outsource certain medical transcription
services to CBay Systems. The Transcription Services Agreement will expire on April 16, 2012 unless
sooner terminated by either party. Under the Transcription Services Agreement, we pay CBay Systems
a per line fee based on each transcribed line of text processed and the specific type of service
provided. CBay Systems will perform its services using our DocQment Enterprise Platform and will be
held to certain performance standards and quality guidelines set forth in the agreement. The
specific services to be performed will be set forth in order forms delivered by us to CBay Systems
from time to time during the term of the Transcription Services Agreement. For the three months
ended March 31, 2010 and 2009, we incurred expenses of $3,634 and $0, respectively, which were
recorded in Cost of revenues. The Transcription Services Agreement terminated by agreement of the
parties on March 9, 2010 when we entered into the Sales & Services Agreement with CBay Systems
referenced immediately below.
On March 9, 2010, we entered into the Sales & Services Agreement with CBay Systems, pursuant
to which we outsource certain medical transcription services to CBay Systems. Under the Sales &
Services Agreement, CBay Systems has discontinued its new customer marketing efforts for
transcription services to hospitals in North America and has become the exclusive supplier to us of
Asian based transcription production services, which are either performed directly by CBay Systems
or through a network of third party suppliers managed by CBay Systems. Under the Sales & Services
Agreement, we pay CBay Systems a per line fee based on each transcribed line of text processed and
the specific type of service provided. The Sales & Services Agreement will expire on March 10,
2015, and thereafter shall automatically renew for two additional five year terms, unless either
party provides the other with written notice of its election to terminate the agreement at the end
of the initial term or at the end of a renewal term, provided such notice is provided to the other
party, not earlier than 12 months nor less than six months prior to the end of the initial term or
the
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(In thousands, except for per share amounts)
Unaudited
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
applicable renewal term. Either we or CBay may terminate the Sales & Services Agreement if the
other party materially breaches any term of the agreement, or in the event CBay Systems and its
affiliates (other than us or our subsidiaries) cease to control, directly or indirectly, the power
to vote at least thirty percent (30%) of our issued and outstanding common equity. For the three
months ended March 31, 2010 and 2009, we recorded cost of revenues of $1,272 and $0, respectively.
On March 31, 2009, we entered into a transcription services subcontracting agreement
(Subcontracting Agreement) with CBay Systems, pursuant to which CBay Systems will subcontract
certain medical transcription, editing and related services to us. Under the Subcontracting
Agreement, we will provide the medical transcription, editing and related services to CBay Systems
using labor located within the United States using our DocQment Enterprise Platform. The specific
services to be performed will be set forth in order forms delivered by CBay Systems to us from time
to time during the term of the Subcontracting Agreement. We will receive 98% of the net monthly
fees collected by CBay Systems from its customers for the services provided by us. For the three
months ended March 31, 2010 and 2009, we recorded revenue of $531 and $0 under the terms of the
Subcontracting agreement.
On September 19, 2009, we entered into a services agreement (Management Services
Agreement) with CBay Inc. (CBay), a wholly-owned subsidiary of CBay Systems, pursuant to which
certain senior executives and directors of CBay render to us, upon the request of our Chief
Executive Officer, certain advisory and consulting services in relation to the affairs of us and
our subsidiaries. The Management Services Agreement will remain in effect until the earliest to
occur of (i) December 31, 2009, if either party gives notice of termination of the Services
Agreement to the other party no later than December 1, 2009, (ii) the end of any calendar quarter
subsequent to December 31, 2009, if either party gives notice of termination of the Services
Agreement to the other party no later than thirty (30) days prior to the end of such calendar
quarter, (iii) such time as CBay or its affiliates (other than the us and our subsidiaries)
control, directly or indirectly, the power to vote less than thirty percent (30%) of the issued and
outstanding common equity of the MedQuist, and (iv) such earlier date as we and CBay may mutually
agree upon in writing. The Management Services Agreement provides that, in consideration of the
management services rendered by CBay to us since July 1, 2009 and to be rendered by CBay to us
pursuant to the Management Services Agreement, we will pay CBay a quarterly services fee equal to
$350, which shall be payable in arrears. For the three months ended March 31, 2010 and 2009, we
incurred services expenses with CBay Inc. of $350 and $0, respectively, which has been recorded in
Selling, general and administrative expense.
As of March 31, 2010 and December 31, 2009, Accounts payable and Accrued expenses
included $363 and $1,362, respectively, for amounts due to CBay. As of March 31, 2010 and
December 31, 2009, Accounts receivable included $396 and $710, respectively, for amounts due from
CBay Systems.
10. Investment in A-Life Medical, Inc. (A-Life)
We have an investment in A-Life of $9,378 and $8,864 as of March 31, 2010 and December 31,
2009. Our investment is accounted for under the equity method as we owned approximately 32% of the
outstanding ownership as of March 31, 2010 and December 31, 2009. During the quarter ended March
31, 2010, A-Life recorded a change in estimate related to its purchase accounting of an
acquisition. Our share of the impact from the change in estimate was approximately $440 which is
included in the Equity in income of affiliated company. Our investment in A-Life is included in
Other Assets in the accompanying consolidated balance sheets.
11. Subsequent Events
On April 22, 2010, we and our majority shareholder, CBay Inc. (together with us, the
Purchasers), completed the acquisition (the Acquisition) of substantially all of the assets of
Spheris, Inc. (Spheris) and certain of its affiliates (collectively with Spheris, the Sellers),
pursuant to the terms of the Stock and Asset Purchase Agreement (the Agreement) entered into
between the Purchasers and Sellers on April 15, 2010. The purchase price for the assets was
approximately $116.3 million, consisting of approximately $98.8 million of cash, and the issuance
of a promissory note in the principal amount of $17.5 million (the Subordinated Promissory Note).
Included in Other Assets in the accompanying consolidated balance sheets as of March 31, 2010, is a
deposit of $7.5 million related to the Acquisition.
In
connection with the Acquisition, MedQuist Inc., together with MedQuist Transcriptions,
Ltd. (MedQuist Transcriptions), a wholly-owned subsidiary (collectively, the Loan Parties) entered
into a Credit Agreement (the GE Credit Agreement) with General Electric Capital Corporation,
CapitalSource Bank, and Fifth Third Bank. The GE Credit Agreement provides for up to $100 million
in senior secured credit facilities, consisting of a $50 million term loan, and a revolving credit
facility of up to $50 million. The credit facilities are secured by a first priority lien on
substantially all of the property of the Loan Parties. The term loan is repayable in equal
quarterly installments of $5 million starting on October 1, 2010, with the balance payable 2.5
years from the date of closing (or, if certain convertible senior notes of CBay are called or
otherwise become due and payable prior to such date, such earlier date). The
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Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
interest rate is Prime
plus 3.25% (currently an interest rate of 6.50%) and is payable monthly. We may also structure
borrowings as Eurodollar loans with an interest rate based on LIBOR rates. We may prepay the loan
with certain prepayment penalties. Mandatory prepayments are required when we generate excess cash
flows as defined under the agreement. The Term Loan maturity date is the earlier of October 22,
2012 or the date on which certain CBay notes are called or otherwise become due and payable.
Maximum borrowings under the Revolving Loan are the lower of a percentage of eligible accounts
receivable or $50 million. The interest rate is Prime plus 3% (currently an interest rate of 6.25%)
and is payable monthly with a scheduled termination date of April 22, 2014.
To complete closing of the transactions, the entire facility amount of $100 million was
utilized. Amounts borrowed under the GE Credit Agreement bear interest at a rate selected by
MedQuist Transcriptions equal to the Base Rate or the Eurodollar Rate (each as defined in the GE
Credit Agreement) plus a margin, all as more fully set forth in the GE Credit Agreement.
Both the Term Loan and the Revolving Loan contain usual and customary financial covenants,
including covenants relating to reporting and notification, payment of indebtedness, taxes and
other obligations, and compliance with applicable laws. There are also financial covenants, which
include a Minimum Consolidated Fixed Charge Coverage Ratio, and a Maximum Consolidated Senior
Leverage Ratio and a Maximum Consolidated Total Leverage Ratio and Minimum Liquidity, as defined.
The GE Credit Agreement also imposes certain customary limitations and requirements on us with
respect to the incurrence of indebtedness and liens, investments, mergers, acquisitions and
dispositions of assets. Amounts due under the GE Credit Agreement may be accelerated upon an Event
of Default (as defined in the GE Credit Agreement), including failure to comply with obligations
under the credit agreement, bankruptcy or insolvency, and termination of certain material
agreements.
The Subordinated Promissory Note was entered into with Spheris, Inc. The loan matures in five
years from the date of the closing with provisions for prepayment at discounted amounts, ranging
from 77.5% of the principal if paid within six months, 87.5% from six to nine months, 97.5% from
nine to twelve months, 102.0% by year two, 101.0% by year three and 100.0% thereafter.
The note bears interest at 8.0% for the first six months, 9.0% from six to nine months, and
12.5% thereafter of which 2.5% may be paid by increasing the principal amount. Payments of interest
are made semi-annually on each six month anniversary of the Spheris transaction.
When we entered into the GE Credit Agreement, we terminated our five-year $25 million
revolving credit agreement with Wells Fargo Foothill, LLC dated
August 31, 2009. Pursuant to its terms, we paid Wells Fargo a
fee of $576 to terminate the Wells Fargo agreement.
On May 4, 2010,
the audit committee of our board of directors approved the payment of a $1.5
million success-based fee to S A C Private Capital Group, LLC (SAC) in connection with the work of SAC to help us
with the Acquisition.
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
This report contains forward-looking statements that are based on current expectations,
estimates, forecasts and projections about us, the industry in which we operate and other matters,
as well as managements beliefs and assumptions and other statements regarding matters that are not
historical facts. These statements include, in particular, statements about our plans, strategies
and prospects. For example, when we use words such as projects, expects, anticipates,
intends, plans, believes, seeks, estimates, should, would, could, will,
opportunity, potential or may, variations of such words or other words that convey
uncertainty of future events or outcomes, we are making forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 (Securities Act) and Section 21E of the
Securities Exchange Act of 1934 (Exchange Act). Our forward-looking statements are subject to risks
and uncertainties. Actual events or results may differ materially from the results anticipated in
these forward-looking statements as a result of a variety of factors. While it is impossible to
identify all such factors, factors that could cause actual results to differ materially from those
estimated by us include:
| each of the factors discussed in Item 1A, Risk Factors, of this report as well as risks discussed elsewhere in this report; | |
| each of the matters discussed in Part II, Item 1, Legal Proceedings; | |
| our ability to recruit and retain qualified medical transcriptionists (MTs) and other employees; |
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Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
| changes in law, including, without limitation, the impact HIPAA will have on our business; | |
| the impact of our new services and products on the demand for our existing services and products; | |
| our increased dependence on speech recognition technology, which we license, but do not own; | |
| our current dependence on medical transcription for a significant portion of our technology-enabled clinical documentation services; | |
| our ability to expand our customer base; | |
| infringement on the proprietary rights of others; | |
| our ability to diversify into other businesses; | |
| our increased dependence on CBay Systems & Services, Inc. as the exclusive provider of medical transcription performed in Asia, the current location of all our medical transcription and medical editing work performed outside of North America; | |
| our ability to effectively integrate the newly-acquired business and operations of Spheris; | |
| the effectiveness of Spheris internal controls, which we are in the process of evaluating; | |
| competitive pricing and service feature pressures in the clinical documentation industry and our response to those pressures; | |
| our ability to operate the business given our restrictions under the GE Credit Agreement; | |
| difficulties relating to our significant management turnover; and | |
| general conditions in the economy and capital markets. |
These and other risks and uncertainties that could affect our actual results are discussed in
this report and in our other filings with the SEC.
Although we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, events, levels of activity, performance, or
achievements. We do not assume responsibility for the accuracy and completeness of the
forward-looking statements other than as required by applicable law. We do not undertake any duty
to update any of the forward-looking statements after the date of this report to conform them to
actual results, except as required by the federal securities laws.
You should read this section in combination with the section entitled Managements
Discussion and Analysis of Financial Condition and Results of Operations for the year ended
December 31, 2009, included in our Annual Report on Form 10-K for the year ended December 31, 2009.
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Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
Executive Overview
We are a leading provider of technology-enabled clinical documentation services. We
offer health systems, hospitals, and group medical practices integrated solutions for voice
capture, speech recognition, medical transcription, document management and clinical documentation
improvement using natural language processing, as well as coding services. Our solutions are
designed to facilitate electronic access to clinical information by healthcare providers and to
improve overall revenue cycle performance and adoption of the Electronic Health Record (EHR). We
perform our services utilizing the DocQmenttm Enterprise Platform
(DEP), our proprietary clinical documentation workflow management system. We believe our services
and enterprise technology solutions including
mobile voice capture devices, speech recognition technologies, Web-based workflow platforms, and
global network of medical transcriptionists (MTs) and medical editors (MEs) enable to improve
patient care, increase physician satisfaction and lower operational costs while facilitating their
migration toward increased adoption and utilization of the EHR.
Recent Developments On April 22, 2010, we and our majority shareholder, CBay Inc. (together
with us, the Purchasers), completed the acquisition (the Acquisition) of substantially all of the
assets of Spheris, Inc. (Spheris) and certain of its affiliates (collectively with Spheris, the
Sellers), pursuant to the terms of the Stock and Asset Purchase Agreement (the Agreement) entered
into between the Purchasers and Sellers on April 15, 2010. See Note 11 to our consolidated
financial statements for a description of the transaction.
Significant developments in the clinical documentation industry include:
| A shortage of qualified domestic medical transcriptionists (MTs) and medical editors (MEs) has increased the demand for offshore medical transcription services by healthcare providers. This demand for qualified MTs and MEs, combined with budgetary pressures experienced by healthcare providers nationwide, has also caused many more healthcare providers to evaluate and consider the use of offshore medical transcription services. | ||
| Several low cost providers have emerged and aggressively moved into our market offering medical transcription services (performed both domestically and offshore) at prices significantly below our traditional price point. While we believe the market for outsourced medical transcription continues to expand, the growing acceptance of utilizing offshore labor by healthcare providers has further increased the competitive environment in the medical transcription industry. | ||
| Technological advances including speech recognition products reduce the length of time required to transcribe medical reports, in turn reducing the overall cost of medical transcription services. | ||
| Growing market penetration of EHR and certain other technologies have eliminated or shortened the length of certain work types produced through transcription. |
Although we remain the leading provider of medical transcription services in the U.S., we
experience competition from many other providers at the local, regional and national level. The
medical transcription industry remains highly fragmented, with hundreds of small companies in the
U.S. performing medical transcription services.
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Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
We believe the outsourced portion of the medical transcription services market will increase
due in part to the majority of healthcare providers seeking the following:
| Reductions in overhead and other administrative costs; | ||
| Improvements in the quality and delivery speed of transcribed medical reports; | ||
| Access to leading technologies, such as speech recognition technology, without development and investment risk; | ||
| Implementation and management of a medical transcription system tailored to the providers specific requirements; | ||
| Access to skilled MTs and MEs; | ||
| Solutions for compliance with governmental and industry mandated privacy and security requirements; and | ||
| Product offerings that interface with EHR initiatives. |
We evaluate our operating results based upon the following factors:
| Revenues; | ||
| Operating income; | ||
| Net income per share; | ||
| Adjusted earnings before interest, taxes, depreciation and amortization; | ||
| Net cash provided by operating activities; and | ||
| Days sales outstanding. |
Our goal is to execute our strategy to yield growth in net revenues, operating income, cash flow
and net income per share.
Network and information systems, the Internet and other technologies are critical to our
business activities. Substantially all of our transcription services are dependent upon the use of
network and information systems, including the use of our DocQment Enterprise Platform (DEP) and
our license to use speech recognition secured from a third party. If information systems including
the Internet or our DEP are disrupted, we could face a significant disruption of services provided
to our customers. We have periodically experienced short term outages with our DEP, which have not
significantly disrupted our business and we have an active disaster recovery program in place for
our information systems and our DEP.
Critical Accounting Policies, Judgments and Estimates
Managements Discussion and Analysis (MD&A) is based in part upon our consolidated
financial statements, which have been prepared in accordance with generally accepted accounting
principles in the U.S. (GAAP). We believe there are several accounting policies that are critical
to understanding our historical and future performance, as these policies affect the reported
amounts of revenues and other significant areas that involve managements judgments and estimates.
These critical accounting policies and estimates have been discussed with our audit committee.
The preparation of our consolidated financial statements requires us to make estimates and
judgments that affect our reported amounts of assets, liabilities, expenses and related disclosure
of contingent liabilities. On an ongoing basis, we evaluate these estimates and judgments. We base
these estimates on historical experience and on various other assumptions that are believed to be
reasonable at such time, the results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from other independent
sources. Actual results may ultimately differ from these estimates. While there are a number of
accounting policies, methods and estimates affecting our consolidated financial statements as
addressed in Note 1 to our consolidated financial statements, areas that are particularly
significant and critical include:
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Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
Valuation of Long-Lived and Other Intangible Assets and Goodwill: In connection with
acquisitions, we allocate portions of the purchase price to tangible and intangible assets,
consisting primarily of acquired technologies, and customer relationships, based on independent
appraisals received after each acquisition, with the remainder allocated to goodwill. We assess the
realizability of goodwill and intangible assets with indefinite useful lives at least annually, or
sooner if events or changes in circumstances indicate that the carrying amount may not be
recoverable. We have determined that the reporting unit level is our sole operating segment.
We review our long-lived assets, including amortizable intangibles, for impairment when
events indicate that their carrying amount may not be recoverable. When we determine that one or
more impairment indicators are present for an asset, we compare the carrying amount of the asset to
net future undiscounted cash flows that the asset is expected to generate. If the carrying amount
of the asset is greater than the net future undiscounted cash flows that the asset is expected to
generate, we then compare the fair value to the book value of the asset. If the fair value is less
than the book value, we recognize an impairment loss. The impairment loss is the excess of the
carrying amount of the asset over its fair value.
Some of the events that we consider as impairment indicators for our long-lived assets,
including goodwill, are:
| our net book value compared to our fair value; | ||
| significant adverse economic and industry trends; | ||
| significant decrease in the market value of the asset; | ||
| the extent that we use an asset or changes in the manner that we use it; | ||
| significant changes to the asset since we acquired it; and | ||
| other changes in circumstances that potentially indicate all or a portion of the company will be sold. |
Deferred income taxes. Deferred tax assets represent future tax benefits that we expect
to be able to apply against future taxable income or that will result in future net operating
losses that we can carry forward to use against future taxable earnings. Our ability to utilize the
deferred tax assets is dependent upon our ability to generate future taxable income. To the extent
that we believe it is more likely than not that all or a portion of the deferred tax asset will not
be utilized, we record a valuation allowance against that asset. In making that determination we
consider all positive and negative evidence and give stronger consideration to evidence that is
objective in nature.
Commitments and contingencies. We routinely evaluate claims and other potential
litigation to determine if a liability should be recorded in the event it is probable that we will
incur a loss and can estimate the amount of such loss.
Revenue recognition. We recognize medical transcription services revenues when there is
persuasive evidence that an arrangement
exists, the price is fixed or determinable, services have been rendered and collectability is
reasonably assured. These services are recorded using contracted rates and are net of estimates for
customer credits. Historically, our estimates have been adequate. If actual results are higher or
lower than our estimates, we would have to adjust our estimates and financial statements in future
periods.
We recognize the remainder of our revenues from the sale and implementation of
voice-capture and document management products including software and implementation, training and
maintenance services related to these products. The application of the accounting guidelines
requires judgment regarding the timing of the recognition of these revenues including: (i) whether
a software arrangement includes multiple elements, and if so, whether vendor-specific objective
evidence of fair value exists for those elements; (ii) whether customizations or modifications of
the software are significant; and (iii) whether collection of the software fee is probable.
Additionally, for certain contracts we recognize revenues using the percentage-of-completion
method. Percentage-of-completion accounting involves estimates of the total costs to be incurred
over the duration of the project.
Accounts receivable and allowance for doubtful accounts. Accounts receivable are recorded
at the invoiced amount and do not bear interest. The carrying value of accounts receivable
approximates fair value. The allowance for doubtful accounts is our best estimate of potential
losses resulting from the inability of our customers to make required payments due. This allowance
is used to state trade receivables at estimated net realizable value.
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Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
We estimate uncollectible amounts based upon our historical write-off experience, current
customer receivable balances, aging of customer receivable balances, the customers financial
condition and current economic conditions. Historically, our estimates have been adequate to
provide for our accounts receivable exposure.
Additionally, we enter into medical transcription service contracts that may contain
provisions for performance penalties in the event we do not meet certain required service levels,
primarily related to turnaround time on transcribed reports. We reduce revenues for any such
performance penalties and service level credits incurred and have included an estimate of such
penalties and credits in our allowance for uncollectible accounts.
We recognize product revenues for sales to end-user customers and resellers upon passage
of title if all other revenue recognition criteria have been met. End-user customers generally do
not have a right of return. We provide certain of our resellers and distributors with limited
rights of return of our products. We reduce revenues for rights to return our product based upon
our historical experience and have included an estimate of such credits in our allowance for
uncollectible accounts.
Customer Accommodation Program. In response to customers concerns regarding historical
billing matters, we established a plan to offer financial accommodations to certain of our
customers during 2005 and 2006 and recorded the related liability. In 2008 we reached an agreement
on customer litigation resolving all claims by the named parties. Since then we have not made
additional offers.
We are unable to predict how many customers, if any, may accept the outstanding
accommodation offers on the terms proposed by us, nor are we able to predict the timing of the
acceptance (or rejection) of any outstanding accommodation offers. Until any offers are accepted,
we may withdraw or modify the terms of the accommodation program or any outstanding offers at any
time. In addition, we are unable to predict how many future offers, if made, will be accepted on
the terms proposed by us. We regularly evaluate whether to proceed with, modify or withdraw the
accommodation program or any outstanding offers.
Basis of Presentation
Sources of Revenues
We derive revenues primarily from providing medical transcription services to health
systems, hospitals and large group medical practices. Our customers are generally charged a rate
times the volume of work that we transcribe or edit. In the clinical documentation workflow, we
provide, in addition to medical transcription technology and services, maintenance services,
digital dictation, speech recognition and electronic signature services.
Cost of Revenues
Cost of revenues includes compensation of our U.S.-based employee MTs and our
subcontractor MTs, other production costs (primarily related to operational and production
management, quality assurance, quality control and customer and field service personnel), and
telecommunication and facility costs. Cost of revenues also includes the direct cost of technology
products sold to customers. MT costs are directly related to medical transcription revenues and are
based on lines transcribed or edited multiplied by a specific rate.
Selling, General and Administrative (SG&A)
Our SG&A expenses include marketing and sales costs, accounting costs, information
technology costs, professional fees, corporate facility costs, corporate payroll and benefits
expenses.
Research and Development (R&D)
Our R&D expenses consist primarily of personnel and related costs, including salaries and
employee benefits for software
engineers and consulting fees paid to independent consultants who provide software engineering
services to us. To date, our R&D efforts have been devoted to new products and services offerings
and increases in features and functionality of our existing products and services.
Depreciation and Amortization
Depreciation is calculated on a straight-line basis over the estimated useful lives of
the assets which range from two to seven years for furniture, equipment and software, and the
lesser of the lease term or estimated useful life for leasehold improvements. Intangible assets are
being amortized using the straight-line method over their estimated useful lives which range from
three to 20 years.
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MedQuist Inc. & Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
Legal Matters
Cost of legal proceedings and settlements includes settlement of claims, ongoing litigation, and associated legal and other
professional fees incurred.
Consolidated Results of Operations
The following tables set forth our consolidated results of operations for the periods
indicated below:
Comparison of Three Months Ended March 31, 2010 and 2009
Three Months Ended March 31, | ||||||||||||||||||||||||
2010 | 2009 | |||||||||||||||||||||||
% of Net | % of Net | |||||||||||||||||||||||
($ in thousands) | Amount | Revenues | Amount | Revenues | $ Change | % Change | ||||||||||||||||||
Net revenues |
$ | 73,981 | 100.0 | % | $ | 78,944 | 100.0 | % | $ | (4,963 | ) | (6.3 | %) | |||||||||||
Operating costs and expenses: |
||||||||||||||||||||||||
Cost of revenues |
49,833 | 67.4 | % | 53,868 | 68.2 | % | (4,035 | ) | (7.5 | %) | ||||||||||||||
Selling, general and administrative |
8,797 | 11.9 | % | 9,438 | 12.0 | % | (641 | ) | (6.8 | %) | ||||||||||||||
Research and development |
2,281 | 3.1 | % | 2,416 | 3.1 | % | (135 | ) | (5.6 | %) | ||||||||||||||
Depreciation |
1,910 | 2.6 | % | 2,552 | 3.2 | % | (642 | ) | (25.2 | %) | ||||||||||||||
Amortization of intangible assets |
1,820 | 2.5 | % | 1,511 | 1.9 | % | 309 | 20.5 | % | |||||||||||||||
Cost of
legal proceedings and settlements |
1,043 | 1.4 | % | 1,924 | 2.4 | % | (881 | ) | (45.8 | %) | ||||||||||||||
Acquisition related charges |
894 | 1.2 | % | | | 894 | n.a. | |||||||||||||||||
Restructuring charges |
60 | 0.1 | % | | | 60 | n.a. | |||||||||||||||||
Total operating costs and expenses |
66,638 | 90.1 | % | 71,709 | 90.8 | % | (5,071 | ) | (7.1 | %) | ||||||||||||||
Operating income |
7,343 | 9.9 | % | 7,235 | 9.2 | % | 108 | 1.5 | % | |||||||||||||||
Equity in income of affiliated company |
514 | 0.7 | % | 72 | 0.1 | % | 442 | 613.9 | % | |||||||||||||||
Interest income (expense), net |
(146 | ) | (0.2 | %) | 46 | 0.1 | % | (192 | ) | (417.4 | %) | |||||||||||||
Income before income taxes |
7,711 | 10.4 | % | 7,353 | 9.3 | % | 358 | 4.9 | % | |||||||||||||||
Income tax provision |
367 | 0.5 | % | 499 | 0.6 | % | (132 | ) | (26.5 | %) | ||||||||||||||
Net income |
$ | 7,344 | 9.9 | % | $ | 6,854 | 8.7 | % | $ | 490 | 7.1 | % | ||||||||||||
Net revenues
Net revenues decreased $5.0 million, or 6.3%, to $74.0 million for the three months ended
March 31, 2010 compared with $78.9 million for the three months ended March 31, 2009. Transcription
volumes increased during the first quarter relative to the prior period, while average prices for
transcription declined and the migration from legacy products reduced the need for maintenance
services.
Cost of revenues
Cost of revenues decreased $4.0 million, or 7.5% to $49.8 million for the three months ended
March 31, 2010 compared with $53.9 million for the three months ended March 31, 2009. This decrease
was attributable primarily to:
| reduced transcription costs of $1.9 million related to our increased use of speech recognition technology, which reduces the payroll costs associated with the production of revenues and an increase in the use of outsourced medical transcription volumes to our international labor partners; | ||
| reduced costs of $2.8 million resulting from headcount reductions taken in 2009 to better align our overhead costs with our lower revenue levels; offset by | ||
| an increase of $0.7 million due to a one-time benefit in the 2009 period for the release of a prior period reserve. |
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MedQuist Inc. & Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
As a percentage of net revenues, cost of revenues decreased to 67.4% for the three
months ended March 31, 2010 from 68.2% for the same period in 2009 for the reasons stated above.
We expect to continue to increase our use of outsourced medical
transcription volumes to our international labor partners.
Selling, general and administrative
SG&A expenses decreased $0.6 million, or 6.8% to $8.8 million for the three months ended
March 31, 2010 compared with $9.4 million for the three months ended March 31, 2009. This decrease
was attributable to a decrease of $0.5 million of consulting fees, a decrease of $0.2 million in
legal fees, a reduction in audit fees of $0.2 million, a decrease of $0.1 million for building
rent, and a decrease in all other SG&A expense of $0.1 million, offset by an increase in bad debt
expense of $0.5 million. SG&A expense in the three month period ended March 31, 2010 as a
percentage of net revenues was 11.9% compared with 12.0% for the same period in 2009.
Research & development
R&D expenses decreased $0.1 million, or 5.6%, to $2.3 million for the three months ended
March 31, 2010 compared with $2.4 million for the three months ended March 31, 2009. This decrease
was related to a decrease of $0.1 million for maintenance contracts with third party vendors. R&D
expenses as a percentage of net revenues were 3.1% for the three months ended March 31, 2010 and
March 31, 2009.
Depreciation
Depreciation expense decreased $0.6 million, or 25.2% to $1.9 million for the three
months ended March 31, 2010 compared with $2.6 million for the three months ended March 31, 2009.
This decrease was primarily the result of reduced capital spending in 2009. Depreciation expense as
a percentage of net revenues was 2.6% for the three months ended March 30, 2010 compared with 3.2%
for the same period in 2009.
Amortization
Amortization expense increased $0.3 million, or 20.5%, to $1.8 million for the three
months ended March 31, 2010 compared with $1.5 million for the three months ended March 31, 2009.
This increase was primarily the result of amortization expense associated with software development
projects which were completed in 2009. Amortization expense as a percentage of net revenues was
2.5% for the three months ended March 31, 2010 compared with 1.9% for the same period in 2009.
Cost of legal proceedings and settlements
Costs of legal proceedings and settlements decreased $0.9 million, or 45.8%, to $1.0
million for the three months ended March 31, 2010 compared with $1.9 million for the three months
ended March 31, 2009. In 2009, we incurred $0.9 million in legal fees regarding a patent claim.
Equity in income of affiliated company
Equity in income of affiliated company increased $0.4 million to $0.5 million for the
three months ended March 31, 2010 compared with $0.1 million for the three months ended March 31,
2009. A-Life recorded a change in estimate related to its purchase accounting of an acquisition.
Our share of the impact from the change in estimate was approximately $0.4 million.
Income tax provision
Our consolidated income tax expense consists principally of an increase in deferred tax
liabilities related to goodwill amortization deductions for income tax purposes during the
applicable period as well as state and foreign income taxes. We recorded a valuation allowance to
reduce our net deferred tax assets to an amount that is more likely than not to be realized in
future years.
We expect that our consolidated income tax expense for the year ended December 31, 2010,
similar to the year ended December 31, 2009, will consist principally of an increase in deferred
tax liabilities related to goodwill amortization deductions for income tax purposes during the
applicable year as well as state and foreign income taxes. We regularly assess the future
realization of deferred taxes and whether the valuation allowance against the majority of domestic
deferred tax assets is still warranted. To the extent sufficient positive evidence, including
past results and future projections, exists to benefit all or part of these benefits, the valuation
allowance will be released accordingly.
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MedQuist Inc. & Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
Liquidity and Capital Resources
As of March 31, 2010,
we had working capital of $20.4 million compared with $19.7 million
as of December 31, 2009. Our principal sources of liquidity include cash generated from operations,
available cash on hand and our former credit facility with Wells Fargo. Cash and cash equivalents
declined $3.5 million to $21.7 million as of March 31, 2010, from $25.2 million as of December 31,
2009. This decrease included cash provided by operating activities of $6.8 million offset by cash
used to purchase property and equipment of $1.7 million, cash used for software development
activities and other investments of $8.4 million, and cash used of $0.2 million for fees and
expenses related to obtainment of our new GE Credit Agreement. See Note 11 to our consolidated
financial statements.
We believe our existing cash, cash equivalents, and cash to be generated from operations, if
any, will be sufficient to finance our operations for the foreseeable future. However, if we fail
to generate adequate cash flows from operations in the future, due to an unexpected decline in our
net revenues, or due to increased cash expenditures in excess of the net revenues generated, then
our cash balances may not be sufficient to fund our continuing operations without obtaining
additional debt or equity. There are no assurances that sufficient funding from external sources
will be available to us on acceptable terms, if at all. For instance, we may have increased cash
expenditures relating to the defense and resolution of the civil litigation matters.
Subsequent Events
On April 22, 2010, we and our majority shareholder, CBay Inc., completed the acquisition of
substantially all of the assets of Spheris, Inc. and certain of its affiliates, pursuant to the
terms of the Stock and Asset Purchase Agreement entered into between the Purchasers and Sellers on
April 15, 2010. The purchase price for the assets was approximately $116.3 million, consisting of
approximately $98.8 million of cash, and the issuance of a promissory note in the principal amount
of $17.5 million (the Subordinated Promissory Note). Included in Other Assets as of March 31,
2010, is a deposit of $7.5 million related to the Acquisition.
In connection with the Acquisition, MedQuist Inc., together with MedQuist Transcriptions,
Ltd., a wholly-owned subsidiary entered into a Credit Agreement with General Electric Capital
Corporation, CapitalSource Bank, and Fifth Third Bank. The GE Credit Agreement provides for up to
$100 million in senior secured credit facilities, consisting of a $50 million term loan, and a
revolving credit facility of up to $50 million. The credit facilities are secured by a first
priority lien on substantially all of the property of the Loan Parties. The term loan is repayable
in equal quarterly installments of $5 million starting on October 1, 2010, with the balance payable
2.5 years from the date of closing (or, if certain convertible senior notes of CBay are called or
otherwise become due and payable prior to such date, such earlier date). The interest rate is Prime
plus 3.25% (currently an interest rate of 6.50%) and is payable monthly. We may also structure
borrowings as Eurodollar loans with an interest rate based on LIBOR rates. We may prepay the loan
with certain prepayment penalties. Mandatory prepayments are required when we generate excess cash
flows as defined under the agreement. The Term Loan maturity date is the earlier of October 22,
2012 or the date on which certain CBay notes are called or otherwise become due and payable.
Maximum borrowings under the Revolving Loan are the lower of a percentage of eligible accounts
receivable of $50 million. The interest rate is Prime plus 3% (currently an interest rate of 6.25%)
and is payable monthly with a scheduled termination date of April 22, 2014.
To complete closing of the transactions, the entire facility amount of $100 million was
utilized. Amounts borrowed under the GE Credit Agreement bear interest at a rate selected by
MedQuist Transcriptions equal to the Base Rate or the Eurodollar Rate (each as defined in the GE
Credit Agreement) plus a margin, all as more fully set forth in the GE Credit Agreement.
Both the Term Loan and the Revolving Loan contain usual and customary financial covenants,
including covenants relating to reporting and notification, payment of indebtedness, taxes and
other obligations, and compliance with applicable laws. There are also financial covenants, which
include a Minimum Consolidated Fixed Charge Coverage Ratio, and a Maximum Consolidated Senior
Leverage Ratio and a Maximum Consolidated Total Leverage Ratio and Minimum Liquidity, as defined.
The GE Credit Agreement also imposes certain customary limitations and requirements on us with
respect to the incurrence of indebtedness and liens, investments, mergers, acquisitions and
dispositions of assets. Amounts due under the GE Credit Agreement may be accelerated upon an Event
of Default (as defined in the GE Credit Agreement), including failure to comply with obligations
under the credit agreement, bankruptcy or insolvency, and termination of certain material
agreements.
The Subordinated Promissory Note was entered into with Spheris, Inc. The loan matures in five
years from the date of the closing with provisions for prepayment at discounted amounts, ranging
from 77.5% of the principal if paid within six months, 87.5% from six to nine months, 97.5% from
nine to twelve months, 102.0% by year two, 101.0% by year three and 100.0% thereafter.
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MedQuist Inc. & Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
The note bears interest at 8.0% for the first six months, 9.0% from six to nine months, and
12.5% thereafter of which 2.5% may be paid by increasing the principal amount. Payments of interest
are made semi-annually on each six month anniversary of the Spheris transaction.
When we entered into the GE Credit Agreement, we terminated our five-year $25 million
revolving credit agreement with Wells Fargo Foothill, LLC dated August 31, 2009.
Pursuant to its terms, we paid Wells Fargo a fee of $576 to terminate
the Wells Fargo agreement.
On
May 4, 2010, the audit committee of our board of directors approved
the payment of a $1.5 million success-based fee to S A C Private
Capital Group, LLC (SAC) in connection with the work of SAC to help
us with the Acquisition.
Off-Balance Sheet Arrangements
We are not involved in any off-balance sheet arrangements that have or are reasonably
likely to have a material current or future impact on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital
resources.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management team, under the supervision and with the participation of our principal
executive officer and our principal financial officer, evaluated the effectiveness of the design
and operation of our disclosure controls and procedures as such term is defined under Rule
13a-15(e) promulgated under the Exchange Act, as of the last day of the fiscal period covered by
this report, March 31, 2010. The term disclosure controls and procedures means our controls and
other procedures that are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SECs rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to ensure that information
required to be disclosed by us in the reports that we file or submit under the Exchange Act is
accumulated and communicated to management, including our principal executive and principal
financial officer, or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure. Based on this evaluation, our principal executive officer
and our principal financial officer concluded that, as of March 31, 2010, our disclosure controls
and procedures were effective at a reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the
fiscal quarter ended March 31, 2010 that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Customer Litigation
Kaiser Litigation
On June 6, 2008, plaintiffs Kaiser Foundation Health Plan, Inc., Kaiser Foundation
Hospitals, The Permanente Medical Group, Inc., Kaiser Foundation Health Plan of the Mid-Atlantic
States, Inc., and Kaiser Foundation Health Plan of Colorado (collectively, Kaiser) filed suit
against MedQuist Inc. and MedQuist Transcriptions, Ltd. (collectively, MedQuist) in the Superior
Court of the State of California in and for the County of Alameda. The action is entitled
Foundation Health Plan Inc., et al v. MedQuist Inc. et al., Case No. CV-078-03425 PJH. The
complaint asserts five causes of action, for common law fraud, breach of contract, violation of
California Business and Professions Code section 17200, unjust enrichment, and a demand for an
accounting. More specifically, Kaiser alleges that we fraudulently inflated the payable units of
measure in medical transcription reports generated by us for Kaiser pursuant to the contracts
between the parties. The damages alleged in the complaint include an estimated $7 million in
compensatory damages, as well as punitive damages, attorneys fees and costs, and injunctive
relief. We contend that we did not breach the contracts with Kaiser, or commit the fraud alleged,
and we intend to defend the suit vigorously. The parties participated in private mediation on
July 24, 2008, but the case was not settled. We removed the case to the United States District
Court for the Northern District of California, and we filed motions to dismiss Kaisers complaint
and to transfer venue of the case to the United Stated District Court for the District of New
Jersey. Kaiser stipulated to transfer, and the case was transferred to the United States District
Court for the District of New Jersey on or about August 26, 2008.
The parties exchanged initial disclosures on October 6, 2008 and appeared before the court for
an initial scheduling conference on October 14, 2008. Kaisers initial disclosures claim damages,
including compensatory damages, punitive damages, and prejudgment interest, in excess of $12
million. Following the scheduling conference, the court ordered the parties to mediation. The
parties participated in court-ordered mediation on February 27, 2009 but the case was not settled.
The court heard argument on our motion to dismiss on March 19, 2009. On April 8, 2009, the court
entered an order denying our motion to dismiss, except that our motion to dismiss plaintiffs claim
under the fraudulent prong of the California Unfair Competition Law was granted. The court issued a
scheduling order on April 17, 2009, setting a pretrial schedule. We filed our answer to plaintiffs
complaint on April 23, 2009.
Kaiser served an initial set of discovery requests on May 7, 2009. On May 20, 2009, the court
temporarily stayed discovery to address allegations of ethical misconduct by Kaisers trial
counsel, Greenberg Traurig, LLP. On July 1, 2009, the court granted us leave to conduct limited
written discovery regarding Greenberg Traurigs alleged ethical misconduct and continued the
temporary stay of all other discovery. On July 14, 2009, we moved for sanctions against Greenberg
Traurig for breach of the New Jersey Rules of Professional Conduct, and we moved to stay the
litigation pending resolution of the motion for sanctions. Discovery is presently stayed pending
resolution of our motion to stay. No hearing date has been set for any of the pending motions. On
February 24, 2010, the court granted our motion to stay pending resolution of the motion for
sanctions and entered a scheduling order setting oral arguments on the pending motion for sanctions
for March 16, 2010. On March 31, 2010 the court granted our motion to disqualify Greenberg Traurig
as counsel for Kaiser. In its order, the court gave Kaiser until May 31, 2010 to obtain new
counsel and set an in-person status conference for June 9, 2010.
Kahn Putative Class Action
On January 22, 2008, Alan R. Kahn, one of our shareholders, filed a shareholder putative
class action lawsuit against us, Koninklijke Philips Electronics N.V. (Philips), our former
majority shareholder, and four of our former non-independent directors, Clement Revetti, Jr.,
Stephen H. Rusckowski, Gregory M. Sebasky and Scott Weisenhoff. The action, entitled Alan R. Kahn
v. Stephen H. Rusckowski, et al., Docket No. BUR-C-000007-08, was venued in the Superior Court of
New Jersey, Chancery Division, Burlington County. In the action, plaintiff purports to bring the
action on his own behalf and on behalf of all current holders of our common stock. The original
complaint alleged that defendants breached their fiduciary duties of good faith, fair dealing,
loyalty, and due care by purportedly agreeing to and initiating a process for our sale or a change
of control transaction which will allegedly cause harm to plaintiff and members of the putative
class. Plaintiff sought damages in an unspecified amount, plus costs and interest, a judgment
declaring that defendants breached their fiduciary duties and that any proposed transactions
regarding our sale or change of control are void, an injunction preventing our sale or any change
of control transaction that is not entirely fair to the class, an order directing us to appoint
three independent directors to our board of directors, and attorneys fees and expenses.
On June 12, 2008, plaintiff filed an amended class action complaint against us, eight of our
current and former directors, and Philips in the Superior Court of New Jersey, Chancery Division.
In the amended complaint, plaintiff alleged that our current and former directors breached their
fiduciary duties of good faith, fair dealing, loyalty, and due care by not providing our public
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shareholders with the opportunity to decide whether they wanted to participate in a share purchase
offer with non-party CBaySystems Holdings Ltd. (CBaySystems Holdings) that would have allowed the
public shareholders to sell their shares of our common stock for an amount above market price.
Plaintiff further alleged that CBaySystems Holdings made the share purchase offer to Philips and
that Philips breached its fiduciary duties by accepting CBaySystems Holdings offer. Based on these
allegations, plaintiff sought declaratory, injunctive, and monetary relief from all defendants.
Plaintiff claimed that we were only named as a party to the litigation for purposes of injunctive
relief.
On July 14, 2008, we moved to dismiss plaintiffs amended class action complaint, arguing (1)
that plaintiffs amended class action complaint did not allege that we engaged in any wrongdoing
which supported a breach of fiduciary duty claim and (2) that a breach of fiduciary duty claim is
not legally cognizable against a corporation. Plaintiff filed an opposition to our motion to
dismiss on July 21, 2008.
On November 21, 2008, the Court granted our motion and the motions filed by the other
defendants and dismissed plaintiffs amended class action complaint with prejudice. On December 31,
2008, plaintiff filed an appeal of the trial courts dismissal order with the New Jersey Appellate
Division. Thereafter, the parties briefed all the issues raised in plaintiffs appeal. In our
opposition brief, we opposed all the arguments plaintiff raised with respect to the dismissal of
the claims against us.
On September 24, 2009, the Appellate Division held oral argument on the issues that are
the subject of plaintiffs appeal. We are now waiting for the Appellate Division to issue a
decision.
Reseller Arbitration Demand
On October 1, 2007, we received from counsel to nine current and former resellers of our
products (Claimants), a copy of an arbitration demand filed by the Claimants, initiating an
arbitration proceeding styled Diskriter, Inc., Electronic Office Systems, Inc., Milner Voice &
Data, Inc., Nelson Systems, Inc., NEO Voice and Communications, Inc., Office Business Systems,
Inc., Roach-Reid Office Systems, Inc., Stiles Office Systems, Inc., and Travis Voice and Data, Inc.
v. MedQuist Inc. and MedQuist Transcriptions, Ltd. (collectively MedQuist) (filed on September 27,
2007, AAA, 30-118-Y-00839-07). The arbitration demand purports to set forth claims for breach of
contract; breach of covenant of good faith and fair dealing; promissory estoppel;
misrepresentation; and tortious interference with contractual relations. The Claimants allege that
we breached our written agreements with the Claimants by: (i) failing to provide reasonable
training, technical support, and other services; (ii) using the Claimants confidential information
to compete against the Claimants; (iii) directly competing with the Claimants territories; and
(iv) failing to make new products available to the Claimants. In addition, the Claimants allege
that we made false oral representations that we: (i) would provide new product, opportunities and
support to the Claimants; (ii) were committed to continuing to use Claimants; (iii) did not intend
to create our own sales force with respect to the Claimants territory; and (iv) would stay out of
Claimants territories and would not attempt to take over the Claimants business and relationships
with the Claimants customers and end-users. The Claimants assert that they are seeking
damages in excess of $24.3 million. We also moved to dismiss MedQuist Inc. as a party to the
arbitration since MedQuist Inc. is not a party to the Claimants agreements, and accordingly, has
never agreed to arbitration. The AAA initially agreed to rule on these matters, but then decided to
defer a ruling to the panel of arbitrators selected pursuant to the parties agreements (Panel). In
response, we informed the Panel that a court, not the Panel, should rule on these issues. When it
appeared that the Panel would rule on these issues, we initiated a lawsuit in the Superior Court of
DeKalb County (the Court) and requested an injunction enjoining the Panel from deciding these
issues. The Court denied the request, and indicated that a new motion could be filed if the Panels
ruling was adverse to MedQuist Inc. or MedQuist Transcriptions, Ltd. On May 6, 2008, the Panel
dismissed MedQuist Inc. as a party, but ruled against our opposition to a consolidated arbitration.
We asked the Court to stay the arbitration in order to review that decision. The Court initially
granted the stay, but later lifted the stay. The Court did not make any substantive rulings
regarding consolidation, and in fact, left that decision and others to the assigned judge, who was
unable to hear those motions. Accordingly, until further order of the Court, the arbitration will
proceed forward.
We filed an answer and counterclaim in the arbitration, which generally denied liability. In
the lawsuit, the defendants filed a motion to dismiss alleging that our complaint failed to state
an actionable claim for relief. On July 25, 2008, we filed our response which opposed the motion to
dismiss in all respects. On September 10, 2008, the Court heard argument on defendants motion to
dismiss. The Court did not issue a decision, but rather, took the matter under advisement.
During discovery in the arbitration, Claimants repeatedly modified the individual damage
claims and asserted two alternative damage theories. Claimants did
not specify what the two alternative damage theories were, but stated that they were seeking
alternative damage amounts for each Claimant. The Panel issued a Revised Scheduling Order, which
tentatively scheduled the arbitration to begin in February 2010.
On March 31, 2010, the parties entered into a Settlement Agreement and Release pursuant
to which we paid the Claimants $500 on April 1, 2010 to resolve all claims. Under the Settlement
Agreement and Release, (i) the parties exchanged mutual releases, (ii) the
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arbitration and related state court litigation were dismissed with prejudice and (iii) we did not
admit to any liability or wrongdoing. We accrued the entire amount of this settlement as of
December 31, 2009.
SEC Investigations of Former Officers
With respect to our historical billing practices, the Securities and Exchange Commission
(SEC) is pursuing civil litigation against our former chief financial officer, whose employment
with us ended in July 2004. Pursuant to our bylaws, we have indemnification obligations for the
legal fees for our former chief financial officer. In February 2010, one of our current employees,
who was our former controller but who does not currently serve in a senior management or financial
reporting oversight role, reached a settlement with the SEC in connection with the civil litigation
that the SEC had brought against him in connection with our historical billing practices.
Item 1A. Risk Factors
Excluding the updates discussed below, there have been no other material changes to the
risk factors discussed in Part I, Item 1A. Risk Factors, in our Annual Report on Form 10-K for
the year ended December 31, 2009 (Form 10-K). You should carefully consider the risks described
in our Form 10-K, which could materially affect our business, financial condition or future
results. The risks described in our Form 10-K are not the only risks we face. Additional risks and
uncertainties not currently known to us or that we currently deem to be immaterial also may
materially adversely affect our business, financial condition, and/or operating results. If any of
the risks actually occur, our business, financial condition, and/or results of operations could be
negatively affected.
We have reviewed the risk factors previously disclosed in our Form 10-K and have the following
revisions:
The risk fact in our Form 10-K for the year ended December 31, 2009 which is entitled We
may pursue future transactions, including the proposed acquisition of certain assets of Spheris
Inc., which could require us to incur debt and assume contingent liabilities and expenses, and we
may not be able to effectively integrate new operations. is hereby amended and restated as
follows:
We may pursue future transactions, which could require us to incur debt and assume contingent
liabilities and expenses, and we may not be able to effectively integrate new operations.
A significant portion of our historical growth has occurred through transactions, and we may
pursue transactions in the future. Transactions involve risks that the combined businesses will not
perform in accordance with expectations and that business judgments concerning the value, strengths
and weaknesses of the combined businesses will prove incorrect. We cannot guarantee that if we
decide to pursue other future transactions, we will be able to identify attractive opportunities or
successfully integrate such other future businesses or assets with our existing business. In
addition, we cannot guarantee the ability to retain customers of such other future businesses or
assets we acquire. Future transactions may involve high costs and may result in the incurrence of
debt, contingent liabilities, interest expense, amortization expense or periodic impairment charges
related to goodwill and other intangible assets as well as significant charges relating to
integration costs.
We cannot guarantee that we will be able to successfully integrate any future transaction with
our existing business or that any combined businesses will be profitable. The successful
integration of new businesses depends on our ability to manage these new businesses effectively.
The successful integration of future transactions may also require substantial attention from our
senior management and the management of the combined businesses, which could decrease the time that
they have to service and attract customers. In addition, because we may actively pursue a number of
opportunities simultaneously, we may encounter unforeseen expenses, complications and delays,
including difficulties in employing sufficient staff and maintaining operational and management
oversight. Our
inability to complete the integration of any future transaction with our existing
business in a timely and orderly manner could reduce our net revenues and negatively impact our
results of operations.
We have also added the following additional risk factors to the Form 10-K:
We may not be able to effectively integrate the operation of Spheris Inc. and the internal controls
of Spheris Inc. may not be effective.
We cannot guarantee that we will be able to identify attractive opportunities or successfully
integrate Spheris with our existing business. In addition, we cannot guarantee the ability to
retain customers of Spheris. The successful integration with Spheris depends on our ability to
manage the operations and business of Spheris effectively and will require substantial attention
from our senior management, which could decrease the time that they have to service and attract
customers. Our inability to complete the integration of Spheris with our existing business in a
timely and orderly manner could reduce our net
revenues and negatively impact our results of operations. In addition, the internal controls
of Spheris, which we are in the process of evaluating, may not be effective.
Our ability to operate the business given our restrictions under the GE Credit Agreement.
Our significant indebtedness could adversely affect our ability to raise additional capital to
fund our business, harm our ability to react to changes in the economy or our business and prevent
us from fulfilling our obligations under our indebtedness, including under our GE Credit Agreement
and the Subordinated Promissory Note. The GE Credit Agreement contains usual and customary
financial covenants, including covenants relating to reporting and notification, payment of
indebtedness, taxes and other obligations, and compliance with applicable laws. There are also
financial covenants, which include a Minimum Consolidated Fixed Charge Coverage Ratio, and a
Maximum Consolidated Senior Leverage Ratio and a Maximum Consolidated Total Leverage Ratio and
Minimum Liquidity, as defined in the GE Credit Agreement. Amounts due under the GE Credit Agreement
may be accelerated upon an Event of Default (as defined in the GE Credit Agreement), including
failure to comply with obligations under the credit agreement, bankruptcy or insolvency, and
termination of certain material agreements;
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 5. Other Information
None.
Item 6. Exhibits
(a) Exhibits
No. | Description | |
10.1(1)
|
Stock and Asset Purchase Agreement, dated February 2, 2010, between Spheris Holding II, Inc., Spheris Inc., Spheris Operations LLC, Vianeta Communications, Spheris Leasing LLC, Spheris Canada Inc., CBay Inc. and MedQuist Inc. | |
10.2(2)
|
Stock and Asset Purchase Agreement, dated April 15, 2010, between Spheris Holding II, Inc., Spheris Inc., Spheris Operations LLC, Vianeta Communications, Spheris Leasing LLC, Spheris Canada Inc., CBay Inc. and MedQuist Inc. | |
10.3(3)
|
Credit Agreement dated as April 22, 2010 among MedQuist Transcriptions, Ltd. as Borrower, MedQuist Inc. as Holdings, the Lenders and L/C Issuers party thereto, and General Electric Capital Corporation as Administrative Agent and Collateral Agent, CapitalSource Bank as Syndication Agent, and Fifth Third Bank as Documentation Agent. | |
10.4
|
MedQuist Transcriptions, Ltd. Subordinated Promissory Note dated April 22, 2010 | |
10.5(#)
|
Sales & Services Agreement dated March 9, 2010 by and between MedQuist, Inc. and CBay Systems & Services, Inc. |
23
Table of Contents
No. | Description | |
31.1
|
Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2
|
Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
# | Portions of this Exhibit are omitted and filed separately with the Secretary of the SEC pursuant to a request for confidential treatment that has been filed with the SEC. | |
(1) | Incorporated by reference to our Current Report on Form 8-K filed with the SEC on February 4, 2010. | |
(2) | Incorporated by reference to our Current Report on Form 8-K filed with the SEC on April 21, 2010. | |
(3) | Incorporated by reference to our Current Report on Form 8-K filed with the SEC on April 28, 2010. |
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Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MEDQUIST INC. |
||||
Date: May 10, 2010 | /s/ Peter Masanotti | |||
Peter Masanotti | ||||
President and Chief Executive Officer (Principal Executive Officer) |
||||
Date: May 10, 2010 | /s/ Dominick Golio | |||
Dominick Golio | ||||
Chief Financial Officer (Principal Financial Officer) |
25
Table of Contents
Exhibit Index
No. | Description | |
10.4
|
MedQuist Transcriptions, Ltd. Subordinated Promissory Note dated April 22, 2010Sales & Services Agreement dated March 9, 2010 by and between MedQuist, Inc. and CBay Systems & Services, Inc. | |
10.5(#)
|
Sales & Services Agreement dated March 9, 2010 by and between MedQuist, Inc. and CBay Systems & Services, Inc. | |
31.1
|
Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2
|
Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
# | Portions of this Exhibit are omitted and filed separately with the Secretary of the SEC pursuant to a request for confidential treatment that has been filed with the SEC. |
26