SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
-----------------
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
-----------------
For the quarterly period Commission file number
ended March 31, 2001 0-19941
MedQuist Inc.
-------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-2531298
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification no.)
Five Greentree Centre, Suite 311, Marlton, NJ 08053
---------------------------------------------------
Address of principal executive offices) (Zip Code)
(856) 810-8000
-------------------------------------
(Registrant's telephone number, including area code)
------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No___
-----
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 36,816,225 shares of
common stock, no par value, as of May 8, 2001.
MedQuist Inc.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE NO.
- ------- --------------------- --------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at March 31, 2001 (Unaudited) and 1
December 31, 2000
Consolidated Statements of Income for the three months ended March 31, 2001 2
and 2000 (Unaudited)
Consolidated Statements of Cash Flows for the three months ended March 31, 2001 3
and 2000 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited) 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosure About Market Risk 10
Special Note Concerning Forward Looking Statements 10
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings 11
Item 2. Changes in Securities and Use of Proceeds 11
Item 3. Defaults upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURE 12
- ---------
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31 December 31,
2001 2000
---- ----
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $61,810 $77,321
Cash equivalent with related party 50,087 20,044
Accounts receivable, net of allowance of $3,527 and
$3,565 74,707 75,155
Prepaid expenses and other current assets 6,724 12,099
----- ------
Total current assets 193,328 184,619
Property and equipment - net 34,847 35,013
Other assets 7,222 6,861
Intangible assets - net 132,815 123,408
------- -------
$368,212 $349,901
======== ========
Liabilities and Shareholders' Equity
Current Liabilities:
Current portion of long-term debt $1,424 $433
Accounts payable 4,701 4,232
Accrued expenses 26,079 23,985
------ ------
Total current liabilities 32,204 28,650
Long-term debt 1,013 22
Other liabilities 1,050 704
Deferred income taxes 2,719 2,719
Shareholders' equity:
Common stock, no par value, 60,000 shares authorized,
36,805 and 36,769 issued and outstanding --- ---
Additional paid-in capital 223,815 223,286
Retained earnings 107,515 94,648
Deferred compensation (104) (128)
----- -----
Total shareholders' equity 331,226 317,806
------- -------
$368,212 $349,901
======== ========
See Accompanying Notes to Condensed Consolidated Financial Statements.
1
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands, except per share amounts)
Three Months Ended
March 31,
---------
2001 2000
---- ----
Revenue $ 95,099 $92,512
-------- -------
Costs and expenses:
Cost of revenue 70,367 65,146
Selling, general and administrative 3,095 2,863
Depreciation 3,768 3,423
Amortization of intangible assets 1,952 1,787
Restructuring charges (600) ---
Lawsuit settlement (3,000) ---
----- ---
Total costs and expenses 75,582 73,219
------ ------
Operating income 19,517 19,293
Other income:
Gain on sale of securities --- 3,675
Interest income, net 1,405 752
----- ---
Income before income taxes 20,922 23,720
Income tax provision 8,055 9,488
----- -----
Net income $12,867 $14,232
======= =======
Basic net income per common share $ 0.35 $ 0.40
======= =======
Diluted net income per common share $ 0.34 $ 0.39
======= =======
See Accompanying Notes to Condensed Consolidated Financial Statements.
2
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Three Months Ended
March 31,
---------
2001 2000
---- ----
Operating activities:
Net income $12,867 $14,232
Adjustments to reconcile net income to net cash provided by operating
activities, net of business acquisitions:
Depreciation and amortization 5,720 5,210
Gain on sale of securities --- (3,675)
Amortization of deferred compensation 24 41
Tax benefit for exercise of employee stock options 25 335
Changes in assets and liabilities:
Accounts receivable, net 2,143 (3,065)
Prepaid expenses and other current assets 5,658 (463)
Other assets (361) ---
Accounts payable 469 122
Accrued expenses 2,217 (1,036)
Other liabilities 346 (24)
--- ---
Net cash provided by operating activities 29,108 11,677
------ ------
Investing activities:
Purchases of property and equipment, net (3,173) (3,795)
Purchase of investments --- (728)
Proceeds from sale of securities --- 4,403
Acquisitions, net of cash acquired (11,452) (4,432)
------- -------
Net cash used in investing activities (14,625) (4,552)
-------- -----
Financing activities:
Repayments of long-term debt (18) (1,489)
Proceeds from the exercise of common stock options 67 335
Purchase and retirement of common stock, at cost --- (15,466)
--- ------
Net cash provided by (used in) financing activities 49 (16,620)
-- ------
Net increase (decrease) in cash, cash equivalents, and cash equivalent with related party 14,532 (9,495)
Cash, cash equivalents and cash equivalent with related party, beginning of period 97,365 62,024
------ ------
Cash, cash equivalents and cash equivalent with related party, end of period $111,897 $52,529
======== =======
Supplemental disclosure of cash flow information:
Cash paid during period for:
Interest $ 10 $ 14
======= ======
Income taxes $ 115 $6,467
======= ======
See Accompanying Notes to Condensed Consolidated Financial Statements.
3
MedQuist Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 2001
(Unaudited - amounts in thousands, except per share amounts)
Note 1. Basis of Presentation and Restructuring Charges
- --------------------------------------------------------
The information set forth in these statements is unaudited. The
information reflects all adjustments that, in the opinion of management, are
necessary to present a fair statement of operations of MedQuist Inc. and its
consolidated subsidiaries for the periods indicated. Results of operations for
the interim periods ended March 31, 2001 are not necessarily indicative of the
results of operations for the full year. Certain information in footnote
disclosures normally included in financial statements have been condensed or
omitted in accordance with the rules and regulations of the Securities and
Exchange Commission.
From 1995 through March 31, 2001, we completed 39 acquisitions. Six
acquisitions, including the acquisition of The MRC Group (MRC), were accounted
for as pooling of interests. Four of the acquisitions accounted for as pooling
of interests were material and, accordingly, we restated our financial
statements.
In December 1998, the Company's board of directors approved
management's restructuring plan associated with the MRC merger. Costs associated
with the plan of approximately $6,539 were recognized in 1998 in accordance with
Emerging Issues Task Force ("EIFT") 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity," as follows:
Non-cancelable leases......................................$3,835
Severance.................................................. 1,618
Non-cancelable contracts and other exit costs.............. 1,086
-----
$6,539
The plan related primarily to the closure of several redundant customer
service centers as well as certain corporate offices in order to improve
operating efficiencies. The plan was completed in 1999. The severance costs are
attributable to 41 individuals from various levels of operational and senior
management. The activity in the restructuring account is as follows:
4
Non-Cancelable
Non-Cancelable Contracts and
Leases Severance Other Exit Costs Total
------ --------- ---------------- -----
1998 Restructuring Charge $3,835 $1,618 $1,086 $6,539
Payments against Restructuring accrual:
1998 0 (567) (410) (977)
1999 (437) (723) (17) (1,177)
2000 (556) (20) --- (576)
2001 (54) --- --- (54)
Revision to estimate recorded in 1999: (1,492) (182) (659) (2,333)
Revision to estimate recorded in 2000: (471) --- --- (471)
Revision to estimate recorded in 2001: (44) (126) --- (170)
---- ----- --- ----
1998 Restructuring accrual balance, at
March 31, 2001: $ 781 $ 0 $ 0 $ 781
======= ====== ====== ======
In 1997, MRC approved a separate management plan to close and/or merge
several redundant customer service centers 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 non-cancelable
leases, the disposition of fixed assets and employee severance costs. During
2001, we revised our accrual estimates and $430 of the restructure accruals were
reversed in connection with the revision. At March 31, 2001, the accrual has
been fully utilized.
Note 2. Acquisitions
- ---------------------
During 2000, we completed eight acquisitions accounted for using the
purchase method. Pro forma information is not presented as the acquisitions were
not material to the Company.
Through March 31, 2001, we completed two acquisitions accounted for
using the purchase method. Pro forma information is not presented as the
acquisitions were not material to the Company.
Note 3. Net Income Per Common Share
- ------------------------------------
Basic net income per share is calculated by dividing net income by the
weighted average number of shares of Common Stock outstanding for the period.
Diluted net income 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 effective of Common Stock equivalents, which consist
of stock options, using the treasury stock method.
5
The table below sets forth the reconciliation of the numerators and
denominators of the basic and diluted net income per share computations:...
Three Months Ended March 31,
-------------------------------------------------------------------------------
2001 2000
----------------------------------- ---------------------------------
Net Per Share Net Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic $12,867 36,803 $0.35 $14,232 35,700 $0.40
Effect of dilutive securities --- 717 (0.01) --- 1,203 (0.01)
--- --- ----- --- ----- ------
Diluted $12,867 37,520 $0.34 $14,232 36,903 $0.39
======= ====== ===== ======= ====== =====
Note 4. Shareholders' Equity
- -----------------------------
During the year ended December 31, 2000, we repurchased 600 shares of
our outstanding common stock for $15,466 at an average price of $25.78 per
share. All common stock acquired was subsequently retired.
In July 2000, Koninklijke Philips Electronics, N.V. (Philips) completed
a tender offer in which they acquired approximately 60% of MedQuist's
outstanding common stock for $51.00 per share.
Since July 2000, Philips has purchased shares in the open market, at
various prices, which has increased their ownership in MedQuist stock to
approximately 71%.
Note 5. Cash, Cash Equivalent and Cash with Related Party
- ----------------------------------------------------------
Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less. Cash equivalent
with related party consists of cash deposited with Philips for the purpose of
optimizing income from temporary excess cash. We maintain a Deposit Facility
with Philips which allows us to invest up to $150 million at LIBOR less 0.125%,
for periods up to 365 days. At March 31, 2001, we had $50.1 million in such an
investment. For the three months ended March 31, 2001 we recorded approximately
$100,000 of interest income from this investment. As the original maturity of
this investment was less than ninety days, we have classified this as a cash
equivalent in our consolidated balance sheet as of March 31, 2001.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
- -------
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.
Cost of revenue consists of all direct costs associated with providing
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.
Results of Operations
- ---------------------
The following table sets forth for the periods indicated, certain financial data
in the Company's Unaudited Consolidated Statements of Income as a percentage of
net revenue:
Three Months Ended
March 31
--------
2001 2000
---- ----
Revenue 100.0% 100.0%
Costs and expenses:
Cost of revenue 74.0 70.4
Selling, general and administrative 3.3 3.1
Depreciation 4.0 3.7
Amortization of intangible assets 2.0 1.9
Restructuring charges (0.6) --
Lawsuit settlement (3.2) --
----- ----
Operating income 20.5 20.9
Gain on sale of securities --- 4.0
Interest income, net 1.5 0.8
--- ---
Income before income taxes 22.0 25.7
Income tax provision 8.5 10.3
--- ----
Net income 13.5% 15.4%
===== ====
7
Three Months Ended March 31, 2001
- ---------------------------------
Revenue. Revenue increased 2.8% from $92.5 million for the three months ended
March 31, 2000 to $95.1 million for the comparable 2001 period. The increase
resulted from increased sales to existing customers, sales to new customers and
additional revenue from acquisitions.
Cost of Revenue. Cost of revenue increased 8.0% from $65.1 million for the three
months ended March 31, 2000 to $70.4 million for the comparable 2001 period. As
a percentage of revenue, cost of revenue increased from 70.4% for the three
months ended March 31, 2000 to 74.0% for the comparable 2001 period. The
increase resulted primarily from increased transcription related payroll and
benefit costs.
Selling, general and administrative. Selling, general and administrative
expenses increased 8.1% from $2.9 million for the three months ended March 31,
2000 to $3.1 million for the comparable 2001 period. As a percentage of
revenues, selling, general and administrative expenses increased from 3.1% for
the three months ended March 31, 2000 to 3.3% for the comparable 2001 period.
The increase primarily resulted from increased spending to support our existing
and new businesses.
Depreciation. Depreciation expense increased 10.0% from $3.4 million for the
three months ended March 31, 2000 to $3.8 million for the comparable 2001
period. As a percentage of revenues, depreciation increased from 3.7% for the
three months ended March 31, 2000 to 4.0% for the comparable period in 2001. The
increase was due to increased capital purchases.
Amortization. Amortization of intangible assets increased from $1.8 million for
the three months ended March 31, 2000 to $2.0 million for the comparable 2001
period. 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 2000 and 2001.
Restructuring charge. During the three months ended March 31, 2001, we revised
our accrual estimates for the restructuring reserves, which were established in
1998 and 1999. As a result, $600,000 of the reserves were reversed into income
in 2001. We will continue to evaluate the restructuring reserve estimates.
Lawsuit settlement. During the three months ended March 31, 2001, we settled a
lawsuit, in our favor, for $3.0 million, net of legal expenses.
Interest income, net. We had net interest income of $752,000 for the three
months ended March 31, 2000 and net interest income of $1.4 million for the
comparable 2001 period. The increase is due to increased cash available for
investment.
Income tax provision. Income taxes decreased from $9.5 million or 40.0% of
income before income taxes to $8.1 million or 38.5% of income before income
taxes. The decrease primarily resulted from state tax planning.
8
Liquidity and Capital Resources
- -------------------------------
At March 31, 2001, we had working capital of $161.1 million, including
$61.8 million of cash and cash equivalents, and $50.1 million of cash equivalent
with Philips. We maintain a $150 million deposit facility with Philips, which
allows us to invest excess funds at a rate of LIBOR less 0.125%. At March 31,
2001, we had $50.1 million in such an investment. During the three months ended
March 31, 2001, our operating activities provided cash of $29.1 million and
during the three months ended March 31, 2000 our operating activities provided
cash of $11.7 million. The increase is primarily due to increased cash receipts
on accounts receivable, refunds on income taxes paid and an increase in accrued
expenses.
During the three months ended March 31, 2001, we used cash in investing
activities of $14.6 million, consisting of $3.2 million of capital expenditures
and $11.4 million for acquisitions accounted for under the purchase method.
During the three months ended March 31, 2000, we used cash for investing
activities of $4.6 million, consisting of $3.8 million of capital expenditures,
$4.4 million for acquisitions accounted for under the purchase method, $728,000
for the purchase of investments, offset by $4.4 million in cash proceeds from
the sale of securities.
During the three months ended March 31, 2001, net cash provided by
financing activities was $49,000. During the three months ended March 31, 2000,
cash used in financing activities was $16.6 million, consisting primarily of
$15.5 million from the purchase and retirement of MedQuist stock, $1.5 million
for repayment of long-term debt, partially offset by $335,000 in proceeds from
the issuance of common stock and issuances in connection with employee benefit
plans.
We believe that our cash and cash equivalents generated from operations
and our borrowing capacity will be sufficient to meet our current working
capital and capital expenditure requirements.
9
Item 3. 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 March 2001. For investment securities, the table presents principal amounts
and related weighted average interest rates (dollars in thousands).
Cash, cash equivalents and cash on deposit with related party $111,897
Average interest rate 5.23%
Special Note Concerning Forward Looking Statements
- --------------------------------------------------
Some of the information in this Form 10-Q contains forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Securities Exchange Act. We also have referred you to this note in
other written or oral disclosures we have made. These statements include
forward-looking language such as "will likely result," "may," "are expected to,"
"is anticipated," "estimated," "projected," "intends to," "consensus earnings
estimates," 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; (2) inability to complete and assimilate
acquisitions of businesses; (3) dependence on our senior management team; (4)
the impact of new services or products on the demand for our services; (5) our
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 of the Health Information Portability and Accountability
Act ("HIPAA"); (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 acquisitions of DVI
(digital dictation equipment), Speech Machines (ASP transcription platform and
business) and entering into the medical record coding reimbursement business.
When considering these forward-looking statements, you should keep in mind these
risk factors and 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-Q or elsewhere. Other risk factors and
cautionary statements are set forth in our other filings with the SEC, and you
are encouraged to read those.
10
Part II Other Information
- --------------------------
Item 1. - Legal Proceedings - Not Applicable
Item 2. - Changes in Securities and Use of Proceeds - Not Applicable
Item 3. - Defaults upon Senior Securities - Not Applicable
Item 4. - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 5. - Other Information - Not Applicable
Item 6. - Exhibits and Reports on Form 8-K
a) Exhibits:
b) The Company filed the following Reports on Form 8-K during
the quarter for which this report is filed.
File Date Item Reported
--------- -------------
February 1, 2001 Regulation FD Disclosure in connection
with earnings release and conference
call
11
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MedQuist Inc.
Registrant
Date: 05/11/01 By: /s/ Brian J. Kearns
-----------------------
Brian J. Kearns
Chief Financial Officer