As filed with the Securities and Exchange Commission on October 18, 2010

Registration No. 333-          

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

CBAYSYSTEMS HOLDINGS LIMITED

(Exact name of Registrant as specified in its charter)

 

 

9009 Carothers Parkway
Franklin, TN 37067
(866) 295-4600

 

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Robert Aquilina
Chairman and Chief Executive Officer
CBaySystems Holdings Limited
9009 Carothers Parkway
Franklin, TN 37067
(866) 295-4600

 

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

With copies to:

 

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

 

If any of the securities being registered on this form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  o

 

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

(Do not check if a smaller reporting company)

 

 

 

CALCULATION OF REGISTRATION FEE

 

 

 

 

 

 

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

SUBJECT TO COMPLETION, DATED OCTOBER 18, 2010

Preliminary Prospectus

 

           Shares

 

 

CBaySystems Holdings Limited

 

Common Stock

 

 

This is the initial public offering of our shares in the United States. We are offering           shares of our common stock.

 

Our shares are currently traded on the Alternative Investment Market of the London Stock Exchange, or AIM. The closing price of our shares on AIM on October 15, 2010 was £1.50, which was equivalent to approximately $2.38 per share based on the Federal Reserve noon buying rate of $1.5845 to £1.00 in effect on October 12, 2010. We intend to delist our common stock from AIM upon the completion of this offering or shortly thereafter and to apply to list our shares on The NASDAQ Global Market under the symbol “       .”

 

Investing in our shares involves significant risks.  See “Risk Factors” beginning on page 16.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

Delivery of the shares of common stock is expected to be made on or about          . The selling stockholders have granted the underwriters an option for a period of 30 days to purchase on the same terms and conditions set forth above, up to an additional           shares of our common stock to cover overallotments.

 

 

 

 

Prospectus dated          , 2010.

 

 

Table of Contents

 

 

 

We have not authorized anyone to give any information or to make any representations other than those contained in this prospectus or in any free-writing prospectus that we may specifically authorize to be delivered or made available to you. We and the underwriters have not authorized anyone to provide you with additional or different information. We and the selling stockholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where such offers and sales are permitted. The information in this prospectus or a free-writing prospectus is accurate only as of its date, regardless of its time of delivery or of any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

 

References in this prospectus to “dollars” or “$” are to the currency of the United States and references to “pounds,” “£,” “pence” or “p” are to the currency of the United Kingdom. There are 100 pence to each pound.

 

Except where otherwise indicated, reference in this prospectus to “volume” or “volumes” are to lines of text edited or transcribed by our medical transcriptionists, or MTs, and medical editors, or MEs.

 

Immediately prior to the consummation of this offering, we intend to convert from a British Virgin Islands company to a Delaware corporation. In connection with that conversion, we may adjust the number of our shares outstanding through a reverse share split or similar action. The conversion and any such reverse share split or similar action will result in no change to our stockholders’ relative ownership interests in us.

 

The industry and market data and other statistical information used throughout this prospectus are based on independent industry publications, government publications, reports by market research firms or other published independent sources. Some data is also based on good faith estimates, which are derived from our review of internal surveys, as well as certain independent sources. Independent industry publications and surveys generally state that they have obtained information from sources believed to be reliable, but do not guarantee the accuracy and completeness of such information.

 

Prospectus Summary

	•	Leader in a large, fragmented market – We are the largest provider by revenue of clinical documentation solutions based on the physician narrative in the United States. Our size enables us to meet the needs of large, sophisticated healthcare customers, provides economies of scale, and enables us to devote significantly more resources to research and development and quality assurance than many other providers.
	•	Integrated solutions delivered as a complete managed service – We offer fully-integrated end-to-end managed services that capture and convert the physician narrative into a high quality customized electronic record. We integrate technologies and services for voice capture and transmission, ASR, medical transcription and editing, workflow automation, and document management and distribution. The end result is value-added clinical documentation with high accuracy and quick turn-around times.
	•	Large and diversified customer base with long-term relationships – We serve more than 2,400 hospitals, clinics and physician practices throughout the United States, including 40% of hospitals with more than 500 licensed beds. We have a long-standing history with our customers and, as of June 30, 2010, approximately 95% of our revenue was from recurring services.
	•	Highly-efficient operating model – We believe we have a significantly lower cost structure than many of our competitors. Over the past two years, we have driven down our cost structure through the use of technology automation, standardized processes, and offshore resources. Our use of ASR, which has grown from 39% of our volume in the fourth quarter of 2008 to 62% in the second quarter of 2010, has

		increased our productivity. Additionally, our expanding footprint in India has enabled us to increase our offshore production from 28% of our volume to 39% over this same period. The financial impact of these measures has been an improvement in gross margins during this timeframe from 33.8% to 35.6%. During this same time, we have grown volumes by 1.9% while sharing cost savings with our customers in the form of lower prices.

	•	Proven management team – We have assembled an outstanding senior leadership team with significant industry experience and domain expertise in both domestic and offshore operations. Our management team has delivered substantial results and brings an entrepreneurial spirit with proven experience in managing growth, driving operational improvements, and successfully integrating acquisitions.

	•	Expand our customer base and increase existing customer penetration – We intend to grow our customer base by targeting three market segments: large healthcare providers still using in-house services, large healthcare providers currently using competing outsourced alternatives, and small-to-medium medical practices. Given our market leadership, strong solution offerings, and low cost structure, we believe we are well positioned to both replace in-house solutions as well as displace competing outsourced alternatives for large healthcare providers. For small-to-medium sized physician practices, we offer an easy-to-use web-based clinical documentation platform, CBayScribe, to expand our market share in this segment, which we believe to be underpenetrated. In order to increase penetration within our existing customer base, we intend to continue targeting additional healthcare clinical areas and facilities of our current customers. Additionally, as healthcare providers centralize their purchasing decisions, we believe that our ability to deliver outstanding services for large, complex requirements provides us with increasing access to new sales opportunities within our existing customer base and through existing customer relationships.
	•	Continue to develop and enhance our integrated solutions – We seek to differentiate our integrated solutions through sophisticated technology and process improvement. We have over 100 employees dedicated to research and development. Over the last year, we launched numerous enhancements, including a front end speech platform for general medicine, additional EHR system integration, and advanced performance monitoring.
	•	Enhance profitability through technical and operational expertise – We have made significant improvements in productivity through business process and infrastructure improvements. Notwithstanding reductions in customer pricing, our gross margins have expanded from 33.8% in the fourth quarter of 2008, our first fiscal quarter after we acquired MedQuist Inc., to 35.6% in the second quarter of 2010, and our Adjusted EBITDA margins have expanded from 10.8% to 17.6% for the same periods. Our management team has proven its ability to implement continuous process improvements and we intend to further increase offshore production and our use of technological automation, including ASR, to lower costs and enhance our profitability.
	•	Facilitate the adoption and promote meaningful use of EHR systems – Our integrated solutions provide a comprehensive, accurate and effective method to incorporate physician narrative into an EHR system. We interface with substantially all of the leading EHR vendors to integrate our clinical documentation solutions and to help our customers realize the full potential of their EHR systems through the use of the physician narrative. In our experience, when EHR is adopted, customers tend to consolidate their purchase decisions, which benefits us as a leading provider of clinical documentation solutions.
	•	Pursue strategic acquisitions – We believe that there are significant opportunities available to create value through strategic acquisitions. We intend to seek appropriate opportunities to grow our customer base, enhance our solutions, consolidate costs, and expand our value proposition to our customers.

		2008																	2009																2010
		Prior to the MedQuist Inc.
MedQuist Inc.		Acquisition
		Q1				Q2				Q3					Q4				Q1				Q2				Q3				Q4				Q1
Volume % Change over Previous Year			(3.3	)%			(4.7	)%			(0.1	)%				(0.4	)%			(2.2	)%			0.8	%			2.5	%			2.8	%			4.0	%

Spheris		2008																2009																	2010
		Q1				Q2				Q3				Q4				Q1				Q2				Q3				Q4					Q1
Volume % Change over Previous Year			(4.8	)%			(4.7	)%			(5.9	)%			(11.6	)%			(13.3	)%			(10.9	)%			(7.9	)%			(6.5	)%				(5.5	)%

	•	We compete with many others in the market for clinical documentation solutions which may result in lower prices for our services, reduced operating margins and an inability to maintain or increase our market share.
	•	Our business is dependent on the continued demand for transcription services, and, if electronic health records companies produce solutions acceptable to large hospital systems for the creation of electronic clinical documentation, the overall demand for medical transcription services could be reduced.
	•	Our ability to sustain and grow profitable operations is dependent on the willingness of new customers to outsource and adopt new technology platforms, as well as our ability to retain customers.
	•	Our success will depend on our ability to support existing technologies, as well as adopt and integrate new technology into our workflow platforms.

Common stock offered		shares
Common stock to be outstanding immediately after this offering(1)		shares
Over-allotment option		The selling stockholders have granted the underwriters a 30-day option to purchase up to          additional shares.

	•	assumes consummation of the MedQuist Exchange based on an exchange ratio of 4.2459 shares of our common stock for each MedQuist Inc. share;(2)

	•	assumes a full exchange in the Exchange Offer based on the ratio applicable under the MedQuist

		Exchange;(3)

	•	assumes our redomiciliation under the laws of the state of Delaware and the related conversion of our shares;

	•	assumes no exercise by the underwriters of their over-allotment option to purchase shares from the selling stockholders; and
	•	assumes an initial public offering price of $      per share, the midpoint of the price range shown on the cover page of this prospectus.

	•	the Spheris Acquisition and the incurrence by MedQuist Inc. of $113.6 million of debt to finance the Spheris Acquisition;
	•	the incurrence by MedQuist Inc. of $285.0 million of indebtedness under the Senior Secured Credit Facility and Senior Subordinated Notes, the simultaneous repayment of $90.0 million of indebtedness under the Acquisition Credit Facility, the repayment of $13.6 million of indebtedness under the Acquisition Subordinated Promissory Notes, the payment of a $176.5 million special dividend to MedQuist Inc.’s stockholders, of which we received $122.6 million and the noncontrolling stockholders of MedQuist Inc. received $53.9 million, and the repayment by us, using the proceeds of such dividend, of $104.1 million to extinguish our 6% Convertible Notes including a $7.7 million premium on early prepayment, and $4.1 million under certain other lines of credit;
	•	the issuance of 20.3 million shares of our common stock in exchange for 4.8 million shares of MedQuist Inc. common stock pursuant to the terms of the Exchange Agreement with certain noncontrolling stockholders of MedQuist Inc., assuming the MedQuist Exchange is consummated without any adjustments, which will increase our ownership in MedQuist Inc. from 69.5% to 82.5%;
	•	the issuance of 4.5 million shares of our common stock pursuant to the Consulting Services Agreement; and
	•	the issuance of 28.4 million shares of our common stock to be issued in exchange for 6.7 million shares of MedQuist Inc. common stock in the Exchange Offer, assuming an exchange ratio equal to the exchange ratio applicable under the Exchange Agreement and a full exchange. This would increase our ownership in MedQuist Inc. from 82.5% to 100%.

	•	the impact on net revenues from volume declines resulting from Spheris’ customer terminations prior to the Spheris Acquisition. The pro forma net revenues for the year ended December 31, 2009 and for the six months ended June 30, 2010 include $24.6 million and $2.3 million, respectively, of net revenues associated with such terminations; and

	•	the full impact on Adjusted EBITDA of cost savings and synergies resulting from the Spheris Acquisition, which we have implemented since the Spheris Acquisition and expect to yield $7.0 million of cost savings in the fourth quarter of 2010, representing an annualized benefit of $28.0 million. Our results for the six months ended June 30, 2010 reflect $0.9 million of such cost savings.

		Historical																				Pro Forma
																						Year				Six Months
		Years Ended												Six Months Ended								Ended				Ended
		December 31,												June 30,								December 31,				June 30,
		2007				2008				2009				2009				2010				2009				2010
														(Unaudited)								(Unaudited)
		(In thousands, except for per share amounts)
Statement of Operations Data
Net revenues		$	57,694			$	193,673			$	371,768			$	188,539			$	200,592			$	528,364			$	243,963
Cost of revenues			30,209				125,074				239,549				121,755				128,641				348,608				159,984
Gross profit			27,485				68,599				132,219				66,784				71,951				179,756				83,979
Operating expenses
Selling, general and administrative			25,137				51,243				60,632				31,764				32,706				79,725				38,869
Research and development			—				6,099				9,604				4,796				5,593				9,604				5,785
Depreciation and amortization			2,915				14,906				26,977				13,610				15,068				40,737				18,910
Cost of legal proceedings and settlements			—				5,311				14,943				12,158				2,152				16,189				2,152
Acquisition related charges			—				—				1,246				—				6,045				—				—
Goodwill impairment charge			—				98,972				—				—				—				—				—
Restructuring charges			—				2,106				2,727				—				966				3,502				966
Total operating expenses			28,052				178,637				116,129				62,328				62,530				149,757				66,682
Operating income (loss)			(567	)			(110,038	)			16,090				4,456				9,421				29,999				17,297
Interest expense, net			(2,108	)			(3,954	)			(9,132	)			(4,660	)			(7,351	)			(31,251	)			(16,316	)
Equity in income (loss) of affiliated companies			(105	)			66				1,933				408				546				1,933				546
Other income			14				9				11				—				108				2,136				60
Income (loss) before income taxes and noncontrolling interests			(2,766	)			(113,917	)			8,902				204				2,724				2,817				1,587
Income tax provision (benefit)			(113	)			(5,398	)			1,082				639				(326	)			342				(190	)
Net income (loss)			(2,653	)			(108,519	)			7,820				(435	)			3,050				2,475				1,777
Less: Net (income) loss attributable to noncontrolling interests			57				(5,154	)			(7,085	)			(2,335	)			(2,497	)			—				11
Net income (loss) attributable to CBaySystems Holdings Limited		$	(2,596	)		$	(113,673	)		$	735			$	(2,770	)		$	553			$	2,475			$	1,788
Net income (loss) per common share attributable to CBaySystems Holdings Limited
Basic		$	(0.04	)		$	(1.13	)		$	(0.01	)		$	(0.03	)		$	(0.01	)		$	0.00			$	0.01
Diluted		$	(0.04	)		$	(1.13	)		$	(0.01	)		$	(0.03	)		$	(0.01	)		$	0.00			$	0.01
Weighted average shares outstanding:
Basic			57,929				101,669				156,116				154,991				157,705				209,326				210,915
Diluted			57,929				101,669				156,116				154,991				157,705				209,326				210,915
Adjusted EBITDA(1)(2)		$	2,362			$	18,886			$	60,130			$	27,970			$	33,760			$	91,517			$	39,385

(1)		See below for reconciliations of net income (loss) attributable to CBaySystems Holdings Limited to Adjusted EBITDA.
(2)		Pro forma amounts do not give effect to (i) the impact on net revenues from volume declines, resulting from pre-acquisition customer terminations at Spheris, of $24.6 million and $2.3 million in net revenues for the year ended December 31, 2009 and the six months ended June 30, 2010, respectively, and (ii) the full impact of cost savings and synergies resulting from the Spheris Acquisition, which we have implemented since the Spheris Acquisition and expect to yield $7.0 million of cost savings in the fourth quarter of 2010, representing an annualized benefit of $28.0 million. Our results for the six months ended June 30, 2010 reflect $0.9 million of such cost savings. See “Unaudited Pro Forma Condensed Combined Financial Information.”

		Historical																				Pro Forma
																						Year				Six Months
		Years Ended												Six Months Ended								Ended				Ended
		December 31,												June 30,								December 31,				June 30,
		2007				2008				2009				2009				2010				2009				2010
														(Unaudited)								(Unaudited)
		(In thousands, except for per share amounts)
Other Data
Net Revenues:
Consolidated(1)		$	57,694			$	193,673			$	371,768			$	188,539			$	200,592			$	528,364			$	243,963
MedQuist Inc.			340,342				326,853				307,200
Spheris			200,392				182,843				156,596
Adjusted EBITDA(2)
Consolidated(1)		$	2,362			$	18,886			$	60,130			$	27,970			$	33,760			$	91,517			$	39,385
MedQuist Inc.			3,480				32,337				55,636
Spheris			28,227				26,317				30,569

(1)		Pro forma amounts do not give effect to (i) the impact on net revenues from volume declines, resulting from pre-acquisition customer terminations at Spheris, of $24.6 million and $2.3 million in net revenues for the year ended December 31, 2009 and the six months ended June 30, 2010, respectively, and (ii) the full impact of cost savings and synergies resulting from the Spheris Acquisition, which we have implemented since the Spheris Acquisition and expect to yield $7.0 million of cost savings in the fourth quarter of 2010, representing an annualized benefit of $28.0 million. Our results for the six months ended June 30, 2010 reflect $0.9 million of such cost savings. See “Unaudited Pro Forma Condensed Combined Financial Information.”
(2)		See below for reconciliations of net income (loss) to Adjusted EBITDA.

		As of June 30,
		2010
										Pro Forma
		Actual				Pro Forma				As Adjusted
						(Unaudited)
Balance Sheet Data						(In thousands)
Cash and cash equivalents(a)		$	22,457			$	25,889
Working capital(b)			6,753				7,357
Total assets			380,151				391,291
Long term debt, including current portion of debt			214,092				294,973
Total equity			74,934				7,355

(a)		Pro forma as adjusted amount gives effect to a $5.0 million payment to SAC PCG in connection with the Corporate Reorganization.
(b)		Working capital is defined as total current assets, excluding cash and cash equivalents, minus total current liabilities, excluding current portion of debt.

		Historical																				Pro Forma
																						Year				Six Months
		Years Ended												Six Months Ended								Ended				Ended
		December 31,												June 30,								December 31,				June 30,
		2007				2008				2009				2009				2010				2009				2010
														(Unaudited)								(Unaudited)
		(In thousands)
Net income (loss) attributable to CBaySystems Holdings Limited		$	(2,596	)		$	(113,673	)		$	735			$	(2,770	)		$	553			$	2,475			$	1,788
Net income (loss) attributable to noncontrolling interests			(57	)			5,154				7,085				2,335				2,497				—				(11	)
Income tax provision (benefit)(a)			(113	)			(5,398	)			1,082				639				(326	)			342				(190	)
Interest expense, net			2,108				3,954				9,132				4,660				7,351				31,251				16,316
Depreciation and amortization			2,915				14,906				26,977				13,610				15,068				40,737				18,910
Cost of legal proceedings and settlements			—				5,311				14,943				12,158				2,152				16,189				2,152
Acquisition related charges			—				5,620				1,246				—				6,045				—				—
Goodwill impairment charge			—				98,972				—				—				—				—				—
Restructuring charges			—				2,106				2,727				—				966				3,502				966
Equity in (income) loss of affiliated companies			105				(66	)			(1,933	)			(408	)			(546	)			(1,933	)			(546	)
Receivable write-offs, asset impairment charges, severance charges and accrual reversals(b)			—				2,000				(1,864	)			(2,254	)			—				(1,046	)			—
Adjusted EBITDA(c)		$	2,362			$	18,886			$	60,130			$	27,970			$	33,760			$	91,517			$	39,385

(a)		We had $130.0 million of federal net operating loss carry forwards as of December 31, 2009 and will record approximately $30.0 million of annual tax amortization related to intangible assets, including goodwill, that will reduce future taxable income. Due to the existence of federal net operating loss carry forwards and the impact of tax amortization related to intangible assets, including goodwill, cash taxes paid (refunded) were $84,000, $160,000, $796,000 for the years ended December 31, 2007, 2008 and 2009, respectively, and $497,000 and $(478,000) for the six months ended June 30, 2009 and 2010, respectively.
(b)		Includes the write-off of amounts due from an unconsolidated affiliate of Spheris, an impairment charge to write-off the balance of an investment and the reversal of certain accruals, related to litigation claims, as a result of the expiration of the applicable statute of limitations.
(c)		Pro forma amounts do not give effect to (i) the impact on net revenue from volume declines, resulting from pre-acquisition customer terminations at Spheris prior to the Spheris Acquisition, of $24.6 million and $2.3 million in net revenues for the year ended December 31, 2009 and the six months ended June 30, 2010, respectively, and (ii) the full impact of cost savings and synergies resulting from the Spheris Acquisition, which we have implemented since the Spheris Acquisition and expect to yield $7.0 million of cost savings in the fourth quarter of 2010, representing an annualized benefit of $28.0 million. Our results for the six months ended June 30, 2010 reflect $0.9 million of such cost savings.

		Years Ended December 31,
		2007				2008				2009
		(In thousands)
Net income (loss)		$	(15,206	)		$	(68,795	)		$	23,291
Income tax provision (benefit)			2,339				(16,513	)			1,975
Interest (income) expense, net			(8,366	)			(2,438	)			134
Depreciation and amortization			16,499				17,504				15,672
Restructuring and acquisition-related charges			2,756				2,055				2,727
Acquisition related charges			—				—				1,263
Cost of legal proceedings and settlements, net			6,083				19,738				14,843
Goodwill impairment charge			—				82,233				—
Equity in income of affiliated companies(a)			(625	)			(236	)			(2,015	)
Other income and accrual reversals(b)			—				(1,211	)			(2,254	)
Adjusted EBITDA		$	3,480			$	32,337			$	55,636

(a)		Represents proportionate share of earnings from our equity method investment in A-Life Medical, Inc., which is expected to be sold in November 2010 pursuant to an executed agreement.
(b)		Represents the reversal of certain accruals relating to certain litigation claims as a result of the expiration of the applicable statute of limitations.

		Years Ended December 31,
		2007				2008				2009
		(In thousands)
Net loss		$	(11,361	)		$	(19,179	)		$	(187,383	)
Income tax provision (benefit)			(5,856	)			3,870				(14,571	)
Interest expense, net			21,171				19,104				17,439
Depreciation and amortization			24,273				21,613				7,230
Operational restructuring charges			—				484				775
Transaction charge			—				—				6,961
Cost of legal proceedings and settlements			—				425				1,246
Goodwill impairment charge			—				—				198,872
Adjusted EBITDA		$	28,227			$	26,317			$	30,569

	•	potential differences caused by variations in capital structures (affecting interest expense, net), tax positions (such as the impact on periods or companies for changes in effective tax rates), the age and book depreciation of fixed assets (affecting depreciation expense);
	•	the impact of non-cash charges, such as goodwill impairment charges and asset impairment charges; and
	•	the impact of unusual expenses or events, such as acquisition related charges, restructuring charges, severance costs and certain unusual or nonrecurring items.

	•	Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;
	•	Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
	•	although depreciation is a non-cash charge, the assets being depreciated will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; and
	•	other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

 

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as other information in this prospectus, before deciding whether to invest in shares of our common stock. The occurrence of any of the following risks, or other risks that are currently unknown or unforeseen by us, could harm our business, financial condition, results of operations or growth prospects. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

 

Risks Related to Our Business

 

We compete with many others in the market for clinical documentation solutions which may result in lower prices for our services, reduced operating margins and an inability to maintain or increase our market share.

 

We compete with other outsourced clinical documentation solutions companies in a highly fragmented market that includes national, regional and local service providers, as well as service providers with global operations. These companies have services that are similar to ours, and certain of these companies have substantially larger or have significantly greater financial resources than we do. We also compete with the in-house medical transcription staffs of our customers and potential customers. There can be no assurance that we will be able to compete effectively against our competitors or timely implement new products and services. Many of our competitors attempt to differentiate themselves by offering lower priced alternatives to our outsourced medical transcription services and customers could elect to utilize less comprehensive solutions than the ones we offer due to the lower costs of those competitive products. Some competition may even be willing to accept less profitable business in order to grow revenue. Increased competition and cost pressures affecting the healthcare markets in general may result in lower prices for our services, reduced operating margins and the inability to maintain or increase our market share.

 

Our business is dependent upon the continued demand for transcription services. If EHR companies produce alternatives to medical transcription that reduce the need for transcription, the demand for our solutions could be reduced.

 

EHR companies’ solutions for the collection of clinical data typically require physicians to directly enter and organize patient information through “point-and-click” templates which attempt to reduce or eliminate the need for transcription. A second alternative to conventional transcription involves a physician dictating a record of patient encounters and receiving a speech-recognized draft of their dictation, which the physician can self-edit. There is significant uncertainty and risk as to the demand for, and market acceptance of, these solutions for the creation of electronic clinical documentation. In the event that these and other solutions are successful and gain wide acceptance, the demand for our solutions could be reduced and our business, financial condition and results of operations could be adversely affected.

 

Our growth is dependent on the willingness of new customers to outsource and adopt our technology platforms.

 

We plan to grow, in part, by capitalizing on perceived market opportunities to provide our services to new customers. These new customers must be willing to outsource functions which may otherwise have been performed within their organizations, adopt new technologies and incur the time and expense needed to integrate those technologies into their existing systems. For example, the up-front cost and time involved in changing medical transcription providers or in converting from an in-house medical transcription department to an outsourced provider may be significant. Many customers may prefer to remain with their current provider or keep their transcription in-house rather than invest the time and resources required for the implementation of a new system. Also, as the maintenance of accurate medical records is a critical element of a healthcare provider’s ability to deliver quality care to its patients and to receive proper and timely reimbursement for the services it renders, potential customers may be reluctant to outsource or change providers of such an important function.

Our success will depend on our ability to support existing technologies as well as to adopt and integrate new technology into our workflow platforms.

 

Our ability to remain competitive in the clinical documentation industry is based, in part, on our ability to develop, utilize and support technology in the services and solutions that we provide to our customers. As our customers advance technologically, we must be able to effectively integrate our solutions with their systems and provide advanced data collection technology. We also may need to develop technologies to provide service systems comparable to those of our competitors as they develop new technology. If we are unable to effectively develop and integrate new technologies, we may not be able to compete effectively with our competitors. In addition, if the cost of developing and integrating new technologies is high, we may not realize our expected return on investment.

 

Technology innovations in the markets that we serve may create alternatives to our products and result in reduced sales.

 

Technology innovations to which our current and potential customers might have access could reduce or eliminate their need for our products. A new or other disruptive technology that reduces or eliminates the use of one or more of our products could negatively impact the sale of these products. Our failure to develop, introduce or enhance products able to compete with new technologies in a timely manner could have an adverse effect on our business, results of operation and financial condition.

 

Many of our customer contracts are terminable at will by our customers, and our ability to sustain and grow profitable operations is dependent upon the ability to retain customers.

 

Many of our contracts can be terminated at will by our customers. If a significant number of our customers were to cancel or materially change their commitments with us, we could have significantly decreased revenue, which would harm our business, operating results and financial condition. We must, therefore, engage in continual operational support and sales efforts to maintain revenue stability and future growth with these customers. If a significant number of our customers terminate or fail to renew their contracts with us, our business could be negatively impacted if additional business is not obtained to replace the business which was lost.

 

Customer retention is largely dependent on providing quality service at competitive prices. Customer retention may be impacted by events outside of our control, such as changes in customer ownership, management, financial condition and competitors’ sales efforts. If we experience a higher than expected rate of customer attrition the resulting loss of business could adversely affect results of operations and financial condition.

 

Our indebtedness could adversely affect our ability to raise additional capital to fund our operations and limit our ability to pursue our growth strategy or to react to changes in the economy or our industry, and our debt obligations include restrictive covenants which may restrict our operations or otherwise adversely affect us.

 

After the consummation of the Recapitalization Transactions, we will have approximately $295.0 million of indebtedness outstanding, consisting of $200.0 million of Term Loan debt under our Senior Secured Credit Facility, $85.0 million of Senior Subordinated Notes and other indebtedness consisting of capital leases and borrowings under other credit facilities, and we may incur additional indebtedness in the future. This indebtedness could have important negative consequences to our business, including:

 

 

In addition, under our debt financing agreements, we must abide by certain financial and other restrictive covenants that, among other things, require us to maintain a minimum consolidated interest coverage ratio, a maximum total leverage ratio and a maximum consolidated senior leverage ratio. Upon a breach of any of the covenants in our debt financing agreements, the lenders could declare us to be in default and could further require any outstanding borrowings to be immediately due and payable, and terminate all commitments to extend further credit.

 

We are dependent on third party speech recognition software incorporated in certain of our technologies, and the inability to maintain, support or enhance such third party software over time could harm our business.

 

We license speech recognition software from third parties, including from competitors, that we incorporate into several of our key products and solutions. Our ability to continue to sell and support these products and solutions depends on continued support from these licensors. The loss of these licenses could adversely impact our business until we identify, license and integrate, or develop and integrate equivalent software. There can be no assurance that such third party licensors will continue to invest the appropriate levels of resources in the software to maintain and enhance the capabilities of the software and if such third party licensors do not continue to develop their products, the development of our solutions to meet the requirements of our customers and potential customers could be adversely affected.

 

Our use of open source and third-party software could impose unanticipated conditions or restrictions on our ability to commercialize our solutions.

 

We incorporate open source software into our workflow solutions platforms and other software solutions. Open source software is accessible, usable and modifiable by anyone, provided that users and modifiers abide by certain licensing requirements. Under certain conditions, the use of some open source code to create derivative code may obligate us to make the resulting derivative code available to others at no cost. The circumstances under which our use of open source code would compel us to offer derivative code at no cost are subject to varying judicial interpretations, and we cannot guarantee that a court would not require certain of our core technology be made available as open source code. The use of such open source code may also ultimately require us to take remedial action, such as replacing certain code used in our products, paying a royalty to use some open source code, making certain proprietary source code available to others or discontinuing certain products, any of which may divert resources away from our development efforts.

 

We may also find that we need to incorporate certain proprietary third-party technologies, including software programs, into our products in the future. Licenses to relevant third-party technologies may not be available to us on commercially reasonable terms, or at all. Therefore, we could face delays in product releases until equivalent technology can be identified, licensed or developed and integrated into our current products. Such delays could materially adversely affect our business, operating results and financial condition.

 

Our ability to expand our business depends on our ability to effectively manage our domestic and offshore production capacity, which we may not be able to do.

 

Our success depends, in part, upon our ability to effectively manage our domestic and offshore production capacity, including our ability to attract and retain qualified MTs and MEs who can provide accurate medical transcription. We must also effectively manage our offshore transcription labor pool, which is currently located in India. If the productivity of our Indian employees does not outpace any increase in wages, our profits could suffer. Because medical transcription is a skilled position in which experience is valuable, we require that our MTs and MEs have substantial experience or receive substantial training before being hired. Competition may force us to increase the compensation and benefits paid to our MTs and MEs, which could reduce our operating margins and profitability.

If we fail to comply with contractual obligations and applicable laws and regulations governing the handling of patient identifiable medical information, we could suffer material losses or be adversely affected by exposure to material penalties and liabilities.

 

As part of the operation of our business, our customers provide us with certain patient identifiable medical information. Although many regulatory and governmental requirements do not directly apply to our operations, we and our hospital and other healthcare provider customers must comply with a variety of requirements related to the handling of patient information, including laws and regulations protecting the privacy, confidentiality and security of protected health information, or PHI. Most of our customers are covered entities under the Health Insurance Portability and Accountability Act of 1996, or HIPAA, and, in many of our relationships, we function as a business associate. The provisions of HIPAA, require our customers to have business associate agreements with us under which we are required to appropriately safeguard the PHI we create or receive on their behalf. Further, we and our customers are required to comply with HIPAA security regulations that require us and them to implement certain administrative, physical and technical safeguards to ensure the confidentiality, integrity and availability of electronic PHI, or EPHI. We are required by regulation and contract to protect the security of EPHI that we create, receive, maintain or transmit for our customers consistent with these regulations. To comply with our regulatory and contractual obligations, we may have to reorganize processes and invest in new technologies. We also are required to train personnel regarding HIPAA requirements. If we, or any of our MTs, MEs or subcontractors, are unable to maintain the privacy, confidentiality and security of the PHI that is entrusted to us, we and/or our customers could be subject to civil and criminal fines and sanctions and we could be found to have breached our contracts with our customers.

 

We are bound by business associate agreements with covered entities that require us to use and disclose PHI in a manner consistent with HIPAA in providing services to those covered entities. The HITECH Act, which was enacted into law on February 17, 2009 as part of the American Recovery and Reinvestment Act of 2009, or ARRA, enhances and strengthens the HIPAA privacy and security standards and makes certain provisions applicable to “business associates” of covered entities. As of February 17, 2010, some provisions of HIPAA apply directly to us. In addition, the HITECH Act creates new security breach notification requirements. The direct applicability of the new HIPAA Privacy and Security provisions will require us to incur additional costs and may restrict our business operations. In addition, these new provisions will result in additional regulations and guidance issued by the United States Department of Health and Human Services and will be subject to interpretation by various courts and other governmental authorities, thus creating potentially complex compliance issues for us and our customers.

 

As of February 17, 2010, we are directly subject to HIPAA’s criminal and civil penalties for breaches of our privacy and security obligations.

 

Security and privacy breaches in our systems may damage customer relations and inhibit our growth.

 

The uninterrupted operation of our hosted solutions and the confidentiality and security of third-party information is critical to our business. Any failures or perceived failures in our security and privacy measures could have a material adverse effect on our financial position and results of operations. If we are unable to protect, or our customers perceive that we are unable to protect, the security and privacy of our electronic information, our growth could be materially adversely affected. A security or privacy breach may:

 

 

While we believe that we use proven applications designed for data security and integrity to process electronic transactions, there can be no assurance that our use of these applications will be sufficient to address changing market conditions or the security and privacy concerns of existing and potential customers.

Our business depends on the reliable and secure operation of our computer hardware, software, Internet applications and data centers.

 

A substantial portion of our business involves the transfer of large amounts of data to and from our workflow platforms. These workflow platforms, and their underlying technologies, are designed to operate and to be accessible by our customers 24 hours a day, seven days a week. Network and information systems, the Internet and other technologies are critical to our business activities. We have periodically experienced short term outages with our workflow platforms that have not significantly disrupted our business. However, a long term outage could adversely affect our ability to provide service to our customers.

 

We also perform data center and/or hosting services for certain customers, including the storage of critical patient and administrative data. Failure of public power and backup generators, impairment of telecommunications lines, a “concerted denial of service cyber attack,” damage (environmental, accidental, intentional or pandemic) to the buildings, the equipment inside the buildings housing our data centers, the customer data contained therein and/or the personnel trained to operate such facilities could cause a disruption in operations and negatively impact customers who depend on us for data center and system support services. Any interruption in operations at our data centers and/or customer support facilities could damage our reputation, cause us to lose existing clients, hurt our ability to obtain new customers, result in revenue loss, create potential liabilities for our customers and us and increase insurance and other operating costs.

 

Recent and proposed legislation and possible negative publicity may impede our ability to utilize offshore production capabilities.

 

Certain state laws that have recently been enacted and bills introduced in recent sessions of the U.S. Congress seek to restrict the transmission of personally identifiable information regarding a U.S. resident to any foreign affiliate, subcontractor or unaffiliated third party without adequate privacy protections or without providing notice of the transmission and an opportunity to opt out. Some of the proposals would require patient consent. If enacted, these proposed laws would impose liability on healthcare businesses arising from the improper sharing or other misuse of personally identifiable information. Some proposals would create a private civil cause of action that would allow an injured party to recover damages sustained as a result of a violation of the new law. A number of states have also considered, or are in the process of considering, prohibitions or limitations on the disclosure of medical or other information to individuals or entities located outside of the U.S. Further, as a result of concerns regarding the possible misuse of personally identifiable information, some of our customers have contractually limited our ability to use MTs and MEs located outside of the U.S. The effect of these proposals would be to limit our ability to utilize our lower-cost offshore production facilities for affected customers, which could adversely affect our operating margins.

 

Any change in legislation, regulation or market practices in the United States affecting healthcare or healthcare insurance may materially adversely affect our business and results of operations.

 

Over the past twenty years the U.S. healthcare industry has experienced a variety of regulatory and market driven changes to how it is operated and funded. Further changes, whether by government policy shift, insurance company changes or otherwise, may happen, and any such changes may adversely affect the U.S. healthcare information and services market. As business process outsourcing and “off-shoring” have grown in recent years, concerns have also grown about the impact of these phenomena on jobs in the United States. These concerns could drive government policy in a way which is disadvantageous to us. Further, if government regulation or market practices leads to fewer individuals seeking medical treatment, we could experience a decline in our processed volumes.

 

Our business, financial condition and results of operations could be adversely affected by the political and economic conditions in India.

 

A significant portion of our operations is located in India. Multiple factors relating to our Indian operations could have a material adverse effect on our business, financial condition and results of operations. These factors include:

 

 

In addition, the Indian economy may differ favorably or unfavorably from other economies in several respects, including the growth rate of GDP, the rate of inflation, resource self-sufficiency and balance of payments position. The Indian government has traditionally exercised and continues to exercise a significant influence over many aspects of the Indian economy. Further actions or changes in policy, including taxation, of the Indian central government or the respective Indian state governments could have a significant effect on the Indian economy, which could adversely affect private sector companies, market conditions and the success of our operations.

 

U.S. and Indian transfer pricing regulations require that any international transactions involving associated enterprises are undertaken at an arm’s length price. Applicable income tax authorities review our tax returns and if they determine that the transfer prices we have applied are not appropriate, we may incur increased tax liabilities, including accrued interest and penalties, which would cause our tax expense to increase, possibly materially, thereby materially reducing our profitability and cash flows. Indian tax authorities reviewed our transfer pricing practices at Spheris India Pvt. Ltd. for tax years ended March 2004 and 2005, prior to our ownership of Spheris, and concluded that the transfer price was not at arms’ length. They assessed additional taxes for these years, which we have paid or fully reserved. However, we continue to dispute this assessment and the matter is currently under appeal.

 

We are exposed to fluctuations of the value of the Indian rupee against the U.S. dollar, which could adversely affect our operations.

 

Although our accounts are prepared in U.S. dollars, much of our operations are carried out in India with payments to staff and suppliers made in Indian Rupees. The exchange rate between the Indian Rupee and the U.S. dollar has changed substantially and could fluctuate in the future. Movements in the rate of exchange between the Indian Rupee and the U.S. dollar could result in increases or decreases in our costs and earnings, and may also affect the book value of our assets located outside the United States and the amount of our equity.

 

We are highly dependent on certain key personnel, and the loss of any or all of these key personnel may have an adverse impact upon future performance.

 

Our operations and future success are dependent upon the existence and expertise in this sector of certain key personnel. The loss of services of any of these individuals for any reason or our inability to attract suitable replacements would have a material adverse effect on the financial condition of our business and operations.

 

We have grown, and may continue to grow, through acquisitions, which could dilute existing stockholders and could involve substantial integration risks.

 

As part of our business strategy, we have in the past acquired, and expect to continue to acquire, other businesses and technologies. We may issue equity securities for future acquisitions, which would dilute existing stockholders, perhaps significantly depending on the terms of the acquisition. We may also incur additional debt in connection with future acquisitions, which may place additional restrictions on the ability to operate the business. Furthermore, prior acquisitions have required substantial integration and management efforts. Acquisitions involve a number of risks, including:

 

 

As a result of these and other risks, we may not realize anticipated benefits from acquisitions. Any failure to achieve these benefits or failure to successfully integrate acquired businesses and technologies could materially and adversely affect our business and results of operations.

 

We will be subject to additional regulatory compliance requirements, including section 404 of the Sarbanes-Oxley Act of 2002, as a result of this offering. If we fail to maintain an effective system of internal controls, our reputation and our business could be harmed.

 

As a U.S. public company, our ongoing compliance with various rules and regulations, including the Sarbanes-Oxley Act of 2002, will increase our legal and finance compliance costs and will make some activities more time-consuming and costly. These rules and requirements may be modified, supplemented or amended from time to time. Implementing these changes may take a significant amount of time and may require specific compliance training of our personnel. For example, Section 404 of the Sarbanes-Oxley Act requires that our management report on, and our independent auditors attest to, the effectiveness of our internal control over financial reporting in our annual reports filed with the SEC. Section 404 compliance may divert internal resources and will take a significant amount of time and effort to complete. We may not be able to successfully complete the procedures and certification and attestation requirements of Section 404 by the time we will be required to do so. If we fail to do so, or if in the future our Chief Executive Officer, Chief Financial Officer or independent registered public accounting firm determines that our internal controls over financial reporting are not effective as defined under Section 404, we could be subject to sanctions or investigations by The NASDAQ Global Market, the SEC, or other regulatory authorities. As a result, investor perceptions of our company may suffer, and this could cause a decline in the market price of our stock. Irrespective of compliance with these rules and regulations, including the requirements under the Sarbanes-Oxley Act, any failure of our internal controls could have a material adverse effect on our stated results of operations and harm our business and reputation. If we are unable to implement these changes effectively or efficiently, it could harm our operations, financial reporting or financial results and could result in an adverse opinion on internal controls from our independent auditors.

 

The historical and unaudited pro forma financial information included elsewhere in this prospectus may not be representative of our results as a combined company after the Spheris Acquisition, and accordingly, you have limited financial information on which to evaluate the combined company and your investment decision.

 

We and Spheris operated as separate companies prior to the Spheris Acquisition. We have had no prior history as a combined company and our operations have not previously been managed on a combined basis. The pro forma financial information included elsewhere in this prospectus, which was prepared in accordance with Article 11 of the SEC’s Regulation S-X, is presented for informational purposes only and is not necessarily indicative of the financial position or results of operations that would have actually occurred had the Spheris Acquisition been completed at or as of the dates indicated, nor is it indicative of the future operating results or financial position of the combined company. The unaudited pro forma condensed combined consolidated statement of operations does not reflect future events that may occur after the Spheris Acquisition, including the potential realization of operating cost savings (synergies) or restructuring activities or other costs related to the planned integration of Spheris, and do not consider potential impacts of current market conditions on revenues, expense efficiencies or asset dispositions. The pro forma financial information presented in this prospectus is based in part on certain

assumptions regarding the Spheris Acquisition that we believe are reasonable under the circumstances. We cannot assure you that our assumptions will prove to be accurate over time.

 

Our ability to use our net operating loss carryforwards may be limited.

 

As of December 31, 2009, we had approximately $130.0 million of federal net operating loss, or NOL, carryforwards to offset future taxable income, which will begin to expire in 2026 if not utilized and approximately $250.0 million of state NOLs. Under the relevant federal and state tax provisions currently in effect, certain substantial cumulative changes in our ownership may further limit the amount of NOL carryforwards that can be utilized annually in the future to offset taxable income. Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, imposes limitations on a company’s ability to use NOL carryforwards if such company experiences a more-than-50-percent ownership change, or an ownership change, over a three-year testing period. We believe that, as a result of this offering or as a result of future issuances of capital stock, it is possible that such an ownership change may occur. Although we do not currently anticipate a significant limitation as a result of an ownership change in connection with this offering, if we experience an ownership change in connection with or subsequent to this offering, our ability to use our United States federal NOL carryforwards in any future periods may be restricted. If we are limited in our ability to use our NOL carryforwards, we will pay more taxes than if we were able to utilize such NOL carryforwards fully. As a result, any inability to use our NOL carryforwards could adversely affect our financial condition and results of operations.

 

We may not own 100% of the stock of certain of our subsidiaries.

 

Unless the MedQuist Exchange closes and the Exchange Offer is completed at the highest acceptance level, we will not wholly own MedQuist Inc., and our ability to gain 100% ownership of MedQuist Inc. could be adversely affected by provisions of New Jersey corporate law that limit certain business combinations between corporations such as MedQuist Inc. organized in New Jersey and their significant shareholders. If we do not wholly own MedQuist Inc., our interests in MedQuist Inc. could conflict with the interests of MedQuist Inc.’s remaining noncontrolling stockholders. Also, MedQuist Inc. may need to seek the consent of its noncontrolling stockholders and/or independent members of its board of directors in order to take certain actions, and those consents may not be forthcoming. Our costs could also be adversely affected by our inability to fully integrate MedQuist Inc. into our consolidated operations and management structure.

 

Risks Related to Our Common Stock

 

Our stock price may fluctuate significantly.

 

An active U.S. public market for our common stock may not develop or be sustained after the completion of this offering and while our stock is currently listed on the Alternative Investment Market of the London Stock Exchange, or AIM, we intend to delist from AIM upon the completion of this offering or shortly thereafter. We will negotiate and determine the offering price of the shares offered hereby with the underwriters based on several factors. This price may vary from the market price of our common stock after this offering. You may be unable to sell your shares of common stock at or above the initial offering price. The stock market, particularly in recent years, has experienced significant volatility, and the volatility of stocks often does not relate to the operating performance of the companies represented by the stock. Factors that could cause volatility in the market price of our common stock include:

 

 

These and other factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against us that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management.

 

Our largest stockholder will exercise significant control over our company.

 

After this offering, affiliates of SAC PCG will beneficially own in the aggregate shares representing approximately  % of our outstanding capital stock. Furthermore, we have entered into a Stockholders Agreement with affiliates of SAC PCG pursuant to which they will have the right to nominate to our board three, two or one directors for so long as they own at least 20%, 10% or 5% of our voting power, respectively. This concentration of ownership of our shares and the Stockholders’ Agreement could delay or prevent proxy contests, mergers, tender offers, open-market purchase programs or other purchases of shares of our common stock that might otherwise give you the opportunity to realize a premium over the then-prevailing market price of our common stock. This concentration of ownership may also adversely affect our stock price.

 

Future sales of shares by existing stockholders could cause our stock price to decline.

 

If our existing stockholders sell, or indicate an intent to sell, substantial amounts of our common stock in the public market after the 180-day contractual lock-up (if applicable) and other applicable legal restrictions on resale discussed in this prospectus lapse, the trading price of our common stock could decline significantly. Not all of our existing stockholders are subject to a contractual lock-up. Upon the completion of this offering, and, after giving effect to (i) the MedQuist Exchange, assuming it is consummated without any adjustments to the exchange ratio, (ii) the Exchange Offer, assuming a full exchange and (iii) the issuance of 4.5 million shares of our common stock pursuant to the Consulting Services Agreement, we will have outstanding           shares of common stock, assuming no exercise of outstanding options. Of these shares,           shares of common stock, plus any shares sold pursuant to the underwriters’ option to purchase additional shares, will be immediately freely tradable, without restriction, in the public market. Jefferies & Company, Inc. may, in its sole discretion, permit our officers, directors, employees and current stockholders to sell shares prior to the expiration of the lock-up agreements. We cannot predict the effect, if any, that public sales of these shares or the availability of these shares for sale will have on the market price of our common stock.

 

After the lock-up agreements pertaining to this offering expire, an additional           shares will be eligible for sale in the public market. In addition, the shares subject to outstanding options under our equity incentive plans and the shares reserved for future issuance under our equity incentive plans will become eligible for sale in the public market in the future, subject to certain legal and contractual limitations. Moreover, 180 days after the completion of this offering, holders of approximately      shares of our common stock will have the right to require us to register these shares under the Securities Act of 1933, as amended, pursuant to a registration rights agreement. If our existing stockholders sell substantial amounts of our common stock in the public market, or if the public perceives that such sales could occur, this could have an adverse impact on the market price of our common stock, even if there is no relationship between such sales and the performance of our business.

 

Provisions of Delaware law and our charter documents could delay or prevent an acquisition of our company, even if the acquisition would be beneficial to our stockholders, and could make it more difficult for you to change management.

 

Provisions of Delaware law and our certificate of incorporation and by-laws, which will be effective upon the completion of this offering, may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a

premium for their shares. These provisions may also prevent or delay attempts by stockholders to replace or remove our current management or members of our board of directors. These provisions include:

 

 

In addition, upon the closing of this offering, we will be subject to provisions of our certificate of incorporation similar to Section 203 of the Delaware General Corporation Law, which, subject to certain exceptions for our largest stockholder and its affiliates, limit business combination transactions with stockholders of 15% or more of our outstanding voting stock that our board of directors has not approved. These provisions and other similar provisions make it more difficult for stockholders or potential acquirers to acquire us without negotiation. These provisions may apply even if some stockholders may consider the transaction beneficial to them.

 

As a result, these provisions could limit the price that investors are willing to pay in the future for shares of our common stock. These provisions might also discourage a potential acquisition proposal or tender offer, even if the acquisition proposal or tender offer is at a premium over the then current market price for our common stock.

 

If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common stock, the price of our common stock could decline.

 

The trading market for our common stock will rely in part on the research and reports, if any, that equity research analysts publish about us and our business. The price of our stock could decline if one or more securities analysts downgrade our stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.

 

We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.

 

We do not intend to pay any cash dividends on our common stock for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth, including growth through acquisitions. The payment of any future dividends will be determined by the board of directors in light of conditions then existing, including our earnings, financial condition and capital requirements, business conditions, corporate law requirements and other factors. See “Dividend Policy.”

 

We may apply the proceeds of this offering to uses that do not improve our operating results or increase the value of your investment.

 

We currently intend to use a substantial portion of the net proceeds from this offering for general corporate purposes, including working capital and other general corporate purposes. We may also use a portion of the net proceeds for the execution of our strategic plans, either through the acquisition of companies or by other means that we believe will complement our business. However, we do not have more specific plans for the net proceeds from this offering. Our board of directors and management will have broad discretion in how we use the net proceeds of this offering and may spend the proceeds in a manner that our stockholders do not deem desirable. These proceeds could be applied in ways that do not improve our operating results or increase the value of your investment.

 

This prospectus contains “forward-looking statements” within the meaning of the federal securities laws. All statements other than statements of historical facts included in this prospectus, including statements regarding our future financial position, economic performance and results of operations, as well as our business strategy, and projected costs and plans and objectives of management for future operations, and the information referred to under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology, such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe” or “continue” or similar terminology.

 

Such forward-looking statements include but are not limited to statements regarding:

 

 

The preceding list is not intended to be an exhaustive list of all of our forward-looking statements. Forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, you are cautioned that any forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Although we believe that the expectations reflected in our forward-looking statements are reasonable as of the date made, expectations may prove to have been materially different from the results expressed or implied by such forward-looking statements. Unless otherwise required by law, we also disclaim any obligation to update our view of any such risks or uncertainties or to announce publicly the result of any revisions to the forward-looking statements made in this prospectus.

 

All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements. You should evaluate all forward-looking statements made in this prospectus in the context of these risks and uncertainties.

 

Recapitalization Transactions

 

On October 1, 2010, MedQuist Inc., as borrower, and our subsidiaries, MedQuist Transcriptions, Ltd. and CBay Inc., as co-borrowers and guarantors, and we and certain of our other subsidiaries, as guarantors, entered into the Senior Secured Credit Facility with General Electric Capital Corporation, as administrative agent, and the lenders party thereto, providing for (i) a $200.0 million Term Loan and (ii) a $25.0 million revolving credit facility. On September 30, 2010, MedQuist Inc., as issuer, and our subsidiaries, MedQuist Transcriptions, Ltd. and CBay Inc., as co-issuers and guarantors, and we and certain of our other subsidiaries, as guarantors, entered into a Note Purchase Agreement with BlackRock Kelso Capital Corporation, PennantPark Investment Corporation, Citibank, N.A., and THL Credit, Inc. providing for the issuance of $85.0 million aggregate principal amount of 13% Senior Subordinated Notes due 2016. Interest on the Senior Subordinated Notes is payable in quarterly installments at the issuers’ option at either (i) 13% in cash or (ii) 12% in cash plus 2% in the form of additional Senior Subordinated Notes. See “Description of Indebtedness” for a more detailed description of the Senior Secured Credit Facility and the Senior Subordinated Notes.

 

The closing and funding of the Term Loan and the Senior Subordinated Notes occurred on October 14, 2010. MedQuist Inc. used the proceeds to repay $80.0 million of indebtedness under its Acquisition Credit Facility, to repay $13.6 million of indebtedness under the Acquisition Subordinated Promissory Note it issued in connection with the Spheris Acquisition and to pay a $176.5 million special dividend to its stockholders. We received $122.6 million of this special dividend and used $104.1 million to redeem our 6% Convertible Notes, and $4.1 million to extinguish certain other lines of credit.

 

MedQuist Exchange

 

On September 30, 2010, we entered into an Exchange Agreement with certain of MedQuist Inc.’s noncontrolling stockholders that currently hold in the aggregate approximately 13% of MedQuist Inc.’s outstanding shares. Pursuant to the Exchange Agreement, those MedQuist Inc. stockholders will receive 4.2459 shares of our common stock for each MedQuist Inc. share, subject to certain adjustments, including adjustments related to MedQuist Inc.’s net debt at the closing of the MedQuist Exchange, and will enter into a stockholders agreement with us that, among other things, provides them with registration rights and contains provisions regarding their voting in the election of our directors. Every $10.0 million decrease below $304.0 million in MedQuist Inc.’s net debt at the closing of the MedQuist Exchange would increase the exchange ratio by approximately 0.05 shares of our common stock. The closing under the Exchange Agreement is conditioned upon, among other conditions, our completion of an initial public offering, the listing of our shares on The NASDAQ Global Market and our reincorporation in Delaware and would increase our ownership in MedQuist Inc. from 69.5% to 82.5%.

 

Exchange Offer

 

On October 18, 2010, we filed with the SEC a registration statement on Form S-4 offering those noncontrolling MedQuist Inc. stockholders that did not participate in the MedQuist Exchange shares of our common stock in exchange for their MedQuist Inc. shares. Assuming the MedQuist Exchange is consummated, a full exchange in the Exchange Offer would increase our ownership in MedQuist Inc. from 82.5% to 100.0%. We can give no assurance regarding the level of participation in the Exchange Offer.

 

Reincorporation and Share Conversion

 

Immediately prior to the consummation of this offering, we intend to convert from a British Virgin Islands company to a Delaware corporation. In connection with that conversion, we may adjust the number of our shares outstanding through a reverse share split or similar action. The conversion and any such reverse share split or similar action will result in no change to our stockholders’ relative ownership interests in us.

 

We also intend to delist our common stock from AIM upon completion of this offering or shortly thereafter and to apply to list our shares on The NASDAQ Global Market.

 

We estimate that the net proceeds from this offering, after deducting the underwriting discounts and commissions and estimated offering expenses, will be approximately $      million, assuming an initial public offering price of $      per share, the midpoint of the estimated price range set forth on the cover page of this prospectus. We intend to use the net proceeds from this offering for working capital and other general corporate purposes. We may also use a portion of the net proceeds for the acquisition of complementary companies or businesses, although we currently do not have any acquisition or investment planned. We will not receive any proceeds from the sale of shares of common stock by the selling stockholders if the underwriters exercise the over-allotment option.

 

We currently expect to retain future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Payments of future dividends, if any, will be at the sole discretion of our board of directors after taking into account various factors, including our business, operating results and financial condition, current and anticipated cash needs, plans for expansion and any legal or contractual limitations on our ability to pay dividends. Our ability to pay dividends on our common stock is limited by the covenants of the agreements governing our indebtedness and may be further restricted by any future debt or preferred securities. See “Description of Indebtedness.”

 

The following table sets forth our capitalization as of June 30, 2010:

 

 

You should read this table together with the information contained in this prospectus, including “Corporate Reorganization,” “Use of Proceeds,” “Unaudited Pro Forma Condensed Combined Financial Information,” “Selected Consolidated Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes thereto included elsewhere in this prospectus.

 

 

 

The following unaudited pro forma condensed consolidated financial information includes our unaudited pro forma condensed combined statements of operations for the year ended December 31, 2009 and the six months ended June 30, 2010 and our unaudited pro forma condensed consolidated balance sheet as of June 30, 2010. The unaudited pro forma condensed combined statements of operations and the unaudited pro forma condensed consolidated balance sheet have been derived from the historical consolidated financial information of us and Spheris, which are included elsewhere in this prospectus.

 

The pro forma combined statements of operations and other operating data for the year ended December 31, 2009 and the six months ended June 30, 2010 give effect to the following transactions as if they had occurred on January 1, 2009:

 

 

The pro forma combined statements of operations and other operating data for the year ended December 31, 2009 and the six months ended June 30, 2010 do not give effect to the following:

 

 

The pro forma balance sheet data as of June 30, 2010 gives effect to the Corporate Reorganization, and the shares of our common stock issuable pursuant to the Consulting Services Agreement, as if they occurred as of June 30, 2010.

 

The pro forma as adjusted balance sheet data as of June 30, 2010 also gives effect to the issuance of        shares of common stock in this offering at an assumed initial public offering price of $      per share, the midpoint of the price range shown on the cover of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us as if such transaction occurred as of June 30, 2010.

 

Our historical consolidated financial information has been adjusted in the unaudited pro forma condensed combined financial information to give effect to pro forma events that are (1) directly attributable to the Spheris Acquisition, the Corporate Reorganization the shares of our common stock issuable pursuant to the Consulting

Services Agreement, (2) factually supportable and (3) with respect to the statements of operations, expected to have a continuing impact on the combined results. The pro forma information does not reflect revenue opportunities and cost savings that may be realized after the Spheris Acquisition. The pro forma financial information also does not reflect expenses related to integration activity that may be incurred by us in connection with the Spheris Acquisition.

 

The pro forma data is based upon available information and certain assumptions that we believe are reasonable. The pro forma data is for informational purposes only and does not purport to represent what our results of operations or financial position actually would have been if such events had occurred on the dates specified above and does not purport to project the results of operations or financial position for any future period or date. The unaudited pro forma condensed combined statements of operations and the unaudited pro forma condensed consolidated balance sheet should be read in conjunction with the accompanying notes, our historical consolidated financial statements, and related notes included elsewhere in this prospectus as adjusted for the acquisition of Spheris using the acquisition method of accounting.

 

You should read the following unaudited pro forma condensed consolidated financial information with our consolidated financial statements and related notes included elsewhere in this prospectus and the information under the section “Capitalization,” “Selected Consolidated Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus.

 

CBaySystems Holdings Limited and Subsidiaries
Unaudited Pro Forma Condensed Combined Statement of Operations
For the year ended December 31, 2009
(In thousands, except per share amounts)

 

 

The accompanying notes are an integral part of the unaudited pro forma condensed combined financial statements.

 

CBaySystems Holdings Limited and Subsidiaries
Unaudited Pro Forma Condensed Combined Statement of Operations
For the six months ended June 30, 2010
(In thousands, except per share amounts)