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, 2000 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) (856) 810-8000
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 $210 million on March 21, 2001, 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 21, 2001 was 36,804,359.
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 2001 Annual Meeting.
1
PART I
Item 1. BUSINESS
MedQuist is a national provider of medical transcription services, a
key component in the provision of healthcare services. Transcription is the
process by which dictation is converted into an electronic medical report. The
timely production of accurate reports is necessary for patient care and for
healthcare providers to receive reimbursement. Through our approximately 8,700
transcriptionists, proprietary software, sophisticated digital dictation
equipment and ability to interface with healthcare providers' computer systems,
we provide customized solutions to shorten our customers' billing cycles and
reduce their overhead and other administrative costs. We serve approximately
2,700 clients nationwide through our client service centers. We also provide
other medical document management services, such as digital dictation systems
and reimbursement coding services.
As a result of internal growth and acquisitions, our revenue has
increased from $61.5 million in 1996 (before restatements for acquisitions
accounted for as pooling of interests) to $364.1 million in 2000 substantially
all of which is from medical transcription. Our experienced management team and
operating structure have enabled us to improve our operating margins. Our growth
has enabled us to take advantage of efficiencies such as a larger network of
transcriptionists and increased negotiating power with our vendors, including
telecommunication providers.
History
MedQuist was incorporated in New Jersey in 1984 and reorganized in 1987
as a group of out-patient healthcare businesses affiliated with a non-profit
healthcare provider. In May 1994, we acquired our first medical transcription
business, Transcriptions, Ltd. By the end of 1995, we had divested all of our
non-medical transcription businesses, and through December 31, 2000, we had
acquired 37 medical transcription companies. In February 2001, we acquired DVI,
a provider of digital dictation systems. In March 2001, we acquired Coding
Concepts, a regional provider of coding reimbursement services.
Industry Overview
Medical transcription is the process by which free-form dictated
patient information is recorded and converted into a useable format,
electronically routed to the appropriate location and added to a patient's
medical record. Physicians and other healthcare providers use this information
for delivery of patient care. Administrative personnel use the information for
billing and other administrative purposes. Accurate and prompt transcribed
records are required for reimbursement and to avoid healthcare fraud and abuse
penalties. We expect that, as the percentage of medical records that are stored
electronically continues to grow, the information management uses for such
records will increase.
The majority of dictated reports are generated within the medical
records departments of hospitals. Historically, transcription services were
performed by hospital employees and were costly and difficult to manage.
Examples of these reports include patient histories, discharge summaries,
operative reports and consultation reports. Increasingly, other hospital
departments, such as radiology, emergency, oncology, pediatrics and cardiology,
are dictating reports to improve 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.
Medical document management includes medical transcription plus other
services related to health care information management, such as digital
dictation systems and reimbursement coding services.
We believe the market for medical document management services will
expand due in part to the following trends:
Consolidation. As healthcare providers consolidate and increase in
size, their information management needs become more complex and they
increasingly require larger and more sophisticated vendors.
Connectivity. The exchange of patient information and the delivery of
patient care must be coordinated among many entities, including physicians,
hospitals and managed care companies. Increasingly, healthcare organizations are
centralizing patient data into an accessible system creating economies of scale
2
to reduce overall healthcare costs and to improve the efficient delivery of
patient care. Accurate medical transcription and distribution and storage of
transcribed records and other document management services are critical to such
coordination.
Cost Containment. Outsourcing services in the healthcare industry
continues to increase as a means to reduce administrative burdens and fixed
costs. Hospitals and other healthcare organizations increasingly are outsourcing
their electronic transcription of dictated patient records as their information
needs and volume of dictated reports expand. Outsourcing medical document
management services permits providers:
o to reduce overhead and other administrative costs;
o to improve the quality of reports;
o to access leading technologies without development and investment
risk; and
o to obtain the expertise to implement and manage a system tailored to
the providers' specific requirements.
Compliance. Government agencies are increasingly focused on fraud and
abuse in the healthcare industry. For example, under Medicare, providers must
submit detailed documentation in order to receive reimbursement. In many
instances, providers have been fined and penalized for failing to substantiate
claims for reimbursement in an audit. As a result, Medicare, the insurance
industry and, in some cases healthcare accreditation organizations, are
requiring transcribed reports:
o to support claims for reimbursement;
o to facilitate communication between various parts of a healthcare
network;
o to improve the quality and efficiency of patient care; and
o to retain and provide reliable information in the event of
malpractice litigation.
Strategy
Our objective is to maintain our position as the leading national
provider of medical transcription services and to enhance that position as the
information needs of healthcare providers continue to expand and evolve.
The key elements of our strategy include the following:
Expand Existing Client Relationships. We provide most of our
transcription services to hospital medical records departments. We seek to
increase our share of transcription services through our close and continuing
client relationships as these departments outsource more of their transcription
requirements and as the volume of patient records continues to grow. In
addition, we will continue to penetrate the direct care departments at hospitals
such as radiology, emergency, oncology, pathology, pediatrics and cardiology,
within our 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 records departments.
Offer New Medical Document Management Services. We have developed, both
internally and through acquisition, the capability of providing additional
medical document management products and services such as digital dictation
systems, reimbursement coding services and handheld dictation devices. We intend
to further develop the depth and breadth of this product and service line-up to
better serve our healthcare provider client base.
Extend Current Client Base. We will continue to extend our base of
traditional hospital clients and to pursue additional clients such as health
maintenance organizations, out-patient clinics and physician practice groups
which we believe will represent a growing percentage of the available market.
Based upon input from new clients, we believe that references from our existing
client base represent a key component of our sales and marketing efforts.
Capitalize on Operating Expertise. Our experienced management team and
our operating structure have enabled us to grow our business and increase cash
flow from operations. We will continue to capitalize on our management
experience and operating expertise.
3
Pursue Strategic Relationships. We have initiated relationships with
developers and end-users of emerging technologies to create enhanced services
for our clients. We will continue to incorporate advances in technology to
improve the efficiency of our operations, reduce our costs, expand the breadth
and functionality of our services and enhance our competitive position.
Pursue Strategic Acquisitions. The medical transcription industry is
highly fragmented with approximately 1,500 providers of outsourced medical
transcription services. The coding reimbursement industry is also highly
fragmented. Most of these are small companies that lack the financial resources
or the technological capabilities necessary to provide transcription services
nationwide. We will continue to pursue acquisitions that will expand our client
base, network of qualified transcriptionists and other employees and geographic
presence.
MedQuist Services
Through our approximately 8,700 transcriptionists, proprietary
software, sophisticated digital dictation equipment and ability to interface
with healthcare providers' computer systems, we provide customized solutions to
shorten our customers' billing cycles and reduce their overhead and other
administrative costs. In addition to hospital medical records departments, our
target markets include patient care departments, such as radiology, emergency
rooms, oncology, pathology, pediatrics and cardiology departments, health
maintenance organizations, physician practice groups and out-patient clinics.
We record and store free-form medical dictation, transcribe the
dictation into reports, and electronically receive, review and distribute final
reports to a client. Authorized individuals at multiple locations can access
this electronic information when needed for administrative, billing and patient
care purposes.
We have designed our system to enable clients and individual healthcare
providers to review the status of particular patient data and transcribed
reports at any point in time and to advise us whether the production of a
particular report requires acceleration. In addition, our system permits us to
monitor our on-time performance, especially with respect to critical reports
requiring turnaround times of less than 24 hours.
We serve approximately 2,700 clients through 70 client service centers
nationwide. Due to the large number of trained transcriptionists and our ability
to allocate work among them efficiently, we believe that we are able to reduce
the production turnaround times for transcribed medical reports. An in-house
staff or small transcription company generally cannot achieve these efficiencies
to the extent that we can. Our system 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.
Our system provides flexibility to address individual client needs. We
are capable of modifying the system to interface with existing client systems.
Our technical staff works closely with our clients, both before and after
installation, to develop system modifications and refinements.
MedQuist has started to offer reimbursement coding services for our
hospital customers. Coding reimbursement services involve the software assisted
manual assignment of numerical codes to identify the diagnosis, treatment and
severity of a medical episode for reimbursement purposes. Coded documents, such
as CPT and ICD-9 forms, are required for reimbursement by the government, health
maintenance organizations (HMO's) and insurance companies. MedQuist enhanced our
coding service offering through our February 28, 2001 acquisition of Coding
Concepts, a leading regional provider of reimbursement coding services. In the
future, MedQuist anticipates the addition of a more automated coding service
offering made available by the use of developing technologies.
MedQuist also provides our healthcare customers with an industry
leading digital dictation systems solution as a result of our February 1, 2001
acquisition of Digital Voice, Inc.
Medical Transcriptionist Recruitment
One of the most significant challenges to our continued growth is the
successful recruitment and retention of qualified transcriptionists. To address
this challenge, we have enhanced our recruitment process, increased training and
formed strategic relationships with various schools across the country.
4
Sales and Marketing Efforts
Our existing client base is a key component of our marketing and sales
strategy. Based on input from new clients, we believe that new clients have
utilized our services in large part due to recommendations and references by our
existing national client base. All office managers and operational vice
presidents, as well as many of our senior management personnel, including our
Chairman and Chief Executive Officer, Mr. Cohen, have sales responsibilities.
We utilize a consultative sales and marketing approach by establishing
a working relationship with our 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,
we obtain information concerning the particular needs of a client and educate
the client as to how our services can be customized to meet those needs. As part
of our marketing efforts, we also advertise in national healthcare trade
publications (including those sponsored by the American Health Information
Management Association) and participate in industry conventions.
Business Partners and Relationships
We are always evaluating emerging technologies and apply them as
appropriate to make our services more reliable, efficient and cost-effective,
and to assist our clients in meeting their transcription and document management
needs. We have initiated relationships with developers and end-users of emerging
technologies, such as voice-recognition, data mining and outcomes analysis and
Internet based telecommunications to create value added services for our clients
and to participate in the development of the computer based patient record. Our
Senior Vice President-New Business Development oversees our strategic
partnerships and manages our new business development department that integrates
these partnerships into useable product and service offerings.
Item 2. PROPERTIES
The Company does not own any real property. The Company leases office
and other space for its service centers nationally. 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 20,000 square feet and has 3 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
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
5
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the
symbol "MEDQ". The following table sets forth the high and low reported prices
for our Common Stock for the last two fiscal years and for the first quarter of
2001. 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
1999
First Quarter $ 38.69 $ 27.69
Second Quarter 43.75 26.69
Third Quarter 45.75 30.00
Fourth Quarter 37.06 24.75
2000
First Quarter $28.75 $19.94
Second Quarter 44.13 27.25
Third Quarter 34.81 17.94
Fourth Quarter 19.75 11.06
2001
First Quarter (through March 21, 2001) 21.88 15.88
On March 21, 2001 the closing sale price for the Common Stock, as
reported on the Nasdaq National Market, was $19.94 per share.
We have never declared or paid any cash dividends on our capital stock.
We expect to retain any future earnings to fund operations and the continued
development of our business and, therefore, do not anticipate paying any cash
dividends in the foreseeable future.
6
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following financial information is derived from our audited
financial statements which have been restated to reflect our 1998 acquisitions
accounted for as pooling of interests. This information is only a summary and
you should read it in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations", our audited financial statements
and related notes and other information that we have filed with the SEC.
Year Ended December 31,
----------------------------------------------------------------
1996 1997 1998 1999 2000
----------- ----------- ----------- ----------- ---------
(In thousands, except per share data)
Statement of Operations Data:
Revenues $152,109 $ 216,158 $271,655 $330,008 $364,149
Costs and expenses:
Cost of revenues 118,978 169,235 209,587 238,180 265,817
Selling, general and administrative 11,908 14,362 16,061 11,763 11,078
Depreciation 7,372 10,339 12,697 12,000 14,720
Amortization of intangible assets 3,150 5,652 3,757 5,333 7,335
Transaction costs and restructuring charges 644 2,075 18,221 (2,648) (1,013)
Tender offer costs -- -- -- -- 6,255
-------- -------- -------- --------- ---------
Total costs and operating expenses 142,052 201,663 260,323 264,628 304,192
-------- -------- -------- --------- ---------
Operating income 10,057 14,495 11,332 65,380 59,957
Gain on sale of securities -- -- -- 309 3,672
Interest (expense) income, net (2,049) (469) 325 1,955 3,874
-------- -------- -------- --------- ---------
Income before income taxes 8,008 14,026 11,657 67,644 67,503
Income tax provision 2,720 5,293 8,472 27,439 28,773
-------- -------- -------- --------- ---------
Income from continuing operations 5,288 8,733 3,185 40,205 38,730
-------- -------- -------- --------- ---------
Net income 5,288 8,733 3,185 40,205 38,730
Inducement of warrant exercise (707) -- -- -- --
-------- -------- -------- --------- ---------
Net income $ 4,581 $ 8,733 $ 3,185 $40,205 38,730
======== ========= ======== ======= ========
Basic income per share:
Net income $ 0.22 $ 0.28 $ 0.10 $ 1.14 $ 1.07
Inducement of warrant exercise (0.03) -- -- -- --
-------- -------- -------- --------- ---------
$ 0.19 $ 0.28 $ 0.10 $ 1.14 $ 1.07
======== ========= ======== ========= ========
Diluted income per share:
Net income $ 0.20 $ 0.26 $ 0.09 $ 1.09 $ 1.04
Inducement of warrant exercise (0.03) -- -- -- --
-------- -------- -------- --------- ---------
$ 0.17 $ 0.26 $ 0.09 $ 1.09 $ 1.04
======== ========= ======== ========= ========
7
Balance Sheet Data:
As of December 31,
-----------------------------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- --------- -------- --------
(In thousands)
Working capital $ 33,483 $ 36,608 $ 41,852 $ 99,354 $155,969
Total assets 158,551 173,773 187,311 302,183 349,901
Long-term debt, net of current portion 9,964 7,589 215 452 22
Shareholders' equity 120,710 131,373 151,186 256,536 317,806
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
We are the leading national provider of medical transcription services.
Substantially all of our revenue to date has been derived from the provision of
medical transcription services, which we recognize when we render services and
deliver reports. We also derive an insignificant amount of revenue from services
other than traditional transcription services, such as coding revenue,
interfacing fees, equipment rentals, equipment sales, referral fees and
commissions from strategic partners. Fees for medical transcription services are
based primarily on contracted rates and revenue is recognized upon the rendering
of services and delivery of transcribed reports. Revenues from other sources are
recognized when earned.
For purposes of our discussion and analysis of our results of
operations we distinguish our revenue growth as "core growth" and growth from
large acquisitions. Core growth includes revenue from all of the above sources
and revenue from acquisitions with annual sales under $5 million, prior to the
date of acquisition. Revenues arising from acquisitions having annual revenue in
excess of $5 million, prior to the date of acquisition, is discussed separately
in our analysis of revenue growth.
Cost of revenue consists of all direct costs associated with providing
transcription related services, including payroll, telecommunications, repairs
and maintenance, rent and other direct costs. Most of our cost of revenue is
variable in nature, but includes certain fixed components. Selling, general and
administrative expenses include costs associated with our senior executive
management, marketing, accounting, legal and other administrative functions.
Selling, general and administrative expenses are mostly fixed in nature, but
include certain variable components.
From 1995 through 2000, we completed 37 acquisitions. Six acquisitions,
including the December 1998 acquisition of MRC, were accounted for as pooling of
interests. Four of these acquisitions were material and, accordingly, we
restated our financial statements.
8
Results of Operations
The following table sets forth, for the periods indicated, certain
financial data as a percentage of revenue, as restated for our acquisitions
accounted for as a pooling of interests:
Year Ended December 31,
---------------------------------------
1998 1999 2000
---------- ---------- ----------
Revenue 100.0% 100.0% 100.0%
Costs and expenses:
Cost of revenue 77.2 72.2 73.0
Selling, general and administrative 5.9 3.6 3.0
Depreciation 4.7 3.6 4.0
Amortization of intangible assets 1.4 1.6 2.0
Transaction costs and restructuring charges 6.7 (0.8) (0.2)
Tender offer costs -- -- 1.7
--------- --------- ---------
Operating income 4.1 19.8 16.5
Gain on sale of securities -- 0.1 1.0
Interest income (expense), net 0.1 0.6 1.0
--------- --------- ---------
Income before income taxes 4.2 20.5 18.5
Income tax provision 3.1 8.3 7.9
--------- --------- ---------
Net income 1.1% 12.2% 10.6%
========== ========== ==========
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Revenues. Revenues increased 10.3% from $330.0 million in 1999 to
$364.1 million in 2000. The $34.1 million increase resulted from increased sales
to existing customers, sales to new customers and strategic partners and
additional revenue from acquisitions. The $34.1 million increase resulted from
$28.7 million of core growth and $5.4 million from large acquisitions.
Cost of Revenues. Cost of revenues increased 11.6% from $238.2 million
in 1999 to $265.8 million in 2000. As a percentage of revenues, cost of revenue
increased from 72.2% in 1999 to 73.0% in 2000 due primarily to an increase in
transcription related payroll and benefit expense in 2000, partially offset by
cost reductions resulting from consolidation of duplicative facilities.
Selling, General and Administrative. Selling, general and
administrative expenses decreased 5.8% from $11.8 million in 1999 to $11.1
million in 2000. As a percentage of revenue, selling, general and administrative
costs decreased from 3.6% in 1999 to 3.0% in 2000. The decrease was due
primarily to administrative staff reductions made in association with the merger
with MRC, and our ability to spread the fixed portion of our overhead over a
larger revenue base.
Depreciation. Depreciation increased 22.7% from $12.0 million in 1999
to $14.7 million in 2000. As a percentage of revenue, depreciation increased
from 3.6% in 1999 to 4.0% in 2000. The increase resulted from increased capital
expenditures and purchase business acquisitions in 1999 and 2000.
Amortization. Amortization of intangible assets was $5.3 million in
1999 compared to $7.3 million in 2000. The increase is attributable to the
amortization of intangible assets associated with the Company's acquisitions
which were accounted for using the purchase method in 1999 and 2000.
Transaction Costs and Restructuring Charges. In 1998, we incurred (1)
$11.0 million of transaction costs associated with pooling of interests business
combinations, (2) $682,000 of transaction costs related to MRC's terminated
9
initial public offering and (3) a $6.5 million restructuring charge associated
with the MRC acquisition. In 1999 we revised our accrual estimates and $315,000
of the $11 million of transaction costs associated with pooling of interest
combinations and $2.3 million of the $6.5 million restructure charges were
reversed in connection with adjustments to our accruals and reserves. In 2000,
we revised our accrual estimates and $542,000 and $471,000 respectively, of the
1997 and 1998 restructure reserves, were reversed in connection with adjustments
to our accruals and reserves.
In December 1998, our board of directors approved a restructuring plan
associated with the MRC acquisition. When the board approved the plan, we
recorded a $6.5 million charge, of which $3.8 million related to non-cancelable
lease obligations on duplicate facilities, $1.6 million related to employee
severance and $1.1 million related to contract cancellations and other exit
costs. As of December 31, 2000, $993,000 of noncancellable leases had been paid,
$1.3 million of the employee severance and $427,000 in other restructuring costs
had been paid. At December 31, 2000, $1.0 million was included in accrued
expenses related to the restructuring.
Non-Cancelable
Non-Cancelable Contracts and
Leases Severance Other Exit Costs Total
------ --------- ---------------- -----
(in thousands)
1998 Restructure Charge $3,835 $1,618 $1,086 $6,539
Payments against Restructure Accrual:
1998 0 (567) (410) (977)
1999 (437) (723) (17) (1,177)
2000 (556) ( 20) --- (576)
Revision to estimate recorded in 1999: (1,492) (182) (659) (2,333)
Revision to estimate recorded in 2000: (471) --- --- (471)
1998 Restructure accrual balance, at
December 31, 2000: $ 879 $ 126 $ 0 $1,005
====== ====== ====== ======
In 1997, MRC incurred a restructuring charge of $2.1 million related to
the closure and consolidation of less profitable or redundant client service
centers and other non-recurring acquisition and integration costs incurred in
connection with MRC's acquisition of Medical Records Corp. As of December 31,
2000, $444,000 related to closed facility leases remained in accrued expenses.
Tender Offer Costs. In July 2000, Koninklijke Philips Electronics, N.V.
(Philips) completed a tender offer in which they acquired approximately 60
percent of MedQuist's outstanding common stock for $51.00 per share. In
association with this tender offer, Medquist incurred approximately $6.3 million
of costs, primarily related to investment banker fees.
Interest. We had interest income of $2.0 million in 1999 and interest
income of $3.9 million in 2000. The increase was a result of the investment of
excess cash balances in 2000.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenues. Revenues increased 21.5% from $271.7 million in 1998 to
$330.0 million in 1999. The $58.3 million increase resulted from increased sales
to existing customers, sales to new customers and strategic partners and
additional revenue from acquisitions. The $58.3 million increase resulted from
$46.8 million of core growth and $11.5 million from large acquisitions.
Cost of Revenues. Cost of revenues increased 13.6% from $209.6 million
in 1998 to $238.2 million in 1999 and was directly related to the increase in
revenues. As a percentage of revenue, cost of revenues decreased from 77.2% in
1998 to 72.2% in 1999 due primarily to cost reductions associated from
eliminating excess operational support areas of MedQuist and MRC, and the
consolidation of duplicative facilities.
Selling, General and Administrative. Selling, general and
administrative expenses decreased 26.7% from $16.1 million in 1998 to $11.8
million in 1999. As a percentage of revenue, selling, general and administrative
10
costs decreased from 5.9% in 1998 to 3.6% in 1999. The decrease was due
primarily to administrative staff reductions made in association with the merger
with MRC, and our ability to spread the fixed portion of our overhead over a
larger revenue base.
Depreciation. Depreciation decreased 5.5% from $12.7 million in 1998 to
$12.0 million in 1999. As a percentage of revenue, depreciation decreased from
4.7% in 1998 to 3.6% in 1999. The decrease resulted from certain capital assets
becoming fully depreciated late in 1998.
Amortization. Amortization of intangible assets was $3.8 million in
1998 compared to $5.3 million in 1999. The increase is attributable to the
amortization of intangible assets associated with the Company's acquisitions
which were accounted for using the purchase method in 1998 and 1999.
Interest. We had interest income of $325,000 in 1998 and interest
income of $2.0 million in 1999. The increase was a result of the investment of
excess cash balances in 1999.
Transaction Costs and Restructuring Charges. In December 1998, our
board of directors approved a restructuring plan associated with the MRC
acquisition. When the board approved the plan, we recorded a $6.5 million
charge, of which $3.8 million related to non-cancelable lease obligations on
duplicate facilities, $1.6 million related to employee severance and $1.1
million related to contract cancellations and other exit costs. As of December
31, 1999, $437,000 of noncancellable leases had been paid, $1.3 million of the
employee severance and $427,000 in other restructuring costs had been paid. At
December 31, 1999, $2.1 million was included in accrued expenses related to the
restructuring.
In 1997, MRC incurred a restructuring charge of $2.1 million related to
the closure and consolidation of less profitable or redundant client service
centers and other non-recurring acquisition and integration costs incurred in
connection with MRC's acquisition of Medical Records Corp. As of December 31,
1999, $1.0 million related to closed facility leases remained in accrued
expenses.
Liquidity and Capital Resources
At December 31, 2000, we had working capital of $156.0 million,
including $77.3 million of cash and cash equivalents and $20.0 million of cash
equivalent with Philips. We maintain a $100 million deposit facility with
Philips, which allows us to invest excess funds at a rate of LIBOR less 0.125%.
At December 31, 2000, we had $20.0 million in such an investment, which was
liquidated on January 19, 2001. During the twelve months ended December 31,
2000, our operating activities provided cash of $60.9 million and during the
twelve months ended December 31, 1999 our operating activities provided cash of
$60.2 million.
During the twelve months ended December 31, 2000, we used cash in
investing activities of $27.9 million, consisting of $17.5 million of capital
expenditures, $6.0 million investments in A-Life Medical, Inc., $8.1 million for
acquisitions accounted for under the purchase method, and $728,000 for the
purchase of securities, offset by $4.4 million in cash proceeds from the sale of
securities. During the twelve months ended December 31, 1999, we used cash for
investing activities of $62.3 million, consisting of $14.2 million of capital
expenditures, $48.4 million for acquisitions accounted for under the purchase
method, $472,000 for the purchase of securities, offset by $781,000 in cash
proceeds from the sale of securities.
During the twelve months ended December 31, 2000, net cash provided by
financing activities was $2.3 million, consisting of $19.3 million in proceeds
from the issuance of common stock, including option exercises and issuances in
connection with employee benefit plans, offset by $15.5 million from the
purchase and retirement of MedQuist stock and $1.6 million for repayment of
long-term debt. During the twelve months ended December 31, 1999, cash provided
by financing activities was $48.1 million, consisting primarily of $51.2 million
in proceeds from the issuance of common stock and warrant exercises and
issuances in connection with employee benefit plans, partially offset by $2.8
million in repayments of debt.
In May 1999, we consummated a secondary public offering of our Common
Stock, selling 800 shares at a price of $33.63 per share. In June 1999, the
underwriters exercised their overallotment option for an additional 505 shares.
After deducting the underwriter's discount and offering expenses, the net
proceeds were $41,858.
11
On April 6, 2000, we made a $6.0 million investment in A-Life Medical,
Inc., a leader in advanced natural language processing technology for the
medical industry.
We believe that our cash, cash equivalent and cash equivalent with
related party, on hand, and cash flow generated from operations and our
borrowing capacity will be sufficient to meet our current working capital and
capital expenditure requirements.
Quantitative And Qualitative Disclosure About Market Risk
We generally do not use derivative financial instruments in our
investment portfolio. We make investments in instruments that meet credit
quality standards, as specified in our investment policy guidelines; the policy
also limits the amount of credit exposure to any one issue, and type of
instrument. We do not expect any material loss with respect to our investment
portfolio.
The following table provides information about our investment portfolio
at December 31, 2000. For investment securities, the table presents principal
amounts and related weighted average interest rates (dollars in thousands).
Cash, cash equivalents and cash on $97,321
deposit with related party
Average interest rate 5.9%
The majority of our debt obligations were repaid in February 1999.
Remaining obligations consist primarily of relatively insignificant capital
lease obligations that mature through 2002.
Inflation
We believe that the effects of inflation and changing prices generally
do not have a material adverse effect on our results of operations or financial
condition.
Forward-Looking Statements
Some of the information in this Form 10-K contains forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Securities Exchange Act. We also may have referred you to this note
in other written or oral disclosures we have made, such as our quarterly
earnings conference calls. These statements include forward-looking language
such as "will likely result," "may," "are expected to," "is anticipated,"
"estimated," "projected," "intends to" or other similar words. Our actual
results are likely to differ, and could differ materially, from the results
expressed in, or implied by, these forward-looking statements. There are many
factors that could cause these forward-looking statements to be incorrect,
including but not limited to the following risks: risks associated with (1) our
ability to recruit and retain qualified transcriptionists and other employees;
(2) inability to complete and assimilate acquisitions of businesses, especially
acquisitions of non-medical transcription businesses, because we have no prior
experience in such businesses; (3) dependence on our senior management team and
new senior management from non-medical transcription acquisitions; (4) the
impact of new services or products on the demand for our existing services; (5)
our current dependence on medical transcription for substantially all of our
business; (6) our ability to expand our customer base; (7) our ability to
maintain our current growth rate in revenue and earnings; (8) the volatility of
our stock price; (9) our ability to compete with others; (10) changes in law,
including, without limitation, the impact the Health Information Portability and
Accountability Act ("HIPAA") will have on our business; (11) infringement on the
proprietary rights of others; (12) our failure to comply with confidentiality
requirements; (13) our customers' and suppliers' failure to be Year 2000
compliant; and (14) risks inherent in diversifying into other businesses, such
as from the acquisition of DVI (digital dictation equipment) and entering into
the medical record coding reimbursement business. When considering these
forward-looking statements, you should keep in mind these risk factors and the
other cautionary statements in this report, and should recognize that those
forward-looking statements speak only as of the date made. MedQuist does not
undertake any obligation to update any forward-looking statement included in
this Form 10-K or elsewhere.
12
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-22.
13
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
Not applicable.
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 2001 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 2001 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 2001 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 2001 Annual Meeting.
14
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 1 of the
Company's Current Report on Form 8-K filed August 15, 1997].
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 Company's
Registration Statement (No. 33-95968) on Form S-1 (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 Governance Agreement, dated as of May 22, 2000. Filed as an
exhibit to the Solicitation/Recommendation Statement on
Schedule 14D-9, dated June 1, 2000, as amended, of Registrant
and incorporated herein by reference.
10.6 Licensing Agreement, dated as of May 22, 2000. Filed as an
exhibit to the Solicitation/Recommendation Statement on
Schedule 14D-9, dated June 1, 2000, as amended, of Registrant
and incorporated herein by reference.
*10.7 Shareholder Agreement, dated as of May 22, 2000, between
MedQuist and David A. Cohen. Filed as an exhibit to the
Solicitation/Recommendation Statement on Schedule 14D-9, dated
June 1, 2000, as amended, of Registrant and incorporated
herein by reference.
*10.8 Shareholder Agreement, dated as of May 22, 2000, between
MedQuist and John A. Donohoe, Jr. Filed as an exhibit to the
Solicitation/Recommendation Statement on Schedule 14D-9, dated
June 1, 2000, as amended, of Registrant and incorporated
herein by reference.
*10.9 Shareholder Agreement, dated as of May 22, 2000, between
MedQuist and John M. Suender. Filed as an exhibit to the
Solicitation/Recommendation Statement on Schedule 14D-9, dated
June 1, 2000, as amended, of Registrant and incorporated
herein by reference.
*10.10 Shareholder Agreement, dated as of May 22, 2000, between
MedQuist and Ronald A. Scarpone. Filed as an exhibit to the
Solicitation/Recommendation Statement on Schedule 14D-9, dated
June 1, 2000, as amended, of Registrant and incorporated
herein by reference.
*10.11 Shareholder Agreement, dated as of May 22, 2000, between
MedQuist and Ethan Cohen. Filed as an exhibit to the
Solicitation/Recommendation Statement on Schedule 14D-9, dated
June 1, 2000, as amended, of Registrant and incorporated
herein by reference.
*10.12 Shareholder Agreement, dated as of May 22, 2000, between
MedQuist and John W. Quaintance. Filed as an exhibit to the
Solicitation/Recommendation Statement on Schedule 14D-9, dated
June 1, 2000, as amended, of Registrant and incorporated
herein by reference.
15
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Exhibit No Description
- ---------- -----------
*10.13 Employment Agreement, dated as of May 22, 2000, between
MedQuist and David A. Cohen. Filed as an exhibit to the
Solicitation/Recommendation Statement on Schedule 14D-9, dated
June 1, 2000, as amended, of Registrant and incorporated
herein by reference.
*10.14 Employment Agreement, dated as of May 22, 2000, between
MedQuist and John A. Donohoe, Jr. Filed as an exhibit to the
Solicitation/Recommendation Statement on Schedule 14D-9, dated
June 1, 2000, as amended, of Registrant and incorporated
herein by reference.
*10.15 Employment Agreement, dated as of May 22, 2000, between
MedQuist and John M. Suender. Filed as an exhibit to the
Solicitation/Recommendation Statement on Schedule 14D-9, dated
June 1, 2000, as amended, of Registrant and incorporated
herein by reference.
*10.16 Employment Agreement, dated as of May 22, 2000, between
MedQuist and Ronald A. Scarpone. Filed as an exhibit to the
Solicitation/Recommendation Statement on Schedule 14D-9, dated
June 1, 2000, as amended, of Registrant and incorporated
herein by reference.
*10.17 Employment Agreement, dated as of May 22, 2000, between
MedQuist and Ethan Cohen. Filed as an exhibit to the
Solicitation/Recommendation Statement on Schedule 14D-9, dated
June 1, 2000, as amended, of Registrant and incorporated
herein by reference.
*10.18 Employment Agreement, dated as of October 16, 2000 between the
Company and Brian J. Kearns, filed herewith.
10.19 Deposit Facility Agreement, dated March 1, 2001, between
MedQuist CM Corporation and Philips Electronics North America
Corporation, filed herewith.
10.23 Registration Rights Agreement among the Company, David A.
Cohen and Edward Forstein, dated September 30, 1996,
[incorporated by reference to Exhibit 10.30.4 of the 9/30/95
10-Q].
10.28 Form of Employee Stock Purchase Plan [incorporated by
reference to Exhibit 10.33 of the 1996 Registration
Statement].
22.1 Subsidiaries [incorporated by reference to Exhibit 22.1 of the
1996 Registration Statement].
23.1 Consent of Arthur Andersen LLP, filed herewith.
24.1 Powers of Attorney (included on signature page)
(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 2000, the Company filed no Reports on Form 8-K.
* Management contract or compensatory plan or arrangement.
16
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 23, 2001.
MedQuist Inc.
By /s/David A. Cohen
-------------------------------------------
David A. Cohen, Chief Executive Officer and
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 as of March
23, 2001.
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.
Signatures Title
/s/ David A. Cohen
- ------------------------------ Chairman and Chief Executive Officer (principal executive officer)
David A. Cohen
/s/ Brian J. Kearns Senior Vice President, Treasurer and Chief Financial Officer (principal
- ----------------------------- financial officer and principal accounting officer)
Brian J. Kearns
- -----------------------------
Hans M. Barella Director
/s/ William E. Curran
- -----------------------------
William E. Curran Director
/s/ Jan H.M. Hommen
- -----------------------------
Jan H.M. Hommen Director
/s/ John A. Donohoe
- -----------------------------
John A. Donohoe President and Director
- -----------------------------
Gerard J. Kleisterlee Director
/s/ Ivo J.M. Lurvink
- -----------------------------
Ivo J.M. Lurvink Director
17
/s/ A. Fred Ruttenberg
- -----------------------------
A. Fred Ruttenberg Director
- ----------------------------
Richard H. Stowe Director
/s/ John H. Underwood
- ----------------------------
John H. Underwood Director
- ----------------------------
Cesar Vohringer Director
18
MedQuist Inc. and Subsidiaries
Index to consolidated financial statements
Report of independent public accountants ......................................1
Consolidated balance sheets
As of December 31, 1999 and 2000.............................................2
Consolidated statements of operations
For the years ended December 31, 1998, 1999 and 2000.........................3
Consolidated statements of shareholders' equity
For the years ended December 31, 1998, 1999 and 2000.........................4
Consolidated statements of cash flows
For the years ended December 31, 1998, 1999 and 2000.........................5
Notes to consolidated financial statements
December 31, 1999 and 2000...................................................6
Report of independent public accountants
To MedQuist Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of MedQuist Inc. (a
New Jersey corporation) and Subsidiaries as of December 31, 1999 and 2000, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MedQuist Inc. and
Subsidiaries as of December 31, 1999 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
Philadelphia, Pennsylvania
January 30, 2001
F-1
MedQuist Inc. and Subsidiaries
Consolidated balance sheets
As of December 31, 1999 and 2000
(in thousands)
1999 2000
---------- ----------
Assets
Current assets:
Cash and cash equivalents $ 62,024 $ 77,321
Cash equivalent with related party -- 20,044
Accounts receivable, net of allowance of $3,559 and
$3,565, respectively 75,988 75,155
Deferred income taxes 5,551 5,553
Prepaid expenses and other 197 6,546
---------- ----------
Total current assets 143,760 184,619
Property and equipment, net 31,715 35,013
Intangible assets, net 123,317 123,408
Deferred income taxes 1,440 --
Other 1,951 6,861
---------- ----------
$ 302,183 $ 349,901
========== ==========
Liabilities and shareholders' equity
Current liabilities:
Current portion of long-term debt $ 1,530 $ 433
Accounts payable 5,373 4,232
Accrued expenses 37,503 23,985
---------- ----------
Total current liabilities 44,406 28,650
---------- ----------
Long-term debt 452 22
---------- ----------
Other long-term liabilities 789 704
---------- ----------
Deferred income taxes -- 2,719
---------- ----------
Commitments and contingencies (Note 11)
Shareholders' equity:
Common stock, no par value, 60,000 shares authorized,
35,902 and 36,769 shares issued and outstanding,
respectively -- --
Additional paid-in capital 200,205 223,286
Retained earnings 55,918 94,648
Unrealized gain on marketable securities 704 --
Deferred compensation (291) (128)
---------- ----------
Total shareholders' equity 256,536 317,806
---------- ----------
$ 302,183 $ 349,901
========== ==========
The accompanying notes are an integral part
of these consolidated financial statements.
F-2
MedQuist Inc. and Subsidiaries
Consolidated statements of operations
For the years ended December 31, 1998, 1999 and 2000
(in thousands, except per-share amounts)
1998 1999 2000
--------- --------- ---------
Revenues $ 271,655 $ 330,008 $ 364,149
Costs and expenses:
Cost of revenues 209,587 238,180 265,817
Selling, general and administrative 16,061 11,763 11,078
Depreciation 12,697 12,000 14,720
Amortization of intangible assets 3,757 5,333 7,335
Transaction costs and restructuring
charges 18,221 (2,648) (1,013)
Tender offer costs -- -- 6,255
--------- --------- ---------
Total costs and expenses 260,323 264,628 304,192
--------- --------- ---------
Operating income 11,332 65,380 59,957
Gain on sale of securities -- 309 3,672
Interest income, net 325 1,955 3,874
--------- --------- ---------
Income before income taxes 11,657 67,644 67,503
Income tax provision 8,472 27,439 28,773
--------- --------- ---------
Net income $ 3,185 $ 40,205 $ 38,730
========= ========= =========
Basic net income per common share $ 0.10 $ 1.14 $ 1.07
========= ========= =========
Diluted net income per common share $ 0.09 $ 1.09 $ 1.04
========= ========= =========
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
MedQuist Inc. and Subsidiaries
Consolidated statements of shareholders' equity
For the years ended December 31, 1998, 1999 and 2000
(in thousands)
Unrealized
Common stock Additional gain on
-------------------- paid-in Retained marketable Deferred
Shares Amount capital earnings securities compensation Total
------- -------- --------- --------- ------------ ------------ ------
Balance, December 31, 1997 32,138 $ -- $119,008 $ 12,365 $ -- $ -- $ 131,373
Comprehensive income
Net income 3,185 -- 3,185
Unrealized gain on available for
sale securities, net of tax -- 585 585
------- ------- -------- -------- ------ ------- ---------
Total comprehensive income 3,185 585 3,770
Exercise of Common stock options and
warrants, including tax benefit 917 -- 9,662 -- -- -- 9,662
Issuance of Common stock, net of
expenses 203 -- 1,701 -- -- -- 1,701
Distributions -- -- -- (1,014) -- -- (1,014)
Grant of Common stock options below
fair value -- -- 1,078 -- -- (1,078) --
Amortization of deferred compensation -- -- -- -- -- 540 540
Cash paid to dissenting stockholders )
in pooling-of-interests transaction -- -- (1,438) -- -- -- (1,438
Transaction costs paid by acquired
company stockholder -- -- 1,540 -- -- -- 1,540
Income tax asset recognized in
pooling-of-interests transaction -- -- 5,052 -- -- -- 5,052
------- ------- -------- -------- ------ ------- ---------
Balance, December 31, 1998 33,258 -- 136,603 14,536 585 (538) 151,186
Comprehensive income
Net income 40,205 -- 40,205
Change in unrealized gain on
available for sale securities, net
of tax -- 119 119
------- ------- -------- -------- ------ ------- ---------
Total comprehensive income 40,205 119 40,324
Exercise of Common stock options and
warrants, including tax benefit 1,153 -- 18,812 -- -- -- 18,812
Income tax asset recognized in
pooling-of-interests transaction -- -- 1,187 -- -- -- 1,187
Issuance of Common stock in
connection with business acquisitions 171 -- 1,256 -- -- -- 1,256
Adjustment for immaterial
pooling-of-interests transaction -- -- -- 1,177 -- -- 1,177
Amortization of deferred compensation -- -- -- -- -- 247 247
Issuance of Common stock, net of
expenses 1,320 -- 42,347 -- -- -- 42,347
------- ------- -------- -------- ------ ------- ---------
Balance, December 31, 1999 35,902 -- 200,205 55,918 704 (291) 256,536
Comprehensive income
Net income 38,730 -- 38,730
Change in unrealized gain on
available for sale securities, net
of tax -- (704 (704
------- ------- -------- -------- ------ ------- ---------
Total comprehensive income 38,730 (704) 38,026
Exercise of Common stock options and
warrants, including tax benefit 1,381 -- 37,025 -- -- -- 37,025
Shares repurchased and retired (600) -- (15,466) -- -- -- (15,466)
Amortization of deferred compensation -- -- -- -- -- 163 163
Issuance of Common stock, net of
expenses 86 -- 1,522 -- -- -- 1,522
------- ------- -------- -------- ------ ------- ---------
Balance, December 31, 2000 36,769 $ -- $223,286 $ 94,648 $ -- $ (128) $ 317,806
======= ======= ======== ======== ====== ======= =========
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
MedQuist Inc. and Subsidiaries
Consolidated statements of cash flows
For the years ended December 31, 1998, 1999 and 2000
(in thousands)
1998 1999 2000
----------- ----------- -----------
Operating activities:
Net income $ 3,185 $ 40,205 $ 38,730
Adjustments to reconcile net income to
net cash provided by operating
activities-
Depreciation and amortization 16,454 17,333 22,055
Gain on sale of securities -- (309) (3,672)
Amortization of deferred compensation 540 247 163
Deferred income tax (benefit) expense (3,213) (1,471) 2,797
Transaction costs paid by acquired
company stockholder 1,540 -- --
Tax benefit for exercise of employee
stock options 7,775 9,496 17,720
Changes in assets and liabilities,
excluding effects of acquisitions and
divestitures:
Accounts receivable, net (10,345) (15,685) 1,071
Prepaid expenses and other 97 186 (6,349)
Other assets 65 1,031 (1)
Accounts payable (767) 183 (1,141)
Accrued expenses 7,954 8,924 (10,295)
Other long-term liabilities (433) 92 (85)
----------- ----------- -----------
Net cash provided by operating activities 22,852 60,232 60,993
----------- ----------- -----------
Investing activities:
Purchases of property and equipment (14,027) (14,169) (17,492)
Acquisitions, net of cash acquired (5,839) (48,405) (8,055)
Purchase of investments -- (472) (728)
Investment in A-Life Medical, Inc. -- -- (6,051)
Proceeds from sale of securities and
investments 4,003 781 4,403
----------- ----------- -----------
Net cash used in investing activities (15,863) (62,265) (27,923)
----------- ----------- -----------
Financing activities:
Repayments of long-term debt and
subordinated payable (10,006) (2,834) (1,568)
Distributions (1,014) (219) --
Proceeds from exercise of Common stock
options and warrants 5,065 9,316 19,305
Net proceeds from issuance of Common stock 413 41,858 --
Purchase and retirement of Common stock,
at cost -- -- (15,466)
----------- ----------- -----------
Net cash (used in) provided by financing
activities (5,542) 48,121 2,271
----------- ----------- -----------
Net increase in cash, cash equivalents and
cash equivalent with related party 1,447 46,088 35,341
Cash, cash equivalents and cash equivalent
with related party, beginning of year 14,489 15,936 62,024
----------- ----------- -----------
Cash, cash equivalents and cash equivalent
with related party, end of year $ 15,936 $ 62,024 $ 97,365
=========== =========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
MedQuist Inc. and Subsidiaries
Notes to consolidated financial statements
December 31, 1999 and 2000
(in thousands, except per-share amounts)
1. Background and summary of significant accounting policies:
Background and basis of presentation
MedQuist Inc. (the Company or MedQuist) is the leading national provider of
medical transcription services to the healthcare industry in the United States.
MedQuist was incorporated in New Jersey in 1984 and reorganized in 1987. From
1995 through 2000, the Company completed 37 acquisitions, of which 31 were
accounted for as purchase transactions and six were accounted for as
pooling-of-interests. Accordingly, the accompanying consolidated financial
statements have been retroactively restated to reflect the acquisitions
accounted for under the pooling-of-interests method (see Note 2).
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
MedQuist and its subsidiaries. All material intercompany balances and
transactions have been eliminated.
Common stock splits
On June 15, 1998, the Company effected a two-for-one stock split for all shares
of Common stock. All share data in the accompanying consolidated financial
statements has been retroactively adjusted to reflect the stock split.
Use of estimates and assumptions
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States 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 amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Revenue recognition
The Company's revenue consists primarily of fees generated in the provision of
medical transcription services. Fees for medical transcription services are
based primarily on contracted rates and revenue is recognized upon the rendering
of services and delivery of transcribed reports. Revenues are also derived from
coding services, interfacing fees, equipment rentals and referral fees and
commissions from strategic partners. Revenues from these other sources are
recognized as earned and are immaterial both individually and in the aggregate.
F-6
Pro forma presentation for income taxes
Prior to their pooling-of-interests merger with the Company, two 1998
acquisitions were taxed as "S" Corporations. Accordingly, no tax provision is
included in the accompanying consolidated financial statements related to their
income prior to their respective acquisition dates. The following pro forma
presentation sets forth the Company's income tax provision, net income and net
income per share as if these two companies had been taxed as "C" Corporations
for all periods presented.
Year ended
December 31,
1998
------------
Income before income taxes, as reported $ 11,657
Pro forma income tax provision 8,766
--------
Pro forma net income $ 2,891
========
Pro forma net income per share:
Basic $ 0.09
Diluted $ 0.08
Cash and cash equivalents
Cash and cash equivalents include cash and highly liquid investments purchased
with an original maturity of three months or less, consisting primarily of cash
on deposit with banks. At December 31, 1999, cash and cash equivalents were
restricted by a letter of credit of $1,400 which was used to repay a note in
January 2000. At times, cash balances held at financial institutions were in
excess of federally insured limits. The Company places its temporary cash
investments with high-credit, quality financial institutions and, by policy,
limits the amount of credit exposure to any one financial institution. The
Company believes no significant concentration of credit risk exists with respect
to these cash investments.
Cash equivalent with related party
Cash equivalent with related party consists of cash deposited with Koninklijke
Philips Electronics N.V. (Philips) for the purpose of optimizing income from
temporary excess cash. The Company maintains a Deposit Facility with a major
shareholder which allows investments up to $100 million to earn interest at
LIBOR less 0.125 percent, for periods up to 365 days. At December 31, 2000, the
Company had $20,044 in such an investment, which was liquidated on January 19,
2001. As the original maturity of this investment was less than three months,
the investment is classified as a cash equivalent in the accompanying
consolidated balance sheet as of December 31, 2000.
Investments
Included in other assets at December 31, 1999, was a warrant to purchase common
stock in Lernout and Hauspie, Inc. (L&H). The warrant was classified as
available-for-sale. Pursuant to SFAS No. 115, available-for-sale securities are
carried at fair value, based on an estimate using the Black-Scholes option
pricing model, with unrealized gains and losses, net of tax, reported as a
separate component of shareholders' equity. The unrealized gain, net of taxes,
at December 31, 1999 was $704. A portion of the warrants were exercised and the
resulting stock was sold during the years ended December 31, 1999 and 2000. The
transactions resulted in gains of $309 and $3,672, respectively. No warrants
remained as of December 31, 2000.
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 two to seven years for furniture, equipment and
software, and the lesser of the lease term or useful life for leasehold
improvements. Repairs and maintenance costs are charged to expense as incurred.
Additions and betterments are capitalized. Gains or losses on disposals are
charged to operations.
Intangible assets
Intangible assets consist primarily of goodwill, customer lists, noncompete
agreements and employee bases. The goodwill related to the May 1994 acquisition
of Transcriptions, Ltd. is being amortized over 40 years. The goodwill related
to subsequent acquisitions is being amortized over 20-30 years. Customer lists
and employee bases are being amortized over 10-20 years and three to five years,
respectively. Noncompete agreements are amortized over their terms, ranging from
1.5 years to four years.
Long-lived assets
The Company continually evaluates whether later events and circumstances have
occurred that indicate that the remaining estimated useful life of long-lived
assets may warrant revision or that the remaining balance may not be
recoverable. When factors indicate that long-lived assets should be evaluated
for possible impairment, the Company uses an estimate of the related
undiscounted cash flows in measuring whether the long-lived asset should be
written down to fair value. Measurement of the amount of the impairment will be
based on generally accepted valuation methodologies, as deemed appropriate. As
of December 31, 2000, management believes that no revision to the remaining
useful lives or write-down of long-lived assets is required.
Transaction costs and restructuring charges
During 1997 and 1998, the Company incurred certain charges resulting from
restructurings, transaction costs associated with pooling-of-interests
acquisitions and expenses incurred in connection with MRC, Inc.'s terminated
initial public offering. In 1999 and 2000, the Company recognized income in
connection with their revised estimate of the required reserves.
Year ended December 31
----------------------------------
1998 1999 2000
-------- --------- ---------
Restructuring charges $ 6,539 $ (2,333) $ (1,013)
Transaction costs associated with
pooling-of-interests 11,000 (315) --
Terminated initial public offering costs 682 -- --
-------- -------- --------
$ 18,221 $ (2,648) $ (1,013)
======== ======== ========
In December 1998, the Company's board of directors approved management's
restructuring plan associated with the MRC, Inc. merger. The plan related
primarily to the closure of several redundant operating facilities as well as
certain corporate offices in order to improve operating efficiencies. Costs
associated with the plan of approximately $6,539 were recognized in 1998 in
accordance with Emerging Issues Task Force (EITF) 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity."
F-8
The following table reflects the significant components of the restructuring
charge for the year ended December 31, 1998:
Noncancelable leases $ 3,835
Severance 1,618
Noncancelable contracts and other exit costs 1,086
--------
$ 6,539
========
In 1999, the Company revised its estimate of the required reserves and reversed
$2,333 of the 1998 restructuring charges as follows:
Noncancelable leases $ (1,492)
Severance (182)
Noncancelable contracts and other exit costs (659)
--------
$ (2,333)
========
In 2000, the Company revised its estimate of the required reserves and reversed
$471 of the 1998 restructuring charge related to noncancelable leases.
The severance costs are attributable to 41 individuals from various levels of
operational and senior management. As of December 31, 1999 and 2000, $437 and
$993 of noncancelable leases had been paid, $1,290 and $1,310 of severance had
been paid, and $427 and $427 of other restructuring costs had been paid,
respectively. The consolidated balance sheets at December 31, 1999 and 2000
reflect $2,052 and $1,005, respectively, in accrued expenses related to the 1998
restructuring charge.
In 1997, MRC approved a separate management plan to close and/or merge several
redundant operating facilities in order to further reduce costs and improve
operating efficiencies. The plan was completed during 1998 and included the cost
of exiting certain facilities, primarily related to noncancelable leases, the
disposition of fixed assets and employee severance costs. Costs associated with
the plan of approximately $2,075 were recognized in 1997 in accordance with EITF
94-3. Included in this amount is approximately $705 for the disposal of assets
and approximately $800 in severance and employee contract buy outs. The balance
is primarily related to noncancelable lease costs. The severance costs are
attributable to eight individuals from various levels of operational and senior
management. In 2000, the Company revised its estimate of the required reserves
and reversed $542 of the 1997 restructuring charge. At December 31, 1999 and
2000, approximately $1,003 and $444, respectively, related to closed facility
leases is included in accrued expenses.
In 1998, the Company incurred the following transaction costs associated with
business combinations accounted for using the pooling-of-interests method:
Investment banker fees $ 7,200
Accounting, legal and other professional fees 2,260
Broker fees 1,540
--------
$ 11,000
========
F-9
Tender offer costs
In July 2000, Philips completed a tender offer in which they acquired
approximately 60 percent of the Company's outstanding Common stock for $51.00
per share. In association with this tender offer, the Company incurred
approximately $6,255 of costs, primarily related to investment banker fees.
Advertising costs
The Company charges advertising costs to expense as incurred. Advertising
expense was $650, $524 and $626 for the years ended December 31, 1998, 1999 and
2000, respectively.
Research and development costs
Research and development costs are charged to expense as incurred. Total
research and development costs were approximately $813 for the year ended
December 31, 1998. None of these costs were incurred in 1999 or 2000.
Statements of cash flow information
For the years ended December 31, 1998, 1999 and 2000, the Company paid interest
of $695, $125 and $46, respectively, and income taxes of $6,705, $15,016 and
$17,007, respectively. Capital lease obligations of $98 were incurred on
equipment leases entered into in 1998. In 1998, convertible notes totaling
$1,288 were converted into 172 shares of Common stock.
The following table displays the net noncash financing activities resulting from
the Company's business acquisitions (see Note 2):
Year ended December 31
-------------------------------
1998 1999 2000
------- --------- -------
Noncash net assets acquired $ 4,401 $ 51,388 $ 8,055
Less- Seller notes and payables -- (1,757) --
Common stock issued -- (1,226) --
Cash paid to dissenting stockholder in
pooling transaction 1,438 -- --
------- -------- -------
Net cash paid for business acquisitions $ 5,839 $ 48,405 $ 8,055
======= ======== =======
Income taxes
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. 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.
Earnings per share
The Company follows SFAS No. 128, "Earnings per Share," which requires a dual
presentation of "basic" and "diluted" earnings per share on the face of the
income statement. Basic earnings per share is calculated by dividing net income
by the weighted average number of shares of Common stock outstanding for the
period. Diluted earnings per share is 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 consists
primarily of stock options, using the treasury stock method.
F-10
The table below sets forth the reconciliation of the numerators and denominators
of the Company's basic and diluted income per share computations:
Year ended December 31
----------------------------------------------------------------------------------------------
1998 1999 2000
------------------------------ ---------------------------- --------------------------------
Per Per Per
Net share Net share Net share
income Shares amount income Shares amount income Shares amount
------- ------ ------- -------- ------ ------ -------- ------ -------
Basic $ 3,185 33,087 $ 0.10 $ 40,205 35,120 $ 1.14 $ 38,730 36,154 $ 1.07
Effect of
dilutive
securities -- 1,818 (0.01) -- 1,609 (0.05) -- 1,015 (0.03)
------- ------ ------- -------- ------ ------ -------- ------ -------
Diluted $ 3,185 34,905 $ 0.09 $ 40,205 36,729 $ 1.09 $ 38,730 37,169 $ 1.04
======= ====== ======= ======== ====== ====== ======== ====== =======
For the years ended December 31, 1998, 1999 and 2000, 654, 72 and 2,055 Common
stock options and warrants, respectively, were excluded from the diluted
computation because their effect would be anti-dilutive.
Fair value of financial instruments
Cash and cash equivalents, cash equivalent with related party, accounts
receivable, accounts payable and accrued expenses are reflected in the
accompanying consolidated financial statements at fair value due to the
short-term nature of those instruments. Available-for-sale investments are also
reflected at fair value in accordance with SFAS No. 115. The carrying amount of
debt obligations approximates fair value at the balance sheet dates.
Comprehensive income
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components in a full set of general-purpose
financial statements that is presented with equal prominence as other financial
statements. The Company's comprehensive income consists of net income and
unrealized holding gains on available-for-sale securities. The adoption of SFAS
No. 130 had no impact on total shareholders' equity and is presented on the
accompanying Consolidated Statements of Shareholders' Equity. For the years
ended December 31, 1998, 1999 and 2000, the pretax unrealized gains on
available-for-sale securities were $900, $950 and $0, respectively, and the tax
expense recorded on the unrealized gains were $315, $246 and $0, respectively.
Segment information
The Company operates in one reportable segment.
F-11
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133, as amended by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 -
an amendment of FASB Statement No. 133," which provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. As the Company does not currently hold derivative
instruments or engage in hedging activities, the adoption of this pronouncement
is expected to have no impact on the Company's financial position or results of
operations.
Effective with the year ended December 31, 1999, the Company was subject to the
provisions of Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides
guidance on accounting for computer software developed or obtained for internal
use including the requirement to capitalize specified costs and the amortization
of such costs. The adoption of SOP 98-1 did not have a material impact on the
Company's financial position or results of operations.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
2. Acquisitions:
On May 28, 1998, the Company completed the acquisition of approximately 94
percent of the outstanding capital stock of Digital Dictation, Inc. (DDI) and on
July 31, 1998, acquired the remaining shares. The Company issued 912 shares of
its Common stock in exchange for all DDI shares. The acquisition was accounted
for using the pooling-of-interests method of accounting.
On August 18, 1998, the Company completed the acquisition of Signal
Transcriptions Network, Inc. (Signal), which was accounted for using the
pooling-of-interests method of accounting. The Company issued 619 shares of its
Common stock and approximately $1,400 in cash to a dissenting Signal stockholder
in exchange for all Signal capital stock. Signal and the Company have elected to
treat their merger as an asset purchase for income tax purposes. In connection
with this election, the Company recorded a deferred tax asset of $5,052 that was
credited directly to shareholders' equity to reflect the tax effect of goodwill
that was recorded for tax purposes.
On November 30, 1998, the Company completed the acquisition of Transcriptions
Ltd. of Florida, Inc. (TLF), which was accounted for using the
pooling-of-interests method. The Company issued 800 shares of its Common stock
for all TLF capital stock.
On September 18, 1998, the Company signed a definitive merger agreement with
MRC, and on December 10, 1998, the merger was consummated. Pursuant to the
agreement, the Company exchanged each share of MRC Common stock and each share
of MRC Preferred stock on an as-converted basis for 0.5163 shares of its Common
stock. In total, the Company issued 8,662 shares of its Common stock to the
former MRC shareholders and options to purchase an aggregate of 1,543 shares to
the former MRC option holders. The MRC merger was accounted for as a
pooling-of-interests.
F-12
The Company's historical financial statements have been retroactively restated
to reflect the acquisitions of DDI, Signal, TLF and MRC. Revenue and net income
as previously reported for the year ended December 31, 1998 and as restated for
the pooling of interests transactions is as follows:
Year ended
December 31, 1998
--------------------------------
Net income
Revenues (loss)
--------------- ------------
MedQuist, as previously reported $ 164,779 (a) $ (305)(a)
DDI 6,165 (b) 253 (b)
Signal 5,281 (b) 543 (b)
TLF 3,688 (c) 522 (c)
MRC 91,742 (c) 2,172 (c)
----------- --------
Restated $ 271,655 $ 3,185
=========== ========
(a) Includes DDI and Signal amounts from July 1, 1998, and TLF and MRC amounts
from October 1, 1998, and includes $18,221 of pretax transaction and
restructuring costs.
(b) Reflects amounts from January 1, 1998 to June 30, 1998.
(c) Reflects amounts from January 1, 1998 to September 30, 1998.
Prior to their mergers with the Company, Signal and TLF were taxed as "S"
Corporations. The above net income amounts do not include an aggregate "C"
Corporation income tax provision for Signal and TLF of approximately $294 for
the year ended December 31, 1998 (see Note 1).
From 1997 through 1999, the Company completed several smaller acquisitions
accounted for using the purchase method. Pro forma information is not presented
as these acquisitions are not material to the Company. Certain of the
acquisitions provide for additional consideration to be paid if net future
billings to defined customers exceed specified contractual levels. These
provisions expire in 2001 and are generally payable on a quarterly basis. When
the contingency is resolved and additional consideration is due, the Company
will account for the payments as additional purchase price and amortize the
additional amount paid over the remaining life of the asset.
F-13
3. Property and equipment:
December 31
-----------------------
1999 2000
---------- ----------
Furniture, equipment and software $ 68,115 $ 82,270
Leasehold improvements 2,377 2,971
---------- ----------
70,492 85,241
Less- Accumulated depreciation and amortization (38,777) (50,228)
---------- ----------
$ 31,715 $ 35,013
========== ==========
4. Investment:
On April 6, 2000, the Company made a $6 million investment in A-Life Medical,
Inc. (A-Life), a leader in advanced natural language processing technology for
the medical industry. The Company has accounted for the investment under the
cost method of accounting. There were no dividends received from this
investment. The Company received approximately $100 of services from A-Life
during the year ended December 31, 2000. As of December 31, 2000, the Company
owned 19.5 percent of A-Life's outstanding shares.
5. Intangible assets:
December 31
-------------------------
1999 2000
---------- ---------
Goodwill $ 86,884 $ 86,884
Customer lists 44,607 51,594
Noncompete agreements 6,576 7,016
Employee base 4,079 4,079
Other 37 37
---------- ---------
142,183 149,610
Less- Accumulated amortization (18,866) (26,202)
---------- ---------
$ 123,317 $ 123,408
========== =========
6. Accrued expenses:
December 31
-------------------------
1999 2000
--------- ---------
Accrued payroll and related taxes $ 13,494 $ 12,075
Restructuring charges 3,055 1,449
Income taxes payable 5,757 --
Other employee related expenses 2,318 2,318
Insurance reserves 2,086 2,100
Other 10,793 6,043
--------- ---------
$ 37,503 $ 23,985
========= =========
F-14
7. Long-term debt:
December 31
----------------------
1999 2000
---------- --------
Subordinated promissory note, repaid in 2000 $ 1,400 $ --
Subordinated promissory notes, due December 2001 357 357
Capital lease obligations 175 73
Other 50 25
---------- --------
1,982 455
Less- Current portion (1,530) (433)
---------- --------
$ 452 $ 22
========== ========
The Company had a credit facility that provided for a $10 million unsecured
senior revolving line of credit which expired on April 23, 2000.
In connection with the acquisition of Medical Records Corp., MRC issued seven
year, 8 percent unsecured notes to the former shareholders totaling $2,000. The
notes required the payment of interest quarterly, with annual principal payments
of $500 beginning in July 2000. The Company repaid these notes in 1999.
In January 1998, subordinated convertible six percent promissory notes in the
amount of $1,288 were converted into 172 shares of Common stock at a conversion
price of $7.48 per share.
8. Shareholders' equity:
In May 1999, the Company consummated a secondary public offering of its Common
stock, selling 800 shares at a price of $33.63 per share. In June 1999, the
underwriters exercised their overallotment option for an additional 505 shares.
After deducting the underwriters' discount and offering expenses, the net
proceeds to the Company were $41,858.
During the year ended December 31, 2000, the Company repurchased 600 shares of
its outstanding Common stock for $15,466 at an average price of $25.78 per
share. All Common stock acquired was subsequently retired.
9. Stock option plans:
The Company has six stock option plans that provide for the granting of options
to purchase shares of Common stock to eligible employees (including officers)
and nonemployee directors of the Company. Options may be granted at fair market
value of the Common stock or at a price determined by a committee of the
Company's board of directors. The stock options vest and are exercisable over
periods determined by the committee.
In February 1998, MRC granted 165 stock options to employees with exercise
prices below the fair market value of their Common stock. Accordingly, MRC
recorded deferred compensation totaling $1,078, of which $540, $247 and $163 was
amortized to expense in 1998, 1999 and 2000, respectively.
F-15
Information with respect to the Company's Common stock options is as follows:
Option price per Aggregate
Shares share proceeds
--------- ----------------- -----------
Outstanding, December 31, 1997 4,337 $ 1.14 - 16.49 $ 29,375
Granted 1,015 5.21 - 31.19 26,012
Exercised (760) 1.14 - 16.49 (1,887)
Canceled (159) 5.21 - 25.63 (391)
------ --------------- ---------
Outstanding, December 31, 1998 4,433 1.34 - 31.19 53,109
Granted 91 28.31 - 44.00 3,365
Exercised (1,153) 1.34 - 31.19 (9,316)
Canceled (202) 5.21 - 31.19 (4,253)
------ --------------- ---------
Outstanding, December 31, 1999 3,169 1.34 - 31.19 42,905
Granted 2,056 17.06 - 70.00 105,380
Exercised (1,381) 1.67 - 44.00 (19,305)
Canceled (244) 5.21 - 70.00 (7,295)
------ --------------- ---------
Outstanding, December 31, 2000 3,600 $ 2.17 - 70.00 $ 121,685
====== =============== =========
At December 31, 2000, there were 1,523 exercisable options with an aggregate
exercise price of $21,024 and 1,472 additional options available for grant under
the plans.
The options outstanding and exercisable by exercise price at December 31, 2000,
are as follows:
Weighted
average Weighted Weighted
remaining average average
Range of exercise Number contractual exercise Number exercise
prices outstanding life price exercisable price
- ----------------- ----------- ----------- --------- ----------- --------
$ 0.00 - 7.00 721 5.1 $ 4.44 641 $ 4.34
7.01 - 14.00 292 5.6 10.27 205 10.19
14.01 - 21.00 381 7.0 14.60 220 14.40
21.01 - 28.00 319 8.0 24.39 222 24.19
28.01 - 35.00 333 7.0 31.12 200 31.14
35.01 - 42.00 76 8.8 37.75 33 38.19
42.01 - 49.00 2 -- 44.00 2 44.00
49.01 - 56.00 759 9.5 50.94 -- --
56.01 - 70.00 717 9.5 70.00 -- --
------- -------
3,600 7.6 33.80 1,523 13.80
======= =======
F-16
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and the related interpretations in accounting for
its stock option plans. 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, "Accounting for Stock-Based
Compensation," the Company's net income and net income per share would have been
reduced to the following pro forma amounts:
Year ended December 31
-----------------------------
1998 1999 2000
-------- --------- --------
Net income:
As reported $ 3,185 $ 40,205 $ 38,730
Pro forma 1,705 35,945 34,447
Basic net income per share:
As reported .10 1.14 1.07
Pro forma .05 1.02 .95
Diluted net income per share:
As reported .09 1.09 1.04
Pro forma .05 .98 .93
The fair value of the options granted is estimated using the Black-Scholes
option pricing model with the following assumptions: dividend yield of 0.0
percent, volatility of 55.0 percent, risk-free interest rates of 4.4 percent to
8.0 percent, and an expected life of five years. The above pro forma amounts may
not be indicative of future amounts because option grants prior to January 1,
1995 have not been included and because future option grants are expected.
F-17
10. Income taxes:
The income tax provision consists of the following:
Year ended December 31
------------------------------------
1998 1999 2000
-------- --------- ---------
Current:
State and local $ 1,596 $ 4,256 $ 3,196
Federal 10,089 24,654 22,780
------- -------- --------
11,685 28,910 25,976
Deferred (3,213) (1,471) 2,797
------- -------- --------
$ 8,472 $ 27,439 $ 28,773
======= ======== ========
A reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate is as follows:
Year ended December 31
--------------------------
1998 1999 2000
---- ---- ----
Statutory federal income tax rate 35.0% 35.0% 35.0%
Nondeductible transaction costs 30.8 (0.2) --
State income taxes, net of federal benefit 3.7 4.1 3.5
Impact of Signal and TLF "S" Corporation
status (4.4) -- --
Other 7.6 1.7 4.1
---- ---- ----
72.7% 40.6% 42.6%
==== ==== ====
Signal and TLF were taxed as an "S" Corporation prior to their mergers with
MedQuist. Accordingly, the former Signal and TLF shareholders were taxed
individually on their companies' taxable income. Therefore, no tax provision is
included in the accompanying consolidated financial statements related to Signal
and TLF's net income (see Note 1).
The tax effected temporary differences that give rise to deferred income taxes
are as follows:
December 31
-------------------------
1999 2000
----------- ----------
Deferred tax asset:
Restructuring accruals $ 922 $ 586
Accruals and reserves 7,703 5,192
Accumulated amortization 1,431 5,474
Deferred compensation 146 279
---------- ---------
Total deferred tax assets 10,202 11,531
---------- ---------
Deferred tax liability:
Accumulated depreciation (1,086) (1,759)
Marketable security (380) --
Intangibles -- (4,943)
Other (1,745) (1,995)
---------- ---------
Total deferred tax liabilities (3,211) (8,697)
---------- ---------
Net deferred tax asset $ 6,991 $ 2,834
========== =========
F-18
Realization of the Company's net deferred tax asset is dependent on future
taxable income. The Company believes that it is more likely than not such assets
will be realized; however, ultimate realization could be negatively impacted by
market conditions and other variables not known or anticipated at this time.
11. Commitments and contingencies:
Rent expense for operating leases was $5,618, $5,410 and $6,969 for the years
ended December 31, 1998, 1999 and 2000, respectively. Minimum annual rental
commitments for noncancelable operating leases having terms in excess of one
year as of December 31, 2000, are as follows:
2001 $ 6,290
2002 5,178
2003 3,848
2004 2,005
2005 665
2006 and thereafter 163
---------
$ 18,149
=========
The Company has an employment agreement, as amended, with a former chief
executive officer. 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 $781 and $704 at December 31, 1999
and 2000, respectively, related to these retirement benefits. 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.
The Company has 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.
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. Employee benefit plans:
Savings plan
The Company offers a savings plan under section 401(k) of the Internal Revenue
Code. This savings plan allows eligible employees to contribute up to 15 percent
of their compensation on a pretax basis. The Company matches 50 percent of
participant's contribution, up to 5 percent of the participant's total
compensation. Effective October 1, 1996, the Company's matching contribution is
made in the form of the Company's Common stock. The charge to operations for the
Company's matching contributions was $125, $177 and $867 in 1998, 1999 and 2000,
respectively. The Company issued 5 shares in 1998 and 1999 and 27 shares in
2000, in connection with the Company's matching contribution.
F-19
MRC had two defined contribution 401(k) plans, covering substantially all
employees. Eligible employees of MRC may contribute certain amounts of their
annual compensation. During 1998 and 1999, MRC made matching contributions to
the plans of $114 and $98, respectively.
Stock purchase plan
All full-time employees except those who own 5 percent or more of the Voting
stock of the Company are eligible to participate in the Company's Employee Stock
Purchase Plan (SPP). The SPP provides that participants may authorize the
Company to withhold up to 10 percent of their earnings for the purchase of the
Company's Common stock. The purchase price of the Common stock is determined by
the Compensation Committee but shall not be less than 85 percent of the fair
market value of the Common stock. Through the SPP, 15, 8 and 21 common shares
have been purchased in 1998, 1999 and 2000, respectively.
13. Quarterly supplemental financial data (unaudited):
Year ended December 31,
1999: Three months ended
--------------------------------------------------
March 31 June 30 September 30 December 31
---------- --------- ------------ -----------
Revenues $ 75,658 $ 79,983 $ 86,001 $ 88,366
Income before income taxes 11,991 15,043 18,462 22,148
Net income 7,056 8,875 10,986 13,288
Basic net income per share 0.21 0.25 0.31 0.37
Diluted net income per share 0.20 0.24 0.29 0.36
Year ended December 31,
2000: Three months ended
--------------------------------------------------
March 31 June 30 September 30 December 31
---------- --------- ------------ -----------
Revenues $ 92,512 $ 90,989 $ 90,648 $ 90,000
Income before income taxes 23,720 19,351 9,109 15,323
Net income 14,232 11,611 3,534 9,353
Basic net income per share 0.40 0.33 0.10 0.25
Diluted net income per share 0.39 0.31 0.10 0.25
F-20
Report of independent public accountants
To MedQuist Inc.:
We have audited in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of MedQuist Inc. and
Subsidiaries included in this Form 10-K, and have issued our report thereon
dated January 30, 2001. Our audits were made for the purpose of forming an
opinion on those financial statements taken as a whole. The Schedule on page S-2
is the responsibility of the Company's management and 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 auditing
procedures applied in 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.
Philadelphia, Pennsylvania
January 30, 2001
S-1
Schedule II
MedQuist Inc. and Subsidiaries
Valuation and qualifying accounts
For the years ended December 31, 1998, 1999 and 2000
Balance at Charged to Charged to Write-offs Balance at
beginning costs and other and cash end of
of period expenses accounts payments period
---------- ---------- ---------- ---------- ----------
Allowance for
doubtful accounts:
Year ended
December 31, 1998 $ 1,298 $ 1,217 $ -- $ 241 $ 2,274
Year ended
December 31, 1999 2,274 3,149 (a) 648 2,512 3,559
Year ended
December 31, 2000 3,559 1,015 -- 1,009 3,565
Accrued
restructuring costs:
Year ended
December 31, 1998 $ 1,733 $ 6,539 $ -- $ 1,497 $ 6,775
Year ended
December 31, 1999 6,775 (2,333) -- 1,387 3,055
Year ended
December 31, 2000 3,055 (1,013) -- 593 1,449
(a) Assumed in business acquisitions accounted for as purchase transactions.
S-2