SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A
AMENDMENT NO. 1
TO
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, 1998 Commission file number 0-19941
New Jersey 22-2531298
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Five Greentree Centre, Suite 311, Marlton, NJ 08053
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (609) 596-8877
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Common Stock (no par value)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of Registrant's knowledge, in definite proxy or information statements
incorporated by reference in Part III of this Form 10-K. [ ]
The aggregate market value of the Registrant's voting stock held by
non-affiliates was approximately $ million on March 23, 1999, 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 22, 1999 was 33,727,120.
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 1999 Annual Meeting.
PART I
Item 1. BUSINESS
MedQuist is the leading 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
6,000 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
2,300 clients nationwide through our 77 client service centers.
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 $271.7 million in 1998. 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.
Recent Developments
On December 10, 1998, MedQuist acquired The MRC Group, Inc. in a
pooling of interests transaction issuing approximately 8.61 million shares of
common stock. MRC, now a subsidiary of MedQuist, serves approximately 500
clients and employs approximately 2,400 experienced medical transcriptionists.
For the year ended December 31, 1997, MRC had revenue of approximately $108.0
million.
We believe that the MRC acquisition will enable us to better utilize key
resources. In addition to the reduction of corporate overhead costs by combining
accounting, legal and human resources, the addition of transcriptionists will
permit a more efficient workflow and faster customer service. In 1997, MRC's
operating income, before its restructuring charge, was 1.1% of total revenue
while MedQuist's operating income, before restating for the pooling of interests
acquisitions, was 14.1% of total revenue. We believe that, over time, the
operating margins of the combined company will continue to improve and achieve
levels comparable to MedQuist's historical performance as a stand-alone company.
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, 1998, we had
acquired MRC and 17 other medical transcription companies.
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.
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We believe the market for outsourced transcription 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 to reduce overall healthcare costs and to improve the efficient delivery
of patient care. Accurate medical transcription and distribution and storage of
transcribed records 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
transcription 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.
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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.
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 consistently improve our operating
margins by spreading the fixed portion of our overhead over a growing revenue
base. We will focus on continuing to grow our revenue to take advantage of
efficiencies such as
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a larger network of transcriptionists and increased negotiating power with our
vendors, including telecommunication providers.
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. 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
geographic presence.
MedQuist Services
Through our approximately 6,000 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.
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We serve approximately 2,300 clients through 77 client service centers
nationwide. Each client service center is run by a manager who is supported by
three additional levels of operating management. 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.
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.
We have hired a Director of National Recruitment and at least two
recruiters in each of our three regional groups. In addition, each client
service center has at least one person designated to monitor and manage
recruitment efforts.
Currently, we are experimenting with software that monitors
transcriptionist quality and should allow us to implement an accelerated
training program so that less experienced transcriptionists can be hired and
trained efficiently. In addition, we have established a "Partners in Education"
program with adult education programs, vocational technology schools, and
colleges offering medical transcription training programs.
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 our senior management, including Mr. Cohen, have sales
responsibilities.
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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 research and development department that
integrates these partnerships into useable product and service offerings. Some
of our current business partners and relationships in exploring these emerging
technologies are described below.
WebMD is an Internet-based healthcare network that connects physicians,
hospitals, third-party payers, and consumers to a virtual marketplace of
medical information, tools, and services. WebMD provides its subscribers with
access to our medical transcription services on its website.
Lernout & Hauspie Speech Products, N.V. is a global leader in advanced
speech and
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language solutions for vertical markets, computers, automobiles,
telecommunications, embedded products, consumer goods and the Internet.Lernout &
Hauspie is making the speech user interface the keystone of simple, convenient
interaction between humans and technology, and is using advanced translation
technology to break doen language barriers. With Lernout & Hauspie, we have
developed a clinical workstation that integrates voice recognition, structured
input and free-form dictation.
Synthesys Technologies, Inc. develops innovative clinical data repository
solutions for the healthcare industry. We have a co-marketing agreement with
Synthesys to sell Synthesys' data mining and outcomes analysis software to our
customer base. The software includes a search engine that provides for analysis
of transcribed clinical data.
MasterChart is a provider of solution-based technology to leading
healthcare system providers. Through an agreement with MasterChart, we offer the
Physassist Portable Dictation, a hand-held digital recorder; Respond, an
Internet document management system; and MasterChart Integration Engine, a
message translation control and monitoring middleware. MasterChart also provides
product development and software design services to MedQuist.
-8-
Item 2. PROPERTIES
The Company does not own any real property. The Company leases office
and other space for 77 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
14,000 square feet and has 5 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
On December 10, 1998, the Company held a Special Meeting of its
shareholders at which the acquisition by merger of The MRC Group, Inc. was
approved. The number of votes cast for, against, as well as abstentions and
broker non-votes as to such matter is as follows:
15,302,593 shares voted for the proposal;
20,646 shares voted against the proposal;
47,952 shares abstained; and
0 broker non-votes.
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PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The 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 the Common Stock for the last two fiscal years and for the first quarter of
1999. 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
---------- ----------
1997
First Quarter ............................ $ 9.33 $ 7.17
Second Quarter ........................... 10.42 6.33
Third Quarter ............................ 12.00 9.33
Fourth Quarter ........................... 17.56 10.81
1998
First Quarter ............................ $ 19.56 $ 15.00
Second Quarter ........................... 29.38 17.63
Third Quarter ............................ 33.00 20.50
Fourth Quarter ........................... 40.00 21.75
1999
First Quarter (through March 22) ......... $ 39.00 $ 29.25
The above noted bid quotations reflect a three for two stock split
effected on September 9, 1997 and a two for one stock split effected on June
15, 1998.
On March 22, 1999 the closing sale price for the Common Stock, as
reported on the Nasdaq National Market, was $30.06 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. In addition, our agreements with our
senior lender restrict the payment of dividends.
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Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following financial information is derived from MedQuist's audited
financial statements for the years ended December 31, 1996, 1997 and 1998
included in this Form 10-K, from its audited financial statements for the year
ended December 31, 1995, and from its unaudited financial statements for the
year ended December 31, 1994. The Company's financial statements have been
restated to reflect MedQuist's 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", MedQuist's financial statements and related notes
and other information that MedQuist has filed with the SEC.
Year Ended December 31,
--------------------------------------------------------------------
(In thousands, except per share data)
1994 1995 1996 1997 1998
---------- ----------- ----------- ------------- -----------
Statement of Operations Data:
Revenue ....................................... $59,228 $109,657 $152,109 $ 216,158 $271,655
Costs and expenses:
Cost of revenue .............................. 46,873 86,265 118,978 169,235 209,587
Selling, general and administrative .......... 6,184 9,144 11,908 14,362 16,061
Depreciation ................................. 2,581 5,752 7,372 10,339 12,697
Amortization of intangible assets ............ 264 896 3,150 5,652 3,757
Transaction costs and restructuring
charges ..................................... -- 347 644 2,075 18,221
------- -------- -------- --------- --------
Total operating expenses .................... 55,902 102,404 142,052 201,663 260,323
------- -------- -------- --------- --------
Operating income .............................. 3,326 7,253 10,057 14,495 11,332
Interest expense (income), net ................ 2,648 4,252 2,049 469 (325)
------- -------- -------- --------- --------
Income from continuing operations before
income taxes ................................. 678 3,001 8,008 14,026 11,657
Income tax provision (benefit) ................ (529) 640 2,720 5,293 8,472
------- -------- -------- --------- --------
Income from continuing operations ............. 1,207 2,361 5,288 8,733 3,185
Discontinued operations ....................... 1,612 (1,729) -- -- --
Extraordinary item ............................ -- (545) -- -- --
------- -------- -------- --------- --------
Net income .................................... 2,819 87 5,288 8,733 3,185
Inducement of warrant exercise ................ -- -- (707) -- --
------- -------- -------- --------- --------
Net income available to common
shareholders ................................. $ 2,819 $ 87 $ 4,581 $ 8,733 $ 3,185
======= ======== ======== ========= ========
Basic income per share:
Continuing operations ........................ $ 0.12 $ 0.23 $ 0.22 $ 0.28 $ 0.10
Discontinued operations ...................... 0.17 (0.17) -- -- --
Extraordinary item ........................... -- (0.05) -- -- --
Inducement of warrant exercise ............... -- -- (0.03) -- --
------- -------- -------- --------- --------
$ 0.29 $ 0.01 $ 0.19 $ 0.28 $ 0.10
======= ======== ======== ========= ========
Diluted income per share:
Continuing operations ........................ $ 0.12 $ 0.22 $ 0.20 $ 0.26 $ 0.09
Discontinued operations ...................... 0.17 (0.16) -- -- --
Extraordinary item ........................... -- (0.05) -- -- --
Inducement of warrant exercise ............... -- -- (0.03) -- --
------- -------- -------- --------- --------
$ 0.29 $ 0.01 $ 0.17 $ 0.26 $ 0.09
======= ======== ======== ========= ========
Balance Sheet Data:
As of December 31,
-----------------------------------------------------------------------
(In thousands)
1994 1995 1996 1997 1998
-------- -------- -------- --------- --------
Working capital ................................ $ 6,453 $ 13,142 $ 33,483 $ 36,608 $ 41,852
Total assets ................................... 85,811 91,191 158,551 173,773 187,311
Long-term debt, net of current portion ......... 39,577 23,342 9,964 7,589 215
Shareholders' equity ........................... 12,096 30,572 120,710 131,373 151,186
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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.
Our fees are based primarily on contracted rates with our customers. We
recognize revenue when we render services and deliver reports to our customers.
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. 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, but include certain variable components.
From 1995 through 1998, we completed 18 acquisitions. Five acquisitions
completed in 1998, including the acquisition of MRC, were accounted for as
pooling of interests. Four of these acquisitions were material and,
accordingly, we restated our financial statements.
On December 10, 1998, MedQuist acquired MRC through the issuance of
approximately 8.61 million shares of the Company's common stock. We believe that
the MRC acquisition will better enable us to better utilize crucial resources
and reduce corporate overhead by combining accounting, legal and human
resources. Further, the additional transcriptionists should permit a more
efficient workflow and faster customer service. In 1997, MRC's revenue and
operating income, before its restructuring charge, were $108.0 million and $1.2
million, or 1.1% of its revenue. MedQuist's operating income, before restating
for its pooling of interests acquisitions, was 14.1% of revenue in 1997. We
believe that, over time, the operating margins of the combined company will
continue to improve and achieve levels comparable to MedQuist's historical
performance as a stand-alone company.
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,
---------------------------------------
1996 1997 1998
----------- ----------- -----------
Revenue .............................................. 100.0% 100.0% 100.0%
Costs and expenses:
Cost of revenue ..................................... 78.2 78.3 77.2
Selling, general and administrative ................. 7.8 6.6 5.9
Depreciation ........................................ 4.9 4.8 4.7
Amortization of intangible assets ................... 2.1 2.6 1.4
Transaction costs and restructuring charges ......... 0.4 1.0 6.7
------ ------ ------
Operating income ..................................... 6.6 6.7 4.1
Interest income (expense), net ....................... ( 1.4) ( 0.2) 0.1
------ ------ ------
Income before income taxes ........................... 5.2 6.5 4.2
Income tax provision ................................. 1.8 2.5 3.1
------ ------ ------
Net income ........................................... 3.4% 4.0% 1.1%
====== ====== ======
---------------------------------
Year Ended December 31, 1998 Compared to
Year Ended December 31, 1997
Revenue. Revenue increased 25.7% from $216.2 million in 1997 to $271.7
million in 1998. The $55.5 million increase as compared to 1997 was composed of
$43.5 million from internally generated growth and $12.0 million from
acquisitions accounted for as purchase transactions.
Cost of Revenue. Cost of revenue increased 23.9% from $169.2 million in
1997 to $209.6 million in 1998 and was directly related to the increase in
revenue. As a percentage of revenue, cost of revenue decreased from 78.3% in
1997 to 77.2% in 1998 due primarily to the improved direct margins of MRC's
business in 1998 versus 1997.
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Selling, General and Administrative. Selling, general and
administrative expenses increased 11.8% from $14.4 million in 1997 to $16.1
million in 1998. The increase was due primarily to increased administrative
costs to support the increase in revenue, in addition to increased technology
development costs. This increase was partially offset by decreased marketing
costs at MRC. As a percentage of revenue, selling, general and administrative
expenses decreased from 6.6% in 1997 to 5.9% in 1998. The percentage decrease
was due primarily to our ability to spread the fixed portion of our overhead
over a larger revenue base.
Depreciation. Depreciation increased 23.3% from $10.3 million in 1997 to
$12.7 million in 1998. The increase in depreciation was a result of increased
capital expenditures to support the growth in revenue. As a percentage of
revenue, depreciation remained relatively constant at 4.7% in 1998 compared to
4.8% in 1997.
Amortization. Amortization of intangible assets was $5.7 million in 1997
compared to $3.8 million in 1998. The amount in 1997 includes amortization of
noncompete agreements from prior business acquisitions that were fully
amortized in late 1997.
Interest. We had interest expense of $469,000 in 1997 and interest
income of $325,000 in 1998. We repaid a significant portion of our debt in 1997
and invested our excess cash in 1998.
Transaction Costs and Restructuring Charges. In 1998, we (1) incurred
$11.0 million of transaction costs associated with pooling of interests
business combinations, (2) incurred $682,000 of transaction costs related to
MRC's terminated initial public offering and (3) recorded a $6.5 million
restructuring charge associated with the MRC acquisition.
As of December 31, 1998, $10.5 million of transaction costs associated
with the pooling of interests acquisitions had been paid, with $500,000 included
in accrued expenses for payments scheduled to be made in 1999.
In June 1998, MRC filed a registration statement for an initial public
offering that was terminated in September 1998 upon signing the merger
agreement with the Company. All transaction costs related to MRC's terminated
initial public offering were paid in 1998.
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. We expect to complete the restructuring in 1999. As of December 31,
1998, $567,000 of the employee severance and $410,000 in other restructuring
costs had been paid. At December 31, 1998, $5.6 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,
1998, $1.2 million related to closed facility leases remained in accrued
expenses.
Year Ended December 31, 1997 Compared to
Year Ended December 31, 1996
Revenue. Revenue increased 42.1% from $152.1 million in 1996 to $216.2
million in 1997. The $64.1 million increase as compared to 1996 was composed of
$53.1 million from internally generated growth and $11.0 million from
acquisitions accounted for as purchase transactions.
Cost of Revenue. Cost of revenue increased 42.2% from $119.0 million in
1996 to $169.2 million in 1997. This increase was directly related to the
increase in revenue. As a percentage of revenue, cost of revenue remained
relatively constant at 78.2% in 1996 as compared to 78.3% in 1997.
Selling, General and Administrative. Selling, general and
administrative expenses increased 21.0% from $11.9 million in 1996 to $14.4
million in 1997. The increase was due primarily to increased administrative
costs to support the increase in revenue, in addition to increased marketing
costs and technology development costs incurred by MRC. As a percentage of
revenue, selling, general and administrative expenses decreased from 7.8% in
1996 to 6.6% in 1997. The percentage decrease was due primarily to our ability
to spread the fixed portion of our overhead over a larger revenue
base.
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Depreciation. Depreciation increased 39.2% from $7.4 million in 1996 to
$10.3 million in 1997. The increase in depreciation was a result of capital
expenditures made to support the growth in revenue. As a percentage of revenue,
depreciation remained relatively constant at 4.8% in 1997 compared to 4.9% in
1996.
Amortization. Amortization of intangible assets was $5.7 million in 1997
as compared to $3.2 million in 1996. The increase in 1997 was attributable to
the acquisitions made in 1996 and 1997 accounted for as purchase transactions.
Interest. Interest expense decreased from $2.0 million in 1996 to
$469,000 in 1997. The decrease in 1997 was primarily related to the payment of
our senior term loans, reduced borrowings under our revolving credit facility
and the payment of the cash portion of the deferred purchase price on May 30,
1996 for our 1994 acquisition of Transcriptions, Ltd. This deferred purchase
price was paid using a portion of the proceeds from our 1996 common stock
offering. In 1996 we recorded $640,000 of non-cash imputed interest expense
associated with the Transcriptions, Ltd. deferred purchase price.
Restructuring Charges. MRC incurred restructuring charges of $2.1 million
in 1997 and $644,000 in 1996. These charges were related to the closure and
consolidation of less profitable or redundant facilities. In addition, the 1997
restructuring charge included other acquisition and integration costs incurred
in connection with MRC's acquisition of Medical Records Corp.
Liquidity and Capital Resources
At December 31, 1998, we had working capital of $41.9 million, including
$15.9 million of cash and cash equivalents, and no outstanding bank debt. During
1998, our operating activities provided cash of $22.9 million and during 1997,
our operating activities provided cash of $ 21.4 million. Our cash flow from
operating activities is generated primarily from our net income before
depreciation and amortization, partially offset by increases in accounts
receivable. In 1998, the increase in operating cash flow was also affected by
increased accrued expenses, primarily related to the restructuring charge.
During 1998, we used cash for investing activities of $15.9 million,
consisting primarily of $14.0 million of capital expenditures. In addition, we
generated $4.0 million in cash from sales of short-term investments and used
$4.4 million for the acquisition of three transcription businesses accounted
for under the purchase method. In addition, we paid $1.4 millon to a dissenting
shareholder in connection with the Signal acquisition. During 1997, we used
cash for investing activities of $18.4 million, consisting primarily of $13.7
million of capital expenditures. In addition, in 1997 we generated $1.0 million
in cash from sales of short-term investments and used $5.6 million for the
acquisition of eight transcription businesses accounted for under the purchase
method.
During 1998, cash used in financing activities was $5.5 million,
consisting primarily of $10.0 million of debt repayments and $1.0 million of
distributions to former stockholders of acquired S-corporations, offset by $5.5
million in proceeds from the issuance of common stock, including option and
warrant exercises and sales in connection with employee benefit plans. During
1997, cash used in financing activities was $3.5 million, consisting primarily
of $3.8 million of debt repayments, and $1.1 million of shareholder
distributions to former stockholders of acquired S-corporations, and $676,000 to
purchase and retire common stock, offset by $2.0 million in proceeds from the
issuance of common stock, including option and warrant exercises and sales in
connection with employee benefit plans.
We have a borrowing facility with Chase Manhattan Bank. The Chase
facility provides for a $10.0 million senior unsecured revolving credit
facility expiring April 23, 2000. The Chase facility bears interest at
resetting rates selected by the Company from various alternatives. The interest
rate alternatives are either (1) the greater of (a) prime rate, (b) the federal
funds rate plus 0.5%, and (c) the bank's certificate of deposit rate plus 1%,
or (2) LIBOR plus 0.75%. The Chase facility also allows us to finance up to
100% of any acquisitions of companies that are in the business of providing
transcriptions-related services. The financing of these acquisitions may be
carved out of the Chase facility and amortized over five-year periods (20
consecutive quarters). Each acquisition term loan that is created would
permanently reduce the remaining Chase facility commitment by a like amount.
We can use the Chase facility for working capital and general corporate
purposes. If any amounts under the Chase facility are repaid, other
-14-
than acquisition term loans, we may reborrow such amounts. The Chase facility
includes financial and other covenants applicable to us, including limitations
on capital expenditures and dividends. As of March 22, we had no outstanding
borrowings under the Chase facility.
We believe that cash flow generated from operations and borrowing
capacity under the Chase facility will be sufficient to meet our current
working capital and capital expenditure requirements. In 1999, we expect capital
expenditures as a percentage of revenue to be consistent with prior years.
Year 2000 Compliance
We are aware of the issues associated with the programming code in
existing computer systems as 2000 approaches. The Year 2000 problem is
pervasive and complex as virtually every computer operation will be affected in
some way by the rollover of the two digit year value to 00. The issue is
whether computer systems will recognize date sensitive information when the
year changes to 2000. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail. We rely on our systems
in operating and monitoring all aspects of our business. We also rely on the
external systems of our customers, suppliers, telecommunication carriers,
utilities and other organizations with which we do business.
We have approached the Year 2000 problem in the following manner:
o assessing, correcting and testing our internal systems;
o obtaining assurance or information on the state of Year 2000 readiness
of our material clients and suppliers; and
o developing contingency plans, when practical, to address expected Year
2000 failures.
-15-
A discussion of each of these areas follows.
Internal Systems. In 1998, we conducted an assessment of our internal
systems. This assessment covered embedded computer chips, computer software,
computer hardware, telephones, communications equipment, facsimile equipment,
scanners, copiers and voice recording systems which we own and were able to
identify as critical to our ability to provide services to our clients. The
assessment identified a variety of software and hardware issues that we needed
to address to be prepared for 2000. Some of these issues include the need to:
o upgrade or modify the BIOS (programs which allow personal computers to
run) on some of our PCs (or replace the PC);
o modify some of our server operating systems;
o reset the dates or modify some of our voice capture systems;
o modify the date fields of some of our interfaces;
o upgrade the version level of the transcription software of some of our
users and clients;
o accelerate the conversion of some clients from outdated software
applications to compliant software applications; and
o upgrade some of the financial systems.
June 30, 1999 is our internal target for rectifying Year 2000 issues for
all mission critical applications. From July 1 to December 31, 1999, we plan to
retest critical systems and evaluate non-critical applications for potential
Year 2000 compliance issues.
Clients and Suppliers. We also have exposure to Year 2000 problems that
may be experienced by others. These risks include the inability to exchange
electronic data and the risk of disruptions and failures of persons with whom
we do business or on whom we or our clients rely. Our business interacts with
or depends on the systems of clients, suppliers, telecommunication carriers,
utilities, vendors, financial institutions and others. If we are not able to
exchange information electronically with our clients and transcriptionists our
business may be materially impacted. For example, our business relies heavily
on telephone services. If phone service is lost, we will be unable to provide
services until phone service is restored or contingency plans can be put in
place.
If our clients, suppliers, vendors and financial institutions are not
Year 2000 compliant, there may be a material disruption to their businesses.
These disruptions could negatively impact us in many ways, including:
o a client may be unable to pay us;
-16-
o a financial institution may be unable to process checks drawn on our
bank accounts, accept deposits or process wire transfers;
o vendor deliveries of computer equipment and other supplies may be
delayed or cease;
o voice and data connections we use to share information may be
interrupted; and
o brokers who make a market in our stock may not be able to trade our
stock.
This list is not comprehensive. Other interruptions to our normal
business activities may occur, the nature and extent of which we cannot
foresee. In an effort to minimize the exposure to such third party Year 2000
problems, we have initiated a process of obtaining written assurances from
these third parties that they will be Year 2000 compliant. Based on the
response we receive from the third parties, we are identifying the associated
risks to our business and making necessary changes.
Contingency Plans. We are developing Year 2000 contingency plans where
practical. These plans address alternatives to electronic processing of medical
information, payroll, vendor payments, cash receipts from clients and
communicating without e-mail. These plans include identifying alternative
sources of goods and services and performing certain tasks manually. For
example, these contingency plans include requiring physicians to dictate into
hand held devices, delivering tapes from these devices to transcriptionists
and printing paper copies of reports to be delivered to clients.
In some situations, however, it is impractical to have an effective
contingency plan. For example, a failure of our primary banking institution may
interrupt our cash receipts and our ability to pay our employees and vendors in
a timely manner. Our contingency plan may call for paying employees in cash,
but may not be practical due to the amount of cash involved, the number of
locations and the number of individuals to be paid. The number of Year 2000
failures we suffer may exceed our ability to address them all at one time. In
addition, significant Year 2000 failures by third parties, including clients,
may jeopardize our financial strength. In severe circumstances, our ability to
continue as a going concern may be threatened or we may fail. We believe,
however, that we are taking reasonable and prudent steps to address the Year
2000 problem based on information currently available to us. We will continue
to monitor this issue and plan to modify our approach if we believe the
circumstances warrant such a change.
Based on the information available to date, we expect to incur
approximately $200,000 in expense to correct operational problems such as BIOS
fixes. We also believe we will incur approximately $1.2 million to replace and
upgrade voice capture systems, which will be capitalized and depreciated over
their estimated useful lives of five years.
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, 1998. For investment securities, the table presents principal
amounts and related weighted average interest rates (dollars in thousands).
Cash and cash equivalents ......... $15,936
Average interest rate ............ 4.0%
Warrant investment ................ $ 900
Average interest rate ............ --
Total portfolio ................... $16,836
Weighted average interest rate ... 3.8%
-17-
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. 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; (2) acquisitions; (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 a single line of
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
relating to the classification of our transcriptionists; (11) potential
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) our various anti-takeover protections. When
considering these forward-looking statements, you should keep in mind these risk
factors and the other cautionary statements in this prospectus, 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.
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-21.
MEDQUIST INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants ................ F-2
Consolidated Balance Sheets ............................. F-3
Consolidated Statements of Operations ................... F-4
Consolidated Statements of Shareholders' Equity ......... F-5
Consolidated Statements of Cash Flows ................... F-6
Notes to Consolidated Financial Statements .............. F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MedQuist Inc.:
We have audited the accompanying consolidated balance sheets of MedQuist
Inc. (a New Jersey corporation) and Subsidiaries as of December 31, 1997 and
1998, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MedQuist
Inc. and Subsidiaries as of December 31, 1997 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Philadelphia, Pa.,
February 1, 1999
F-2
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31,
---------------------------
1997 1998
----------- -------------
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 14,489 $ 15,936
Short-term investments ............................................. 4,003 --
Accounts receivable, net of allowance of $1,298 and $2,274 ......... 41,819 52,477
Deferred income taxes .............................................. 3,177 6,438
Prepaid expenses and other ......................................... 307 233
--------- ---------
Total current assets ............................................ 63,795 75,084
Property and equipment, net ........................................... 25,442 27,022
Intangible assets, net ................................................ 82,382 82,216
Other ................................................................. 2,154 2,989
--------- ---------
$ 173,773 $ 187,311
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt .................................. $ 6,792 $ 2,372
Accounts payable ................................................... 5,777 5,010
Accrued expenses ................................................... 14,618 25,850
--------- ---------
Total current liabilities ....................................... 27,187 33,232
--------- ---------
Long-term debt ........................................................ 7,589 215
--------- ---------
Other long-term liabilities ........................................... 1,130 697
--------- ---------
Deferred income taxes ................................................. 6,494 1,981
--------- ---------
Commitments and contingencies (Note 10)
Shareholders' equity:
Common stock, no par value, 60,000 shares authorized, 32,138
and 33,258 shares issued and outstanding .......................... -- --
Additional paid-in capital ......................................... 119,008 136,603
Retained earnings .................................................. 12,365 14,536
Unrealized gain on marketable securities ........................... -- 585
Deferred compensation .............................................. -- (538)
--------- ---------
Total shareholders' equity ...................................... 131,373 151,186
--------- ---------
$ 173,773 $ 187,311
========= =========
The accompanying notes are an integral part of these statements.
F-3
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year Ended December 31,
--------------------------------------------
1996 1997 1998
------------ -------------- ------------
Revenue ................................................ $ 152,109 $ 216,158 $ 271,655
--------- ---------- ---------
Costs and expenses:
Cost of revenue ..................................... 118,978 169,235 209,587
Selling, general and administrative ................. 11,908 14,362 16,061
Depreciation ........................................ 7,372 10,339 12,697
Amortization of intangible assets ................... 3,150 5,652 3,757
Transaction costs and restructuring charges ......... 644 2,075 18,221
--------- ---------- ---------
Total operating expenses ......................... 142,052 201,663 260,323
--------- ---------- ---------
Operating income ....................................... 10,057 14,495 11,332
Interest expense (income), net ......................... 2,049 469 (325)
--------- ---------- ---------
Income before income taxes ............................. 8,008 14,026 11,657
Income tax provision ................................... 2,720 5,293 8,472
--------- ---------- ---------
Net income ............................................. 5,288 8,733 3,185
Inducement of warrant exercise ......................... (707) -- --
--------- ---------- ---------
Net income available to common shareholders ............ $ 4,581 $ 8,733 $ 3,185
========= ========== =========
Basic income per share:
Net income .......................................... $ 0.22 $ 0.28 $ 0.10
Inducement of warrant exercise ...................... ( 0.03) -- --
--------- ---------- ---------
Net income available to common shareholders ......... $ 0.19 $ 0.28 $ 0.10
========= ========== =========
Diluted income per share:
Net income .......................................... $ 0.20 $ 0.26 $ 0.09
Inducement of warrant exercise ...................... ( 0.03) -- --
--------- ---------- ---------
Net income available to common shareholders ......... $ 0.17 $ 0.26 $ 0.09
========= ========== =========
The accompanying notes are an integral part of these statements.
F-4
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Additional Unrealized
Common Stock Gain on
-------------------- Paid-in Retained Marketable Deferred
Shares Amount Capital Earnings Securities Compensation Total
---------- -------- ------------ ------------ ------------ -------------- -------------
BALANCE, DECEMBER 31, 1995 ........... 13,182 $ -- $ 29,493 $ 1,079 $ -- $ -- $ 30,572
Net income .......................... -- -- -- 5,288 -- -- 5,288
Exercise of common stock options,
including tax benefit ............. 98 -- 336 -- -- -- 336
Issuance of common stock in
connection with business
acquisitions ...................... 4,773 -- 10,751 -- -- -- 10,751
Sale of common stock, net of
expenses .......................... 10,395 -- 68,714 -- -- -- 68,714
Distributions ....................... -- -- -- (928) -- -- (928)
Exercise of warrants, including
inducement charge ................. 3,016 -- 6,980 (707) -- -- 6,273
Purchase and retirement of
common stock, at cost ............. (36) -- (296) -- -- -- (296)
------ ---- --------- -------- ----- -------- ---------
BALANCE, DECEMBER 31, 1996 ........... 31,428 -- 115,978 4,732 -- -- 120,710
Net income .......................... -- -- -- 8,733 -- -- 8,733
Exercise of common stock options
and warrants, including tax
benefit ........................... 759 -- 3,455 -- -- -- 3,455
Issuance of common stock, net of
expenses .......................... 33 -- 251 -- -- -- 251
Distributions ....................... -- -- -- (1,100) -- -- (1,100)
Purchase and retirement of
common stock, at cost ............. (82) -- (676) -- -- -- (676)
------ ---- --------- -------- ----- -------- ---------
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 stockhold-
ers 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
====== ==== ========= ======== ===== ======== =========
The accompanying notes are an integral part of these statements.
F-5
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
---------------------------------------
1996 1997 1998
----------- ----------- -----------
OPERATING ACTIVITIES:
Net income ........................................................ $ 5,288 $ 8,733 $ 3,185
Adjustments to reconcile net income to net cash provided by
operating activities--
Depreciation and amortization ................................... 10,522 15,991 16,454
Amortization of debt discounts .................................. 704 -- --
Amortization of deferred compensation ........................... -- -- 540
Deferred income tax provision (benefit) ......................... 1,105 (200) (3,213)
Loss on disposal of property and equipment ...................... -- 223 --
Transaction costs paid by acquired company stockholder .......... -- -- 1,540
Changes in assets and liabilities, excluding effects of
acquisitions and divestitures--
Accounts receivable, net ..................................... (5,571) (7,230) (10,345)
Prepaid expenses and other ................................... 1,403 631 97
Other assets ................................................. 182 (362) 65
Accounts payable ............................................. (1,983) 543 (767)
Accrued expenses ............................................. (832) 3,175 15,729
Other long-term liabilities .................................. (79) (87) (433)
--------- --------- ---------
Net cash provided by operating activities ................... 10,739 21,417 22,852
--------- --------- ---------
INVESTING ACTIVITIES:
Purchases of property and equipment ............................... (6,553) (13,716) (14,027)
Acquisitions, net of cash acquired ................................ (26,205) (5,628) (5,839)
Sale (purchase) of short-term investments ......................... (5,893) 973 4,003
--------- --------- ---------
Net cash used in investing activities ....................... (38,651) (18,371) (15,863)
--------- --------- ---------
FINANCING ACTIVITIES:
Repayments of long-term debt and subordinated payable ............. (38,728) (3,757) (10,006)
Proceeds from issuance of long-term debt .......................... 7,121 -- --
Distributions ..................................................... (928) (1,100) (1,014)
Proceeds from exercise of common stock options and
warrants ........................................................ 226 1,785 5,065
Net proceeds from issuance of common stock ........................ 68,714 251 413
Purchase and retirement of common stock ........................... (296) (676) --
--------- --------- ---------
Net cash provided by (used in) financing activities ......... 36,109 (3,497) (5,542)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ....................................................... 8,197 (451) 1,447
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ....................... 6,743 14,940 14,489
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR ............................. $ 14,940 $ 14,489 $ 15,936
========= ========= =========
The accompanying notes are an integral part of these statements.
F-6
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Background and Basis of Presentation
MedQuist Inc. (the "Company" or "MedQuist") is the leading national
provider of medical transcription services. MedQuist was incorporated in New
Jersey in 1984 and reorganized in 1987. From 1995 through 1998, the Company
completed 18 acquisitions, of which 13 were accounted for as purchase
transactions and five were accounted for as pooling of interests (see Note 2).
The pooling of interests transactions, all of which occurred in 1998, include
the acquisitions of Digital Dictation, Inc. ("DDI"), Signal Transcriptions
Network, Inc. ("Signal"), Transcriptions Ltd. of Florida, Inc. ("TLF") and The
MRC Group, Inc. ("MRC") which required restatement of the Company's financial
statements. Accordingly, the accompanying financial statements have been
restated to reflect these 1998 acquisitions accounted for under the pooling of
interests method.
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 September 9, 1997, the Company effected a three-for-two stock split for
all shares of common stock. Further, 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 financial statements has been retroactively adjusted to reflect
both stock splits.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported assets and liabilities and contingency
disclosures at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Revenue Recognition
Fees for transcription-related services are based primarily on contracted
rates, and revenue is recognized upon the rendering of services and delivery of
reports.
Pro Forma Presentation for Income Taxes
Prior to their mergers with the Company, Signal and TLF were taxed as "S"
Corporations. Accordingly, no tax provision is included in the accompanying
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
Signal and TLF had been taxed as "C" Corporations for all periods presented.
F-7
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except per share amounts)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
Year Ended December 31,
--------------------------------------------
1996 1997 1998
------------ ------------- -------------
Income before income taxes, as reported ......... $ 8,008 $ 14,026 $ 11,657
Pro forma income tax provision .................. 3,357 5,975 8,766
-------- --------- ---------
Pro forma net income ............................ $ 4,651 $ 8,051 $ 2,891
======== ========= =========
Pro forma net income per share:
Basic .......................................... $ 0.19 $ 0.25 $ 0.09
Diluted ........................................ $ 0.18 $ 0.24 $ 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, 1997, cash and cash
equivalents included a restricted certificate of deposit of $1,339 which was
used to repay a note payable in January 1998.
Investments
Short-term investments held by the Company at December 31, 1997 consisted
primarily of investments in high-quality, fixed-income bonds with varying
maturities and rates. In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," the Company classified their investments as
held-to-maturity since the Company had both the intent and ability to hold to
maturity. Accordingly, such investments were carried at amortized cost.
Included in other assets at December 31, 1998, is a warrant to purchase
common stock in Learnout and Hauspie, Inc. ("L&H"). The warrant has been
classified as available-for-sale. Pursuant to SFAS No. 115, available-for-sale
securities are carried at fair value, 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, 1998 was $585.
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 lease term 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,
non-compete agreements and employee bases. The goodwill related to the May 1994
acquisition of Transcriptions, Ltd. (see Note 2) is being amortized over 40
years. All other goodwill is being amortized over 20-30 years. Customer lists
and employee bases are being amortized over 10-20 years and five years,
respectively. Non-compete agreements are amortized over their terms, ranging
from 1.5 years to four years. Subsequent to its acquisitions, the Company
continually evaluates whether later events and circumstances have occurred that
indicate that the remaining estimated useful life of intangible assets may
warrant revision or that the remaining balance may not be recoverable. When
factors indicate that intangible assets should be evaluated for possible
impairment, the Company uses an estimate of the related undiscounted cash flows
F-8
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except per share amounts)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
in measuring whether the intangible 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, 1998,
management believes that no revision to the remaining useful lives or
write-down of intangible assets is required.
Transaction Costs and Restructuring Charges
During 1996, 1997 and 1998, the Company incurred certain charges resulting
from restructurings and in 1998 incurred transaction costs associated with
pooling of interests acquisitions and professional fees in connection with
MRC's terminated initial public offering, as follows:
Year Ended December 31,
----------------------------------
1996 1997 1998
-------- ---------- ----------
Restructuring charges .......................................... $ 644 $ 2,075 $ 6,539
Transaction costs associated with pooling of interests ......... -- -- 11,000
Terminated initial public offering costs ....................... -- -- 682
----- ------- --------
$ 644 $ 2,075 $ 18,221
===== ======= ========
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 have been 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," as follows:
Non-cancelable leases ................................. $ 3,835
Severance ............................................. 1,618
Non-cancelable contracts and other exit costs ......... 1,086
-------
$ 6,539
=======
The plan relates primarily to the closure of several redundant customer
service centers as well as certain corporate offices in order to improve
operating efficiencies. The Company expects to complete the plan in 1999. The
severance costs are attributable to 41 individuals from various levels of
operational and senior management. As of December 31, 1998, $567 of severance
had been paid and $410 of other restructuring costs had been paid. The
consolidated balance sheet at December 31, 1998 reflects $5,562 in accrued
expenses related to the 1998 restructuring charge.
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. 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 non-cancelable lease costs. The
severance costs are attributable to eight individuals from various levels of
operational and senior management. At December 31, 1997 and 1998, approximately
$1,773 and $1,213, respectively, related to MRC's restructuring charge is
included in accrued expenses.
F-9
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except per share amounts)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
In 1996, MRC approved a separate management plan to close and/or merge
several redundant customer service centers as well as certain corporate offices
in order to reduce costs and improve operating efficiencies. The plan was
essentially completed during 1997 and included the cost of exiting certain
facilities, primarily related to non-cancelable leases, and employee severance
costs. Costs associated with the plan of approximately $644 were recognized in
1996 in accordance with EITF 94-3.
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 fee paid by acquired company stockholder ......... 1,540
--------
$ 11,000
========
At December 31, 1998, $500,000 of such costs are included in accrued
expenses for payments scheduled to be made in 1999.
Advertising Costs
The Company charges advertising costs to expense as incurred. Advertising
expense was $329, $678 and $650 for the years ended December 31, 1996, 1997 and
1998, respectively.
Research and Development Costs
Research and development costs are charged to expense as incurred. Total
research and development costs were approximately $450, $550 and $813 for the
years ended December 31, 1996, 1997 and 1998, respectively.
Statements of Cash Flow Information
For the years ended December 31, 1996, 1997 and 1998, the Company paid
interest of $1,404, $1,027 and $695, respectively, and income taxes of $1,700,
$3,162 and $6,705, respectively. Capital lease obligations of $191, $174 and
$98 were incurred on equipment leases entered into in 1996, 1997 and 1998,
respectively. In 1996, the Company exchanged $500 of debt for shares of capital
stock. 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,
-------------------------------------
1996 1997 1998
----------- ---------- ----------
Noncash net assets acquired ........................................ $ 40,274 $ 8,965 $ 4,401
Less -- Seller notes and payables .................................. (3,318) (3,337) --
Common stock issued ................................................ (10,751) -- --
Cash paid to dissenting stockholder in pooling transaction ......... -- -- 1,438
--------- -------- -------
Net cash paid for business acquisitions ........................... $ 26,205 $ 5,628 $ 5,839
========= ======== =======
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.
F-10
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except per share amounts)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
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.
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,
-------------------------------------------------------------------------------------------------------
1996 1997 1998
--------------------------------- --------------------------------- ---------------------------------
Per Per Per
Net Share Share Net Share
Income Shares Amount Income Shares Amount Income Shares Amount
---------- -------- ----------- ---------- -------- ----------- ---------- -------- -----------
Basic ............... $ 5,288 24,138 $ 0.22 $ 8,733 31,726 $ 0.28 $ 3,185 33,087 $ 0.10
Effect of dilutive
securities ......... -- 1,906 ( 0.02) -- 1,632 ( 0.02) -- 1,818 ( 0.01)
------- ------ ------- ------- ------ ------- ------- ------ -------
Diluted ............. $ 5,288 26,044 $ 0.20 $ 8,733 33,358 $ 0.26 $ 3,185 34,905 $ 0.09
======= ====== ======= ======= ====== ======= ======= ====== =======
For the years ended December 31, 1996, 1997 and 1998, 1,288, 1,961 and 654
common stock options and warrants were excluded from the diluted computation
because their effect would be anti-dilutive.
Fair Value of Financial Instruments
Cash, accounts receivable, accounts payable and accrued expenses are
reflected in the accompanying 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
long-term notes receivable and debt obligations approximate 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. During 1996 and
1997, there were no other comprehensive items. For the years ended December 31,
1998, the pre-tax unrealized gain on available-for-sale securities was $900 and
the deferred tax recorded on the unrealized gain was $315.
Segment Reporting
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information."
This statement establishes additional standards for segment reporting in the
financial statements and is effective for fiscal years beginning after December
15, 1997. As the Company operates in one reportable segment, SFAS No. 131 had
no effect on the Company's financial statements.
F-11
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except per share amounts)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
Reclassifications
Certain prior year amounts have been reclassified to conform to the
current year presentation.
2. ACQUISITIONS
Effective May 1, 1994, the Company purchased substantially all of the
assets of Transcriptions, Ltd. and Affiliates ("Transcriptions"), as well as
assumed certain liabilities for $16,930 in cash, including acquisition costs of
$322, plus the payment of Transcriptions' interest bearing debt of $5,816, plus
a deferred purchase price based on future operating results. Effective December
29, 1995, the Company fixed the deferred purchase price by agreeing to pay the
former owners of Transcriptions $18,375 in cash and issue 2,584 shares of
common stock (valued at $4,550 for financial reporting purposes) on August 31,
1996. The total purchase price for the Transcriptions acquisition was $44,797.
The acquisition has been accounted for using the purchase method with the
purchase price allocated to the fair value of the acquired assets and
liabilities.
In July 1996, MRC acquired all of the outstanding capital stock of Medical
Records Corp. The former shareholders of Medical Records Corp. received total
consideration of approximately $27,000, consisting of cash, notes and shares of
common stock. The acquisition was accounted for as a purchase, and the results
of Medical Records Corp. are included in the accompanying consolidated
financial statements from the date of the acquisition. In connection with the
acquisition, MRC assumed certain acquisition-related liabilities from Medical
Records Corp. The cost of the acquisition has been allocated on the basis of
the estimated fair market value of the assets acquired and liabilities assumed.
The allocation resulted in goodwill and other intangible assets of
approximately $33,015, which are being amortized over lives of 1.5 to 30 years.
The following unaudited pro forma summary presents the results of
operations of the Company as if the payment of the Transcriptions deferred
purchase price, which causes additional amortization and interest expense, and
the Medical Records Corp. acquisition had occurred on January 1, 1996.
Year Ended
December 31, 1996
------------------
Revenue ............................. $ 179,683
Net income .......................... 726
Net income per share ................ .03
On May 28, 1998, the Company completed the acquisition of approximately
94% of the outstanding capital stock of DDI and on July 31, 1998 acquired the
remaining shares. The Company issued 912 shares in exchange for all DDI shares.
The acquisition was accounted for using the pooling of interests method of
accounting. Accordingly, the Company's historical financial statements were
retroactively restated to reflect the combination with DDI.
On August 18, 1998, the Company completed the acquisition of 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.
The Company's historical financial statements have been restated to reflect the
combination with Signal. Signal and the Company elected to treat their merger
as an asset purchase for income tax purposes. 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 income tax purposes.
F-12
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except per share amounts)
2. ACQUISITIONS -- (Continued)
On November 30, 1998, the Company completed the acquisition of 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. Accordingly, the
Company's consolidated financial statements have been restated to reflect the
combination with TLF.
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, each share of MRC common stock and each share of MRC preferred stock
on an as-converted basis was exchanged for 0.5163 shares of the Company's
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. Accordingly, the Company's consolidated financial
statements have been restated to reflect the merger with MRC.
Revenue and net income as previously reported for the years ended December
31, 1996, 1997 and 1998 and as restated for the pooling of interests
transactions are as follows:
Year Ended
December 31, 1998
------------------------------
Revenue Net Income
----------- ----------
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 (i) DDI and Signal amounts from July 1, 1998, (ii) TLF and MRC
amounts from October 1, 1998 and (iii) $18,221 of pre-tax 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.
Year Ended
December 31, 1997
-------------------------
Revenue Net Income
----------- -----------
MedQuist, as previously reported ......... $ 84,495 $ 7,631
DDI ...................................... 10,026 616
Signal ................................... 9,294 1,100
TLF ...................................... 4,226 712
MRC ...................................... 108,117 (1,326)
--------- --------
Restated ................................. $ 216,158 $ 8,733
========= ========
F-13
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except per share amounts)
2. ACQUISITIONS -- (Continued)
Year Ended
December 31, 1996
-------------------------
Revenue Net Income
----------- -----------
MedQuist, as previously reported ......... $ 61,480 $ 3,477
DDI ...................................... 6,937 440
Signal ................................... 8,058 842
TLF ...................................... 3,934 882
MRC ...................................... 71,700 (1,060)
--------- --------
Restated ................................. $ 152,109 $ 4,581
========= ========
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 $637, $682
and $294 for the years ended December 31, 1996, 1997 and 1998, respectively
(see Note 1).
From 1996 through 1998, 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 2000 and 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.
3. PROPERTY AND EQUIPMENT
December 31,
-------------------------
1997 1998
----------- -----------
Furniture, equipment and software .................... $ 46,608 $ 52,571
Leasehold improvements ............................... 1,341 1,553
--------- ---------
47,949 54,124
Less -- Accumulated depreciation and amortization .... (22,507) (27,102)
--------- ---------
$ 25,442 $ 27,022
========= =========
4. INTANGIBLE ASSETS
December 31,
-------------------------
1997 1998
----------- -----------
Goodwill ................................. $ 64,600 $ 67,109
Customer lists ........................... 21,552 22,640
Non-compete agreements ................... 3,405 3,405
Employee base ............................ 2,514 2,514
Other .................................... 137 150
-------- ---------
92,208 95,818
Less -- Accumulated amortization ......... (9,826) (13,602)
-------- ---------
$ 82,382 $ 82,216
======== =========
F-14
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except per share amounts)
5. ACCRUED EXPENSES:
December 31,
-----------------------
1997 1998
---------- ----------
Accrued payroll and related taxes ......... $ 7,175 $ 9,329
Restructuring charges ..................... 1,733 6,775
Other ..................................... 5,710 9,746
-------- --------
$ 14,618 $ 25,850
======== ========
6. LONG-TERM DEBT
December 31,
------------------------
1997 1998
---------- -----------
Note payable to bank, repaid in 1998 .................................... $ 5,250 $ --
Note payable to former shareholders of Medical Records Corp.,
repaid in 1999 ......................................................... 2,000 2,000
Promissory notes, repaid or converted into common stock in 1998 ......... 5,085 --
Capital lease obligations ............................................... 1,786 468
Other ................................................................... 260 119
-------- --------
14,381 2,587
Less -- current portion ................................................. (6,792) (2,372)
-------- --------
$ 7,589 $ 215
======== ========
On April 23, 1997, the Company amended its credit facility to provide for
a $10 million unsecured senior revolving line of credit through April 23, 2000.
The revolver bears interest at resetting rates selected by the Company from
various alternatives. The interest rate alternatives are either (i) the greater
of (a) prime rate, (b) the federal funds rate plus 0.5% (c) the bank's
certificate of deposit rate plus 1%, or (ii) LIBOR plus 0.75%. The credit
facility also allows for the Company to finance up to 100% of any acquisitions
of companies that are in the business of providing transcriptions-related
services. The financing of these acquisitions may be carved out of the revolver
and amortized over 20 consecutive quarters. Each acquisition term loan that is
created would permanently reduce the remaining borrowings under the revolver.
In addition to acquisitions, the revolver can be used for working capital
and general corporate purposes. To the extent any amounts under the revolver
are repaid, other than acquisition term loans, the Company may reborrow such
amounts. The credit facility requires the Company to maintain certain financial
and non-financial covenants, including limitations on capital expenditures and
dividends.
For the year ended December 31, 1997 and 1998, the Company did not incur
any interest expense on the revolving credit facility, as there were no
borrowings on the credit facility. For the year ended December 31, 1996, the
Company incurred interest expense of $49 on the revolving credit facility, at a
weighted average interest rate of 9.78%. The highest outstanding borrowing
under the revolver during 1996 was $2,534.
In connection with the acquisition of Medical Records Corp., MRC entered
into a note agreement with a bank. The note was for $7,000 with an interest
rate of LIBOR plus 1.65%, which totaled approximately 7.3% at December 31,
1997. The note was secured by substantially all of MRC's assets. The agreement
required the payment of interest quarterly along with equal monthly principal
payments of $117 through September 2001. The note was repaid in 1998.
F-15
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except per share amounts)
6. LONG-TERM DEBT -- (Continued)
Also, in connection with the acquisition of Medical Records Corp., MRC
issued seven year, 8% unsecured notes to former shareholders of Medical Records
Corp. for $2,000. The notes require 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 6% 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.
Long-term debt maturities as of December 31, 1998, are as follows:
1999 ................... $ 2,372
2000 ................... 138
2001 ................... 48
2002 ................... 29
-------
$ 2,587
=======
7. SHAREHOLDERS' EQUITY
In May 1996, MedQuist consummated a secondary public offering of its
common stock, selling 6,600 shares at a price of $5.67 per share. In June 1996,
the underwriters exercised their overallotment option for an additional 922
shares. After deducting the underwriters' discount and offering expenses, the
net proceeds to the Company were $39,442. In July 1996, MRC issued shares of
preferred stock for total consideration, net of offering expenses, of $29,272.
Such preferred stock was exchanged for MedQuist common in the merger (see Note
2).
In connection with the 1992 issuance of a senior subordinated note, the
Company sold to the holder for $1,100, warrants to purchase 1,732 shares of
Class A and 1,068 shares of Class B preferred stock at an exercise price of
$2.50 per share. Each share of Class A and Class B preferred stock was
convertible into one share of common stock. During 1994, the holder was issued
additional warrants and all warrant exercise prices were reset at $2.43, in
accordance with the antidilution provisions of the original warrant agreement.
Simultaneous with the closing of the secondary public offering, the company and
the holder agreed that the holder would exercise the warrants by tendering the
$7,000 principal amount of the senior subordinated notes and simultaneously
converting the shares of preferred stock received upon such exercise into 2,888
shares of common stock. As an inducement for the holder to exercise the
warrants and convert the preferred stock, the Company issued the holder 128
additional shares of common stock. This inducement, valued at $707 or $0.03 per
diluted share, has been recorded as a deduction from the net income available
to common shareholders in 1996.
In connection with the Company's May 1994 credit agreement, the Company
issued the agent bank warrants to purchase 226 shares of common stock at an
exercise price of $2.25 per share. These warrants were exercised on June 12,
1997 by the agent bank for proceeds to the Company of $508.
In connection with the sale of equity securities to certain investors in
1992 and 1993, warrants to purchase common stock at $12.69 per share were
issued by MRC. The warrants were fully vested and exercisable at the date of
issuance and have terms which permit conversion into common stock at specified
prices during periods ranging from four to five years. The fair value of the
warrants at the date of grant was de minimis and therefore no compensation
expense has been recorded in the accompanying financial statements. During
1998, 157 warrants were exercised and 37 were cancelled. At December 31, 1998,
no warrants were outstanding.
F-16
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except per share amounts)
8. 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 granted may be 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 MRC's common stock. Accordingly, MRC
recorded deferred compensation totaling $1,078, of which $540 was amortized to
expense in 1998.
Information with respect to the Company's common stock options is as
follows:
Option Price Aggregate
Shares Per Share Proceeds
--------- ----------------- ------------
Outstanding, December 31, 1995 ......... 2,407 $1.14 - $8.31 $ 7,141
Granted ............................... 1,670 2.71 - 10.48 10,810
Exercised ............................. (98) 2.17 - 5.13 (220)
Canceled .............................. (156) 2.71 - 3.17 (271)
----- ----------------- --------
Outstanding, December 31, 1996 ......... 3,823 1.14 - 10.48 17,460
Granted ............................... 1,240 5.21 - 16.49 13,345
Exercised ............................. (533) 1.56 - 10.42 (1,018)
Canceled .............................. (193) 3.17 - 8.67 (412)
----- ----------------- --------
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
===== ================= ========
At December 31, 1998, there were 2,172 exercisable options with an
aggregate exercise price of $16,204 and 273 additional options available for
grant under the plans.
The options outstanding and exercisable by exercise price at December 31,
1998 are as follows:
Weighted
Average Weighted Weighted
Range Of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- ------------------ ------------- ------------- ---------- ------------- -----------
$0.00 - $3.11 463 5.9 $ 2.36 321 $ 2.20
3.12 - 6.23 845 7.0 4.56 488 4.42
6.24 - 9.35 833 5.9 8.12 650 8.17
9.36 - 12.47 935 7.4 10.48 567 10.48
12.48 - 15.59 524 9.0 14.34 144 14.26
15.60 - 18.71 11 8.8 15.90 2 15.94
18.72 - 21.83 52 9.4 21.43 -- --
21.84 - 24.95 116 9.6 23.11 -- --
24.96 - 28.06 43 9.6 25.63 -- --
28.07 - 31.18 611 9.7 31.13 -- --
--- --- -------- --- -------
4,433 7.5 $ 12.00 2,172 $ 7.46
===== === ======== ===== =======
F-17
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except per share amounts)
8. STOCK OPTION PLANS -- (Continued)
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 the following pro forma amounts:
Year Ended December 31,
------------------------------------
1996 1997 1998
---------- ---------- ----------
Net income:
As reported ................ $ 5,288 $ 8,733 $ 3,185
Pro forma .................. 4,454 7,613 1,705
Basic net income per share:
As reported ................ .22 .28 .10
Pro forma .................. .18 .24 .05
Diluted net income per share:
As reported ................ .20 .26 .09
Pro forma .................. .17 .23 .05
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%,
volatility of 50.0%-55.0%, risk-free interest rates of 4.5% to 8.0%, and
expected lives of five to ten 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.
9. INCOME TAXES
The income tax provision consists of the following:
Year Ended December 31,
----------------------------------
1996 1997 1998
-------- ---------- ----------
Current:
State and local ......... $ 79 $ 1,176 $ 1,596
Federal ................. 1,536 4,317 10,089
------ ------- --------
1,615 5,493 11,685
Deferred ................. 1,105 (200) (3,213)
------ ------- --------
$2,720 $ 5,293 $ 8,472
====== ======= ========
F-18
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except per share amounts)
9. INCOME TAXES -- (Continued)
A reconciliation of the statutory federal income tax rate to the effective
income tax rate is as follows:
Year Ended December 31,
------------------------------------
1996 1997 1998
---------- ---------- ----------
Statutory federal income tax rate ....................... 34.0% 35.0% 35.0%
State income taxes, net of federal benefit .............. 3.0 3.0 3.7
Non-deductible merger costs ............................. -- -- 30.8
Impact of Signal and TLF "S" Corporation status ......... (8.0) (4.9) (4.4)
Other ................................................... 5.0 4.6 7.6
----- ----- -----
34.0% 37.7% 72.7%
===== ===== =====
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 financial statements related to Signal and TLF's
net income prior to their mergers with the Company (see Note 1).
At December 31, 1997, the tax bases of Signal's net assets approximated
their reported amount for financial statement purposes. However, Signal and the
Company elected to treat their merger as an asset purchase for income tax
purposes. Accordingly, the Company recorded a deferred tax asset and an
increase in additional paid-in capital of $5,052, which represents the tax
effect of goodwill that was recorded for income tax purposes.
The tax effected temporary differences that give rise to deferred income
taxes are as follows:
December 31,
-----------------------------
1997 1998
------------- -------------
Deferred tax asset:
Restructuring accruals ........... $ 602 $ 2,722
Carryforwards .................... 338 --
Accruals and reserves ............ 2,237 3,716
--------- ---------
$ 3,177 $ 6,438
========= =========
Deferred tax liability:
Accumulated depreciation ......... $ (1,475) $ (1,725)
Accumulated amortization ......... (3,518) 1,124
Deferred compensation ............ 210 289
Marketable security .............. -- (315)
Other ............................ (1,711) (1,354)
--------- ---------
$ (6,494) $ (1,981)
========= =========
10. COMMITMENTS AND CONTINGENCIES
Rent expense for operating leases was $5,053, $4,599 and $5,618 for the
years ended December 31, 1996, 1997 and 1998, respectively. Minimum annual
rental commitments for noncancelable operating leases having terms in excess of
one year as of December 31, 1998, are as follows:
F-19
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except per share amounts)
10. COMMITMENTS AND CONTINGENCIES -- (Continued)
1999............................................. $ 4,857
2000............................................. 3,590
2001............................................. 2,564
2002............................................. 1,616
2003............................................. 550
2004............................................. 29
--------
$ 13,206
========
The Company has an employment agreement, as amended, with a former Chief
Executive Officer who is currently a director of the Company. The agreement
entitles this individual to receive retirement benefits of $75 per year for
life plus certain other benefits, as defined. Included in other long-term
liabilities is $544 and $457at December 31, 1997 and 1998, 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.
11. 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% of their compensation on a pre-tax basis. The Company matches 50% of
participant's contribution, up to 5% 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 $63, $80 and $125 in 1996, 1997 and 1998,
respectively. The Company issued approximately five thousand shares in both
1997 and 1998, in connection with the Company's matching contribution. The
Company did not issue shares in 1996 in connection with the savings plan.
MRC has two defined contribution 401(k) plans, covering substantially all
employees. Eligible employees of MRC may contribute certain amounts of their
annual compensation. During 1996, 1997 and 1998, MRC made matching
contributions to the plans of $171,000, $117,000 and $114,000, respectively.
Stock Purchase Plan
All full-time employees except those who own five 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% 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 eighty-five
percent of the fair market value of the common stock. Through the SPP, five and
15 shares of common stock have been purchased in 1997 and 1998, respectively.
In connection with the SPP, the Company did not issue any shares in 1996.
F-20
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except per share amounts)
12. QUARTERLY SUPPLEMENTAL FINANCIAL DATA (UNAUDITED)
Three Months Ended
Year Ended December 31, 1997: -------------------------------------------------------------
March 31 June 30 September 30 December 31
------------- ------------- -------------- ------------
Revenue .............................. $ 49,914 $ 52,999 $ 55,269 $ 57,976
Income before income taxes ........... 3,283 4,557 4,632 1,554
Net income ........................... 2,058 2,931 2,910 834
Basic net income per share ........... 0.07 0.10 0.10 0.02
Diluted net income per share ......... 0.06 0.09 0.09 0.02
Three Months Ended
Year Ended December 31, 1998: -------------------------------------------------------------
March 31 June 30 September 30 December 31
------------- ------------- -------------- ------------
Revenue .............................. $ 63,915 $ 66,870 $ 69,005 $ 71,865
Income before income taxes ........... 6,214 6,327 6,155 (7,039)
Net income ........................... 4,004 3,969 3,776 (8,564)
Basic net income per share ........... 0.12 0.12 0.12 (0.24)
Diluted net income per share ......... 0.12 0.12 0.11 (0.24)
F-21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Medquist Inc.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Medquist, Inc. and Subsidiaries
included in this Registration Statement, and have issued our report thereon
dated February 1, 1999. 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.
/s/ Arthur Andersen LLP
Philadelphia, Pa.
February 1, 1999
S-1
MEDQUIST INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Charged to Balance at
beginning costs and other end of
of period expenses Accounts Write-offs Period
------------ ------------ ------------------- ------------ -----------
Allowance for doubtful accounts:
Year ended December 31, 1996 ......... $ 1,040 $ 409 $ (208) (a) $ 169 $ 1,072
Year ended December 31, 1997 ......... 1,072 812 20 606 1,298
Year ended December 31, 1998 ......... 1,298 1,217 -- 241 2,274
Accrued restructuring costs:
Year ended December 31, 1996 ......... $ 347 $ 644 $ -- $ 121 $ 870
Year ended December 31, 1997 ......... 870 2,075 (289) (b) 923 1,733
Year ended December 31, 1998 ......... 1,733 6,539 -- 1,497 6,775
- ------------
(a) Amount includes the addition of $64 relating to purchase accounting
adjustment in connection with MRC's acquisition of Medical Records, Inc.
offset by a write-off of $272 relating to MedQuist's discontinued
operations.
(b) Reclassified to other long-term liabilities.
S-2
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 1999 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 1999 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 1999 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 1999 Annual Meeting.
-19-
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Exhibit No. Description
- ----------- -----------
3.1 Amended and Restated Certificate of Incorporation of the Company
[incorporated by reference to Exhibit 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 Employment Agreement by and between the Company and John R. Emery,
[incorporated by reference to Exhibit 10.5 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996 (the
"1996 10-K")].
*10.6 Employment Agreement by and between the Company and David A. Cohen,
dated May 1, 1994 ("Cohen Employment Agreement") [incorporated by
reference to Exhibit 10.33 of the Company's Form 10-Q for the
three-month period ended June 30, 1994 (the "6/30/94 10-Q")].
*10.7 Amendment to Cohen Employment Agreement, dated March 1, 1996
[incorporated by reference to Exhibit 10.7 of the 1996 Registration
Statement].
*10.8 Employment Agreement by and between the Company and John A. Donohoe,
dated May 27, 1994 ("Donohoe Employment Agreement") [incorporated by
reference to Exhibit 10.8 of the 1996 Registration Statement].
-20-
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K - Continued
Exhibit No. Description
- ----------- -----------
*10.9 Amendment to Donohoe Employment Agreement, dated March 1, 1996
[incorporated by reference to Exhibit 10.9 of the 1996 Registration
Statement].
*10.10 Employment Agreement by and between the Company and Ronald F.
Scarpone, dated May 27, 1994, as amended March 1, 1996 [incorporated
by reference to Exhibit 10.10 of the 1996 Registration Statement].
*10.11 Employment Agreement by and between the Company and James R. Emshoff,
dated August 25, 1996 [incorporated by reference to Exhibit 10.37 of
the Company's Form 10-Q for the three-month period ended September 30,
1996 (the "9/30/95 10-Q")].
10.20 Asset Purchase Agreement among the Company, Transcriptions, Ltd. and
its affiliates and subsidiaries, dated January 26, 1994 (the
"Transcriptions Agreement") [incorporated by reference to Exhibit
10.30 of the 1993 10-K].
* Management contract or compensatory plan or arrangement.
-21-
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K - Continued
Exhibit No. Description
- ----------- -----------
10.21 Amendment to the Transcriptions Agreement, dated September 30, 1996,
[incorporated by reference to Exhibit 10.30.1 of the 9/30/95 10-Q].
10.22 Amendment to the Transcriptions Agreement, dated November 1, 1996
[incorporated by reference to Exhibit 10.30.2 of the 9/30/95 10-Q].
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].
10.24 Amended and Restated Credit Agreement among the Company,
Transcriptions, Ltd., the Guarantors named therein, the Lenders named
therein and Chemical Bank as agent, dated December 29, 1996
[incorporated by reference to Exhibit 10.24 of the 1996 Registration
Statement].
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)
-22-
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K - Continued
Exhibit No. Description
- ----------- -----------
27.1 Financial Data Schedule, Restated 1998
27.2 Financial Data Schedule, Restated 1997
(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 1998, the Company filed the following
Reports on Form 8-K:
Current Report on Form 8-K, dated December 15, 1998, regarding the
completion of the acquisition of The MRC Group, Inc.
-23-
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) Securities Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereto duly authorized, in the City of Marlton, State of
New Jersey, on March 26, 1999.
MedQuist Inc.
By /s/David A. Cohen
---------------------------------------------------
David A. Cohen, President, Chief Executive Officer,
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, this report has been signed below by the following persons as of
March 26, 1999.
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/ John R. Emery Senior Vice President, Treasurer and Chief Financial Officer (principal
- --------------------------- financial officer and principal accounting officer)
John R. Emery
Bruce K. Anderson Director
William T. Carson, Jr. Director
John T. Casey Director
Richard J. Censits Director
James R. Emshoff Director
Terrence J. Mulligan Director
A. Fred Ruttenberg Director
R. Timothy Stack Director
By: /s/ David A. Cohen
-----------------------
David A. Cohen
Attorney-in-fact
- ---------------------------
Edward L. Samek Director
- ---------------------------
Richard H. Stowe Director
- ---------------------------
John H. Underwood Director
-24-