SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (the "Act")
MEDQUIST INC.
(Exact name of registrant as specified in its charter)
For the fiscal year ended December 31, 1996 Commission file number 0-19941
New Jersey 22-2531298
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Five Greentree Centre, Suite 311, Marlton, NJ 08053
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (609) 596-8877
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
--------------
Common Stock (no par value)
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 report(s), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of Registrant's knowledge, in definite proxy or information statements
incorporated by reference in Part III of this Form 10-K. [ ]
The aggregate market value of the Registrant's voting stock held by
non-affiliates was approximately $118.5 million on March 25, 1997, based on the
closing price of Registrant's Common Stock as reported on the Nasdaq National
Market as of such date.
The number of shares of the Registrant's Common Stock, no par value,
outstanding as of March 25, 1997 was 6,906,229.
DOCUMENTS INCORPORATED BY REFERENCE
The following document is incorporated by reference.
Part III - Proxy Statement to be filed with the Commission in
connection with the 1997 Annual Meeting.
PART I
Item 1. BUSINESS
The following Report contains forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain risks, including, without limitation, the dependence on a single line of
business; rapid technological change; inability to expand into new markets or to
make acquisitions; inability to attract and retain key personnel and
transcriptionists; and the effects of regulatory changes within the healthcare
industry.
General
The Company is a leading national provider of electronic transcription
and document management services to the healthcare industry. Through its
proprietary software, open architecture environment and network of more than
2,000 trained transcriptionists, the Company converts free-form medical
dictation into electronically formatted patient records which healthcare
providers use in connection with patient care and for other administrative
purposes. The Company's customized outsourcing services enable clients to
improve the accuracy of transcribed medical reports, reduce report turnaround
times, shorten billing cycles and reduce overhead and other administrative
costs. The Company believes that the electronic capture and delivery of
free-form physician dictation are key components in the increasing
implementation by healthcare providers of electronic medical record systems.
The Company continues to implement advances in technology to improve
the delivery of its services. The Company provides clients with its Medical
Transcription System ("MTS"), an integrated transcription and document
management system based upon proprietary software. The Company's technical staff
customize MTS to address initial data capture, conversion of data into
electronic format, editing of data and routing of electronically formatted
reports to the client's host computer system. For electronic data interchange,
MTS incorporates the HL-7 format or other interface protocols. The Company's
Dictation Tracking System ("DTS") enables the Company and its clients to track
the status of particular patient data and transcribed reports at any point in
time. Clients also use DTS as an integral management tool to monitor physician
timeliness in the dictation, review and sign-off process and to evaluate the
Company's on-time performance.
Company History
The Company was incorporated in New Jersey in 1987 as a group of
out-patient healthcare businesses affiliated with a non-profit healthcare
provider. During the last several years, the Company sold its out-patient
businesses, acquired Transcriptions, Ltd. in May 1994 and two other small
transcription businesses in 1995, and sold its receivables management division
in December 1995. In 1996, the Company acquired five additional regional
transcription companies. As used herein, the term the "Company" includes all of
its subsidiaries, including its subsidiary Transcriptions, Ltd., as well as its
predecessor.
Item 1. BUSINESS - Continued
Industry Overview
Growth in the demand for medical transcription services is directly
impacted by the number of hospital admissions and out-patient visits. Each
hospital admission or out-patient visit generates dictated or written data which
must be entered into a patient's record. For the year ended September 30, 1995,
the American Hospital Association estimated the number of hospital admissions
and out-patient visits in the United States to be 8.3 million (an increase of
approximately 3% over the corresponding period in 1992) and 112 million (an
increase of approximately 22% over the corresponding period in 1992),
respectively.
Electronic medical transcription and document management is the process
by which free-form dictated patient data is captured in a useable format, routed
to the appropriate location and inserted into a patient's medical record.
Physicians and other individual healthcare providers use this information for
direct patient care delivery purposes and administrative personnel use the
information for billing and other administrative purposes. Historically, the
majority of dictated reports and related transcription expenditures were
generated by hospital medical record departments, where transcription services
represent a significant expenditure. Examples of these reports include patient
histories, discharge summaries, operative reports and consults. Increasingly,
other hospital departments, such as radiology, emergency, oncology, pediatrics
and cardiology, are dictating reports to improve their delivery of care and
administrative functions. Health maintenance organizations, out-patient clinics
and physician practice groups are also expanding their use of transcribed
medical reports. Accordingly, the Company believes the market for outsourced
transcription services will expand due in part to the following emerging trends.
Outsourcing. In the 1990's outsourcing of services in the healthcare
industry is increasing as a means to reduce administrative burdens and fixed
costs. Hospitals and other healthcare organizations are increasingly outsourcing
their electronic transcription of dictated patient records as their information
needs and volume of dictated reports expand. Particularly as healthcare
providers grow in size and the delivery of medical care becomes decentralized,
outsourcing of transcription services permits providers to reduce overhead and
costs, ease administrative burdens, improve quality of reports, access leading
technologies without development and investment risk and obtain the expertise to
implement and manage a system tailored to their specific requirements.
Growth in Information Systems. As healthcare organizations expand and
the delivery of care becomes increasingly decentralized, the insurance industry
and, in some cases, healthcare accreditation organizations are requiring
expanded use of transcribed reports to facilitate communication between various
parts of a healthcare network, to improve the quality and efficiency of patient
care, and to retain and provide reliable information in the event of malpractice
litigation. Moreover, the growing information needs of hospitals and other
healthcare organizations are driving the creation of electronic medical record
systems as the first step in the implementation of the computer based patient
record and the ability to perform outcomes analysis. The Company believes that
electronic medical transcription services are a core component of such systems
and records since they provide the ability to capture, access and manipulate the
patient data which forms the basis of the patient record.
-3-
Item 1. BUSINESS - Continued
Delivery of Care. As the health insurance industry continues to shift
from traditional fee-for-service reimbursement to managed care forms of
reimbursement such as "capitation," healthcare providers and payors are creating
integrated healthcare delivery systems consisting of hospitals, health
maintenance organizations, out-patient clinics and physician practice groups
which must coordinate the exchange of patient information and the delivery of
patient care. The accurate and efficient capture of patient data, and the
distribution and storage of and access to patient medical records are critical
to such coordination. Similar coordination is required as healthcare
organizations, often with different information systems, consolidate and
increase in size through mergers and acquisitions. Increasingly, healthcare
organizations are recognizing that centralizing patient data into an accessible
system can create economies of scale to reduce overall healthcare costs and
improve the efficient delivery of patient care.
Consolidation. The medical transcription industry is highly fragmented.
An industry trade organization estimates that there are approximately 1,500
providers of medical transcription services, most of which are small local or
regional companies. Many of these companies lack the financial resources or the
technological capabilities necessary to provide outsourced transcription
services to healthcare providers nationwide. As healthcare organizations
themselves consolidate and increase in size, and their information needs become
more complex, providers and payors increasingly require large and sophisticated
vendors.
Strategy
The Company's objectives are to maintain its leadership position as a
provider of electronic transcription and document management services to the
healthcare industry and to enhance that position as the information needs of
healthcare providers continue to expand and evolve. The key elements of the
Company's strategy include the following:
Expand Existing Client Relationships. A majority of the Company's
transcription services are provided to hospital medical record departments.
Through its close and continuing client relationships, the Company seeks to
increase its services as these departments outsource more of their transcription
requirements and as the volume of patient records continue to grow. In addition,
the Company is seeking to penetrate the direct care departments at hospitals
such as radiology, emergency, oncology, pathology, pediatrics and cardiology,
within its existing client base. Historically, these departments have not
dictated their patient data or outsourced the transcription of their patient
data to the same extent as medical record departments.
Extend Current Client Base. The Company is seeking to extend its base
of traditional hospital clients and to pursue new clients such as health
maintenance organizations, out-patient clinics and physician practice groups
which the Company believes will represent a growing percentage of the available
market. Based upon input from new clients, the Company believes that references
from its existing client base represent a key component of its sales and
marketing efforts.
Leverage Technology Leadership. The Company's proprietary software,
which operates within an open architecture environment, and the Company's
technological expertise enable it to create customized systems tailored to
specific client requirements and changing industry standards. The Company
intends to continue to incorporate advances in technology to improve the
efficiency of its operations, reduce costs, expand the breadth and functionality
of its services and enhance its competitive position.
-4-
Item 1. BUSINESS - Continued
Capitalize on Emerging Technologies. The Company is initiating
relationships with developers and end-users of emerging technologies, such as
voice-recognition, physician clinical work stations and Internet based
communications, to create value added services for its clients and to
participate in the development of the computer based patient record.
Pursue Strategic Acquisitions. The Company intends to pursue
acquisitions of other transcription companies which expand its client base,
management team, network of qualified transcriptionists or geographic presence,
as well as acquisitions, joint ventures and other relationships which expand its
technological expertise. As the only publicly traded company engaged primarily
in the provision of medical transcription services, the Company believes that it
can capitalize on consolidation opportunities within the fragmented medical
transcription industry. In 1996 and 1995, respectively, the Company completed
five and two acquisitions of small regional medical transcription companies. See
Footnote 2 to the Consolidated Financial Statements attached hereto.
The MedQuist Integrated System
The Company integrates proprietary software with sophisticated digital
dictation equipment, and a healthcare provider's host system, a network of more
than 2,000 transcriptionists and an experienced management team to provide
customized solutions for hospitals and other healthcare providers. Through its
outsourced transcription and document management services, the Company captures
and stores free-form medical dictation, professionally transcribes such
dictation into accurate reports, and electronically receives, reviews and
distributes final reports to a client by up-loading them into the client's
computer system for placement into a patient's medical record. Authorized
individuals at multiple locations can access this electronic information when
needed for administrative, billing and patient care purposes. The Company
believes that the transcription and management of free-form dictation are key
components in the increasing implementation of electronic medical record
systems.
The following are the key characteristics of the Company's electronic
transcription and document management system:
Customization/Open-Architecture. MTS operates in an open architecture
environment providing flexibility to address individual client needs. The
Company is capable of modifying MTS to interface with existing or legacy
systems. The Company's technical staff works closely with its clients, both
before and after installation, to develop system modifications and refinements.
For example, MTS allows database abstracting and can generate reports which
clients can use for administrative, management or direct delivery of patient
care purposes (i.e., outcomes analysis studies).
Fast, Accurate and Reliable Reports. The Company believes that due to
its large number (more than 2,000) of trained transcriptionists and its ability
to allocate work among them efficiently, it is able to reduce the production
turnaround times for transcribed medical reports. MTS allows a match of client
turnaround requirements and transcriptionist availability that an in-house staff
or smaller organization generally cannot provide. MTS also provides editing and
electronic review capabilities, such as specific reference to pages or clauses
to alert clients to potential deficiencies, that increase accuracy and
reliability. The quality of its transcriptionists and the capabilities of MTS
enable the Company to deliver its services on a cost-effective basis.
-5-
Item 1. BUSINESS - Continued
Distribution/Routing System. MTS speeds the distribution of transcribed
reports within the client's healthcare organization. MTS enables the Company to
exchange patient data with the client, using either the HL-7 format or another
interface protocol selected by the client. As a result, completed reports are
uploaded directly into the client's computer system. Once received at the client
host computer, authorized healthcare professionals throughout the client's
organization can access the report.
Tracking System. DTS enables a client and individual healthcare
providers to review the status of particular patient data and transcribed
reports at any point in time and to advise the Company whether the production of
a particular report requires acceleration. Through DTS, the client and the
Company are able to monitor the Company's on-time performance, especially with
respect to critical reports requiring turnaround times of less than 24 hours.
Healthcare providers also use DTS as an integral management tool to monitor
physician timeliness in their dictation, review and sign-off process.
Technology Development
The Company continually evaluates emerging technologies and applies
them as appropriate to make its services more reliable, efficient and
cost-effective, and to assist its clients in meeting their transcription and
document management needs. The Company modifies MTS to interface with existing
or legacy systems. The Company works directly with its clients, both before and
after implementation of its systems, to create customized solutions. For
example, the Company partners with its clients to customize MTS to enable
electronic data exchange in accordance with the HL-7 format, or other interface
protocols, to link the various components of the client's healthcare network.
The Company has also made technological enhancements to MTS to increase
the speed and accuracy of its transcriptionists. Completed projects include the
development of keys and keystroke combinations which translate into commonly
used, often misspelled, medical and technical terms. Additional improvements in
the MTS online spellcheck and editing systems are currently under development,
as are enhancements to the Company's electronic signature capability, the
Company's use of facsimile servers to facilitate the distribution of transcribed
reports to multiple locations, and the conversion of ASCII text into HTML
documents for transmission over computer networks.
Clients
The Company's diversified client base includes more than 500 hospitals
and other healthcare organizations and physician practice groups. A majority of
the Company's largest clients are hospitals, including large metropolitan
hospitals and major teaching hospitals. Additional clients include health
maintenance organizations and out-patient clinics. The Company's clients are
located in 38 states and the District of Columbia. The following table sets
forth certain information relating to the Company's client profile and their
contribution to the Company's revenue for 1995 and 1996:
1996 1995
Percentage Percentage
Type of Client of Revenues of Revenues
- -------------- ----------- -----------
Hospital Medical Records Departments............... 69.7% 78.3%
Other Hospital Departments......................... 20.9% 13.3%
HMOs, Out-Patient Clinics and Other Healthcare
Providers........................................ 8.5% 7.8%
Physician Practice Groups.......................... 0.9% 0.6%
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Item 1. BUSINESS - Continued
Sales and Marketing
All office managers and operational vice presidents, as well as the
Company's senior management including the Chief Executive Officer, have sales
responsibilities. Based on input from new clients, the Company believes that,
historically, the new clients have utilized its services in large part due to
recommendations and references by its existing national client base, and that
references from its existing client base will continue to be a key component of
its marketing and sales strategy. In addition to its traditional transcription
services to hospital medical record departments, the Company's target markets
include patient care departments, such as radiology, emergency rooms, oncology,
pathology, pediatrics and cardiology, health maintenance organizations,
physician practice groups and out-patient clinics.
When performing sales and marketing responsibilities, the Company's
employees utilize a consultative sales and marketing approach by establishing a
working relationship with its clients through a series of direct meetings with
the chief financial officer, health information manager, chief information
officer and other key individuals at the client's organization. In this manner,
the Company obtains information concerning the particular needs of a client, and
educates the client as to how the Company's services can be customized to meet
those needs. As part of its marketing efforts, the Company also advertises in
national healthcare trade publications (including those sponsored by the
American Health Information Management Association), and participates in
industry conventions.
Competition
The Company currently competes in a highly fragmented industry which is
predominately populated by small, regional or local companies, with a limited
number of national companies. According to the Medical Transcription Industry
Alliance, there are over 1,500 companies providing medical transcription
services in the United States. The Company believes that it competes for clients
on the basis of price, ability to customize services and the reliability,
accuracy and turnaround time of transcribed reports. In addition to competition,
the market available to the Company is limited by healthcare organizations which
maintain in-house transcription departments.
Employees
As of March 13, 1997, the Company employed 573 persons, of whom 28 are
administrative, 25 are branch office managers, 41 are technical support, 235 are
clerical and other support personnel, and 244 are transcriptionists. In
addition, 1,821 persons provide transcription services to the Company from their
homes. The Company compensates its transcriptionists under an incentive-based
compensation structure based upon their performance (including accuracy, speed
and output). The Company believes that its ability to engage at-home
transcriptionists enables it to compete effectively for the limited number of
skilled transcriptionists. By being able to work out of their homes, qualified
transcriptionists can make their own hours, eliminate commuting costs and time
and have the benefits of flexible work hours. Additionally, many of the
Company's transcriptionists are working parents with children and the ability to
work at home permits them to reduce child care costs.
-7-
Item 1. BUSINESS - Continued
The Company takes the position that its at-home transcriptionists are
independent contractors for state tax, benefits and unemployment purposes and
statutory employees for social security and federal income tax purposes. A
successful challenge to the Company's position or a change in applicable law
could result in the incurrence of liability for withholding taxes, disability
payments, unemployment payments, interest and penalties by the Company.
The Company utilizes a quality control program for training its
transcriptionists to permit greater accuracy of transcribed reports. The Company
has hired a national recruiter for screening and testing applicants for
positions as transcriptionists and maintains relationships with transcriptionist
schools to develop applicant pools. Screening procedures include testing
applicants' skills to determine whether they meet the Company's standards.
None of the Company's employees are represented by a labor union. The
Company considers its relations with its employees to be good.
Government Regulation
The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the outsourcing arrangements of healthcare
providers. Federal and state legislators have proposed programs to reform the
United States healthcare system and other proposals are in the development
stage. In general, these programs and proposals tend to emphasize managed care,
seek to lower reimbursement rates and otherwise attempt to control the
environment in which providers operate.
In providing its services, the Company is subject to certain statutory,
regulatory and common law requirements regarding the confidentiality of such
medical information. The Company requires its personnel to agree to keep all
medical information confidential and monitors compliance with applicable
confidentiality requirements.
Federal and state regulators are making increasing efforts to
investigate claims of false billing for government reimbursement and have
secured substantial payments from healthcare providers to resolve these claims.
Because these claims often result from a lack of appropriate documentation to
support billing, these government investigational efforts may stimulate a need
for more comprehensive transcription services. Additionally, healthcare
accreditation organizations and governmental authorities have begun to require
more efficient transcription of patient medical records as part of the
requirements for a hospital or other healthcare organization to receive and
maintain its accreditation.
It presently cannot be determined if any additional healthcare
legislation or self-regulatory proposals (whether relating to reimbursement,
accreditation, billing practices, confidentiality, the healthcare industry in
general or otherwise) will be introduced, the form that any such legislation or
proposals would take, whether such legislation or proposals would be enacted or
adopted and, if enacted or adopted, what effect, if any, such legislation or
proposals would have on the healthcare industry in general and the Company in
particular.
-8-
Item 1. BUSINESS - Continued
Intellectual Property
The Company considers its MTS and DTS trademarks and its corporate
names MedQuist and Transcriptions, Ltd. to be important to the operation of its
business and the marketing of its services. The Company has been issued a
registered trademark for the corporate name "MedQuist." No registered trademark
has been issued for MTS, DTS or the corporate name Transcriptions, Ltd. The
Company regards the software underlying its services as proprietary, and relies
primarily on a combination of contract, copyright and trademark law, trade
secrets, confidentiality agreements and contractual provisions to protect its
proprietary rights. The Company has no patents or patent applications pending,
and relies on existing trade secrets and copyright laws to afford it protection
against unauthorized use. The Company is not aware that any of its software,
trademarks or other proprietary rights infringe the proprietary rights of third
parties.
Item 2. PROPERTIES
The Company does not own any real property. The Company leases office
and other space for 32 service centers in 22 states. The Company's typical
service center ranges in size from 1,000 to 7,000 square feet and is leased for
a term ranging from three to five years. The Company's executive offices
comprise 14,000 square feet and has three years remaining on its lease. The
Company believes that there is adequate office space available to it should it
need to move or expand and that minimal leasehold improvements are required in
order to open a new location.
Item 3. LEGAL PROCEEDINGS
Although the Company from time to time in the course of the operation
of its business is subject to various legal proceedings, the Company is not
currently a party to any material pending legal proceeding nor, to the knowledge
of the Company, is any material legal proceeding currently threatened.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters during the fourth quarter of the
year covered by this report to a vote of the security holders through the
solicitation of proxies or otherwise.
-9-
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
Since May 24, 1996 the Common Stock has been traded on the Nasdaq
National Market under the symbol "MEDQ". From September 20, 1994 until May 24,
1996, the Common Stock was traded on the American Stock Exchange under the
symbol "MBS." From May 12, 1992, when the Company completed its initial public
offering, until September 20, 1994, the Common Stock was quoted in the Nasdaq
National Market. The following table sets forth, for the last two fiscal years
and for the first quarter of 1997 through the date set forth below, the high and
low reported closing sale prices for the Common Stock for the period during
which the Common Stock has been traded on the American Stock Exchange and the
range of high and low bid quotations for the period in which the Common Stock
was quoted in the Nasdaq National Market. The bid quotations for the Nasdaq
National Market reflect inter-dealer prices, do not include retail mark-ups,
mark-downs or commissions and may not necessarily reflect actual transactions.
High Low
---- ---
1995
First Quarter................................... 8-1/8 6-3/4
Second Quarter.................................. 9-1/4 6-3/8
Third Quarter................................... 10-1/8 6-3/8
Fourth Quarter.................................. 9-3/8 6-3/4
1996
First Quarter................................... 13 8-3/8
Second Quarter.................................. 20-3/4 12-1/8
Third Quarter................................... 22-1/4 12-1/2
Fourth Quarter.................................. 25 16-1/2
1997
First Quarter................................... 26-1/2 22-1/2
On March 25, 1997 the closing sale price for the Common Stock, as
reported on the Nasdaq National Market, was $23 per share, and there were 83
record holders of the Common Stock and the Company estimates there were
approximately 1,500 beneficial holders.
DIVIDEND POLICY
To date, the Company has not paid any dividends on its capital stock.
The Company currently intends to retain any future earnings to fund operations
and the continued development of its business and, therefore, does not
anticipate paying any cash dividends on its Common Stock in the foreseeable
future. Future cash dividends, if any, will be determined by the Board of
Directors, and will be based upon the Company's earnings, capital requirements,
financial condition and other factors deemed relevant by the Board of Directors.
The Company's senior lender restricts the payment of any dividends.
-10-
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below reflects
selected consolidated financial data of the Company for the periods indicated,
after giving retroactive effect of the Company's discontinued operations. The
selected consolidated financial data for each of the four years ended December
31, 1996 have been derived from the consolidated financial statements of the
Company which have been audited by Arthur Andersen LLP, independent public
accountants. The selected consolidated financial data for the year ended
December 31, 1992 has been derived from consolidated financial statements of the
Company audited by Deloitte & Touche LLP. This data should be read in
conjunction with the consolidated financial statements of the company and the
notes thereto, and Management's Discussion and Analysis of Financial Condition
and Results of Operations included elsewhere in this Report.
Year Ended December 31,
------------------------------------------------------------------------
(In thousands, except per share data)
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
Statement of Operations Data:
Revenues(1) ...................................... $ 61,480 $ 45,127 $ 24,841 $ -- $ --
Costs and expenses:
Cost of revenues ............................... 45,591 33,711 18,677 -- --
Selling, general and
administrative ............................... 3,579 4,325 2,798 1,688 1,533
Depreciation ................................... 2,468 1,862 639 60 53
Amortization of
intangible assets ............................ 1,176 496 264 12 10
-------- -------- -------- -------- --------
Total operating expenses .................... 52,814 40,394 22,378 1,760 1,596
-------- -------- -------- -------- --------
Operating income (loss) .......................... 8,666 4,733 2,463 (1,760) (1,596)
Interest expense ................................. 1,649 3,695 2,738 1,426 393
-------- -------- -------- -------- --------
Income (loss) from continuing
operations before income taxes .................. 7,017 1,038 (275) (3,186) (1,989)
Income tax provision (benefit) ................... 2,833 431 (109) 1,290 (867)
-------- -------- -------- -------- --------
Income (loss) from continuing
operations(1) ................................ 4,184 607 (166) (1,896) (1,122)
Discontinued operations (2) ..................... -- (1,729) 1,612 3,746 2,629
Extraordinary item (3) ........................... -- (545) -- -- --
-------- -------- -------- -------- --------
Net income (loss) ................................ 4,184 (1,667) 1,446 1,850 1,507
Inducement deduction(4) .......................... (707) -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) available to
common shareholders ............................ $ 3,477 $ (1,667) $ 1,446 $ 1,850 $ 1,507
======== ======== ======== ======== ========
Income (loss) per share (5):
Continuing operations(1) ....................... $ 0.70 $ 0.26 $ 0.09 $ (0.40) $ (0.41)
Discontinued operations(2) ..................... -- (0.73) 0.49 1.02 0.97
Extraordinary item (3) ......................... -- (0.23) -- -- --
Inducement deduction (4) ....................... (0.12) -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) per share .................. $ 0.58 $ (0.70) $ 0.58 $ 0.62 $ 0.56
======== ======== ======== ======== ========
Shares used in computing income
(loss) per share (5) .......................... 6,002 2,362 3,316 3,656 2,697
======== ======== ======== ======== ========
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Balance Sheet Data:
December 31,
------------------------------------------------------------------------
(in thousands)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Working capital .............................. $ 18,355 $ 4,926 $ 776 $ 1,108 $ (373)
Total assets ................................. 74,341 58,095 51,403 25,041 27,556
Long-term debt, net of
current portion ............................ 1,719 15,956 30,415 12,395 13,663
Subordinated payable to
related parties ............................ -- 21,887 -- -- --
Shareholders' equity ......................... 65,695 10,420 10,692 9,071 11,937
- ---------------------------
(1) Transcriptions, Ltd. was acquired by the Company effective May 1,
1994. All prior businesses have been treated as discontinued
operations. See (2) below.
(2) On November 14, 1995, the Company executed a letter of intent to sell
its receivables management business. The operations and net assets of
the Company's receivables management business and previously divested
businesses have been accounted for as discontinued operations.
Discontinued operations are presented net of tax and include a gain on
disposal of $1,749 in 1993 and a loss on disposal of $3,180 in 1995.
See Note 3 of Notes to Consolidated Financial Statements.
(3) Represents the loss on early extinguishment of debt, net of income taxes.
(4) Represents issuance of 42,500 shares of common stock to induce a
warrant holder to exercise. The Company has recorded a $707
non-recurring deduction from net earnings available to common
shareholders. See Note 8 of Notes to Consolidated Financial Statements.
(5) For the years prior to 1996, the Company's total outstanding options
and warrants to purchase Common Stock exceeded 20% of the total
outstanding common stock. Therefore, the income per share computations
for such years are modified as required under Accounting Principle
Board Opinion No. 15. See Note 1 of Notes to Consolidated Financial
Statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The Company is a leading national provider of electronic transcription
and document management services to the healthcare industry. As a result of
acquisition and divestiture activity from 1992 through 1995, the Company's
operations have changed considerably and the Company's financial statements
reflect its previously divested businesses as discontinued operations. The
Company's continuing operations relate only to its transcription business.
Accordingly, the operating results of the Company do not reflect the financial
results of the transcription business prior to its May 1994 acquisition of
Transcriptions, Ltd.
Fees for transcription related services are based primarily on
contracted rates, and revenue is recognized upon the rendering of services and
delivery of reports. Cost of revenues consists of all direct costs associated
with providing transcription related services, including payroll,
telecommunications, software customization, repairs and maintenance, rent and
other direct costs. Selling, general and administrative expenses include costs
associated with the Company's senior executive management and with marketing and
sales, finance, legal and other administrative functions.
On May 24, 1996, the Securities and Exchange Commission declared
effective a registration statement relating to the sale of 2,200,000 shares of
common stock of the Company at a price of $17.00 per share. A portion of the net
proceeds from the offering have been used to pay in full the cash portion of the
deferred purchase price payable to related parties in connection with the
acquisition of Transcriptions, Ltd. and to repay in full borrowings outstanding
under the Company's senior credit facility with certain lenders. The remaining
net proceeds were used by the Company for general corporate purposes.
Simultaneous with the closing of the offering, the Company issued
962,675 shares of common stock to a warrant holder. The warrant holder exercised
its warrants to purchase preferred stock by canceling the $7.0 million principal
amount of a senior subordinated note and simultaneously converted such preferred
stock into common stock. In addition, the Company issued 42,500 shares of common
stock to induce the warrant holder to exercise. As a result of this issuance,
the Company has recorded a $707,000 or $0.12 per share non-recurring deduction
from net earnings available to common shareholders.
On June 21, 1996, the underwriters exercised the over-allotment option
for the purchase of 307,160 additional shares of the Company's common stock at
the offering price of $17.00 per share. The Company's net proceeds for the
exercise of the over-allotment option of approximately $4.9 million was used for
general corporate purposes.
-13-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
Results of Continuing Operations
The following table sets forth, for the periods indicated, certain
financial data as a percentage of net revenues:
Year Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
Revenues .............................................................. 100.0% 100.0% 100.0%
Costs and expenses:
Cost of revenues..................................................... 74.2 74.7 75.2
Selling, general and administrative.................................. 5.8 9.6 11.3
Depreciation......................................................... 4.0 4.1 2.6
Amortization of intangible assets.................................... 1.9 1.1 1.0
Operating income....................................................... 14.1 10.5 9.9
Interest expense....................................................... 2.7 8.2 11.0
Income (loss) from continuing operations before income taxes........... 11.4 2.3 (1.1)
Income tax provision (benefit)......................................... 4.6 1.0 (0.4)
Income (loss) from continuing operations............................... 6.8 1.3 (0.7)
-14-
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues. Revenues increased 36.4% from $45.1 million in 1995 to $61.5
million in 1996. The $16.4 million increase over 1995 is composed of $11.1
million from internally generated growth and $5.3 million of revenues from
acquisitions.
Cost of Revenues. Cost of revenues increased from $33.7 million in
1995 to $45.6 million in 1996 directly related to the increase in revenues. As a
percentage of revenues, cost of revenues decreased from 74.7% in 1995 to 74.2%
in 1996, primarily related to a decrease in wage related expenses, partially
offset by an increase in telecommunication costs.
Selling, General and Administrative. Selling, general and
administrative expense decreased from $4.3 million in 1995 to $3.6 million in
1996. The decrease is primarily attributed to a $697,000 non-recurring charge in
1995 related to retirement and severance costs. As a percentage of revenues,
selling, general and administrative expenses decreased from 9.6% in 1995 to 5.8%
in 1996.
Depreciation. Depreciation increased from $1.9 million in 1995 to $2.5
million in 1996. The aggregate increase in 1996 reflects continued capital
purchases to support the increased revenue base. As a percentage of revenues,
depreciation remained relatively consistent at 4.0% in 1996 compared to 4.1% in
1995.
Amortization. Amortization of intangible assets was $1.2 million in
1996 as compared to $496,000 in 1995. The increase in 1996 is attributable to
the increase in intangible assets associated with the fixing of the deferred
purchase price for Transcriptions, Ltd., which the Company began to amortize
effective December 29, 1995, and the impact of the intangible assets associated
with the Company's five acquisitions completed in 1996.
Interest. Interest expense decreased from $3.7 million in 1995 to $1.6
million in 1996. The decrease in 1996 was due to the prepayment of approximately
$16.7 million of debt with the net proceeds from the sale of the receivables
management business in December 1995, partially offset by an increase of
$640,000 related to the non-cash imputed interest associated with the fixing of
the debt portion of the deferred purchase price for Transcriptions, Ltd. in
December 1995. On May 30, 1996 the Company's senior term loans, borrowings under
the revolver and the debt portion of the deferred purchase price were paid in
full with a portion of the proceeds from the Company's 2.5 million share equity
offering.
-15-
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues. Revenues increased 82.0% to $45.1 million in 1995 from $24.8
million in 1994. The 1994 revenues are presented only from the May 1994
acquisition of Transcriptions, Ltd. and on a pro forma basis, as if the
acquisition had occurred on January 1, 1994, revenues would have been $36.6
million in 1994. The $8.5 million (23.0%) increase in 1995 revenues over 1994
pro forma revenues reflect $7.7 million of revenues from internally generated
growth and $0.8 million of revenues from acquisitions.
Cost of Revenues. Cost of revenues increased from $18.7 million
in 1994 to $33.7 million in 1995 reflecting the full year of the transcriptions
business operations in 1995.
Selling, General and Administrative. Selling, general and
administrative expenses increased from $2.8 million in 1994 to $4.3 million in
1995. The increase resulted primarily from $697,000 of non-recurring retirement
and severance costs associated with the departure of certain executive
personnel, expenditures incurred during the fourth quarter in connection with
the opening of three new locations, and the effect of a full year of
transcriptions operations. As a percentage of revenues, selling, general and
administrative expenses decreased from 11.3% in 1994 to 9.6% in 1995, reflecting
the full year of the transcriptions business operations in 1995.
Depreciation. Depreciation expense increased from $639,000 in 1994 to
$1.9 million in 1995. The increase reflects a full year of transcriptions
operations and an increased level of capital purchases in the fourth quarter of
1994 and during 1995.
Amortization. Amortization of intangible assets was $496,000 in 1995
as compared to $264,000 in 1994, reflecting a full year of amortization expense
in 1995 related to the Transcriptions, Ltd. acquisition.
Interest. Interest expense increased from $2.7 million in 1994 to $3.7
million in 1995. The increase in 1995 was primarily due to the borrowings which
were incurred in connection with the May 1994 acquisition of Transcriptions,
Ltd.
Discontinued Operations
For the years ended December 31, 1994 and 1995, the discontinued
operations generated net revenue of $21.4 million and $18.8 million and net
income of $1.6 million and $1.5 million, respectively. The 1995 divestiture of
the receivables management business generated a net loss of $3.2 million.
Included in this net loss is net income of $113,000 related to the operation of
the receivables management division from November 14, 1995 through December 29,
1995.
-16-
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
Extraordinary Item
During 1995, the Company recorded an extraordinary loss on the early
extinguishment of debt of $545,000. The extraordinary loss is the result of the
write off of certain deferred financing costs incurred in May 1994.
Inducement of Preferred Stock Conversion
Simultaneous with the closing of the Company's 1996 equity offering, a
warrant holder exercised its warrants to purchase 962,675 shares of convertible
preferred stock by applying the $7.0 million principal amount of a senior
subordinated note against the exercise price. The preferred stock was
simultaneously converted into common stock. The Company issued 42,500 shares of
common stock to induce the warrant holder to exercise. As a result of this
issuance, the Company recorded a $707,000 or $0.12 per share non-recurring
deduction from net income available to common shareholders.
Liquidity and Capital Resources
At December 31, 1996, the Company had working capital of $18.4
million, including $8.9 million of cash and cash equivalents. During 1996, the
Company's operating activities provided cash of $5.0 million and during 1995
these activities provided $6.1 million. The decrease in cash provided by
operating activities is primarily related to an increase in accounts receivable
and a decrease in accounts payable and accrued expenses offset by the change in
deferred income taxes.
During 1996, the Company purchased $3.2 million of capital equipment
and completed the acquisition of five transcription businesses for approximately
$4.8 million in cash, $1.3 million subordinated convertible promissory notes and
28,602 shares of Common Stock. These expenditures were financed primarily
through cash flows from operations and the issuance of subordinated notes
payable to the sellers.
The Company entered into a borrowing facility with Chemical Bank (the
"Chemical Facility") when it acquired Transcriptions, Ltd. in May 1994. The
Chemical Facility was restructured in December 1995 to provide for an aggregate
of $9.5 million of Term Loans (which the Company prepaid in full on May 30,
1996), and a $10.0 million revolving credit facility expiring December 31, 1998,
which is subject to a borrowing base limitation based on a percentage of
eligible accounts receivable. The revolver is secured by substantially all of
the assets of the Company. The revolver bears interest at resetting rates
selected by the Company from various alternatives and the Company's level of
compliance with certain financial covenants. The interest rate alternatives are
either (i) 0.5% to 1.5% in excess of the greater of (x) Chemical's base lending
rate, (y) the federal funds rate plus 1.0% or (z) the bank's certificate of
deposit rate, or (ii) LIBOR plus 2.0% to 3.0%. The Company may not reborrow
amounts under the Term Loan.
-17-
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
The revolver can be used for working capital and general corporate
purposes. To the extent any amounts under the revolver are repaid, the Company
may reborrow such amounts. The Chemical Facility includes certain financial and
other covenants applicable to the Company, including limitations on capital
expenditures and dividends.
Effective December 29, 1995 the Company and the former owner of
Transcriptions, Ltd., who include the Company's current Chief Executive Officer
and Chief Operating Officer, amended the Transcriptions purchase agreement to
fix the amount of the deferred purchase price (see Note 2 of Notes to
Consolidated Financial Statements). The amendment required the Company to pay
$18.375 million in cash and issue 861,463 shares of Common Stock (valued at
$4.55 million for financial reporting purposes) on August 31, 1996. The cash
portion of the deferred purchase price was discounted using an 8.75% rate and
was presented as part of the $21.9 million subordinated payable to related
parties at December 31, 1995. On May 30, 1996, in connection with the equity
offering, the Company paid the cash portion of the subordinated payable in full.
The Company believes that cash flow generated from the Company's
operations and its borrowing capacity under the Chemical Facility and certain
capital leasing arrangements should be sufficient to meet its working capital
and capital expenditure requirements through December 31, 1998. Additional funds
may be required in connection with any future acquisitions.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements. The information called
for by this Item is set forth on Pages F-1 through F-19.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
Not applicable.
-18-
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to
the Company's Proxy Statement to be filed with the Commission in connection with
the 1997 Annual Meeting.
Item 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the Company's Proxy Statement to be filed with the Commission in connection with
the 1997 Annual Meeting.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
the Company's Proxy Statement to be filed with the Commission in connection with
the 1997 Annual Meeting.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the Company's Proxy Statement to be filed with the Commission in connection with
the 1997 Annual Meeting.
-19-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Exhibit No. Description
- ----------- -----------
3.1 Amended and Restated Certificate of Incorporation of the Company
[incorporated] by reference to Exhibit 3.1 of the Company's
Registration Statement (No. 33-95968) on Form S-1 (the "1992
Registration Statement").
3.2 By-Laws of the Company incorporated by reference to Exhibit 3.2 of the
Company's 1993 Annual Report on Form 10-K (the "1993 10-K").
3.3 Certificate of Designation of Terms of Preferred Stock [incorporated
by reference to Exhibit 3.3 of the Company's 1992 Annual Report on
Form 10-K (the "1992 10-K).
4.1 Specimen Stock Certificate incorporated by reference to Exhibit 4.1 of
the Company's Registration Statement (No. 333-3050) on Form S-1 (the
"1996 Registration Statement").
*10.1 Agreement between the Company and Richard J. Censits, dated January
29, 1996 [incorporated by reference to Exhibit 10.1 of the 1996
Registration Statement].
*10.2 Incentive Stock Option Plan of the Company, dated January 1988
[incorporated by reference to Exhibit 10.2 of the 1992 Registration
Statement].
*10.3 Stock Option Plan of the Company, dated January 1992, as amended
[incorporated by reference to Exhibit 10.3 of the 1996 Registration
Statement].
*10.4 Nonstatutory Stock Option Plan for Non-Employee Directors of the
Company, dated January 1992 [incorporated by reference to Exhibit 10.4
of the 1992 Registration Statement].
*10.5 Employment Agreement by and between the Company and John R. Emery,
filed herewith.
*10.6 Employment Agreement by and between the Company and David A. Cohen,
dated May 1, 1994 ("Cohen Employment Agreement") [incorporate by
reference to Exhibit 10.33 of the Company's Form 10-Q for the
three-month period ended June 30, 1994 (the "6/30/94 10-Q").
*10.7 Amendment to Cohen Employment Agreement, dated March 1, 1996
[incorporated by reference to Exhibit 10.7 of the 1996 Registration
Statement].
*10.8 Employment Agreement by and between the Company and John A. Donohoe,
dated May 27, 1994 ("Donohoe Employment Agreement") [incorporated by
reference to Exhibit 10.8 of the 1996 Registration Statement].
*10.9 Amendment to Donohoe Employment Agreement, dated March 1, 1996
[incorporated by reference to Exhibit 10.9 of the 1996 Registration
Statement].
* Management contract or compensatory plan or arrangement.
-20-
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K -
Continued
Exhibit No. Description
- ----------- -----------
*10.10 Employment Agreement by and between the Company and Ronald F.
Scarpone, dated May 27, 1994, as amended March 1, 1996 [incorporated
by reference to Exhibit 10.10 of the 1996 Registration Statement].
*10.11 Employment Agreement by and between the Company and James R. Emshoff,
dated August 25, 1995 [incorporated by reference to Exhibit 10.37 of
the Company's Form 10-Q for the three-month period ended September 30,
1995 (the "9/30/95 10-Q").
*10.12 Stock Option Agreement by and between the Company and James R.
Emshoff, dated August 25, 1995 [incorporated by reference to Exhibit
10.38 of the 9/30/95 10-Q].
10.13 Amended and Restated Senior Subordinated Loan Agreement by and between
the Company and Heller, dated as of December 29, 1995 [incorporated by
reference to Exhibit 10.13 of the 1996 Registration Statement].
10.14 Warrant Purchase Agreement by and between the Company and Heller,
dated as of December 14, 1992 [incorporated by reference to Exhibit 3
of the Company's Current Report on Form 8-K filed December 24, 1992
(the "12/24/92 8-K").
10.15 Registration Rights Agreement between the Company and Heller, dated as
of December 14, 1992 [incorporated by reference to Exhibit 6 of the
12/24/92 8-K].
10.16 Warrant to Purchase Class A Convertible Preferred Stock issued to
Heller, dated as of May 27, 1994 (the "Class A Warrant") [incorporated
by reference to Exhibit 10.27.7 of the 6/30/94 10-Q].
10.17 Warrant to Purchase Class B Convertible Preferred Stock issued to
Heller, dated as of May 27, 1994 (the "Class B Warrant") [incorporated
by reference to Exhibit 10.27.8 of the 6/30/94 10-Q].
10.18 Amendment to Class A Warrant, dated as of December 29, 1995
[incorporated by reference to Exhibit 10.18 of the 1996 Registration
Statement].
10.19 Amendment to Class B Warrant, dated as of December 29, 1995
[incorporated by reference to Exhibit 10.19 of the 1996 Registration
Statement].
10.20 Asset Purchase Agreement among the Company, Transcriptions, Ltd. and
its affiliates and subsidiaries, dated January 26, 1994 (the
"Transcriptions Agreement") [incorporated by reference to Exhibit
10.30 of the 1993 10-K].
10.21 Amendment to the Transcriptions Agreement, dated September 30, 1995,
[incorporated by reference to Exhibit 10.30.1 of the 9/30/95 10-Q].
10.22 Amendment to the Transcriptions Agreement, dated November 1, 1995
[incorporated by reference to Exhibit 10.30.2 of the 9/30/95 10-Q].
* Management contract or compensatory plan or arrangement.
-21-
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K -
Continued
Exhibit No. Description
- ----------- -----------
10.23 Registration Rights Agreement among the Company, David A. Cohen and
Edward Forstein, dated September 30, 1995, [incorporated by reference
to Exhibit 10.30.4 of the 9/30/95 10-Q].
10.24 Amended and Restated Credit Agreement among the Company,
Transcriptions, Ltd., the Guarantors named therein, the Lenders named
therein and Chemical Bank as agent, dated December 29, 1995
[incorporated by reference to Exhibit 10.24 of the 1996 Registration
Statement].
10.25 Letter Agreement between the Company and Heller, dated May 27, 1994,
regarding representation on the Company's Board of Directors
[incorporated by reference to Exhibit 10.35 of the 6/30/94 Form 10-Q].
10.26 Asset Purchase Agreement among the Company, MedQuist CCI, L.P., and
Medaphis Hospital Services Corporation, dated December 31, 1995
[incorporated by reference to Exhibit 2 of the Company's Current
Report on Form 8-K filed on January 12, 1996 (the "1/12/96 8-K")].
10.27 Stock Purchase Agreement among the Company, MedQuist Receivables
Management Company and Medaphis Hospital Services Corporation
[incorporated by reference to Exhibit 3 of the 1/12/96 8-K].
10.28 Form of Employee Stock Purchase Agreement [incorporated by reference
to Exhibit 10.33 of the 1996 Registration Statement].
10.29 Agreement among the Company, Heller and Heller Financial, Inc., dated
March 29, 1996 [incorporated by reference to Exhibit 10.29 of the 1996
Registration Statement].
10.30 Amendment and Assignment of Registration Rights Agreement among Heller
Financial, Inc., Heller and the Company, dated May 27, 1994
[incorporated by reference to Exhibit 10.30 of the 1996 Registration
Statement].
10.31 Second Amendment to Registration Rights Agreement between Heller and
the Company, dated December 29, 1995 [incorporated by reference to
Exhibit 10.31 of the 1996 Registration Statement].
10.32 Registration Agreement between the Company and Chemical Bank, date May
27, 1994 [incorporated by reference to Exhibit 10.31 of the 1996
Registration Statement].
11.0 Statement re: Computation of Per Share Earnings, filed herewith.
22.1 Subsidiaries [incorporated by reference to Exhibit 22.1 of the 1996
Registration Statement].
23.1 Consent of Arthur Andersen LLP.
24.1 Powers of Attorney (included on signature page)
-22-
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K -
Continued
Exhibit No. Description
- ----------- -----------
(b) Financial Statements and Financial Statement Schedule
1. The consolidated financial statements of the Company and its
subsidiaries filed as part of this Report are listed on the attached
Index to Consolidated Financial Statements. See page F-1.
2. The Schedule to the consolidated financial statements of the Company
and its subsidiaries filed as part of this Report is listed in the
attached Index to Consolidated Financial Statements. See page F-1.
(c) Reports on Form 8-K
During the fourth quarter of 1996, the Company filed no Reports on
Form 8-K.
-23-
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) Securities Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereto duly authorized, in the City of Marlton, State of
New Jersey, on March 28, 1997.
MedQuist Inc.
By /s/David A. Cohen
---------------------------------------------------
David A. Cohen, President, Chief Executive Officer,
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, this report has been signed below by the following persons in the
capacities indicated on March 28, 1997.
Each person below, in so signing, also makes, constitutes and appoints
David A. Cohen his true and lawful attorney-in-fact, with full power and
substitution and resubstitution, in his name, place and stead to execute and
cause to be filed with the Securities and Exchange Commission any or all
amendments to this Report.
/s/David A. Cohen President, Chief Executive Officer March 28, 1997
- ---------------------------------------- and Chairman of the Board
David A. Cohen Director
/s/William T. Carson, Jr. Director March 28, 1997
- -----------------------------------------
William T. Carson, Jr.
/s/Richard J. Censits Director March 28, 1997
- -----------------------------------------
Richard J. Censits
/s/James F. Conway Director March 28, 1997
- ----------------------------------------
James F. Conway
/s/James R. Emshoff Director March 28, 1997
- ----------------------------------------
James R. Emshoff
/s/Terrence J. Mulligan Director March 28, 1996
- ----------------------------------------
Terrence J. Mulligan
/s/A. Fred Ruttenberg Director March 28, 1997
- ----------------------------------------
A. Fred Ruttenberg
/s/John H. Underwood Director March 28, 1997
- ----------------------------------------
John H. Underwood
/s/Bruce Van Fossen Vice President, Controller and Acting March 28, 1997
- --------------------------------------- Principal Financial and Accounting
Bruce Van Fossen, Vice President, Officer
Controller and Acting Principal Financial
and Accounting Officer
-24-
MEDQUIST INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
CONSOLIDATED BALANCE SHEETS F-3
CONSOLIDATED STATEMENTS OF OPERATIONS F-4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7
FINANCIAL STATEMENT SCHEDULE:
II. Valuation and Qualifying Accounts F-19
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MedQuist Inc.:
We have audited the accompanying consolidated balance sheets of MedQuist Inc. (a
New Jersey corporation) and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, shareholders' equity and cash
flows for the three years in the period ended December 31, 1996. These financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of MedQuist Inc. and subsidiaries
as of December 31, 1996 and 1995, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the Index to
Consolidated Financial Statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
February 5, 1997
F-2
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31
------------------------
1996 1995
------- -------
ASSETS
Current assets:
Cash and cash equivalents $ 8,878 $ 1,812
Accounts receivable, net of allowance of $318 and $257 14,239 9,769
Deferred income taxes 237 966
Prepaid expenses and other 123 754
------- -------
Total current assets 23,477 13,301
Property and equipment, net 8,105 6,725
Intangible assets, net 42,436 37,426
Net assets of discontinued operations -- 180
Other 323 463
------- -------
$74,341 $58,095
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 314 $ 2,246
Accounts payable 1,034 2,164
Accrued payroll 1,913 1,092
Accrued expenses 1,861 2,873
------- -------
Total current liabilities 5,122 8,375
------- -------
Long-term debt 1,719 15,956
------- -------
Subordinated payable to related parties -- 21,887
------- -------
Other long-term liabilities 631 848
------- -------
Deferred income taxes 1,174 609
------- -------
Commitments and contingencies (Note 11)
Shareholders' equity:
Class A preferred stock, no par value, 650 shares authorized, none
issued -- --
Class B preferred stock, no par value, 400 shares authorized, none
issued -- --
Common stock, no par value, 20,000 shares authorized, 6,881 and 2,446
shares issued and outstanding 56,437 4,639
Retained earnings 9,258 5,781
------- -------
Total shareholders' equity 65,695 10,420
------- -------
$74,341 $58,095
======= =======
The accompanying notes are an integral part of these statements.
F-3
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per-share amounts)
Year Ended December 31
------------------------------
1996 1995 1994
-------- -------- --------
Revenues $ 61,480 $ 45,127 $ 24,841
-------- -------- --------
Costs and expenses:
Cost of revenues 45,591 33,711 18,677
Selling, general and administrative 3,579 4,325 2,798
Depreciation 2,468 1,862 639
Amortization of intangible assets 1,176 496 264
-------- -------- --------
Total operating expenses 52,814 40,394 22,378
-------- -------- --------
Operating income 8,666 4,733 2,463
Interest expense 1,649 3,695 2,738
-------- -------- --------
Income (loss) from continuing operations
before income taxes 7,017 1,038 (275)
Income tax provision (benefit) 2,833 431 (109)
-------- -------- --------
Income (loss) from continuing operations 4,184 607 (166)
Discontinued operations, net of income taxes:
Income from operations -- 1,451 1,612
Loss on disposal -- (3,180) --
-------- -------- --------
Income (loss) before extraordinary items 4,184 (1,122) 1,446
Loss on early extinguishment of debt, net of
income tax benefit -- (545) --
-------- -------- --------
Net income (loss) 4,184 (1,667) 1,446
Inducement of warrant exercise (707) -- --
-------- -------- --------
Net income (loss) available to common shareholders $ 3,477 $ (1,667) $ 1,446
======== ======== ========
Income (loss) per share:
Income from continuing operations $ 0.70 $ 0.26 $ 0.09
Discontinued operations -- (0.73) 0.49
Extraordinary item -- (0.23) --
Inducement of warrant exercise (0.12) -- --
-------- -------- --------
$ 0.58 $ (0.70) $ 0.58
======== ======== ========
Shares used in computing income (loss) per
share (Note 1) 6,002 2,362 3,316
======== ======== ========
The accompanying notes are an integral part of these statements.
F-4
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Common Stock
------------------ Retained
Shares Amount Earnings Total
-------- -------- -------- --------
BALANCE, DECEMBER 31, 1993 2,223 $ 3,069 $ 6,002 $ 9,071
Net income -- -- 1,446 1,446
Exercise of common stock options,
including tax benefit 27 175 -- 175
-------- -------- -------- --------
BALANCE, DECEMBER 31, 1994 2,250 3,244 7,448 10,692
Net loss -- -- (1,667) (1,667)
Exercise of common stock options,
including tax benefit 173 1,210 -- 1,210
Issuance of common stock in connection
with business acquisition 23 185 -- 185
-------- -------- -------- --------
BALANCE, DECEMBER 31, 1995 2,446 4,639 5,781 10,420
Net income -- -- 4,184 4,184
Exercise of common stock options,
including tax benefit 33 336 -- 336
Issuance of common stock in connection
with business acquisitions 890 5,040 -- 5,040
Sale of common stock, net of expenses 2,507 39,442 -- 39,442
Exercise of warrants, including
inducement charge 1,005 6,980 (707) 6,273
-------- -------- -------- --------
BALANCE, DECEMBER 31, 1996 6,881 $ 56,437 $ 9,258 $ 65,695
======== ======== ======== ========
The accompanying notes are an integral part of these statements.
F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31
------------------------------
1996 1995 1994
-------- -------- --------
OPERATING ACTIVITIES:
Net income (loss) $ 4,184 $ (1,667) $ 1,446
Adjustments to reconcile net income (loss) to net cash
provided by operating activities-
Depreciation and amortization 3,644 4,005 2,115
Amortization of debt discounts 704 131 161
Loss on disposal of discontinued operations -- 4,286 --
Loss on early extinguishment of debt -- 545 --
Deferred income tax provision (benefit) 1,294 (355) 865
Changes in assets and liabilities, excluding
effects of acquisitions and divestitures--
Accounts receivable (4,106) (2,377) 561
Prepaid expenses and other 690 706 (508)
Other assets 182 (128) (81)
Accounts payable (1,206) 1,127 805
Accrued payroll 684 (326) (587)
Accrued expenses (1,024) 282 (989)
Other long-term liabilities (79) (91) 143
-------- -------- --------
Net cash provided by operating activities 4,967 6,138 3,931
-------- -------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment (3,211) (3,448) (982)
Acquisitions, net of cash acquired (4,810) (7) (21,738)
Proceeds from divestiture -- 16,723 --
Other -- -- 692
-------- -------- --------
Net cash provided by (used in)
investing activities (8,021) 13,268 (22,028)
-------- -------- --------
FINANCING ACTIVITIES:
Repayments of long-term debt and subordinated payable (29,548) (19,019) (3,796)
Proceeds from exercise of common stock options 226 796 154
Net proceeds from issuance of common stock 39,442 -- --
Proceeds from issuance of long-term debt -- -- 22,525
Deferred financing costs -- (178) (1,530)
Net borrowings on revolving line of credit -- -- 250
-------- -------- --------
Net cash provided by (used in)
financing activities 10,120 (18,401) 17,603
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 7,066 1,005 (494)
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR 1,812 807 1,301
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 8,878 $ 1,812 $ 807
======== ======== ========
The accompanying notes are an integral part of these statements.
F-6
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per-share amounts)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Background
MedQuist Inc. is a leading national provider of electronic transcription and
document management services to the health care industry. MedQuist Inc. was
incorporated in New Jersey in 1987 as a group of outpatient health care
businesses affiliated with a nonprofit health care provider. In 1992 and 1993,
the outpatient businesses were sold (see Note 3), and in 1994, Transcriptions,
Ltd. was acquired (see Note 2). In November 1995, MedQuist Inc. discontinued its
receivables management business. The operations and net assets of the
receivables management business and the outpatient businesses, which together
formed one business segment, have been accounted for as discontinued operations
(see Note 3).
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
MedQuist Inc. and its subsidiaries (the "Company"). All material intercompany
balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported assets and liabilities and contingency disclosures at the
date of the financial statements and the reported operations during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Fees for transcription-related services are based primarily on contracted rates,
and revenue is recognized upon the rendering of services and delivery of
records. Included in revenues are franchise fees of $239, $317 and $216 for the
years ended December 31, 1996, 1995 and 1994, respectively.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments purchased
with an original maturity of three months or less.
F-7
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization have
been provided using the straight-line method over the estimated useful lives of
the assets, which range from three to five years for furniture, equipment and
software, and the lease term for leasehold improvements. Repairs and maintenance
costs are expensed as incurred. Additions and betterments are capitalized. Gains
or losses on the disposition of property and equipment are charged to
operations.
Intangible Assets
Intangible assets include the excess of cost over the net asset value of
acquired businesses, customer lists and deferred financing costs and are being
amortized over 20 to 40 years, 20 years and 5 to 6 years, respectively.
Subsequent to its acquisitions, the Company continually evaluates whether later
events and circumstances have occurred that indicate that the remaining
estimated useful life of intangible assets may warrant revision or that the
remaining balance may not be recoverable. When factors indicate that intangible
assets should be evaluated for possible impairment, the Company uses an estimate
of the related undiscounted operating income over the remaining life of the
intangible asset in measuring whether the intangible asset is recoverable. As of
December 31, 1996, management believes that no revision to the remaining useful
lives or write-down of intangible assets is required.
Accrued Expenses
Accrued expenses consist primarily of deferred revenue, accrued interest,
deferred telephone credits and accrued professional fees. At December 31, 1996
and 1995, deferred revenue was $492 and $466, respectively.
Severance Costs
In fiscal 1995, two of the Company's then Chief Executive Officers resigned. In
connection with such resignations, the Company incurred severance and retirement
costs of $697 for the year ended December 31, 1995.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense was
$102, $162 and $96 for the years ended December 31, 1996, 1995 and 1994,
respectively.
Statements of Cash Flow Information
For the years ended December 31, 1996, 1995 and 1994, the Company paid interest
of $674, $3,155 and $2,108, respectively, and income taxes of $1,675, $478 and
$257, respectively. Capital lease obligations of $191, $531 and $593 were
incurred on equipment leases entered into in 1996, 1995 and 1994, respectively.
In 1994, the Company refinanced $5,265 of long-term debt and $820 under its line
of credit.
F-8
The following table displays the net noncash assets and liabilities that were
consolidated as a result of the acquisitions (see Note 2):
Year Ended December 31
---------------------------------
1996 1995 1994
-------- -------- --------
Noncash assets (liabilities):
Accounts receivable $ 364 $ 169 $ 6,720
Prepaid expenses and other 59 19 550
Property and equipment 446 213 4,034
Intangible assets 6,389 23,183 14,516
Accounts payable and accrued
expenses (335) (299) (2,670)
Long-term debt (305) (379) (404)
-------- -------- --------
Net noncash assets acquired 6,618 22,906 22,746
Less-Seller notes and payables (1,318) (22,714) (1,008)
Common Stock issued (490) (185) --
-------- -------- --------
Net cash paid for business
acquisitions $ 4,810 $ 7 $ 21,738
======== ======== ========
Income Taxes
Income taxes are calculated using the liability method in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes." Accordingly, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Income (Loss) Per Share
For the year ended December 31, 1996, net income per share was calculated by
dividing net income by the weighted average number of shares of common stock
outstanding for the period, adjusted for the dilutive effect of common stock
equivalents, which consist of stock options, using the treasury stock method.
For years prior to 1996, the Company's total outstanding common stock options
and warrants exceeded 20% of the total outstanding common stock. Therefore, the
income per share computations are modified, as required under Accounting
Principles Board Opinion No. 15, to assume that all outstanding common stock
options and warrants were exercised and the related proceeds were used to
repurchase up to 20% of the total outstanding common stock. Any remaining
proceeds are assumed to be used to reduce borrowings, thereby reducing interest
expense, net of tax. For the year ended December 31, 1995, all stock options and
warrants have been excluded from the calculation, since the net result of
F-9
including them was antidilutive. Because interest expense has not been allocated
to discontinued operations (see Note 3), the reduction of interest expense only
impacts income per share from continuing operations.
New Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," which establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles and goodwill. The Company
adopted SFAS No. 121 effective January 1, 1996. The adoption of SFAS No. 121 did
not have an effect on the Company's financial condition or results of
operations.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which establishes financial
accounting and reporting standards for stock-based employee compensation plans.
SFAS No. 123 also applies to transactions in which an entity issues its equity
instruments to acquire goods or services from nonemployees. The Company adopted
the disclosure requirements of SFAS No. 123 in 1996 (see Note 9).
2. ACQUISITIONS:
Effective May 1, 1994, the Company purchased substantially all of the assets of
Transcriptions, Ltd. and affiliates ("Transcriptions") and assumed certain
liabilities, as defined, for $16,930 in cash, including acquisition costs of
$322, plus the payment of Transcriptions' interest-bearing debt of $5,816, plus
a deferred purchase price based on future operating results. The deferred
purchase price consideration was to equal 5.2 times the average annual pretax
income, as defined, during the 24-month period ended May 31, 1996, less $19,200,
and was payable on or before August 31, 1996.
Effective December 29, 1995, and in connection with the sale of the receivables
management division (see Note 3), the Company fixed the deferred purchase price
by agreeing to pay the former owners of Transcriptions $18,375 in cash and issue
861 shares of Common Stock (valued at $4,550 for financial reporting purposes)
on August 31, 1996.
The total purchase price for the Transcriptions acquisition was $44,797. The
acquisition has been accounted for using the purchase method with the purchase
price allocated to the fair value of the acquired assets and liabilities. The
results of operations of Transcriptions are included in the accompanying
consolidated statements of operations from May 1, 1994.
The following unaudited pro forma summary presents the results of operations of
the Company as if the Transcriptions acquisition, including the payment of the
deferred purchase price which causes additional amortization and interest
expense, had occurred on January 1, 1994. The pro forma information does not
purport to be indicative of the results
F-10
that would have been attained if the operations had actually been combined
during the periods presented and is not necessarily indicative of operating
results to be expected in the future.
Year Ended
December 31
-----------------------
1995 1994
---- ----
Net revenues $ 45,127 $ 36,634
Loss from continuing operations (701) (940)
Loss per share from continuing operations (0.30) (0.42)
Shares used in computing loss per share 2,362 2,250
In addition, in 1995 and 1996, the Company completed two and five acquisitions,
respectively, for total consideration of $1,019 and $6,454, respectively. The
acquisitions have been accounted for using the purchase method. Pro forma
information is not presented as these acquisitions are not material to the
Company.
3. DISCONTINUED OPERATIONS:
Since December 1992, the Company has sold or eliminated all of the businesses
within its discontinued segment as follows:
Consideration Divestiture
Business Received Date
- -------------------------------------- ------------- -------------
Occupational health and rehabilitation $ 475 December 1992
Retail pharmacy -- December 1992
Home medical 1,955 July 1993
Medical transport services 3,535 August 1993
Ambulatory surgery services 6,833 September 1993
InForMED software -- September 1993
Receivables management 17,330 December 1995
On November 14, 1995, the Company signed a letter of intent to sell its
receivables management business, the last remaining businesses in the segment.
Accordingly, the operations and net assets of all divested businesses in this
segment have been accounted for as discontinued operations and the operating
results and net assets are reported in such manner for all periods presented in
the accompanying consolidated financial statements.
For the years ended December 31, 1995 and 1994, the discontinued operations
generated revenue of $18,767 and $21,438 and net income of $1,451 and $1,612,
respectively. The 1995 divestiture of receivables management generated an
after-tax loss of $3,180, which includes net income of $113 related to the
operations of the business from the November 14, 1995 measurement date through
the December 29, 1995 disposal date.
F-11
4. PROPERTY AND EQUIPMENT:
December 31
-------------------------
1996 1995
-------- --------
Furniture, equipment and software $ 12,410 $ 9,509
Leasehold improvements 88 78
-------- --------
12,498 9,587
Less-Accumulated depreciation
and amortization (4,393) (2,862)
-------- --------
$ 8,105 $ 6,725
======== ========
5. INTANGIBLE ASSETS:
December 31
------------------------
1996 1995
-------- --------
Excess of cost over net asset value of
acquired businesses $ 34,162 $ 33,899
Customer lists 9,972 3,800
Deferred financing costs 84 608
Other -- --
-------- --------
44,218 38,307
Less- Accumulated amortization (1,782) (881)
-------- --------
$ 42,436 $ 37,426
======== ========
6. LONG-TERM DEBT:
December 31
---------------------
1996 1995
-------- --------
Senior term loans repaid in 1996 $-- $ 9,500
Senior subordinated note payable to a financial
institution, tendered in 1996 in connection
with exercise of warrants -- 6,422
Subordinated 5% promissory note, due June 1998 30 --
Subordinated 6% promissory notes, due September 2003 1,288 --
Capital lease obligations 715 826
Subordinated promissory notes, repaid in 1996 -- 1,454
-------- --------
2,033 18,202
Less- Current portion (314) (2,246)
-------- --------
$ 1,719 $ 15,956
======== ========
F-12
In connection with the Transcriptions acquisition in May 1994 (see Note 2), the
Company entered into a credit agreement (the "Credit Agreement") with certain
banks that included $22,000 of term loans and an $8,000 revolving credit
facility. In connection with the sale of the Receivables Management Division
(see Note 3), the Company restructured its credit facility to include $9,500 of
term loans and a $10,000 revolver. In connection with the restructuring of the
credit facility, the Company expensed, as an extraordinary item, the related
deferred financing costs of $826, increasing the 1995 net loss by $545, or $.23
per share.
The term loans and outstanding borrowings under the revolving credit facility
were repaid in 1996 in connection with the Company's Common Stock offering (see
Note 8). The credit facility, which expires in December 1998, bears interest at
resetting rates, as selected by the Company, based on various rate alternatives
and the Company's level of compliance with certain financial covenants, as
defined. The interest rate alternatives are LIBOR plus 2% to 3% or 0.5% to 1.5%
in excess of either the bank's prime rate, federal funds plus 1% or the bank's
certificate of deposit rate, subject to certain restrictions, as defined. The
Company is required to comply with various financial and nonfinancial covenants,
the most restrictive of which are specified income and debt-related financial
ratios and restrictions on the payment of dividends, acquisitions and the sale
of property and equipment, among other items, as defined. The revolving credit
facility is subject to a borrowing base of 85% of eligible receivables, as
defined, and at December 31, 1996, there was $10,000 available under the
revolver.
For the years ended December 31, 1996, 1995 and 1994, the Company incurred
interest expense of $49, $498 and $326 on the revolving credit facility, at a
weighted average interest rate of 9.78%, 8.96% and 7.72%. The highest
outstanding borrowings under the revolver during 1996 and 1995 were $2,534 and
$7,332, respectively.
Long-term debt maturities as of December 31, 1996, are as follows:
1997 $ 403
1998 415
1999 49
2000 --
2001 --
2002 and thereafter 1,288
-------
2,155
Less- Interest on capital lease obligations (122)
-------
$ 2,033
=======
F-13
7. SUBORDINATED PAYABLE TO RELATED PARTIES:
Effective December 29, 1995, the Company and the former owners of
Transcriptions, who include the Company's current Chief Executive Officer and
Chief Operating Officer, amended the Transcriptions purchase agreement to fix
the amount of the deferred purchase price (see Note 2). The amendment provided
for the Company to pay $18,375 in cash and issue 861 shares of Common Stock
(valued at $4,550 for financial reporting purposes) on August 31, 1996. The cash
portion of the deferred purchase price was discounted and presented as a
subordinated payable of $17,337 at December 31, 1995. The shares to be issued
were also included in the subordinated payable at December 31, 1995. In May
1996, the Company repaid the cash portion of the payable, and the Common Stock
was issued in August 1996.
8. SHAREHOLDERS' EQUITY:
In May 1996, the Company consummated a secondary public offering of its Common
Stock, selling 2,200 shares at a price of $17 per share. In June 1996, the
underwriters exercised their overallotment option for an additional 307 shares.
After deducting the underwriters' discount and offering expenses, the net
proceeds to the Company were $39,442.
In connection with the 1992 issuance of a senior subordinated note (see Note 6),
the Company sold to the holder for $1,100 warrants to purchase 577 shares of
Class A and 356 shares of Class B preferred stock at an exercise price of $7.50
per share. Each share of Class A and Class B preferred stock is convertible into
one share of common stock. During 1994, the holder was issued additional
warrants and all warrant exercise prices were reset at $7.28, in accordance with
the antidilution provisions of the original warrant agreement. In March 1996,
the Company and the holder agreed that, on the closing date of the secondary
common stock offering, the holder would exercise the warrants by tendering the
$7,000 principal amount of the senior subordinated note and simultaneously
converting the shares of Preferred Stock received upon such exercise into 962
shares of Common Stock. As an inducement for the holder to exercise the warrants
and convert the Preferred Stock, the Company issued the holder 43 additional
shares of Common Stock. This inducement, valued at $707, has been recorded as a
deduction from the net income available to common shareholders in 1996.
In connection with the May 1994 Credit Agreement (see Note 6), the Company
issued the agent bank warrants to purchase 75 shares of Common Stock at an
exercise price of $6.74 per share. These warrants expire May 2001.
F-14
9. STOCK OPTION PLANS:
The Company has three stock option plans that provide the granting of options to
purchase an aggregate of 1,653 shares of Common Stock to eligible employees
(including officers) and nonemployee directors of the Company. Options granted
may be at fair market value of the Common Stock or at a price determined by a
committee of the Board. The stock options vest and are exercisable over a period
determined by the committee. Information with respect to the Company's options
follows:
Option Price Aggregate
Shares Per Share Proceeds
------ --------- --------
Outstanding, December 31, 1993 264 $2.00 - $ 6.70 $1,164
Granted 300 4.69 - 6.75 1,663
Exercised (27) 3.40 - 6.00 (154)
Canceled (37) 4.65 - 6.75 (163)
----- ----- ------ ------
Outstanding, December 31, 1994 500 2.00 - 6.75 2,510
Granted 305 7.25 - 9.50 2,594
Exercised (173) 2.00 - 7.25 (796)
Canceled (45) 2.00 - 7.50 (259)
----- ----- ------ ------
Outstanding, December 31, 1995 587 2.00 - 9.50 4,049
Granted 276 8.38 - 19.63 3,766
Exercised (33) 3.40 - 15.38 (226)
Canceled (30) 9.50 (285)
----- ----- ------ ------
Outstanding, December 31, 1996 800 $3.40 - $19.63 $7,304
===== ===== ====== ======
At December 31, 1996, there were 373 exercisable options at an aggregate
exercise price of $2,238 and 126 additional options were available for grant
under the plans.
The Company applies Accounting Principal Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and the related interpretations in accounting for
its stock option plans. The disclosure requirement of SFAS No. 123, "Accounting
for Stock-Based Compensation," was adopted by the Company in 1996. Had
compensation cost for the Company's common stock options been determined based
upon the fair value of the options at the date of grant, as prescribed under
SFAS No. 123, the Company's net income available to common shareholders would
have been reduced to the following pro forma amounts:
Year Ended December 31
----------------------
1996 1995
------- ---------
Net income (loss):
As reported $ 3,477 $ (1,667)
Pro forma 2,770 (1,991)
Income (loss) per share:
As reported 0.58 (0.70)
Pro forma 0.46 (0.84)
F-15
The fair value of the options granted during 1996 and 1995 is estimated using
the Black-Scholes option pricing model with the following assumptions:
volatility of 55%, risk-free interest rate of 5.3% to 8.0%, and an expected life
of five years.
10. INCOME TAXES:
The income tax provision (benefit) consists of the following:
Year Ended December 31
-----------------------------------------
1996 1995 1994
------- ------- -------
Current:
State $ 71 $ 181 $ --
Federal 1,468 161 85
------- ------- -------
1,539 342 85
Deferred 1,294 (355) 865
------- ------- -------
$ 2,833 $ (13) $ 950
======= ======= =======
Year Ended December 31
--------------------------------------
1996 1995 1994
---------- ---------- ----------
Continuing operations $ 2,833 $ 431 $ (109)
Discontinued operations:
Income from operations -- 796 1,059
Gain (loss) on disposal -- (959) --
Extraordinary item -- (281) --
---------- ---------- ----------
$ 2,833 $ (13) $ 950
========== ========== ==========
A reconciliation of the statutory federal income tax rate to the effective
continuing operations income tax rate is as follows:
Year Ended December 31
----------------------------------
1996 1995 1994
---------- ---------- --------
Statutory federal income tax rate 34.0% 34.0% 34.0%
State income taxes, net of federal benefit 3.3 6.5 5.6
Other 3.1 1.0 --
-------- ---------- ---------
40.4% 41.5% 39.6%
======== ========= =========
F-16
The tax effected temporary differences that give rise to deferred income taxes
are as follows:
December 31
-------------------------
1996 1995
----------- -----------
Deferred tax asset:
Allowance for doubtful accounts $ 113 $ 210
Other 124 756
----------- -----------
$ 237 $ 966
=========== ===========
Deferred tax liability: $ (953) $ (545)
Accumulated depreciation (546) (402)
Accumulated amortization 224 --
Deferred compensation 101 338
Other ----------- -----------
$ (1,174) $ (609)
=========== ===========
11. COMMITMENTS AND CONTINGENCIES:
Rent expense for operating leases was $1,279, $732 and $459 for the years ended
December 31, 1996, 1995 and 1994, respectively. Minimum annual rental
commitments for noncancelable operating leases having terms in excess of one
year as of December 31, 1996, are as follows:
1997 $ 1,366
1998 1,125
1999 718
2000 353
2001 112
-------------
$ 3,674
=============
The Company has employment agreements with four key executives with terms
ranging from two to three years. The agreements provide for, among other things,
compensation, benefits, termination and noncompetition.
The Company has an employment agreement, as amended on January 1, 1996, with a
former Chief Executive Officer who is currently a director of the Company. The
agreement entitles this individual to receive retirement benefits of $75 per
year for life plus certain other benefits, as defined. Included in other
long-term liabilities is $631 and $847 at December 31, 1996 and 1995,
respectively, related to these retirement benefits. In accordance with terms of
the employment agreement, during 1993, the Company loaned this individual $300,
which was repaid on March 1, 1996, and is included in other assets at December
31, 1995. The employment agreement also requires the Company to loan the former
Chief Executive Officer's estate the necessary funds to exercise any options
owned by the individual at the time of his death. At December 31, 1996, such
amount would be $552.
The Company has adopted a severance plan for certain executive officers that
provides for one-time payments in the event of a change in control, as defined.
No liabilities are currently required to be recorded with respect to this plan.
The Company has entered into an agreement with its long-distance carrier through
October 1998 that provides for, among other things, annual minimum purchases of
$1,800 and termination penalties. In addition, as an inducement to enter into
the agreement, the long-distance carrier provided the Company with credits that
the Company is amortizing on a straight-line basis over the term of the
agreement. The amortization of the deferred telephone credits was $55, $87 and
$65 for the years ended December 31, 1996, 1995 and 1994.
In the normal course of business, the Company is a party to various claims and
legal proceedings. Although the ultimate outcome of these matters is presently
not determinable, management of the Company, after consultation with legal
counsel, does not believe that the resolution of these matters will have a
material effect upon the Company's financial position or results of operations.
12. QUARTERLY FINANCIAL DATA (UNAUDITED):
Quarterly financial data for the years ended December 31, 1995 and 1996, are
summarized below:
Year Ended December 31, 1995
Three Months Ended
-------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Revenues $ 10,426 $ 10,806 $ 11,538 $ 12,357
Pretax income (loss) from continuing
operations (197) 212 667 356
Net income (loss) from continuing
operations (115) 124 390 208
Net income (loss) per share from
continuing operations (0.04) 0.07 0.14 0.10
Year Ended December 31, 1996
Three Months Ended
-------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Revenues
Pretax income from continuing $13,978 $14,373 $15,511 $17,618
operations
Net income from continuing operations 925 1,414 2,201 2,477
Net income per share from continuing
operations 546 836 1,311 1,491
0.14 0.16 0.18 0.20
F-18
SCHEDULE II
MEDQUIST INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 1996
(in thousands)
Balance, Charged to Charged to
Beginning Costs and Other Balance,
Description of Year Expenses Accounts Deductions End of Year
----------- ------- -------- -------- ---------- -----------
Allowances for doubtful accounts:
1996 $ 550(a) $ 44 $ (272)(a) $ (4) $ 318
1995 316 243 487 (496) 550(a)
1995 882 18 145 (729) 316
- -------------
(a) Includes amounts related to discontinued operations.