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EX-31.2 - EX-31.2 - MEDQUIST INC | w80390exv31w2.htm |
EX-32.2 - EX-32.2 - MEDQUIST INC | w80390exv32w2.htm |
EX-10.5 - EX-10.5 - MEDQUIST INC | w80390exv10w5.htm |
EX-32.1 - EX-32.1 - MEDQUIST INC | w80390exv32w1.htm |
EX-31.1 - EX-31.1 - MEDQUIST INC | w80390exv31w1.htm |
EX-10.2 - EX-10.2 - MEDQUIST INC | w80390exv10w2.htm |
EX-10.4 - EX-10.4 - MEDQUIST INC | w80390exv10w4.htm |
EX-10.1 - EX-10.1 - MEDQUIST INC | w80390exv10w1.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 September 30, 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 (Do not check if a smaller reporting company) |
Smaller reporting company o |
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 October 22,
2010 was 37,555,893.
MEDQUIST INC.
INDEX
INDEX
Page | ||||
1 | ||||
1 | ||||
13 | ||||
25 | ||||
26 | ||||
26 | ||||
26 | ||||
30 | ||||
30 | ||||
30 | ||||
30 |
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 | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net revenues |
$ | 102,933 | $ | 76,836 | $ | 274,442 | $ | 233,251 | ||||||||
Operating costs and expenses: |
||||||||||||||||
Cost of revenues |
68,427 | 52,768 | 185,350 | 157,993 | ||||||||||||
Selling, general and administrative |
9,352 | 7,930 | 28,169 | 25,819 | ||||||||||||
Research and development |
3,681 | 2,439 | 9,274 | 7,235 | ||||||||||||
Depreciation |
2,822 | 2,197 | 7,518 | 7,418 | ||||||||||||
Amortization of intangible assets |
3,394 | 1,518 | 8,229 | 4,533 | ||||||||||||
Cost of legal proceedings and settlements |
631 | 1,382 | 2,783 | 13,440 | ||||||||||||
Acquistion and integration related charges |
842 | | 6,501 | | ||||||||||||
Restructuring charges |
495 | 481 | 1,425 | 481 | ||||||||||||
Total operating costs and expenses |
89,644 | 68,715 | 249,249 | 216,919 | ||||||||||||
Operating income |
13,289 | 8,121 | 25,193 | 16,332 | ||||||||||||
Equity in income of affiliated company |
70 | 2,154 | 616 | 2,582 | ||||||||||||
Interest income (expense) |
(2,927 | ) | (29 | ) | (6,706 | ) | 36 | |||||||||
Income before income taxes |
10,432 | 10,246 | 19,103 | 18,950 | ||||||||||||
Income tax provision |
1,461 | 542 | 1,908 | 1,556 | ||||||||||||
Net income |
$ | 8,971 | $ | 9,704 | $ | 17,195 | $ | 17,394 | ||||||||
Net income per share: |
||||||||||||||||
Basic |
$ | 0.24 | $ | 0.26 | $ | 0.46 | $ | 0.46 | ||||||||
Diluted |
$ | 0.24 | $ | 0.26 | $ | 0.46 | $ | 0.46 | ||||||||
Weighted average shares outstanding: |
||||||||||||||||
Basic |
37,556 | 37,556 | 37,556 | 37,556 | ||||||||||||
Diluted |
37,556 | 37,560 | 37,556 | 37,556 | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
1
Table of Contents
MedQuist Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands)
Unaudited
Consolidated Balance Sheets
(In thousands)
Unaudited
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 21,894 | $ | 25,216 | ||||
Accounts receivable, net of allowance of $3,305 and $3,159, respectively |
65,026 | 43,627 | ||||||
Income tax receivable |
35 | 772 | ||||||
Other current assets |
9,311 | 4,940 | ||||||
Total current assets |
96,266 | 74,555 | ||||||
Property and equipment, net |
14,975 | 11,772 | ||||||
Goodwill |
88,951 | 40,813 | ||||||
Other intangible assets, net |
81,984 | 36,307 | ||||||
Deferred income taxes |
1,525 | 1,396 | ||||||
Other assets |
14,788 | 9,818 | ||||||
Total assets |
$ | 298,489 | $ | 174,661 | ||||
Liabilities and Shareholders Equity |
||||||||
Current liabilities: |
||||||||
Current portion of long term debt (subsequently refinanced, see Note 4) |
$ | 25,000 | $ | | ||||
Accounts payable |
6,275 | 8,687 | ||||||
Accrued expenses |
24,374 | 21,490 | ||||||
Accrued compensation |
17,133 | 12,432 | ||||||
Current portion of lease obligations |
1,229 | | ||||||
Related party payable |
6,681 | 1,362 | ||||||
Deferred revenue |
10,762 | 10,854 | ||||||
Total current liabilities |
91,454 | 54,825 | ||||||
Long term debt (subsequently refinanced, see Note 4) |
68,898 | | ||||||
Deferred income taxes |
5,419 | 3,240 | ||||||
Other non-current liabilities |
874 | 1,848 | ||||||
Commitments and contingencies |
||||||||
Shareholders equity: |
||||||||
Common stock no par value; authorized 60,000 shares; 37,556 and 37,556 shares issued and outstanding, respectively |
237,993 | 237,848 | ||||||
Accumulated deficit |
(108,659 | ) | (125,854 | ) | ||||
Accumulated other comprehensive income |
2,510 | 2,754 | ||||||
Total shareholders equity |
131,844 | 114,748 | ||||||
Total liabilities and shareholders equity |
$ | 298,489 | $ | 174,661 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
2
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MedQuist Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Unaudited
Consolidated Statements of Cash Flows
(In thousands)
Unaudited
Nine months ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Operating activities: |
||||||||
Net income |
$ | 17,195 | $ | 17,394 | ||||
Adjustments to reconcile net income to cash provided by
operating activities: |
||||||||
Depreciation and amortization |
15,747 | 11,951 | ||||||
Equity in income of affiliated company |
(616 | ) | (2,582 | ) | ||||
Deferred income taxes |
2,021 | 662 | ||||||
Stock option expense |
145 | 144 | ||||||
Noncash interest expense |
328 | | ||||||
Provision for doubtful accounts |
1,571 | 230 | ||||||
Loss on disposal of property and equipment |
| 27 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(554 | ) | 6,847 | |||||
Income tax receivable |
733 | (50 | ) | |||||
Other current assets |
(1,216 | ) | 3,467 | |||||
Other non-current assets |
869 | (34 | ) | |||||
Accounts payable |
1,129 | (351 | ) | |||||
Accrued expenses and Related party payable |
(6,910 | ) | (3,744 | ) | ||||
Accrued compensation |
878 | 2,959 | ||||||
Deferred revenue |
(170 | ) | (4,107 | ) | ||||
Other non-current liabilities |
(1,056 | ) | 168 | |||||
Net cash provided by operating activities |
30,094 | 32,981 | ||||||
Investing activities: |
||||||||
Purchase of property and equipment |
(3,793 | ) | (3,603 | ) | ||||
Proceeds from sale of investments |
| |||||||
Capitalized software |
(3,806 | ) | (1,846 | ) | ||||
Proceeds from sale of investments |
| |||||||
Investment in affiliated company |
| (852 | ) | |||||
Proceeds from sale of property |
| |||||||
Acquisition, net of cash acquired |
(98,661 | ) | | |||||
Net cash used in investing activities |
(106,260 | ) | (6,301 | ) | ||||
Financing activities: |
||||||||
Borrowing on credit line |
100,000 | | ||||||
Repayment of debt |
(20,000 | ) | | |||||
Dividends paid |
| (49,949 | ) | |||||
Debt issuance costs |
(7,031 | ) | (1,171 | ) | ||||
Purchase and retirement of stock |
| | ||||||
Proceeds from issuance of stock |
| | ||||||
Payments on lease obligations |
(129 | ) | | |||||
Net cash provided by (used in) financing activities |
72,840 | (51,120 | ) | |||||
Effect of exchange rate changes |
4 | 199 | ||||||
Net decrease in cash and cash equivalents |
(3,322 | ) | (24,241 | ) | ||||
Cash and cash equivalents beginning of period |
25,216 | 39,918 | ||||||
Cash and cash equivalents end of period |
$ | 21,894 | $ | 15,677 | ||||
Supplemental cash flow information: |
||||||||
Cash paid (refunded) for income taxes |
$ | (318 | ) | $ | 241 | |||
Accommodation payments paid with credits |
$ | | $ | 103 | ||||
Noncash debt incurred in connection with the Spheris
acquisition |
$ | 13,570 | $ | | ||||
The accompanying notes are an integral part of these consolidated financial statements.
3
Table of Contents
MedQuist Inc. and 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 operations, 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 (the 2009 Form 10-K) filed with the Securities and
Exchange Commission (SEC) on March 12, 2010.
4
Table of Contents
MedQuist Inc. and 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
2. Acquisition of Spheris Assets in the United States
On April 22, 2010, we and our 69.5%
shareholder, CBay Inc., completed the acquisition of
substantially all of the assets of Spheris and certain of its affiliates, pursuant to the terms of
the Stock and Asset Purchase Agreement. This acquisition provided substantial incremental volume growth and also provided
opportunities for operating efficiencies and operating margin expansion. See Note 7, Accrued
Expenses for further discussion of our 2010 restructuring plan approved by management to realize
some of these savings.
Costs incurred for the acquisition and direct integration costs are included in the
line item Acquisition and integration related charges on the accompanying statements of operations.
The acquisition was funded from the proceeds of credit facilities entered into in connection with
the acquisition. See Note 3 for a description of the acquisition financing. The third quarter of
2010 was the first full quarter of inclusion of the impact from the acquired Spheris business in
our consolidated results of operations.
5
Table of Contents
MedQuist Inc. and 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 unaudited pro forma summary presents the consolidated information of the Company
as if the business combination had occurred at the beginning of each period.
Pro Forma Three Months | ||||
Ended September 30, 2009 | ||||
Net revenues |
$ | 115,381 | ||
Net income |
$ | 9,147 | ||
Net income per share (Basic) |
$ | 0.24 | ||
Net income per share (Diluted) |
$ | 0.24 |
Pro Forma Nine Months | ||||||||
Ended September 30, | ||||||||
2010 | 2009 | |||||||
Net revenues |
$ | 317,813 | $ | 353,638 | ||||
Net income |
$ | 20,909 | $ | 16,428 | ||||
Net income per share (Basic) |
$ | 0.56 | $ | 0.44 | ||||
Net income per share (Diluted) |
$ | 0.56 | $ | 0.44 |
These amounts have been calculated after applying our accounting policies and adjusting the
results of Spheris to reflect the additional amortization of intangibles that would have been
charged assuming the fair value adjustments to intangible assets had been applied from the
beginning of the annual period being reported on, and the additional interest expense assuming the
acquisition related debt had been incurred at the beginning of the period being reported on,
excluding the acquisition costs, and including the related tax effects.
The acquired business contributed net revenues of $58.2 million for the period April 22, 2010
to September 30, 2010.
The following table summarizes the consideration transferred by the Company to acquire the
domestic assets of Spheris, and the amounts of identified assets acquired and liabilities assumed
at the acquisition date. The amounts recorded are subject to finalization of assumed liabilities.
Cash consideration paid |
$ | 98,834 | ||
Fair value of unsecured Subordinated Promissory Note |
13,570 | |||
Total consideration transferred |
$ | 112,404 | ||
Recognized amounts of identifiable assets acquired and liabilities assumed: |
||||
Fair value of Spheris net assets acquired |
||||
Working capital |
$ | 7,373 | ||
Property, plant and equipment |
6,626 | |||
Developed technology (included in intangibles) |
11,390 | |||
Customer relationships (included in intangibles) |
37,210 | |||
Trademarks and trade names (included in intangibles) |
1,640 | |||
Goodwill |
48,165 | |||
Identifiable assets acquired and liabilities assumed |
$ | 112,404 | ||
The related amortization period is shown below:
Amortization | ||||
Period | ||||
Developed technology |
9 years | |||
Customer relationships |
7-9 years | |||
Trademarks and trade names |
4 years | |||
Goodwill |
indefinite |
The amounts and lives of the identified intangibles other than goodwill were valued by us at fair
value. In preparing fair value, we considered the report of an
independent valuation firm. The goodwill is attributable to the workforce of the acquired business
and the significant synergies expected to arise after our acquisition of Spheris. The goodwill and
intangible assets are deductible for tax purposes.
6
Table of Contents
MedQuist Inc. and 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
Fair value is defined as the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at the measurement date. There is
a hierarchy of valuation techniques based on the nature of the inputs used to develop the fair
value measures. This is an exit price concept for the valuation of the asset or liability. In
addition, market participants are assumed to be unrelated buyers and sellers in the principal or
the most advantageous market for the asset or liability. Fair value measurements for an asset
assume the highest and best use by these market participants. Many of these fair value measurements
can be highly subjective and it is also possible that other professionals, applying reasonable
judgment to the same facts and circumstances, could develop and support a range of alternative
estimated amounts.
Total acquisition-related transaction costs incurred by us are expensed in the periods in
which the costs are incurred. Acquisition-related transaction costs (such as advisory, legal,
valuation and other professional fees) are not included as components of consideration transferred
but are accounted for as expenses in the periods in which the costs are incurred. External cost
incurred to acquire the business, and incremental direct integration costs, primarily travel, have
been included in the line item Acquisition and integration related charges on our consolidated
statements of operations.
3. Debt
Debt consisted of the following:
September 30, 2010 | ||||
Term loan due from 2010 to 2012, with interest at Prime plus 3.25% |
$ | 45,000 | ||
Revolving loan with interest at Prime plus 3% with a scheduled termination date of April 22, 2014 |
35,000 | |||
Subordinated Promissory Note due in 2015 with varying interest rates and provisions for early repayment |
13,898 | |||
93,898 | ||||
Less: Current maturities |
(25,000 | ) | ||
Total long term debt |
$ | 68,898 | ||
There was no debt outstanding at December 31, 2009.
The entire amount of debt was
refinanced in October 2010, see Note 4 Subsequent Events.
In connection with the Spheris
acquisition, MedQuist Transcriptions, Ltd., a subsidiary of
MedQuist Inc. (MedQuist Transcriptions), and certain other subsidiaries of MedQuist Inc. (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 provided for
up to $100.0 million in senior secured credit facilities, consisting of a $50.0 million term loan,
and a revolving credit facility of up to $50.0 million. The credit facilities were secured by a
first priority lien on substantially all of the property of the Loan Parties. The term loan was
repayable in equal quarterly installments of $5.0 million beginning October 1, 2010, with the
balance payable 2.5 years from the date of closing. Amounts borrowed under the GE Credit Agreement
incurred 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. At September 30, 2010, the revolving credit facility and the term
loan had interest rates of 6.25% and 6.75%, respectively.
We incurred $6.1 million in costs in connection with the GE Credit Agreement which are
reflected in Other current assets and Other assets. These costs were expensed upon closing of our
new credit facilities in October 2010.
The GE Credit Agreement also contained excess cash flow repayment provisions that required 25%
of Excess Cash Flows, as defined in the agreement, to be remitted to the lenders within 95 days
after year-end. We estimated that the amount of repayment that would have been due during April 2011 at
approximately $10 million.
Total current maturities under
the GE Credit Agreement consisted of (a) $10 million estimated
for excess cash flow sweeps in April 2011, and (b) $15 million of contractual maturities of the
term loan obligations. As discussed in Note 4, we paid off all amounts outstanding plus accrued
interest under the GE Credit Agreement, thus terminating the GE Credit Agreement.
As of September 30, 2010, we believe we were in compliance with the covenants of the GE Credit
Agreement.
7
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MedQuist Inc. and 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
When we entered into the GE Credit Agreement, we terminated the five-year $25.0 million
revolving credit agreement with Wells Fargo Foothill, LLC (the Wells Credit Agreement) that we
entered into on August 31, 2009. We never borrowed under the Wells Credit Agreement. In the nine
month period ended September 30, 2010, we wrote off deferred financing fees of $1.1 million and
incurred termination fees of $0.6 million in connection with the termination of this facility. Such
costs are included in Interest expense in the accompanying statements of operations.
In connection with the Spheris acquisition, we entered into a subordinated promissory note
with Spheris (the Subordinated Promissory Note). The loan was scheduled to mature in five years
from the date of the acquisition. The face amount of the Subordinated Promissory Note totaled $17.5
million 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. For purposes of the purchase price
allocation, the note was discounted at 77.5% of the principal ($13.6 million). This note was a
non-cash transaction. The fair value of the note was determined through the use of a Monte Carlo
model which is Level 3 in the Fair Value hierarchy based upon significant unobservable inputs.
The Subordinated Promissory Note had stated interest rates of 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
acquisition. For financial statement purposes the interest has been calculated using the average
interest rates over the term of the Subordinated Promissory Note. As discussed in Note 4, we paid
off all amounts outstanding, at 77.5% of the face value,
plus accrued interest under the Subordinated Promissory Note thus extinguishing the note.
4. Subsequent Events
Recapitalization Transactions and Sale of A-Life
On October 1, 2010, we entered into a senior secured credit facility (the Senior Secured
Credit Facility), with certain lenders and General Electric Capital Corporation, as Administrative
Agent. The Senior Secured Credit Facility contains a number of significant covenants and consists
of $225.0 million in senior secured credit facilities comprised of:
| a $200.0 million term loan, advanced in one drawing on October 14, 2010 (the Closing Date), with a term of five years, repayable in equal quarterly installments of $5.0 million, commencing on the first day of the first fiscal quarter beginning after the Closing Date, with the balance payable at maturity; and | ||
| a $25.0 million revolving credit facility under which borrowings may be made from time to time during the period from the Closing Date until the fifth anniversary of the Closing Date. The revolving facility includes a $5.0 million letter-of-credit sub-facility and a $5 million swing line loan sub-facility. |
The borrowings under the Senior Secured Credit Facility bear interest at a rate equal to an
applicable margin plus, at the co-borrowers option, either (a) a base rate determined by reference
to the highest of (1) the rate last quoted by the Wall Street Journal as the Prime Rate in the
United States, (2) the federal funds rate plus 1/2 of 1% and (3) the LIBOR rate for a
one-month interest period plus 1.00% or (b) the higher of (1) a LIBOR rate determined by reference
to the costs of funds for deposits in the currency of such borrowing for the interest period
relevant to such borrowing adjusted for certain additional costs and (2) 1.75%. The applicable
margin is 4.50% with respect to base rate borrowings and 5.50% with respect to LIBOR borrowings.
The loans are secured by substantially all of our assets and are guaranteed by our 69.5%
shareholder, CBay Inc., and CBaySystems Holdings Limited (CBay Holdings), the majority
owner of CBay Inc. The agreements contain customary covenants, including reporting and
notification. The financial covenants are calculated on a consolidated basis for CBay Holdings and
its subsidiaries (including us), and include a Senior Leverage Ratio, Total Leverage Ratio, and an
Interest Coverage Ratio. As of September 30, 2010 we believe we were in compliance.
In addition to the Senior Secured Credit Facility we issued $85.0 million aggregate principal
amount of 13% senior subordinated notes due 2016 (the Senior Subordinated Notes), pursuant to a
purchase agreement. Interest on the notes is payable in quarterly installments at the issuers
option at either (i) 13% in cash or (ii) 12% in cash payment plus 2% in the form of additional
senior subordinated notes. The Senior Subordinated Notes are non-callable for two years after the
closing date after which they are redeemable at 105.0% declining ratably until four years after the
closing date. The Senior Subordinated Notes contain a number of significant covenants that, among
other things, restrict our ability to dispose of assets, repay other indebtedness, incur additional
indebtedness, pay dividends, prepay subordinated indebtedness, incur liens, make capital
expenditures, investments or acquisitions, engage in mergers of consolidations, engage in certain
types of transactions with affiliates and otherwise restrict our activities.
Proceeds from the Senior Secured Credit Facility and the Senior Subordinated Notes were used
to repay $80.0 million of our indebtedness under the GE Credit Agreement plus interest, to repay
$13.9 million of our indebtedness under the Subordinated Promissory Note plus interest, and to pay
a $176.5 million special cash dividend to our shareholders.
The effects on our capital structure are estimated to impact our financial position as
follows:
Historical | Effect of | Pro forma | ||||||||||
September 30, | Refinancing and | September | ||||||||||
2010 | Dividend | 30, 2010 | ||||||||||
Current portion of long-term debt and long term debt |
$ | 93,898 | $ | 191,102 | $ | 285,000 | ||||||
Shareholders equity (deficit) |
||||||||||||
Common stock |
$ | 237,993 | $ | | $ | 237,993 | ||||||
Accumulated deficit |
(108,659 | ) | (176,500 | ) | (285,159 | ) | ||||||
Accumulated other comprehensive income |
2,510 | 2,510 | ||||||||||
In September 2010, an Agreement and Plan of Merger was executed by A-Life to merge A-Life with
Ingenix. The sale was completed on October 27, 2010. Under this transaction, our shares in A-Life
were sold to Ingenix for cash consideration of $23.8 million, of which $4.7 million will be held in
escrow until March 2012. Additionally, during the fourth quarter 2010, we completed
recapitalization transactions as described above changing our debt and equity structures. We
expect to receive $19 million of cash in November 2010 in connection with the A-Life sale and,
upon receipt we expect to have over $40 million in cash on-hand and approximately $285 million in
debt.
Exchange Transactions
On September 30, 2010, certain of our noncontrolling shareholders entered into an exchange
agreement (the MedQuist Exchange) with CBay Holdings, pursuant to which those shareholders will
receive 4.2459 CBay Holdings shares for each MedQuist Inc. share, subject to certain adjustments
relating to the level of our net debt at closing of the MedQuist Exchange, and will enter into a
stockholders agreement with CBay Holdings that, among other things, provides them with registration
rights and contains provisions regarding their voting in the election of CBay Holdings directors.
The closing under the MedQuist Exchange is conditioned upon the listing of CBay Holdings shares on
the NASDAQ Stock Market the completion of an initial public offering by CBay Holdings in the United States by
January 31, 2011, the reincorporation of CBay Holdings as a Delaware corporation and other
conditions, and would increase CBay Holdings ownership in MedQuist Inc. from 69.5% to 82.5%. We
are not a party to the MedQuist Exchange.
On October 18, 2010, CBay Holdings filed a registration statement with the SEC on Form S-4
relating to a proposed offer to those noncontrolling MedQuist Inc. shareholders who did not
participate in the MedQuist Exchange, pursuant to which CBay Holdings expects to offer to exchange
shares of CBay Holdings common stock for outstanding shares of MedQuist Inc. common stock. We will
not be a party to the proposed exchange offer. The terms of the proposed exchange offer are
described in such registrant statement. Assuming the MedQuist Exchange is consummated, a full
exchange in the exchange offer would increase CBay Holdings ownership in MedQuist Inc. from 82.5%
to 100.0%.
5. Comprehensive Income
Comprehensive income was as follows:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net income |
$ | 8,971 | $ | 9,704 | $ | 17,195 | $ | 17,394 | ||||||||
Foreign currency translation adjustment |
269 | 138 | (244 | ) | 813 | |||||||||||
Comprehensive income |
$ | 9,240 | $ | 9,842 | $ | 16,951 | $ | 18,207 | ||||||||
6. 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.
The following table reflects the weighted average shares outstanding used to compute basic and
diluted net income per share:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net income |
$ | 8,971 | $ | 9,704 | $ | 17,195 | $ | 17,394 | ||||||||
Weighted average shares outstanding: |
||||||||||||||||
Basic |
37,556 | 37,556 | 37,556 | 37,556 | ||||||||||||
Effect of dilutive shares |
| 4 | | | ||||||||||||
Diluted |
37,556 | 37,560 | 37,556 | 37,556 | ||||||||||||
Net income per share: |
||||||||||||||||
Basic |
$ | 0.24 | $ | 0.26 | $ | 0.46 | $ | 0.46 | ||||||||
Diluted |
$ | 0.24 | $ | 0.26 | $ | 0.46 | $ | 0.46 |
For the three months ended September 30, 2010 and 2009, 1,006 and 1,494 options, respectively,
and the nine months ended September 30, 2010 and 2009, 1,006 and 1,513 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.
During the third quarter of 2010, our Compensation Committee issued awards under the Long Term
Incentive Plan, the terms and conditions of which will be determined in the future under the terms
of the plan.
7. Accrued Expenses
Accrued expenses consisted of the following:
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MedQuist Inc. and 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
September 30, 2010 | December 31, 2009 | |||||||
Customer accommodations |
$ | 10,387 | $ | 11,635 | ||||
Other (no item exceeds 5% of current liabilities) |
13,987 | 9,855 | ||||||
Total accrued expenses |
$ | 24,374 | $ | 21,490 | ||||
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 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
accommodations.
Nine months ended | Year ended | |||||||
September 30, 2010 | December 31, 2009 | |||||||
Beginning balance |
$ | 11,635 | $ | 12,055 | ||||
Payments and other adjustments |
(1,248 | ) | (317 | ) | ||||
Credits |
| (103 | ) | |||||
Ending balance |
$ | 10,387 | $ | 11,635 | ||||
2010 Restructuring Plan
Managements ongoing cost reduction initiatives, including process improvement, combined with
the acquisition of Spheris, resulted in a restructuring plan involving staff reductions and other
actions designed to maximize operating efficiencies. The affected employees are entitled to receive
severance benefits under existing established severance policies. The employees affected were
primarily in the operations and administrative functions. Management approved the initial actions
under the plan during the second quarter of 2010. In the third quarter of 2010, management
identified additional opportunities for synergies and approved additional restructuring involving
staff reductions, primarily in the operations and development functions. Management approved this
plan during the third quarter of 2010.
The table below reflects the financial statement activity related to the 2010 restructuring plan:
Nine Months Ended | ||||
September 30, 2010 | ||||
Beginning balance |
$ | | ||
Charge during the three months ended June 30, 2010 |
809 | |||
Charge during the three months ended September 30, 2010 |
1,232 | |||
Cash paid |
(634 | ) | ||
Ending balance |
$ | 1,407 | ||
The Company expects that restructuring activities may continue in 2010 and 2011 as management
identifies opportunities for synergies resulting from the acquisition of Spheris including the
elimination of redundant functions.
2009 Restructuring Plan
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MedQuist Inc. and 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
During the third and fourth quarters of 2009, because 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:
Nine Months Ended | Year Ended | |||||||
September 30, 2010 | December 31, 2009 | |||||||
Beginning balance |
$ | 2,064 | $ | | ||||
Charge (reversal) |
(616 | ) | 2,810 | |||||
Cash paid |
(1,113 | ) | (746 | ) | ||||
Ending balance |
$ | 335 | $ | 2,064 | ||||
8. 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 | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Legal fees |
$ | 631 | $ | 1,382 | $ | 1,873 | $ | 7,690 | ||||||||
Settlements |
| | 910 | 5,750 | ||||||||||||
Total |
$ | 631 | $ | 1,382 | $ | 2,783 | $ | 13,440 | ||||||||
The amounts included in settlements for the nine months ended September 30, 2010 represent an
additional charge of $0.9 million related to our settlement with Kaiser Foundation Health Plan,
Inc. and affiliates further discussed in Note 10. The amounts included in Settlements for 2009
represent the settlement of a patent litigation matter.
9. 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. During the nine months ended September 30, 2010, we reduced our accruals by $544, related
to various state uncertain tax positions as a result of filing voluntary disclosure agreements with
state jurisdictions.
10. Commitments and Contingencies
Kaiser Litigation
On June 6, 2008, plaintiffs Kaiser Foundation Health Plan, Inc. and affiliates (collectively,
Kaiser) filed suit against us in the Superior Court of the State of California related to our
billing practices.
In July 2010, the parties reached a settlement of the litigation whereby we made a payment of
$2.0 million to resolve all of Kaisers claims. Neither we, nor Kaiser, admitted to any liability
or wrongdoing in connection with the settlement. Of this amount, $1.1 million was included in
Accrued expenses at December 31, 2009 and we expensed an additional $0.9 million in the nine months
ended September 30, 2010.
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MedQuist Inc. and 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
Kahn Putative Class Action
This action was initiated on January 22, 2008, when 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. The
action was venued in the Superior Court of New Jersey, Chancery Division, Burlington County.
Thereafter on June 12, 2008, plaintiff filed an amended class action complaint against us, eight of
our then current and former directors, and Philips. In the amended complaint, plaintiff alleged
that our then 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 Limited. The share purchase offer 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 November 21, 2008, the Court dismissed plaintiffs amended class action complaint with
prejudice. Thereafter, on July 1, 2010, the New Jersey Appellate Division entered an Order and
Opinion that affirmed the dismissal of the claims against MedQuist and two of the MedQuist director
defendants. The Appellate Division reversed the dismissal of the claims against the remaining
defendants Philips and certain of our former directors and remanded those claims back to the
Chancery Division. We are no longer a defendant in this matter, but we are monitoring the matter
since it involves claims against our former directors.
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.
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 Investigation of Former Officer
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 been providing indemnification for the legal fees for our former chief financial
officer.
11. Related Party Transactions
CBay Inc. has an approximately 69.5% ownership interest in us.
We have an agreement with CBay Systems & Services, Inc, (CBay Systems), a wholly-owned
subsidiary of our majority shareholder, CBay Inc., under which we outsource medical transcription
services to CBay Systems. We incurred expenses of $11,428 and $1,793 for the three months ended
September 30, 2010 and 2009, respectively. For the nine months ended September 30, 2010 and 2009,
we incurred expenses of $23,411 and $3,334, respectively. All medical transcription expenses for
both periods were recorded in Cost of revenues in the accompanying consolidated statements of operations.
We also have a subcontracting agreement with CBay Systems, pursuant to which CBay Systems
subcontracts medical transcription, editing and related services to us. For the three months ended
September 30, 2010 and 2009, we recorded revenue of $589 and $506, respectively, and for the nine
months ended September 30, 2010 and 2009, we recorded revenue of $1,684 and $975, respectively,
under the terms of the subcontracting agreement.
We have a Management Services Agreement with CBay Inc. pursuant to which certain senior
executives and directors of CBay Inc. provide advisory and consulting services. The Management
Services Agreement provides that, in consideration of the management services rendered by CBay Inc.
to us since July 1, 2009 we pay CBay Inc. a quarterly services fee equal to $350, payable in
arrears. For the three month periods ending September 30, 2010 and 2009, we incurred $350 in
services expenses with CBay Inc. For the nine months ended September 30, 2010 and 2009, we
incurred service expenses with CBay Inc. of $1,050. All Management Services Agreement costs
incurred have been recorded as Selling, general and administrative
expenses in the accompanying consolidated statements of operations.
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MedQuist Inc. and 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
of September 30, 2010 and December 31, 2009, Related party
payable in the accompanying consolidated balance sheets included $6,681 and
$1,362, respectively, representing amounts due to CBay Inc. and CBay Systems. As of September 30,
2010 and December 31, 2009, Accounts receivable in the accompanying consolidated balance sheets included $610 and $710, respectively, for amounts
due from CBay Systems. In addition, we paid $4.6 million for a related party liability assumed in
the Spheris acquisition.
On May 4, 2010, we recorded a $1.5 million success-based transaction fee to S A C Private
Capital Group, LLC (SAC) for work performed on the Spheris acquisition. SAC owns a majority
interest in CBay Holdings, the majority owner of CBay Inc.
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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 the risk factors set forth in the in our
Annual Report on Form 10-K for the year ended December 31, 2009 (2009
Form 10-K) (as updated by our
Quarterly Report on Form 10-Q for the quarter ended March 31,
2010 filed with the Securities and Exchange Commission (SEC) on May 10,
2010 (the Q1 Form 10-Q) and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2010
filed with the SEC on August 9, 2010 (the Q2 Form 10-Q):
| 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; | |
| potential synergies from the acquisition of Spheris; | |
| our ability to adopt and integrate new technologies; | |
| our expectation as to the future growth of the healthcare industry and continued demand for transcription services; | |
| increases in the productivity of medical transcriptionists (MTs) and medical editors (MEs) in order to outpace the decline in prices for medical transcription; | |
| customer retention; | |
| potential benefits of our size and scale; | |
| our ability to develop and adopt new technologies; | |
| our ability to gain new customers; | |
| our ability to increase sales; and | |
| our ability to diversify into other businesses. | |
| our 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; and | |
| our ability to operate the business given our restrictions under the Senior Secured Credit Facility and Senior Subordinated Notes; |
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 the 2009 Form
10-K.
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Executive Overview
We are a leading provider of integrated clinical documentation solutions for the U.S.
healthcare system. Our end-to-end solutions convert physicians dictation of patient interactions,
or the physician narrative, into a high quality and customized electronic record. These solutions
integrate technologies and services for voice capture and transmission, automated speech
recognition (ASR), medical transcription and editing, workflow automation, and document management
and distribution to deliver a complete managed service for our customers. Our solutions enable
hospitals, clinics, and physician practices to improve the quality of clinical data as well as
accelerate and automate the documentation process, and we believe our solutions improve physician
productivity and satisfaction, enhance revenue cycle performance, and facilitate the adoption and
meaningful use of electronic health records.
Recent Developments
On October 1, 2010, we entered into definitive agreements relating to a $310 million financing
consisting of a $225 million senior secured credit facility and the issuance of $85 million of 13%
senior subordinated notes. The $225 million senior secured credit facility is led by General
Electric Capital Corporation, as administrative agent, and SunTrust Bank, as syndication agent.
The facility consists of a $200 million term loan and a $25 million revolving credit facility
bearing an interest rate of LIBOR + 550 basis points and a LIBOR floor of 1.75%. In addition, the
revolving credit facility bears a fee of 50 basis points on undrawn amounts. On October 14, 2010,
we incurred $85.0 million of indebtedness through the issuance of the 13% senior subordinated notes
due 2016 pursuant to a note purchase agreement. At our option, a portion of the interest is payable
in the form of additional senior subordinated notes, in which event the interest rate would be 12%
in cash and 2% in the form of additional notes. In addition, on October 14, 2010, we incurred
$200.0 million of indebtedness under the term loan. Our 69.5% shareholder, CBay Inc., and CBay
Holdings guaranteed our obligations under the senior secured credit facility and the senior
subordinated notes. Proceeds from the financing were used to refinance the debt incurred in
connection with the April 2010 acquisition of the assets of Spheris and to pay a special cash
dividend of $176.5 million ($4.70 per share) to shareholders of record as of October 11, 2010.
In September 2010, an Agreement and Plan of Merger was executed by A-Life to merge A-Life with Ingenix. The sale
was completed on October 27, 2010. Under this transaction, our shares in A-Life were sold to Ingenix for cash
consideration of $23.8 million, of which $4.7 million will be held in escrow until March 2012.
Additionally, during the fourth quarter 2010, we completed recapitalization transactions as described
below changing our debt and equity structures. We expect to receive $19.1 million of cash in November 2010
in connection with the A-Life sale, and upon receipt we expect to have over $40 million in cash on-hand and
approximately $285 million in debt.
The effects on our capital structure are estimated to impact our financial position as
follows:
Historical | Effect of | Pro forma | ||||||||||
September 30, | Refinancing | September 30, | ||||||||||
2010 | and Dividend | 2010 | ||||||||||
(in thousands) | ||||||||||||
Current portion of long-term debt and long term debt |
$ | 93,898 | $ | 191,102 | $ | 285,000 | ||||||
Shareholders equity (deficit) |
||||||||||||
Common stock |
$ | 237,993 | $ | | $ | 237,993 | ||||||
Accumulated deficit |
(108,659 | ) | (176,500 | ) | (285,159 | ) | ||||||
Accumulated other comprehensive income |
2,510 | 2,510 | ||||||||||
Total shareholders equity (deficit) |
$ | 131,844 | $ | (176,500 | ) | $ | (44,656 | ) | ||||
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On October 18, 2010 CBay Holdings filed a registration statement on Form S-1 with the SEC
disclosing that it has entered into an agreement with certain of our noncontrolling shareholders
that currently hold in the aggregate approximately 13% of our outstanding shares, pursuant to which
those MedQuist Inc. shareholders will receive 4.2459 CBay Holdings shares for each MedQuist Inc.
share exchanged (the MedQuist Exchange), subject to certain adjustments relating to the
level of our net debt at closing of the MedQuist Exchange, and will enter into a stockholders
agreement with CBay Holdings that, among other things, provides them with registration rights and
contains provisions regarding their voting in the election of CBay Holdings directors. The
closing under the MedQuist Exchange is conditioned upon the listing of CBay Holdings shares on
the NASDAQ Stock Market, the completion by CBay Holdings of an initial public offering in the United States by
January 31, 2011, the reincorporation of CBay Holdings as a Delaware corporation and other
conditions, and would increase CBay Holdings ownership in MedQuist Inc. from 69.5% to 82.5%. We
are not a party to the MedQuist Exchange.
On October 18, 2010, CBay Holdings filed a registration statement on Form S-4 with the SEC
relating to a proposed offer to those noncontrolling MedQuist Inc. shareholders who did not
participate in the MedQuist Exchange, pursuant to which CBay Holdings expects to offer to exchange
shares of CBay Holdings common stock for outstanding shares of MedQuist Inc. common stock. We will
not be a party to the proposed exchange offer. The terms of the proposed exchange offer are
described in such registrant statement. Assuming the MedQuist Exchange is consummated, a full
exchange in the exchange offer would increase CBay Holdings ownership in MedQuist Inc. from 82.5%
to 100.0%.
On April 22, 2010, we and our majority shareholder, CBay Inc. (together with us, the
Purchasers), completed the acquisition of substantially all of the assets of Spheris and certain of
its affiliates (collectively with Spheris, the Sellers), pursuant to the terms of the Stock and
Asset Purchase Agreement (the Purchase Agreement) entered into between the Purchasers and the
Sellers on April 15, 2010. We believe the acquisition will provide significant improvement to our
revenue growth and margins. See Note 2 to our consolidated financial statements for a description
of the acquisition.
Volume and Pricing Trends
The vast majority of our revenue is generated by providing clinical documentation services to
our customers. Our customers are generally charged a rate per character multiplied by the number of
characters that we process. Our volume had been declining prior to CBay Inc.s acquisition of a
69.5% ownership interest in us from Koniklijke Philips Electronics N.V. (Philips) in August 2008,
and we have been able to reverse this trend by increasing our sales (through the acquisition of new
accounts and additional work types from existing customers) and decreasing our losses of existing
customers. We have reduced losses of our historical MedQuist customers primarily by improving our
quality and improving our account management efforts.
We base our pricing on various factors, principally market forces, the extent to which we can
utilize our offshore production facilities, the extent to which customers utilize the ASR
technology available in our solutions, the scope of services provided, and turnaround times
requested by a particular customer. We work with our customers to evaluate how different solutions
affect pricing and to determine what for them is an optimal mix of service level and price. Higher
utilization of offshore production and ASR leads to lower costs for us, which permits us to offer
better pricing to our customers while at the same time contributing to margin growth. We have
successfully migrated a significant portion of our volume offshore and we will continue these
efforts.
As technological advances and increased use of offshore resources have driven down industry
costs, the average price per character has also declined as healthcare providers have sought to
participate in the economic gains. We intend to monitor and adjust our pricing accordingly to
remain competitive as these industry trends continue.
During
the nine months ended September 30, 2010, our net revenues have
increased versus the prior
year period due primarily to the incremental Spheris acquisition volumes. The historical Spheris volumes had been declining prior to our acquisition of this business, and
although we believe we have stabilized these volumes, the carryover impact of historical losses may
impact us in future periods. These increases have been
partially offset by the impact of pricing trends noted above, as well
as lower non-core maintenance
service revenues. The third quarter of 2010 was the first full
quarter that included the impact
from the acquired Spheris business in our consolidated statements of operations.
Operating Improvements
We have executed significant operational improvements since CBay Inc.s acquisition of a 69.5%
ownership interest in us from Philips in August 2008. Cost of revenue on a per unit basis has
declined due to the increased utilization of ASR technology and the increased percentage of volume
produced offshore. Our use of speech recognition technology has increased from 42% to 72% over the
eight quarters ended September 30, 2010. Additionally we have increased our offshore
production as a percentage of our volume from
15
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9% to 34% for the same period. As we continue to increase the use of ASR technology and move volume offshore, we expect to continue to reduce costs.
Some of our contracts specify lower prices for work performed offshore or using speech
recognition technology. Therefore, our operating income will not increase by the full amount of the
savings we realize. Additionally, management has been reducing support staff headcount in order to
further reduce operating costs.
These improvements have resulted in operating income margin percentages improvements for both
the three and nine months ended September 30, 2010 compared to the same periods in 2009.
Selling, General and Administrative Expense Savings
We have made significant reductions in selling, general and administrative expenses since
2008. These savings were achieved primarily through headcount reductions and aggressive efforts to
reduce other administrative expenses.
In
connection with the Spheris acquisition we have identified specific savings in the sales
and marketing and general and administrative areas. We anticipate that these savings will be
implemented throughout the remainder of 2010 and 2011.
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 the consolidated financial statements included with our 2009 Form 10-K,
areas that are particularly significant and critical include:
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, with the remainder
allocated to goodwill. In preparing such purchase price allocations we consider the report of an
independent valuation firm. 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; |
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| 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.
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.
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.
Accounts receivable and allowance for doubtful accounts. Accounts receivable are recorded at
the invoiced amount and do not bear interest. The net 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 when due. This
allowance is used to state trade receivables at estimated net realizable value.
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 and in Accrued expenses.
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.
Acquisition of Spheris Inc. Assets and Related Debt Incurred
As mentioned under Recent Developments above, on April 22, 2010, we and our majority
shareholder, CBay Inc., completed the acquisition of substantially all of the assets of Spheris.
Spheris provided medical transcription services in the United States.
This acquisition provided substantial incremental volume growth and also provided
opportunities for operating efficiencies and operating margin expansion. See Note 7, Accrued
Expenses for further discussion of our 2010 restructuring plan approved by management to realize
some of these savings.
Costs incurred for the Spheris acquisition and direct integration costs are included in the line
item Acquisition and integration related charges in the accompanying consolidated statements of
operations. The third quarter of 2010 was the first full quarter of inclusion of the impact from the acquired
Spheris business in our consolidated results of operations.
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The following unaudited pro forma summary presents the consolidated information of the Company
as if the business combination had occurred at the beginning of each period.
Pro Forma Three Months | ||||
Ended September 30, 2009 | ||||
(in thousands, except per share amount) | ||||
Net revenues |
$ | 115,381 | ||
Net income |
$ | 9,147 | ||
Net income per share (Basic) |
$ | 0.24 | ||
Net income per share (Diluted) |
$ | 0.24 |
Pro Forma Nine Months | ||||||||
Ended September 30, | ||||||||
2010 | 2009 | |||||||
(in thousands, except per share amount) | ||||||||
Revenue |
$ | 317,813 | $ | 353,638 | ||||
Net income |
$ | 20,909 | $ | 16,428 | ||||
EPS Basic |
$ | 0.56 | $ | 0.44 | ||||
EPS Diluted |
$ | 0.56 | $ | 0.44 |
These amounts have been calculated after applying the Companys accounting policies and
adjusting the results of Spheris to reflect the additional amortization of intangibles that would
have been charged assuming the fair value adjustments to intangible assets had been applied from
the beginning of the annual period being reported on, and the additional interest expense assuming
the acquisition related debt had been incurred at the beginning of the annual period being reported
on, excluding the acquisition costs, and including the related tax effects.
In the fourth quarter of 2009 and the first nine months of 2010, we incurred $1.2
million and $6.5 million, respectively, of acquisition and integration related charges. These
expenses are recorded in the line item Acquisition and integration related charges on our
consolidated statements of operations.
Debt Incurred
September 30, 2010 | ||||
(in thousands) | ||||
Term loan due from 2010 to 2012, with interest at Prime plus 3.25% |
$ | 45,000 | ||
Revolving loan with interest at Prime plus 3% with a scheduled termination date of April 22, 2014 |
35,000 | |||
Subordinated Promissory Note due in 2015 with varying interest rates and provisions for early repayment |
13,898 | |||
93,898 | ||||
Less: Current maturities |
(25,000 | ) | ||
Total long term debt |
$ | 68,898 | ||
There was no debt outstanding at December 31, 2009.
The entire amount of debt was refinanced in October 2010. See Note 4, Subsequent Events, to
our consolidated financial statements included in Item 1 of this report.
Basis of Presentation
Sources of Net 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, digital dictation, speech recognition
and electronic signature services. In addition, we provide maintenance services for our legacy
dictation systems and products.
Cost of Revenues
Cost of revenues includes compensation of our U.S.-based employee MTs and our subcontractor
MTs, including costs under our Sales and Services Agreement with CBay Systems, 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.
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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.
Cost of legal proceedings and settlements
Cost of legal proceedings and settlements includes settlement of claims, ongoing litigation,
and associated legal and other professional fees incurred.
Acquisition and integration related charges
Acquisition and integration related charges include advisory, legal, counseling and travel
costs related to the Spheris acquisition.
Restructuring charges
Restructuring charges are primarily employee severance and vacated facility costs.
Consolidated Results of Operations
The following tables set forth our consolidated results of operations for the periods
indicated below:
Comparison of Three Months Ended September 30, 2010 and 2009
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MedQuist Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
Condensed Consolidated Statements of Operations
Unaudited
Three Months Ended September 30, | ||||||||||||||||||||||||
2010 | 2009 | Change in | ||||||||||||||||||||||
% of Net | % of Net | % of Net | ||||||||||||||||||||||
($ in thousands) | Amount | Revenues | Amount | Revenues | $ Change | Revenues | ||||||||||||||||||
Net revenues |
$ | 102,933 | 100.0 | % | $ | 76,836 | 100.0 | % | $ | 26,097 | | |||||||||||||
Operating costs and expenses: |
||||||||||||||||||||||||
Cost of revenues |
68,427 | 66.5 | % | 52,768 | 68.7 | % | 15,659 | (2.2 | %) | |||||||||||||||
Selling, general and administrative |
9,352 | 9.1 | % | 7,930 | 10.3 | % | 1,422 | (1.2 | %) | |||||||||||||||
Research and development |
3,681 | 3.6 | % | 2,439 | 3.2 | % | 1,242 | 0.4 | % | |||||||||||||||
Depreciation |
2,822 | 2.7 | % | 2,197 | 2.9 | % | 625 | (0.1 | %) | |||||||||||||||
Amortization of intangible assets |
3,394 | 3.3 | % | 1,518 | 2.0 | % | 1,876 | 1.3 | % | |||||||||||||||
Cost of legal proceedings and settlements |
631 | 0.6 | % | 1,382 | 1.8 | % | (751 | ) | (1.2 | %) | ||||||||||||||
Acquisition and integration related charges |
842 | 0.8 | % | | | 842 | 0.8 | % | ||||||||||||||||
Restructuring charges |
495 | 0.5 | % | 481 | 0.6 | % | 14 | (0.1 | %) | |||||||||||||||
Total operating costs and expenses |
89,644 | 87.1 | % | 68,715 | 89.4 | % | 20,929 | (2.3 | %) | |||||||||||||||
Operating income |
13,289 | 12.9 | % | 8,121 | 10.6 | % | 5,168 | 2.3 | % | |||||||||||||||
Equity in income of affiliated company |
70 | 0.1 | % | 2,154 | 2.8 | % | (2,084 | ) | (2.7 | %) | ||||||||||||||
Interest expense |
(2,927 | ) | (2.8 | %) | (29 | ) | (0.0 | %) | (2,898 | ) | (2.8 | %) | ||||||||||||
Income before income taxes |
10,432 | 10.1 | % | 10,246 | 13.3 | % | 186 | (3.2 | %) | |||||||||||||||
Income tax provision |
1,461 | 1.4 | % | 542 | 0.7 | % | 919 | 0.7 | % | |||||||||||||||
Net income |
$ | 8,971 | 8.7 | % | $ | 9,704 | 12.6 | % | $ | (733 | ) | (3.9 | %) | |||||||||||
Net revenues
Net revenues increased $26.1 million, or 34.0%, to $102.9 million for the three months ended
September 30, 2010 compared with $76.8 million for the three months ended September 30, 2009. The
acquisition of Spheris contributed $32.8 million in net revenues for the three months ended
September 30, 2010 versus the same period in the prior year. This increase was offset by a decrease in legacy
maintenance services revenues which were $4.1 million and $5.1 million for the three months ended September 30,
2010 and 2009, respectively. Current year net revenues were also unfavorably impacted by effects
of lower average pricing realized for our transcription services.
Cost of revenues
Cost of revenues were $68.4 million for the three months ended September 30, 2010 compared
with $52.8 million for the three months ended September 30, 2009. As a percentage of net revenues,
cost of revenues decreased to 66.5% for the three months ended September 30, 2010 from 68.7% for
the same period in 2009 primarily due to increased utilization of speech recognition technologies,
increased utilization of offshore resources, and other operating cost reduction initiatives. The increase in
total dollars versus the prior year period was primarily due to direct incremental costs associated
with the incremental Spheris volumes.
Selling, general and administrative
SG&A expenses were 9.1% of net revenues for the three month period ended September 30, 2010
compared to 10.3% for the same period in the prior year. The improvement versus prior year is due
to the impact of synergies realized from the Spheris acquisition and other cost savings
initiatives.
Research & development
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R&D expenses as a percentage of net revenues were 3.6% for the three months ended September
30, 2010 and 3.2% for the three months ended September 30, 2009. This increase was due to the
impact of the costs associated with the historical Spheris R&D activities, offset by the impact of
synergies realized from the Spheris acquisition.
Depreciation
Depreciation expense as a percentage of net revenues was 2.7% for the three months ended
September 30, 2010 compared with 2.9% for the same period in 2009. This decrease is primarily due
to lower capital spending in 2009.
Amortization
Amortization expense as a percentage of net revenues was 3.3% for the three months ended
September 30, 2010 compared with 2.0% for the same period in 2009. This increase was primarily due
to amortization of acquired intangible assets associated with the acquisition of Spheris.
Cost of legal proceedings and settlements
Costs of legal proceedings and settlements as a percentage of net revenues were 0.6% for the
three month period ended September 30, 2010 compared to 1.8% for the same period in the prior year
as the costs associated with defense of historical MedQuist litigation issues has continued to
decline.
Acquisition and integration related charges
We incurred Acquisition and
integration related charges of $0.8 million for the Spheris
acquisition for the three months ended September 30, 2010.
Restructuring charges
During the three months ended September 30, 2010, we recorded net restructuring charges of
$0.5 million related to employee severance. We expect that restructuring activities may
continue in 2010 and 2011 as management identifies opportunities for synergies resulting from the
acquisition of Spheris including the elimination of redundant functions. In the three months ended
September 30, 2009 we incurred $0.5 million in restructuring charges, primarily due to severance.
Interest expense
Interest expense during the three months ended September 30, 2010 was $2.9 million which is
related to the debt incurred in connection with the Spheris acquisition and the amortization of
debt issuance costs.
Income tax provision
Income tax provision as a percentage of income before taxes was 14.0% for the three months
ended September 30, 2010 as compared to 5.3% for the same period prior year. This increase in the
effective tax rate was caused by the additional tax deductions for goodwill related to Spheris that
are not expected to reverse on our books.
Comparison of Nine Months Ended September 30, 2010 and 2009
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MedQuist Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
Unaudited
Condensed Consolidated Statements of Operations
Unaudited
Nine Months Ended September 30, | ||||||||||||||||||||||||
2010 | 2009 | |||||||||||||||||||||||
Change in | ||||||||||||||||||||||||
% of Net | % of Net | % of Net | ||||||||||||||||||||||
($ in thousands) | Amount | Revenues | Amount | Revenues | $ Change | Revenues | ||||||||||||||||||
Net revenues |
$ | 274,442 | 100.0 | % | $ | 233,251 | 100.0 | % | $ | 41,191 | | |||||||||||||
Operating costs and expenses: |
||||||||||||||||||||||||
Cost of revenues |
185,350 | 67.5 | % | 157,993 | 67.7 | % | 27,357 | (0.2 | %) | |||||||||||||||
Selling, general and administrative |
28,169 | 10.3 | % | 25,819 | 11.1 | % | 2,350 | (0.8 | %) | |||||||||||||||
Research and development |
9,274 | 3.4 | % | 7,235 | 3.1 | % | 2,039 | 0.3 | % | |||||||||||||||
Depreciation |
7,518 | 2.7 | % | 7,418 | 3.2 | % | 100 | (0.4 | %) | |||||||||||||||
Amortization of intangible assets |
8,229 | 3.0 | % | 4,533 | 1.9 | % | 3,696 | 1.1 | % | |||||||||||||||
Cost of legal proceedings and settlements |
2,783 | 1.0 | % | 13,440 | 5.8 | % | (10,657 | ) | (4.7 | %) | ||||||||||||||
Acquisition and integration related charges |
6,501 | 2.4 | % | | | 6,501 | 2.4 | % | ||||||||||||||||
Restructuring charges |
1,425 | 0.5 | % | 481 | 0.2 | % | 944 | 0.3 | % | |||||||||||||||
Total operating costs and expenses |
249,249 | 90.8 | % | 216,919 | 93.0 | % | 32,330 | (2.2 | %) | |||||||||||||||
Operating income |
25,193 | 9.2 | % | 16,332 | 7.0 | % | 8,861 | 2.2 | % | |||||||||||||||
Equity in income of affiliated company |
616 | 0.2 | % | 2,582 | 1.1 | % | (1,966 | ) | (0.9 | %) | ||||||||||||||
Interest income (expense) |
(6,706 | ) | (2.4 | %) | 36 | 0.0 | % | (6,742 | ) | (2.5 | %) | |||||||||||||
Income before income taxes |
19,103 | 7.0 | % | 18,950 | 8.1 | % | 153 | (1.2 | %) | |||||||||||||||
Income tax provision |
1,908 | 0.7 | % | 1,556 | 0.7 | % | 352 | 0.0 | % | |||||||||||||||
Net income |
$ | 17,195 | 6.3 | % | $ | 17,394 | 7.5 | % | $ | (199 | ) | (1.2 | %) | |||||||||||
Net revenues
Net revenues increased $41.2 million, or 17.7%, to $274.4 million for the nine months ended
September 30, 2010 compared with $233.3 million for the nine months ended September 30, 2009. The
acquisition of Spheris contributed $58.2 million in net revenues for the nine months ended
September 30, 2010 versus the same period in the prior year.
This increase was offset by a decrease in legacy
maintenance services revenues which were $12.9 million and $16.0 million for the nine months ended September 30, 2010
and 2009, respectively. Current year net revenues were also
unfavorably impacted by effects of
lower average pricing realized for our transcription services.
Cost of revenues
Cost of revenues were $185.4 million for the nine months ended September 30, 2010 compared
with $158.0 million for the nine months ended September 30, 2009. As a percentage of net revenues,
cost of revenues decreased to 67.5% for the three months ended September 30, 2010 from 67.7% for
the same period in 2009 primarily due to increased utilization of speech recognition technologies,
increased utilization of offshore resources, and other operating cost reduction initiatives. The increase
in total dollars versus the prior year period was primarily due to direct incremental costs
associated with the incremental Spheris volumes as well as a nonrecurring $1.2 million credit
during 2009 related to medical claims costs.
Selling, general and administrative
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SG&A expenses were 10.3% of net revenues for the nine month period ended September 30, 2010
compared to 11.1% for the same period in the prior year. The improvement versus prior year is due
to the impact of synergies realized from the Spheris acquisition and other cost savings
initiatives.
Research & development
R&D expenses as a percentage of net revenues were 3.4% for the nine months ended September 30,
2010 and 3.1% for the nine months ended September 30, 2009. This increase was due to the impact of
the costs associated with the historical Spheris R&D activities, offset by the impact of synergies
realized from the Spheris acquisition.
Depreciation
Depreciation expense as a percentage of net revenues was 2.7% for the nine months ended
September 30, 2010 compared with 3.2% for the same period in 2009. This decrease is primarily due
to lower capital spending in 2009.
Amortization
Amortization expense as a percentage of net revenues was 3.0% for the nine months ended
September 30, 2010 compared with 1.9% for the same period in 2009. This increase was primarily due
to amortization of acquired intangible assets associated with the acquisition of Spheris.
Cost of legal proceedings and settlements
Costs of legal proceedings and settlements as a percentage of net revenues were 1.0% for the
nine month period ended September 30, 2010 compared to 5.8% for the same period in the prior year.
This decrease is due to costs incurred in the 2009 period related to the Anthurium settlement of
$5.8 million, related legal fees of $3.8 million and other legal fees of $2.0 million offset by
current year charges of $0.9 million related to the Kaiser litigation which was settled in the
current year.
Acquisition and integration related charges
We incurred Acquisition and integration related charges of $6.5 million for the Spheris
acquisition for the nine months ended September 30, 2010.
Restructuring charges
During the nine months ended September 30, 2010, we recorded net restructuring charges of $1.4
million related to employee severance. We expect that restructuring activities may
continue in 2010 and 2011 as management identifies opportunities for synergies resulting from the
acquisition of Spheris including the elimination of redundant functions. In the nine months ended
September 30, 2009 we incurred $0.5 million in restructuring charges, primarily due to severance.
Interest expense
Interest expense during the nine months ended September 30, 2010 was $6.7 million which is
related to the debt incurred in connection with the Spheris acquisition and the amortization of
debt issuance costs, as well as expenses related to write-off of capitalized fees and early
termination charges under our previous credit facility.
Income tax provision
Income tax provision as a percentage of income before taxes was 10.0% for the three months
ended September 30, 2010 as compared to 8.2% for the same period in the prior year. This increase
in the effective tax rate was caused by the additional tax deductions for goodwill related to
Spheris that are not expected to reverse on our books.
Liquidity and Capital Resources
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Our principal sources of liquidity include cash generated from operations, available cash on
hand, and availability under our revolving credit facility. Cash provided by operating activities
was $30.1 million for the nine months ended September 30, 2010 versus $33.0 million provided by
operations for the same period prior year. Some of the significant items impacting operating cash
flows during the current year period included:
| Improvements in operating income, including the addition provided by the Spheris acquisition | ||
| Cash paid for acquisition and integration related charges of $6.1 million | ||
| Restructuring payments of $1.7 million | ||
| Accrued expenses reflected a use of $6.9 million made up primarily of a payment of $4.6 million for a related party liability assumed in connection with the acquisition of Spheris, and a $2.0 million payment to settle the Kaiser litigation |
Additionally, during the nine month period ended September 30, 2010, we received $100.0 million in
cash inflow from the GE credit
facility which was utilized to fund the acquisition of Spheris and to fund debt issuance costs. We
have made $20.0 million in principal payments on the GE debt facility through September 30, 2010. The entire amount of debt was refinanced in October 2010, see Recapitalization Transactions below.
In September 2010, an Agreement and Plan of Merger was executed by A-Life to merge A-Life with
Ingenix. The sale was completed on October 27, 2010. Under this transaction, our shares in A-Life
were sold to Ingenix for cash consideration of $23.8 million, of which $4.7 million will be held in
escrow until March 2012. Additionally, during the fourth quarter 2010, we completed
recapitalization transactions as described below changing our debt and equity structures. We
expect to receive $19.1 million of cash in November 2010 in connection with the A-Life sale, and
upon receipt we expect to have over $40 million in cash on-hand and approximately $285 million in
debt.
Recapitalization Transactions
On October 1, 2010, we entered into definitive agreements relating to a $310 million financing
consisting of a $225 million senior secured credit facility and the issuance of $85 million of 13%
senior subordinated notes. The $225 million senior secured credit facility is led by General
Electric Capital Corporation, as administrative agent, and SunTrust Bank, as syndication agent.
The facility consists of a $200 million term loan and a $25 million revolving credit facility
bearing an interest rate of LIBOR + 550 basis points and a LIBOR floor of 1.75%. In addition, the
revolving credit facility bears a fee of 50 basis points on undrawn amounts. On October 14, 2010,
we incurred $85.0 million of indebtedness through the issuance of the 13% senior subordinated notes
due 2016 pursuant to a note purchase agreement. At our option, a portion of the interest is payable
in the form of additional senior subordinated notes, in which event the interest rate would be 12%
in cash and 2% in the form of additional notes. In addition, on October 14, 2010, we incurred
$200.0 million of indebtedness under the term loan. Our 69.5% shareholder, CBay Inc.,
and CBay Holdings guaranteed our obligations under the senior secured credit facility and the
senior subordinated notes.
Proceeds from the financing were used to refinance the debt incurred in connection with the
April 2010 acquisition of the assets of Spheris and to pay a special cash dividend of $176.5
million ($4.70 per share) to shareholders of record as of October 11, 2010.
We believe our existing cash, cash equivalents, and cash to be generated from operations and
available borrowings under our revolving credit facility will be sufficient to finance our
operations for the next twelve months. 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 selling
additional equity. There are no assurances that sufficient funding from external sources will be
available to us on acceptable terms, if at all.
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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 with the participation of our chief executive officer and our chief financial
officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule
13a-15, Securities Exchange Act of 1934 (the Exchange Act) as of the end of the period covered by
this Quarterly Report on Form 10-Q. In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired control objectives.
In addition, management is required to apply its judgment in evaluating the benefits of possible
disclosure controls and procedures relative to their costs to implement and maintain.
Based on managements evaluation, our chief executive officer and chief financial officer
concluded that our disclosure controls and procedures are designed at a reasonable assurance level
and are effective to provide reasonable assurance that information we are required to disclose in
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, and that such information
is accumulated and communicated to our management, including our chief executive officer and our
chief financial officer, or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the fiscal
quarter ended September 30, 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
Kaiser Litigation
On September 6, 2008, plaintiffs Kaiser Foundation Health Plan, Inc. and affiliates
(collectively, Kaiser) filed suit against us in the Superior Court of the State of California
related to our billing practices.
In July 2010, the parties reached a settlement of the litigation whereby we made a payment of
$2.0 million to resolve all of Kaisers claims. Neither we, nor Kaiser, admitted to any liability
or wrongdoing in connection with the Settlement.
Kahn Putative Class Action
This action was initiated on January 22, 2008, when 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. The
Action was venued in the Superior Court of New Jersey, Chancery Division, Burlington County.
Thereafter, on June 12, 2008, plaintiff filed an amended class action complaint against us, eight
of our then current and former directors, and Philips. In the amended complaint, plaintiff alleged
that our then 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 Limited. The share purchase offer 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 November 21, 2008, the Court dismissed plaintiffs amended class action complaint with
prejudice. Thereafter, on July 1, 2010, the New Jersey Appellate Division entered an Order and
Opinion that affirmed the dismissal of the claims against MedQuist and two of the MedQuist director
defendants. The Appellate Division reversed the dismissal of the claims against the remaining
defendants Philips and certain of our former directors and remanded those claims back to the
Chancery Division. We are no longer a defendant in this matter but we are monitoring the matter
since it involves claims against our former directors.
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.
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 Investigation of Former Officer
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 been providing indemnification for the legal fees for our former chief financial
officer.
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 the 2009 Form 10-K (as updated below as
well as by the Q1 Form 10-Q and the Q2 Form 10-Q). You should carefully consider the risks
described in our 2009 Form 10-K as well as in the Q1 Form 10-Q and the Q2 Form 10-Q, which could
materially affect our business, financial condition or future results. The risks described in our
2009 Form 10-K (as updated below as well as by the Q1 Form 10-Q and the Q2 Form 10-Q) 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.
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The risk factors in our 2009 Form 10-K entitled If the electronic health records (EHR)
companies produce solutions acceptable to large hospital systems for the creation of electronic
clinical documentation that are not based on the conversion of voice to text, the overall demand
for medical transcription services could be reduced. and Our business, particularly our DEP and
speech recognition software, depends on the continuous, effective, reliable, and secure operation
of our computer hardware, software, and Internet applications and related tools and functions. and
Proposed legislation and possible negative publicity may impede our ability to utilize global
service capacities. are hereby amended and restated as follows:
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 business, particularly our DocQment(tm) Enterprise Platform (DEP) and our speech
recognition software, depends on the continuous, effective, reliable, and secure operation of our
computer hardware, software, and Internet applications and related tools and functions.
A substantial portion of our business involves the transfer of large amounts of data to and from
our DEP via the Internet. Also, we rely on a global enterprise software system to operate and
manage our business. Our DEP, and its underlying technologies, are designed to operate and to be
accessible to 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. Substantially all
of our transcription services are dependent upon the use of network and information systems,
including the use of our DEP and our speech recognition software, which is licensed from a third
party. We have periodically experienced short term outages with our DEP 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.
Proposed legislation and possible negative publicity may impede our ability to utilize global
service capabilities.
Certain stated laws that have recently been enacted and bills introduced in recent sessions
of the U.S. Congress have sought 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 business 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 and 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 limitation s on the disclosure of medical or other
information to individuals or entities located outside the U.S. Further, as a result of this
negative publicity and concerns regarding the possible misuse of personally identifiable
information, some of our customers have
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contractually limited our ability to use MTs 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.
The risk factor added to the risk factors in our 2009 Form 10-K by the Q2 Form 10-Q are
entitled Our ability to operate the business given our restrictions under the GE Credit
Agreement. is hereby amended and restated as follows:
Our ability to operate the business given our restrictions under our new indebtedness
agreements.
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 Senior
Secured Credit Facility and the Senior Subordinated Notes. The Senior Secured Credit Facility
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, a Maximum Consolidated Senior Leverage Ratio and a Maximum Consolidated
Total Leverage Ratio, as defined in the Senior Secured Credit Facility as well as certain
restrictions on the acquisition of other companies. Amounts due under the Senior Secured Credit
Facility may be accelerated upon an Event of Default (as defined in the Senior Secured Credit
Facility), including failure to comply with obligations under the credit agreement, bankruptcy or
insolvency, and termination of certain material agreements.
We have also identified the following new risk factors, which should be considered in addition
to the risk factors in our 2009 Form 10-K (as updated by the Q1 Form 10-Q and the Q2 Form 10-Q):
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 providers 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.
Our common stock may be materially impacted by the exchange offering by CBay Holdings regardless
of whether the exchange offering is completed.
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Shares of our common stock will be subject to different risks as a result of CBay Holdings
exchange offer to our noncontrolling shareholders who did not participate in the MedQuist
Exchange filed with the SEC on Form S-4, in October 2010 (the CBay Offer) regardless of whether
the CBay Offer is completed.
Following the consummation of the CBay Offer, an active, liquid trading market for our common
stock may no longer exist and shares of our common stock may be subject to delisting from the
NASDAQ in each case, which may adversely affect their liquidity and value for an indefinite
period of time. If the number of shares materially decreases or if they are delisted, then
equity research coverage of our common stock may be discontinued. In addition, depending on the
number of holders of our common stock following the completion of the CBay Offer, we may
deregister under the Exchange Act.
In addition, if following the consummation of the CBay Offer, if CBay Holdings holds more than
90%, but less than 100%, under New Jersey law, it may be able to force the merger of us with or
into CBay Holdings or one of its affiliates, which would result in common stock being converted
into the right to receive merger consideration and our shareholders will no longer hold an
interest in our company.
If the CBay Offer is delayed or not completed, our common stock may be subject to material risks
including the risk that the market price of our common stock may decline to the extent that the
current market price reflects a market assumption that the CBay Offer has been or will be
completed.
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 the results of operations and financial condition.
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 and 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
technologies 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.
Security and privacy breaches in our systems may damage customer relations and inhibit our
growth.
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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, among other things, cause our
customers to lose confidence in our solutions and harm our reputation, expose us to liability,
and increase our expenses from remediation costs.
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 the changing market conditions or the security and privacy concerns
of existing and potential customers.
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 if
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.
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 #
|
Amendment No. 1 to the Sales and Services Agreement, dated July 26, 2010 between MedQuist, Inc. and CBay Systems & Services, Inc. | |
10.2 #
|
Amendment No. 1 to the Subcontracting Agreement dated July 26, 2010, between MedQuist, Inc. and CBay Systems & Services, Inc. | |
10.3 (1)
|
Settlement Agreement and Release dated August 12, 2010 by and among MedQuist Inc. and MedQuist Transcriptions, Ltd., on the one hand, and Kaiser Foundation Health Plan, Inc., Kaiser Foundation Hospitals, The Permanente Medical Group, Inc., Southern California Permanente Medical Group, Kaiser Foundation Health Plan of the Mid-Atlantic States, Inc., and Kaiser Foundation Health Plan of Colorado, on the other hand. | |
10.4
|
First Amendment to Norcross, Georgia Office Lease Agreement dated as of March 1, 2009. | |
10.5
|
Second Amendment to Norcross, Georgia Office Lease Agreement dated as of August 1, 2009. |
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. |
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No. | Description | |
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 August 18, 2010. |
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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: November 9, 2010 | /s/ Peter Masanotti | |||
Peter Masanotti | ||||
President and Chief Executive Officer (Principal Executive Officer) |
||||
Date: November 9, 2010 | /s/ Dominick Golio | |||
Dominick Golio | ||||
Chief Financial Officer (Principal Financial Officer) |
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Exhibit Index
No. | Description | |
10.1 #
|
Amendment No. 1 to the Sales & Services Agreement, dated July 26, 2010, between MedQuist, Inc. and CBay Systems & Services, Inc. | |
10.2 #
|
Amendment No. 1 to the Subcontracting Agreement , dated July 26, 2010, between MedQuist, Inc. and CBay Systems & Services, Inc. | |
10.4
|
First Amendment to Norcross, Georgia Office Lease Agreement dated as of March 1, 2009. | |
10.5
|
Second Amendment to Norcross, Georgia Office Lease Agreement dated as of August 1, 2009. | |
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. |
33