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As filed with the Securities and Exchange Commission on October 18, 2010
Registration No. 333-          
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
 
CBAYSYSTEMS HOLDINGS LIMITED
(Exact name of Registrant as specified in its charter)
 
         
British Virgin Islands (prior to reincorporation)
Delaware (after reincorporation)
  7374   98-0676666
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I. R. S. Employer
Identification No.)
 
9009 Carothers Parkway
Franklin, TN 37067
(866) 295-4600
 
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)
 
 
Robert Aquilina
Chairman and Chief Executive Officer
CBaySystems Holdings Limited
9009 Carothers Parkway
Franklin, TN 37067
(866) 295-4600
 
(Name, address, including zip code, and telephone number, including area code, of agent for service)
 
With copies to:
 
     
D. Rhett Brandon, Esq.
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, NY 10017
(212) 455-2000
  Colin Diamond, Esq.
White & Case LLP
1155 Avenue of the Americas
New York, NY 10036
(212) 819-8200
 
 
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
 
If any of the securities being registered on this form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  o
 
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o Accelerated filer o Non-accelerated filer þ Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
 
CALCULATION OF REGISTRATION FEE
 
             
Title of Each Class of
    Proposed Maximum
    Amount of
Securities to be Registered     Aggregate Offering Price(1)     Registration Fee(1)
Common stock, par value U.S.$0.10 per share
    $115,000,000     $8,199.50
             
 
(1)  Estimated pursuant to Rule 457(o) under the Securities Act of 1933, as amended, solely for the purpose of calculating the registration fee. Includes shares issuable upon exercise of the underwriters’ option to purchase additional shares of common stock.
 
 
 
 
The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
 


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The information in this prospectus is not complete and may be changed. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where such offer or sale is not permitted.
 
SUBJECT TO COMPLETION, DATED OCTOBER 18, 2010
Preliminary Prospectus
 
           Shares
 
 
CBaySystems Holdings Limited
 
Common Stock
 
 
This is the initial public offering of our shares in the United States. We are offering           shares of our common stock.
 
Our shares are currently traded on the Alternative Investment Market of the London Stock Exchange, or AIM. The closing price of our shares on AIM on October 15, 2010 was £1.50, which was equivalent to approximately $2.38 per share based on the Federal Reserve noon buying rate of $1.5845 to £1.00 in effect on October 12, 2010. We intend to delist our common stock from AIM upon the completion of this offering or shortly thereafter and to apply to list our shares on The NASDAQ Global Market under the symbol “       .”
 
Investing in our shares involves significant risks.  See “Risk Factors” beginning on page 16.
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
                 
    PER SHARE   TOTAL
 
Public offering price
  $            $               
Underwriting discount
  $       $    
Proceeds to CBaySystems Holdings Limited (before expenses)
  $       $    
 
Delivery of the shares of common stock is expected to be made on or about          . The selling stockholders have granted the underwriters an option for a period of 30 days to purchase on the same terms and conditions set forth above, up to an additional           shares of our common stock to cover overallotments.
 
Jefferies & Company Lazard Capital Markets
 
Macquarie Capital RBC Capital Markets
 
 
Prospectus dated          , 2010.
 


 

 
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 EX-23.2
 EX-23.3
 EX-23.4
 EX-23.5
 
 
We have not authorized anyone to give any information or to make any representations other than those contained in this prospectus or in any free-writing prospectus that we may specifically authorize to be delivered or made available to you. We and the underwriters have not authorized anyone to provide you with additional or different information. We and the selling stockholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where such offers and sales are permitted. The information in this prospectus or a free-writing prospectus is accurate only as of its date, regardless of its time of delivery or of any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.
 
References in this prospectus to “dollars” or “$” are to the currency of the United States and references to “pounds,” “£,” “pence” or “p” are to the currency of the United Kingdom. There are 100 pence to each pound.
 
Except where otherwise indicated, reference in this prospectus to “volume” or “volumes” are to lines of text edited or transcribed by our medical transcriptionists, or MTs, and medical editors, or MEs.
 
Immediately prior to the consummation of this offering, we intend to convert from a British Virgin Islands company to a Delaware corporation. In connection with that conversion, we may adjust the number of our shares outstanding through a reverse share split or similar action. The conversion and any such reverse share split or similar action will result in no change to our stockholders’ relative ownership interests in us.
 
The industry and market data and other statistical information used throughout this prospectus are based on independent industry publications, government publications, reports by market research firms or other published independent sources. Some data is also based on good faith estimates, which are derived from our review of internal surveys, as well as certain independent sources. Independent industry publications and surveys generally state that they have obtained information from sources believed to be reliable, but do not guarantee the accuracy and completeness of such information.


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Prospectus Summary
 
This summary highlights certain information contained elsewhere in this prospectus and may not contain all of the information you should consider before investing in our shares. You should read this summary together with the entire prospectus, including the information presented under the heading “Risk Factors,” the consolidated financial statements and related notes and the unaudited pro forma condensed combined financial information and related notes appearing elsewhere in this prospectus.
 
Except where the context otherwise requires, or where otherwise indicated, references in this prospectus to “we,” “us,” or “our” are to CBaySystems Holdings Limited and its subsidiaries, references to “MedQuist Inc.” are to MedQuist Inc. and its subsidiaries and references to “Spheris” are to Spheris Inc. and its subsidiaries for the period prior to April 22, 2010 and to the business we acquired from Spheris Inc. for the period after such date.
 
Overview
 
We are a leading provider of integrated clinical documentation solutions for the U.S. healthcare system. Our end-to-end solutions convert physicians’ dictation of patient interactions, or the physician narrative, into a high quality and customized electronic record. These solutions integrate technologies and services for voice capture and transmission, automated speech recognition, or ASR, medical transcription and editing, workflow automation, and document management and distribution to deliver a complete managed service for our customers. Our solutions enable hospitals, clinics, and physician practices to improve the quality of clinical data as well as accelerate and automate the documentation process, and we believe our solutions improve physician productivity and satisfaction, enhance revenue cycle performance, and facilitate the adoption and meaningful use of electronic health records.
 
We are the largest provider by revenue of clinical documentation solutions based on the physician narrative in the United States. During the three months ended June 30, 2010, we processed, on an annualized run rate basis, more than 2.9 billion lines of clinical documentation on our platform. The significant majority of lines we process are edited or transcribed by our more than 14,000 MTs and MEs. Of this volume, for the three months ended June 30, 2010, more than 60% was processed using ASR technology and nearly 40% was produced offshore. Our size allows us to handle the clinical documentation requirements of many of the largest and most complex healthcare delivery networks in the United States, provides us with economies of scale, and enables us to devote significantly more resources to enhancing our solutions through research and development than most of our competitors.
 
We serve more than 2,400 hospitals, clinics, and physician practices throughout the United States, including 40% of hospitals with more than 500 licensed beds. As of June 30, 2010, the average tenure of our top 50 customers was over five years, and approximately 95% of our revenue was from recurring services. Insights gained from our broad, long-standing customer relationships allow us to optimize our integrated solutions, and we believe that this positions us for future growth as we target new customers.
 
We have realized significant increases in both revenue and profitability as the result of two large acquisitions, MedQuist Inc., in which we acquired a majority interest in August 2008, and Spheris, which we acquired in April 2010. From 2007 to 2009, our net revenues increased from $57.7 million to $371.8 million. Over this same period, our Adjusted EBITDA increased from $2.4 million to $60.1 million, and our Adjusted EBITDA margins expanded from 4.1% to 16.2%. For a reconciliation of our net income (loss) attributable to CBaySystems Holdings Limited to Adjusted EBITDA, see “Summary Historical and Unaudited Pro Forma Consolidated Financial Data.”
 
Our Industry
 
Over the past several decades, our industry has evolved from almost exclusively in-house production to outsourced services and from labor-intensive services to technologically-enabled solutions. The market opportunity for our solutions is driven by overall healthcare utilization and cost containment efforts in the United States. Numerous factors are driving increases in the demand for healthcare services including population growth, longer life expectancy, the increasing prevalence of chronic illnesses, and expanded coverage from healthcare reform. According to the U.S. Centers for Medicare and Medicaid Services, spending on healthcare grew from $1.2 trillion


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in 1998 to $2.3 trillion in 2008, representing a compound annual growth rate of 7.0%. It also projects that healthcare spending will grow to reach $4.2 trillion, or 19.3% of U.S. gross domestic product, by 2018, representing a compound annual growth rate of 6.3%. At the same time, U.S. healthcare providers remain under substantial pressure to reduce costs while maintaining or improving the quality of care.
 
Accurate and timely clinical documentation has become a critical requirement of the growing U.S. healthcare system. Medicare, Medicaid, and insurance companies demand extensive patient care documentation. The 2009 Health Information Technology for Economic and Clinical Health Act, or the HITECH Act, includes numerous incentives to promote the adoption and meaningful use of electronic health records, or EHRs, across the healthcare industry. Consequently, healthcare providers are increasingly using EHRs to input, store, and manage their clinical data in a digital format. Healthcare providers that use EHRs require accurate, easy-to-use, and cost-effective means to input clinical data that are not disruptive to the physician workflow.
 
The market for outsourced clinical documentation solutions based on the physician narrative is substantial. Key components of this market include voice capture and transmission technologies, ASR software, medical transcription and editing services, and document workflow and management software. ValueNotes Database Pvt. Ltd., or ValueNotes, a market research firm, estimates that the market for outsourced medical transcription services was $5.4 billion in 2009 and is expected to grow 8.2% per annum over the next five years to $8.0 billion in 2014.
 
Healthcare providers are increasingly choosing to outsource their clinical documentation processes. The benefits of outsourcing include reduced costs, access to leading technologies, accelerated turn-around times, improved data accuracy, greater physician productivity, and satisfaction of security and compliance requirements. We believe that the majority of clinical documentation is still produced in-house by U.S. hospitals and physician practices today. ValueNotes estimates that the in-house medical transcription market was 67% of the overall market in 2009, and projects the percentage of outsourced production of medical transcription will grow from 33% in 2009 to 38% in 2014.
 
While outsourcing provides many benefits, the landscape for outsourced service providers is highly fragmented, with hundreds of providers offering varying degrees of technological automation and offshore capabilities. Technological automation and a rise in offshore capabilities have substantially decreased the cost of production and have further differentiated outsourcing providers. We believe that participants in our industry must expand their technology platform and offshore production capabilities to remain competitive.
 
Our Competitive Strengths
 
Our competitive strengths include:
 
  •  Leader in a large, fragmented market – We are the largest provider by revenue of clinical documentation solutions based on the physician narrative in the United States. Our size enables us to meet the needs of large, sophisticated healthcare customers, provides economies of scale, and enables us to devote significantly more resources to research and development and quality assurance than many other providers.
 
  •  Integrated solutions delivered as a complete managed service – We offer fully-integrated end-to-end managed services that capture and convert the physician narrative into a high quality customized electronic record. We integrate technologies and services for voice capture and transmission, ASR, medical transcription and editing, workflow automation, and document management and distribution. The end result is value-added clinical documentation with high accuracy and quick turn-around times.
 
  •  Large and diversified customer base with long-term relationships – We serve more than 2,400 hospitals, clinics and physician practices throughout the United States, including 40% of hospitals with more than 500 licensed beds. We have a long-standing history with our customers and, as of June 30, 2010, approximately 95% of our revenue was from recurring services.
 
  •  Highly-efficient operating model – We believe we have a significantly lower cost structure than many of our competitors. Over the past two years, we have driven down our cost structure through the use of technology automation, standardized processes, and offshore resources. Our use of ASR, which has grown from 39% of our volume in the fourth quarter of 2008 to 62% in the second quarter of 2010, has


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  increased our productivity. Additionally, our expanding footprint in India has enabled us to increase our offshore production from 28% of our volume to 39% over this same period. The financial impact of these measures has been an improvement in gross margins during this timeframe from 33.8% to 35.6%. During this same time, we have grown volumes by 1.9% while sharing cost savings with our customers in the form of lower prices.
 
  •  Proven management team – We have assembled an outstanding senior leadership team with significant industry experience and domain expertise in both domestic and offshore operations. Our management team has delivered substantial results and brings an entrepreneurial spirit with proven experience in managing growth, driving operational improvements, and successfully integrating acquisitions.
 
Our Strategy
 
Key elements of our strategy include:
 
  •  Expand our customer base and increase existing customer penetration – We intend to grow our customer base by targeting three market segments: large healthcare providers still using in-house services, large healthcare providers currently using competing outsourced alternatives, and small-to-medium medical practices. Given our market leadership, strong solution offerings, and low cost structure, we believe we are well positioned to both replace in-house solutions as well as displace competing outsourced alternatives for large healthcare providers. For small-to-medium sized physician practices, we offer an easy-to-use web-based clinical documentation platform, CBayScribe, to expand our market share in this segment, which we believe to be underpenetrated. In order to increase penetration within our existing customer base, we intend to continue targeting additional healthcare clinical areas and facilities of our current customers. Additionally, as healthcare providers centralize their purchasing decisions, we believe that our ability to deliver outstanding services for large, complex requirements provides us with increasing access to new sales opportunities within our existing customer base and through existing customer relationships.
 
  •  Continue to develop and enhance our integrated solutions – We seek to differentiate our integrated solutions through sophisticated technology and process improvement. We have over 100 employees dedicated to research and development. Over the last year, we launched numerous enhancements, including a front end speech platform for general medicine, additional EHR system integration, and advanced performance monitoring.
 
  •  Enhance profitability through technical and operational expertise – We have made significant improvements in productivity through business process and infrastructure improvements. Notwithstanding reductions in customer pricing, our gross margins have expanded from 33.8% in the fourth quarter of 2008, our first fiscal quarter after we acquired MedQuist Inc., to 35.6% in the second quarter of 2010, and our Adjusted EBITDA margins have expanded from 10.8% to 17.6% for the same periods. Our management team has proven its ability to implement continuous process improvements and we intend to further increase offshore production and our use of technological automation, including ASR, to lower costs and enhance our profitability.
 
  •  Facilitate the adoption and promote meaningful use of EHR systems – Our integrated solutions provide a comprehensive, accurate and effective method to incorporate physician narrative into an EHR system. We interface with substantially all of the leading EHR vendors to integrate our clinical documentation solutions and to help our customers realize the full potential of their EHR systems through the use of the physician narrative. In our experience, when EHR is adopted, customers tend to consolidate their purchase decisions, which benefits us as a leading provider of clinical documentation solutions.
 
  •  Pursue strategic acquisitions – We believe that there are significant opportunities available to create value through strategic acquisitions. We intend to seek appropriate opportunities to grow our customer base, enhance our solutions, consolidate costs, and expand our value proposition to our customers.


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Our History
 
We began operation in 1998 with the goal of providing high-quality outsourced clinical documentation solutions to U.S. healthcare providers at a low cost. We combined U.S. sales, marketing, and customer service with offshore operations, primarily in India, and have grown our scale through strategic acquisitions.
 
Acquisitions
 
MedQuist Inc.
 
In August 2008, an affiliate of S.A.C. Private Capital Group, LLC, or SAC PCG, invested $124.0 million to acquire a majority interest in us. Concurrent with this investment, we acquired a 69.5% interest in MedQuist Inc., or the MedQuist Inc. Acquisition. At the time of the acquisition, MedQuist Inc. was the largest U.S. medical transcription service provider by revenue, but had been adversely impacted by inefficient operations, litigation and customer disputes. Net revenues for MedQuist Inc. had fallen from $483.9 million for the year ended December 31, 2002 to $340.3 million for the year ended December 31, 2007.
 
We believed that MedQuist Inc., despite its operational challenges and substantial overhead, had strong underlying technology, deep healthcare domain expertise, and a long-tenured customer base. Following our acquisition of MedQuist Inc., we embarked upon a strategy to enhance the management team, streamline operations, improve relationships with customers, leverage our offshore resources, increase the utilization of ASR technology, and resolve all outstanding litigation. This strategy resulted in a stabilization of volume trends starting in the second quarter of 2009. The following table shows the percentage change in MedQuist Inc.’s volume for the nine quarters ended March 31, 2010, the last quarter prior to our acquisition of Spheris, or the Spheris Acquisition.
 
                                                                           
 
    2008     2009     2010  
    Prior to the MedQuist Inc.
                                       
MedQuist Inc.
  Acquisition                                        
    Q1     Q2     Q3       Q4     Q1     Q2     Q3     Q4     Q1  
Volume % Change over Previous Year
    (3.3 )%     (4.7 )%     (0.1 )%       (0.4 )%     (2.2 )%     0.8 %     2.5 %     2.8 %     4.0 %
 
Spheris
 
In April 2010, we acquired certain assets, principally customer contracts, from Spheris in a transaction conducted under Section 363 of the Bankruptcy Code. Spheris was the second largest U.S. medical transcription service provider by revenue at the time. Spheris had experienced declines in volumes from customer attrition, which we believed was attributable to quality issues and underinvestment in product development caused by financial constraints leading up to its bankruptcy. Some volume declines continued after the date of the Spheris Acquisition as the result of notices of termination given prior to that date. The following table shows the percentage change in Spheris’ volume for the nine quarters ended March 31, 2010, the last quarter prior to the Spheris Acquisition.
 
                                                                           
 
Spheris
  2008     2009       2010  
    Q1     Q2     Q3     Q4     Q1     Q2     Q3     Q4       Q1  
 
Volume % Change over Previous Year
    (4.8 )%     (4.7 )%     (5.9 )%     (11.6 )%     (13.3 )%     (10.9 )%     (7.9 )%     (6.5 )%       (5.5 )%
                                                                           
 
We considered the negative volume trend for Spheris in our acquisition valuation. Net revenues for Spheris were $156.6 million and $35.2 million for the year ended December 31, 2009 and the three months ended March 31, 2010, respectively. Customers who submitted notices of termination prior to the acquisition generated revenues of $24.6 million and $1.7 million during the year ended December 31, 2009 and the three months ended March 31, 2010, respectively. Therefore, net revenues for the year ended December 31, 2009 and the three months ended March 31, 2010, less revenues attributable to customers who submitted notices of termination prior to the Spheris Acquisition, were $132.0 million and $33.5 million, respectively.


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Our Spheris integration efforts have focused on merging the new customer base acquired, integrating systems and eliminating cost redundancies. We expect the measures we have implemented since the Spheris Acquisition to yield $7.0 million of cost savings in the fourth quarter of 2010, representing an annualized impact of $28.0 million. We expect that the integration of Spheris will be fully completed by the first half of 2011.
 
Pricing
 
We base our pricing on various factors, principally, market forces, the extent to which we can utilize our offshore production facilities, the extent to which customers utilize the ASR technology available in our solutions, the scope of services provided and turn-around times requested by a particular customer. We work with our customers to evaluate how different solutions affect pricing and to determine an optimal mix of service level and price for that customer. Higher utilization of offshore production and ASR leads to lower costs for us, which permits us to offer better pricing to our customers while at the same time contributing to margin growth. We have successfully migrated a significant portion of MedQuist Inc.’s volume offshore and we will continue these efforts in relation to our combined businesses.
 
Recent Developments
 
Recapitalization Transactions
 
On October 14, 2010, MedQuist Inc. incurred $85.0 million of indebtedness through the issuance of 13% senior subordinated notes due 2016, or the Senior Subordinated Notes, under a note purchase agreement, or the Note Purchase Agreement, and incurred $200.0 million of indebtedness under a term loan, or the Term Loan, under a $225.0 million credit facility, or the Senior Secured Credit Facility. We are a guarantor of both the Senior Subordinated Notes and the Senior Secured Credit Facility. MedQuist Inc. used the proceeds to repay $80.0 million of indebtedness under its prior credit facility, or the Acquisition Credit Facility, to repay $13.6 million of indebtedness under a subordinated promissory note, or the Acquisition Subordinated Promissory Notes, each issued in connection with the Spheris Acquisition, and to pay a $176.5 million special dividend to its stockholders. We received $122.6 million of this special dividend and used $104.1 million to extinguish our 6% Convertible Notes issued to Royal Philips Electronics, in connection with the MedQuist Inc. Acquisition and $4.1 million to extinguish certain other lines of credit. We refer to these transactions as the Recapitalization Transactions.
 
Exchange Transactions
 
On September 30, 2010, certain of MedQuist Inc.’s noncontrolling stockholders entered into an exchange agreement with us, or the Exchange Agreement, whereby we agreed to issue approximately 20.3 million shares of our common stock in exchange for their 4.8 million shares of MedQuist Inc. common stock, subject to certain adjustments to the exchange ratio based principally on the level of MedQuist Inc.’s net debt at closing. We refer to this as the MedQuist Exchange. The MedQuist Exchange is contingent upon, among other conditions, our completion of this offering, listing our shares on The NASDAQ Global Market and our reincorporation in Delaware, and, assuming the MedQuist Exchange is consummated without any adjustments, would increase our ownership in MedQuist Inc. from 69.5% to 82.5%.
 
On October 18, 2010, we filed with the Securities and Exchange Commission, or the SEC, a registration statement on Form S-4 offering those noncontrolling MedQuist Inc. stockholders who did not participate in the MedQuist Exchange shares of our common stock in exchange for their MedQuist Inc. shares. Assuming the MedQuist Exchange is consummated, a full exchange in the Exchange Offer would increase our ownership in MedQuist Inc. from 82.5% to 100.0%. We can give no assurance regarding the level of participation in the Exchange Offer.
 
For a more detailed description of the Recapitalization Transactions, the MedQuist Exchange and the Exchange Offer, collectively, the Corporate Reorganization, see “Corporate Reorganization.”


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Risks Associated With Our Business
 
Our business is subject to a number of risks which you should be aware of before making an investment decision. Those risks are discussed more fully in “Risk Factors” beginning on page 16. For example:
 
  •   We compete with many others in the market for clinical documentation solutions which may result in lower prices for our services, reduced operating margins and an inability to maintain or increase our market share.
 
  •   Our business is dependent on the continued demand for transcription services, and, if electronic health records companies produce solutions acceptable to large hospital systems for the creation of electronic clinical documentation, the overall demand for medical transcription services could be reduced.
 
  •   Our ability to sustain and grow profitable operations is dependent on the willingness of new customers to outsource and adopt new technology platforms, as well as our ability to retain customers.
 
  •   Our success will depend on our ability to support existing technologies, as well as adopt and integrate new technology into our workflow platforms.
 
Corporate Information
 
Our principal executive offices are located at 9009 Carothers Parkway, Franklin, TN 37067. The telephone number of our principal executive offices is (866) 295-4600.
 
Immediately prior to the consummation of this offering, we intend to convert from a British Virgin Islands company to a Delaware corporation.


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The Offering
 
Common stock offered           shares
 
Common stock to be outstanding immediately after this offering(1)
          shares
 
Over-allotment option The selling stockholders have granted the underwriters a 30-day option to purchase up to          additional shares.
 
Use of proceeds
 
We estimate that our net proceeds from this offering, after deducting the underwriting discounts and commissions and estimated offering expenses, will be approximately $          , assuming an initial public offering price of $      per share, the midpoint of the price range shown on the cover page of this prospectus. We intend to use the net proceeds from this offering for working capital and other general corporate purposes. We may also use a portion of the net proceeds for the acquisition of complementary companies or businesses, although we currently do not have any acquisition or investment planned. We will not receive any proceeds from the sale of shares by the selling stockholders.
 
Dividend policy
 
We currently expect to retain future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Payments of future dividends, if any, will be at the sole discretion of our board of directors after taking into account various factors, including our business, operating results and financial condition, current and anticipated cash needs, plans for expansion and any legal or contractual limitations on our ability to pay dividends. Our ability to pay dividends on our common stock is limited by the covenants of the agreements governing our indebtedness and may be further restricted by the terms of any future debt or preferred securities.
 
The NASDAQ Global Market listing
 
We intend to apply to list our common stock on The NASDAQ Global Market under the symbol “       .”
 
Assumptions in this Prospectus
 
Unless we indicate otherwise, all information in this prospectus:
 
  •  assumes consummation of the MedQuist Exchange based on an exchange ratio of 4.2459 shares of our common stock for each MedQuist Inc. share;(2)
 
  •  assumes a full exchange in the Exchange Offer based on the ratio applicable under the MedQuist
 
 
(1) The number of shares of common stock to be outstanding after this offering includes (i) approximately 20.3 million shares of common stock to be issued in the MedQuist Exchange, (ii) approximately 28.4 million shares of our common stock to be issued in the Exchange Offer, assuming a full exchange and (iii) approximately 4.5 million shares of our common stock issuable pursuant to an agreement with an affiliate of SAC PCG, or the Consulting Services Agreement, entered into at the time of the MedQuist Inc. Acquisition, and excludes (i) approximately 11.5 million shares of common stock reserved for issuance under our equity incentive plans, of which options to purchase approximately 5.8 million shares with a weighted average exercise price of $1.18 were outstanding as of June 30, 2010, (ii) 403,680 shares of common stock reserved for issuance under the stand-alone grants made to certain present and former executives under management stockholders agreements, of which options to purchase 403,680 shares with a weighted average price of $1.75 were outstanding as of June 30, 2010, and (iii) 366,695 shares of our common stock issuable pursuant to a warrant agreement between us and Oosterveld International BV, dated March 19, 2009. See “Certain Relationships and Related Party Transactions.”
(2) The exchange ratio under the MedQuist Exchange is subject to adjustment based principally upon the level of MedQuist Inc.’s net debt at the closing of the MedQuist Exchange. Every $10.0 million decrease below $304.0 million in MedQuist Inc.’s net debt would increase the exchange ratio by approximately 0.05 shares of our common stock.


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  Exchange;(3)
 
  •  assumes our redomiciliation under the laws of the state of Delaware and the related conversion of our shares;
 
  •  assumes no exercise by the underwriters of their over-allotment option to purchase shares from the selling stockholders; and
 
  •  assumes an initial public offering price of $      per share, the midpoint of the price range shown on the cover page of this prospectus.
 
 
(3) The ratio applicable under the Exchange Offer has not yet been fixed, but we currently expect it will be approximately the same as the exchange ratio applicable to the MedQuist Exchange.


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Summary Historical and Unaudited Pro Forma Consolidated Financial Data
 
The following table sets forth our summary historical consolidated financial data for the years ended December 31, 2007, 2008 and 2009 and as of June 30, 2010 and for the six months ended June 30, 2009 and 2010. The summary historical consolidated financial data for the years ended December 31, 2007, 2008 and 2009 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary historical consolidated financial data as of June 30, 2010 and for the six months ended June 30, 2009 and 2010 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. We prepared the unaudited historical information on a basis consistent with that used in preparing our audited consolidated financial statements, which reflect all adjustments, consisting of only normal recurring adjustments, that we consider necessary to present fairly our financial position and results of operations for the unaudited periods.
 
Our summary historical consolidated statements of operations and other operating data reflect the consolidation of the results of operations of MedQuist Inc. since August 6, 2008 and Spheris since April 22, 2010, the respective dates of their acquisition.
 
The summary consolidated financial data also sets forth our unaudited pro forma condensed combined statements of operations for the year ended December 31, 2009 and the six months ended June 30, 2010 and our unaudited pro forma condensed consolidated balance sheet as of June 30, 2010. The unaudited pro forma condensed combined statements of operations and the unaudited pro forma condensed consolidated balance sheet have been derived from the historical consolidated financial information of us and Spheris, which are included elsewhere in this prospectus.
 
The pro forma combined statements of operations and other operating data for the year ended December 31, 2009 and the six months ended June 30, 2010 give effect to the following transactions as if they had occurred on January 1, 2009:
 
  •  the Spheris Acquisition and the incurrence by MedQuist Inc. of $113.6 million of debt to finance the Spheris Acquisition;
 
  •  the incurrence by MedQuist Inc. of $285.0 million of indebtedness under the Senior Secured Credit Facility and Senior Subordinated Notes, the simultaneous repayment of $90.0 million of indebtedness under the Acquisition Credit Facility, the repayment of $13.6 million of indebtedness under the Acquisition Subordinated Promissory Notes, the payment of a $176.5 million special dividend to MedQuist Inc.’s stockholders, of which we received $122.6 million and the noncontrolling stockholders of MedQuist Inc. received $53.9 million, and the repayment by us, using the proceeds of such dividend, of $104.1 million to extinguish our 6% Convertible Notes including a $7.7 million premium on early prepayment, and $4.1 million under certain other lines of credit;
 
  •  the issuance of 20.3 million shares of our common stock in exchange for 4.8 million shares of MedQuist Inc. common stock pursuant to the terms of the Exchange Agreement with certain noncontrolling stockholders of MedQuist Inc., assuming the MedQuist Exchange is consummated without any adjustments, which will increase our ownership in MedQuist Inc. from 69.5% to 82.5%;
 
  •  the issuance of 4.5 million shares of our common stock pursuant to the Consulting Services Agreement; and
 
  •  the issuance of 28.4 million shares of our common stock to be issued in exchange for 6.7 million shares of MedQuist Inc. common stock in the Exchange Offer, assuming an exchange ratio equal to the exchange ratio applicable under the Exchange Agreement and a full exchange. This would increase our ownership in MedQuist Inc. from 82.5% to 100%.
 
The pro forma combined statements of operations and other operating data for the year ended December 31, 2009 and the six months ended June 30, 2010 do not give effect to the following:
 
  •  the impact on net revenues from volume declines resulting from Spheris’ customer terminations prior to the Spheris Acquisition. The pro forma net revenues for the year ended December 31, 2009 and for the six months ended June 30, 2010 include $24.6 million and $2.3 million, respectively, of net revenues associated with such terminations; and


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  •  the full impact on Adjusted EBITDA of cost savings and synergies resulting from the Spheris Acquisition, which we have implemented since the Spheris Acquisition and expect to yield $7.0 million of cost savings in the fourth quarter of 2010, representing an annualized benefit of $28.0 million. Our results for the six months ended June 30, 2010 reflect $0.9 million of such cost savings.
 
The pro forma balance sheet data as of June 30, 2010 gives effect to the Corporate Reorganization and the shares of our common stock issuable pursuant to the Consulting Services Agreement, as if they occurred as of June 30, 2010.
 
The pro forma as adjusted balance sheet data as of June 30, 2010 also gives effect to the issuance of        shares of common stock in this offering at an assumed initial public offering price of $      per share, the midpoint of the price range shown on the cover of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us as if such transaction occurred as of June 30, 2010.
 
Our historical consolidated financial information has been adjusted in the unaudited pro forma condensed combined financial information to give effect to pro forma events that are (1) directly attributable to the Spheris Acquisition, the Corporate Reorganization, the shares of our common stock issuable pursuant to the Consulting Services Agreement (2) factually supportable and (3) with respect to the statements of operations, expected to have a continuing impact on the combined results. The pro forma information does not reflect revenue opportunities and cost savings that may be realized after the Spheris Acquisition. The pro forma financial information also does not reflect expenses related to integration activity that may be incurred by us in connection with the Spheris Acquisition.
 
The pro forma data is based upon available information and certain assumptions that we believe are reasonable. The pro forma data is for informational purposes only and does not purport to represent what our results of operations or financial position actually would have been if such events had occurred on the dates specified above and does not purport to project the results of operations or financial position for any future period or date. The pro forma data should be read in conjunction with our historical consolidated financial statements, and related notes included elsewhere in this prospectus as adjusted for the acquisition of Spheris using the acquisition method of accounting.
 
You should read the following summary financial and other data together with our consolidated financial statements and related notes included elsewhere in this prospectus and the information under the sections entitled “Capitalization,” “Unaudited Pro Forma Condensed Combined Financial Information,” “Selected Consolidated Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus.


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    Historical     Pro Forma  
                                  Year
    Six Months
 
    Years Ended
    Six Months Ended
    Ended
    Ended
 
    December 31,     June 30,     December 31,
    June 30,
 
    2007     2008     2009     2009     2010     2009     2010  
                      (Unaudited)     (Unaudited)  
    (In thousands, except for per share amounts)  
 
Statement of Operations Data
                                                       
Net revenues
  $ 57,694     $ 193,673     $ 371,768     $ 188,539     $ 200,592     $ 528,364     $ 243,963  
Cost of revenues
    30,209       125,074       239,549       121,755       128,641       348,608       159,984  
                                                         
Gross profit
    27,485       68,599       132,219       66,784       71,951       179,756       83,979  
                                                         
Operating expenses
                                                       
Selling, general and administrative
    25,137       51,243       60,632       31,764       32,706       79,725       38,869  
Research and development
          6,099       9,604       4,796       5,593       9,604       5,785  
Depreciation and amortization
    2,915       14,906       26,977       13,610       15,068       40,737       18,910  
Cost of legal proceedings and settlements
          5,311       14,943       12,158       2,152       16,189       2,152  
Acquisition related charges
                1,246             6,045              
Goodwill impairment charge
          98,972                                
Restructuring charges
          2,106       2,727             966       3,502       966  
                                                         
Total operating expenses
    28,052       178,637       116,129       62,328       62,530       149,757       66,682  
                                                         
Operating income (loss)
    (567 )     (110,038 )     16,090       4,456       9,421       29,999       17,297  
Interest expense, net
    (2,108 )     (3,954 )     (9,132 )     (4,660 )     (7,351 )     (31,251 )     (16,316 )
Equity in income (loss) of affiliated companies
    (105 )     66       1,933       408       546       1,933       546  
Other income
    14       9       11             108       2,136       60  
                                                         
Income (loss) before income taxes and noncontrolling interests
    (2,766 )     (113,917 )     8,902       204       2,724       2,817       1,587  
Income tax provision (benefit)
    (113 )     (5,398 )     1,082       639       (326 )     342       (190 )
                                                         
Net income (loss)
    (2,653 )     (108,519 )     7,820       (435 )     3,050       2,475       1,777  
Less: Net (income) loss attributable to noncontrolling interests
    57       (5,154 )     (7,085 )     (2,335 )     (2,497 )           11  
                                                         
Net income (loss) attributable to CBaySystems Holdings Limited
  $ (2,596 )   $ (113,673 )   $ 735     $ (2,770 )   $ 553     $ 2,475     $ 1,788  
                                                         
Net income (loss) per common share attributable to CBaySystems Holdings Limited
                                                       
Basic
  $ (0.04 )   $ (1.13 )   $ (0.01 )   $ (0.03 )   $ (0.01 )   $ 0.00     $ 0.01  
Diluted
  $ (0.04 )   $ (1.13 )   $ (0.01 )   $ (0.03 )   $ (0.01 )   $ 0.00     $ 0.01  
Weighted average shares outstanding:
                                                       
Basic
    57,929       101,669       156,116       154,991       157,705       209,326       210,915  
Diluted
    57,929       101,669       156,116       154,991       157,705       209,326       210,915  
Adjusted EBITDA(1)(2)
  $ 2,362     $ 18,886     $ 60,130     $ 27,970     $ 33,760     $ 91,517     $ 39,385  
(1) See below for reconciliations of net income (loss) attributable to CBaySystems Holdings Limited to Adjusted EBITDA.
(2) Pro forma amounts do not give effect to (i) the impact on net revenues from volume declines, resulting from pre-acquisition customer terminations at Spheris, of $24.6 million and $2.3 million in net revenues for the year ended December 31, 2009 and the six months ended June 30, 2010, respectively, and (ii) the full impact of cost savings and synergies resulting from the Spheris Acquisition, which we have implemented since the Spheris Acquisition and expect to yield $7.0 million of cost savings in the fourth quarter of 2010, representing an annualized benefit of $28.0 million. Our results for the six months ended June 30, 2010 reflect $0.9 million of such cost savings. See “Unaudited Pro Forma Condensed Combined Financial Information.”


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The following table sets forth certain historical financial and operating data for us, MedQuist Inc. and Spheris.
 
                                                         
    Historical     Pro Forma  
                                  Year
    Six Months
 
    Years Ended
    Six Months Ended
    Ended
    Ended
 
    December 31,     June 30,     December 31,
    June 30,
 
    2007     2008     2009     2009     2010     2009     2010  
                      (Unaudited)     (Unaudited)  
    (In thousands, except for per share amounts)  
 
Other Data
                                                       
Net Revenues:
                                                       
Consolidated(1)
  $ 57,694     $ 193,673     $ 371,768     $ 188,539     $ 200,592     $ 528,364     $ 243,963  
MedQuist Inc. 
    340,342       326,853       307,200                                  
Spheris
    200,392       182,843       156,596                                  
Adjusted EBITDA(2)
                                                       
Consolidated(1)
  $ 2,362     $ 18,886     $ 60,130     $ 27,970     $ 33,760     $ 91,517     $ 39,385  
MedQuist Inc. 
    3,480       32,337       55,636                                  
Spheris
    28,227       26,317       30,569                                  
(1) Pro forma amounts do not give effect to (i) the impact on net revenues from volume declines, resulting from pre-acquisition customer terminations at Spheris, of $24.6 million and $2.3 million in net revenues for the year ended December 31, 2009 and the six months ended June 30, 2010, respectively, and (ii) the full impact of cost savings and synergies resulting from the Spheris Acquisition, which we have implemented since the Spheris Acquisition and expect to yield $7.0 million of cost savings in the fourth quarter of 2010, representing an annualized benefit of $28.0 million. Our results for the six months ended June 30, 2010 reflect $0.9 million of such cost savings. See “Unaudited Pro Forma Condensed Combined Financial Information.”
(2) See below for reconciliations of net income (loss) to Adjusted EBITDA.
 
                         
    As of June 30,
 
    2010  
                Pro Forma
 
    Actual     Pro Forma     As Adjusted  
          (Unaudited)
       
Balance Sheet Data         (In thousands)        
 
Cash and cash equivalents(a)
  $ 22,457     $ 25,889          
Working capital(b)
    6,753       7,357          
Total assets
    380,151       391,291          
Long term debt, including current portion of debt
    214,092       294,973          
Total equity
    74,934       7,355          
(a) Pro forma as adjusted amount gives effect to a $5.0 million payment to SAC PCG in connection with the Corporate Reorganization.
(b) Working capital is defined as total current assets, excluding cash and cash equivalents, minus total current liabilities, excluding current portion of debt.


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The following table presents a reconciliation of net income (loss) attributable to CBaySystems Holdings Limited to Adjusted EBITDA:
 
                                                         
    Historical     Pro Forma  
                                  Year
    Six Months
 
    Years Ended
    Six Months Ended
    Ended
    Ended
 
    December 31,     June 30,     December 31,
    June 30,
 
    2007     2008     2009     2009     2010     2009     2010  
                      (Unaudited)     (Unaudited)  
    (In thousands)  
 
Net income (loss) attributable to CBaySystems Holdings Limited
  $ (2,596 )   $ (113,673 )   $ 735     $ (2,770 )   $ 553     $ 2,475     $ 1,788  
Net income (loss) attributable to noncontrolling interests
    (57 )     5,154       7,085       2,335       2,497             (11 )
Income tax provision (benefit)(a)
    (113 )     (5,398 )     1,082       639       (326 )     342       (190 )
Interest expense, net
    2,108       3,954       9,132       4,660       7,351       31,251       16,316  
Depreciation and amortization
    2,915       14,906       26,977       13,610       15,068       40,737       18,910  
Cost of legal proceedings and settlements
          5,311       14,943       12,158       2,152       16,189       2,152  
Acquisition related charges
          5,620       1,246             6,045              
Goodwill impairment charge
          98,972                                
Restructuring charges
          2,106       2,727             966       3,502       966  
Equity in (income) loss of affiliated companies
    105       (66 )     (1,933 )     (408 )     (546 )     (1,933 )     (546 )
Receivable write-offs, asset impairment charges, severance charges and accrual reversals(b)
          2,000       (1,864 )     (2,254 )           (1,046 )      
                                                         
Adjusted EBITDA(c)
  $ 2,362     $ 18,886     $ 60,130     $ 27,970     $ 33,760     $ 91,517     $ 39,385  
                                                         
(a) We had $130.0 million of federal net operating loss carry forwards as of December 31, 2009 and will record approximately $30.0 million of annual tax amortization related to intangible assets, including goodwill, that will reduce future taxable income. Due to the existence of federal net operating loss carry forwards and the impact of tax amortization related to intangible assets, including goodwill, cash taxes paid (refunded) were $84,000, $160,000, $796,000 for the years ended December 31, 2007, 2008 and 2009, respectively, and $497,000 and $(478,000) for the six months ended June 30, 2009 and 2010, respectively.
 
(b) Includes the write-off of amounts due from an unconsolidated affiliate of Spheris, an impairment charge to write-off the balance of an investment and the reversal of certain accruals, related to litigation claims, as a result of the expiration of the applicable statute of limitations.
 
(c) Pro forma amounts do not give effect to (i) the impact on net revenue from volume declines, resulting from pre-acquisition customer terminations at Spheris prior to the Spheris Acquisition, of $24.6 million and $2.3 million in net revenues for the year ended December 31, 2009 and the six months ended June 30, 2010, respectively, and (ii) the full impact of cost savings and synergies resulting from the Spheris Acquisition, which we have implemented since the Spheris Acquisition and expect to yield $7.0 million of cost savings in the fourth quarter of 2010, representing an annualized benefit of $28.0 million. Our results for the six months ended June 30, 2010 reflect $0.9 million of such cost savings.


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The following table presents a reconciliation of net income (loss) to Adjusted EBITDA for MedQuist Inc.:
 
                         
    Years Ended December 31,  
    2007     2008     2009  
    (In thousands)  
 
Net income (loss)
  $ (15,206 )   $ (68,795 )   $ 23,291  
Income tax provision (benefit)
    2,339       (16,513 )     1,975  
Interest (income) expense, net
    (8,366 )     (2,438 )     134  
Depreciation and amortization
    16,499       17,504       15,672  
Restructuring and acquisition-related charges
    2,756       2,055       2,727  
Acquisition related charges
                1,263  
Cost of legal proceedings and settlements, net
    6,083       19,738       14,843  
Goodwill impairment charge
          82,233        
Equity in income of affiliated companies(a)
    (625 )     (236 )     (2,015 )
Other income and accrual reversals(b)
          (1,211 )     (2,254 )
                         
Adjusted EBITDA
  $ 3,480     $ 32,337     $ 55,636  
                         
 
 
(a) Represents proportionate share of earnings from our equity method investment in A-Life Medical, Inc., which is expected to be sold in November 2010 pursuant to an executed agreement.
 
(b) Represents the reversal of certain accruals relating to certain litigation claims as a result of the expiration of the applicable statute of limitations.
 
The following table presents a reconciliation of net loss to Adjusted EBITDA for Spheris:
 
                         
    Years Ended December 31,  
    2007     2008     2009  
    (In thousands)  
 
Net loss
  $ (11,361 )   $ (19,179 )   $ (187,383 )
Income tax provision (benefit)
    (5,856 )     3,870       (14,571 )
Interest expense, net
    21,171       19,104       17,439  
Depreciation and amortization
    24,273       21,613       7,230  
Operational restructuring charges
          484       775  
Transaction charge
                6,961  
Cost of legal proceedings and settlements
          425       1,246  
Goodwill impairment charge
                198,872  
                         
Adjusted EBITDA
  $ 28,227     $ 26,317     $ 30,569  
                         


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Adjusted EBITDA is a metric used by management to measure operating performance. Adjusted EBITDA is defined as net income (loss) attributable to CBaySystems Holdings Limited, MedQuist Inc. or Spheris, as applicable, plus net income (loss) attributable to noncontrolling interests, income taxes, interest expense, depreciation and amortization, cost of legal proceedings and settlements, acquisition related charges, goodwill impairment charge, restructuring charges, equity in income (loss) of affiliated company, asset impairment charges, severance costs, and certain unusual or nonrecurring items. We present Adjusted EBITDA as a supplemental performance measure because we believe it facilitates operating performance comparisons from period to period and company to company by backing out the following:
 
  •  potential differences caused by variations in capital structures (affecting interest expense, net), tax positions (such as the impact on periods or companies for changes in effective tax rates), the age and book depreciation of fixed assets (affecting depreciation expense);
 
  •  the impact of non-cash charges, such as goodwill impairment charges and asset impairment charges; and
 
  •  the impact of unusual expenses or events, such as acquisition related charges, restructuring charges, severance costs and certain unusual or nonrecurring items.
 
Because Adjusted EBITDA facilitates internal comparisons of operating performance on a more consistent basis, we also use Adjusted EBITDA in measuring our performance relative to that of our competitors. Adjusted EBITDA is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net income, operating income or any other performance measures derived in accordance with GAAP or as an alternative to cash flow from operating activities as measures of our profitability or liquidity. We understand that although Adjusted EBITDA is frequently used by securities analysts, lenders and others in their evaluation of companies, Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
 
  •  Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;
 
  •  Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
 
  •  although depreciation is a non-cash charge, the assets being depreciated will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; and
 
  •  other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.


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Risk Factors
 
Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as other information in this prospectus, before deciding whether to invest in shares of our common stock. The occurrence of any of the following risks, or other risks that are currently unknown or unforeseen by us, could harm our business, financial condition, results of operations or growth prospects. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.
 
Risks Related to Our Business
 
We compete with many others in the market for clinical documentation solutions which may result in lower prices for our services, reduced operating margins and an inability to maintain or increase our market share.
 
We compete with other outsourced clinical documentation solutions companies in a highly fragmented market that includes national, regional and local service providers, as well as service providers with global operations. These companies have services that are similar to ours, and certain of these companies have substantially larger or have significantly greater financial resources than we do. We also compete with the in-house medical transcription staffs of our customers and potential customers. There can be no assurance that we will be able to compete effectively against our competitors or timely implement new products and services. Many of our competitors attempt to differentiate themselves by offering lower priced alternatives to our outsourced medical transcription services and customers could elect to utilize less comprehensive solutions than the ones we offer due to the lower costs of those competitive products. Some competition may even be willing to accept less profitable business in order to grow revenue. Increased competition and cost pressures affecting the healthcare markets in general may result in lower prices for our services, reduced operating margins and the inability to maintain or increase our market share.
 
Our business is dependent upon the continued demand for transcription services. If EHR companies produce alternatives to medical transcription that reduce the need for transcription, the demand for our solutions could be reduced.
 
EHR companies’ solutions for the collection of clinical data typically require physicians to directly enter and organize patient information through “point-and-click” templates which attempt to reduce or eliminate the need for transcription. A second alternative to conventional transcription involves a physician dictating a record of patient encounters and receiving a speech-recognized draft of their dictation, which the physician can self-edit. There is significant uncertainty and risk as to the demand for, and market acceptance of, these solutions for the creation of electronic clinical documentation. In the event that these and other solutions are successful and gain wide acceptance, the demand for our solutions could be reduced and our business, financial condition and results of operations could be adversely affected.
 
Our growth is dependent on the willingness of new customers to outsource and adopt our technology platforms.
 
We plan to grow, in part, by capitalizing on perceived market opportunities to provide our services to new customers. These new customers must be willing to outsource functions which may otherwise have been performed within their organizations, adopt new technologies and incur the time and expense needed to integrate those technologies into their existing systems. For example, the up-front cost and time involved in changing medical transcription providers or in converting from an in-house medical transcription department to an outsourced provider may be significant. Many customers may prefer to remain with their current provider or keep their transcription in-house rather than invest the time and resources required for the implementation of a new system. Also, as the maintenance of accurate medical records is a critical element of a healthcare provider’s ability to deliver quality care to its patients and to receive proper and timely reimbursement for the services it renders, potential customers may be reluctant to outsource or change providers of such an important function.


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Our success will depend on our ability to support existing technologies as well as to adopt and integrate new technology into our workflow platforms.
 
Our ability to remain competitive in the clinical documentation industry is based, in part, on our ability to develop, utilize and support technology in the services and solutions that we provide to our customers. As our customers advance technologically, we must be able to effectively integrate our solutions with their systems and provide advanced data collection technology. We also may need to develop technologies to provide service systems comparable to those of our competitors as they develop new technology. If we are unable to effectively develop and integrate new technologies, we may not be able to compete effectively with our competitors. In addition, if the cost of developing and integrating new technologies is high, we may not realize our expected return on investment.
 
Technology innovations in the markets that we serve may create alternatives to our products and result in reduced sales.
 
Technology innovations to which our current and potential customers might have access could reduce or eliminate their need for our products. A new or other disruptive technology that reduces or eliminates the use of one or more of our products could negatively impact the sale of these products. Our failure to develop, introduce or enhance products able to compete with new technologies in a timely manner could have an adverse effect on our business, results of operation and financial condition.
 
Many of our customer contracts are terminable at will by our customers, and our ability to sustain and grow profitable operations is dependent upon the ability to retain customers.
 
Many of our contracts can be terminated at will by our customers. If a significant number of our customers were to cancel or materially change their commitments with us, we could have significantly decreased revenue, which would harm our business, operating results and financial condition. We must, therefore, engage in continual operational support and sales efforts to maintain revenue stability and future growth with these customers. If a significant number of our customers terminate or fail to renew their contracts with us, our business could be negatively impacted if additional business is not obtained to replace the business which was lost.
 
Customer retention is largely dependent on providing quality service at competitive prices. Customer retention may be impacted by events outside of our control, such as changes in customer ownership, management, financial condition and competitors’ sales efforts. If we experience a higher than expected rate of customer attrition the resulting loss of business could adversely affect results of operations and financial condition.
 
Our indebtedness could adversely affect our ability to raise additional capital to fund our operations and limit our ability to pursue our growth strategy or to react to changes in the economy or our industry, and our debt obligations include restrictive covenants which may restrict our operations or otherwise adversely affect us.
 
After the consummation of the Recapitalization Transactions, we will have approximately $295.0 million of indebtedness outstanding, consisting of $200.0 million of Term Loan debt under our Senior Secured Credit Facility, $85.0 million of Senior Subordinated Notes and other indebtedness consisting of capital leases and borrowings under other credit facilities, and we may incur additional indebtedness in the future. This indebtedness could have important negative consequences to our business, including:
 
  •  increasing the difficulty of our ability to make payments on our outstanding debt;
 
  •  increasing our vulnerability to general economic and industry conditions because our debt payment obligations may limit our ability to use our cash to respond to or defend against changes in the industry or the economy;
 
  •  requiring a substantial portion of our cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities;
 
  •  limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions and general corporate or other purposes;


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  •  limiting our ability to pursue our growth strategy; and
 
  •  placing us at a disadvantage compared to our competitors who are less leveraged and may be better able to use their cash flow to fund competitive responses to changing industry, market or economic conditions.
 
In addition, under our debt financing agreements, we must abide by certain financial and other restrictive covenants that, among other things, require us to maintain a minimum consolidated interest coverage ratio, a maximum total leverage ratio and a maximum consolidated senior leverage ratio. Upon a breach of any of the covenants in our debt financing agreements, the lenders could declare us to be in default and could further require any outstanding borrowings to be immediately due and payable, and terminate all commitments to extend further credit.
 
We are dependent on third party speech recognition software incorporated in certain of our technologies, and the inability to maintain, support or enhance such third party software over time could harm our business.
 
We license speech recognition software from third parties, including from competitors, that we incorporate into several of our key products and solutions. Our ability to continue to sell and support these products and solutions depends on continued support from these licensors. The loss of these licenses could adversely impact our business until we identify, license and integrate, or develop and integrate equivalent software. There can be no assurance that such third party licensors will continue to invest the appropriate levels of resources in the software to maintain and enhance the capabilities of the software and if such third party licensors do not continue to develop their products, the development of our solutions to meet the requirements of our customers and potential customers could be adversely affected.
 
Our use of open source and third-party software could impose unanticipated conditions or restrictions on our ability to commercialize our solutions.
 
We incorporate open source software into our workflow solutions platforms and other software solutions. Open source software is accessible, usable and modifiable by anyone, provided that users and modifiers abide by certain licensing requirements. Under certain conditions, the use of some open source code to create derivative code may obligate us to make the resulting derivative code available to others at no cost. The circumstances under which our use of open source code would compel us to offer derivative code at no cost are subject to varying judicial interpretations, and we cannot guarantee that a court would not require certain of our core technology be made available as open source code. The use of such open source code may also ultimately require us to take remedial action, such as replacing certain code used in our products, paying a royalty to use some open source code, making certain proprietary source code available to others or discontinuing certain products, any of which may divert resources away from our development efforts.
 
We may also find that we need to incorporate certain proprietary third-party technologies, including software programs, into our products in the future. Licenses to relevant third-party technologies may not be available to us on commercially reasonable terms, or at all. Therefore, we could face delays in product releases until equivalent technology can be identified, licensed or developed and integrated into our current products. Such delays could materially adversely affect our business, operating results and financial condition.
 
Our ability to expand our business depends on our ability to effectively manage our domestic and offshore production capacity, which we may not be able to do.
 
Our success depends, in part, upon our ability to effectively manage our domestic and offshore production capacity, including our ability to attract and retain qualified MTs and MEs who can provide accurate medical transcription. We must also effectively manage our offshore transcription labor pool, which is currently located in India. If the productivity of our Indian employees does not outpace any increase in wages, our profits could suffer. Because medical transcription is a skilled position in which experience is valuable, we require that our MTs and MEs have substantial experience or receive substantial training before being hired. Competition may force us to increase the compensation and benefits paid to our MTs and MEs, which could reduce our operating margins and profitability.


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If we fail to comply with contractual obligations and applicable laws and regulations governing the handling of patient identifiable medical information, we could suffer material losses or be adversely affected by exposure to material penalties and liabilities.
 
As part of the operation of our business, our customers provide us with certain patient identifiable medical information. Although many regulatory and governmental requirements do not directly apply to our operations, we and our hospital and other healthcare provider customers must comply with a variety of requirements related to the handling of patient information, including laws and regulations protecting the privacy, confidentiality and security of protected health information, or PHI. Most of our customers are covered entities under the Health Insurance Portability and Accountability Act of 1996, or HIPAA, and, in many of our relationships, we function as a business associate. The provisions of HIPAA, require our customers to have business associate agreements with us under which we are required to appropriately safeguard the PHI we create or receive on their behalf. Further, we and our customers are required to comply with HIPAA security regulations that require us and them to implement certain administrative, physical and technical safeguards to ensure the confidentiality, integrity and availability of electronic PHI, or EPHI. We are required by regulation and contract to protect the security of EPHI that we create, receive, maintain or transmit for our customers consistent with these regulations. To comply with our regulatory and contractual obligations, we may have to reorganize processes and invest in new technologies. We also are required to train personnel regarding HIPAA requirements. If we, or any of our MTs, MEs or subcontractors, are unable to maintain the privacy, confidentiality and security of the PHI that is entrusted to us, we and/or our customers could be subject to civil and criminal fines and sanctions and we could be found to have breached our contracts with our customers.
 
We are bound by business associate agreements with covered entities that require us to use and disclose PHI in a manner consistent with HIPAA in providing services to those covered entities. The HITECH Act, which was enacted into law on February 17, 2009 as part of the American Recovery and Reinvestment Act of 2009, or ARRA, enhances and strengthens the HIPAA privacy and security standards and makes certain provisions applicable to “business associates” of covered entities. As of February 17, 2010, some provisions of HIPAA apply directly to us. In addition, the HITECH Act creates new security breach notification requirements. The direct applicability of the new HIPAA Privacy and Security provisions will require us to incur additional costs and may restrict our business operations. In addition, these new provisions will result in additional regulations and guidance issued by the United States Department of Health and Human Services and will be subject to interpretation by various courts and other governmental authorities, thus creating potentially complex compliance issues for us and our customers.
 
As of February 17, 2010, we are directly subject to HIPAA’s criminal and civil penalties for breaches of our privacy and security obligations.
 
Security and privacy breaches in our systems may damage customer relations and inhibit our growth.
 
The uninterrupted operation of our hosted solutions and the confidentiality and security of third-party information is critical to our business. Any failures or perceived failures in our security and privacy measures could have a material adverse effect on our financial position and results of operations. If we are unable to protect, or our customers perceive that we are unable to protect, the security and privacy of our electronic information, our growth could be materially adversely affected. A security or privacy breach may:
 
  •  cause our customers to lose confidence in our solutions;
 
  •  harm our reputation;
 
  •  expose us to liability; and
 
  •  increase our expenses from potential remediation costs.
 
While we believe that we use proven applications designed for data security and integrity to process electronic transactions, there can be no assurance that our use of these applications will be sufficient to address changing market conditions or the security and privacy concerns of existing and potential customers.


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Our business depends on the reliable and secure operation of our computer hardware, software, Internet applications and data centers.
 
A substantial portion of our business involves the transfer of large amounts of data to and from our workflow platforms. These workflow platforms, and their underlying technologies, are designed to operate and to be accessible by our customers 24 hours a day, seven days a week. Network and information systems, the Internet and other technologies are critical to our business activities. We have periodically experienced short term outages with our workflow platforms that have not significantly disrupted our business. However, a long term outage could adversely affect our ability to provide service to our customers.
 
We also perform data center and/or hosting services for certain customers, including the storage of critical patient and administrative data. Failure of public power and backup generators, impairment of telecommunications lines, a “concerted denial of service cyber attack,” damage (environmental, accidental, intentional or pandemic) to the buildings, the equipment inside the buildings housing our data centers, the customer data contained therein and/or the personnel trained to operate such facilities could cause a disruption in operations and negatively impact customers who depend on us for data center and system support services. Any interruption in operations at our data centers and/or customer support facilities could damage our reputation, cause us to lose existing clients, hurt our ability to obtain new customers, result in revenue loss, create potential liabilities for our customers and us and increase insurance and other operating costs.
 
Recent and proposed legislation and possible negative publicity may impede our ability to utilize offshore production capabilities.
 
Certain state laws that have recently been enacted and bills introduced in recent sessions of the U.S. Congress seek to restrict the transmission of personally identifiable information regarding a U.S. resident to any foreign affiliate, subcontractor or unaffiliated third party without adequate privacy protections or without providing notice of the transmission and an opportunity to opt out. Some of the proposals would require patient consent. If enacted, these proposed laws would impose liability on healthcare businesses arising from the improper sharing or other misuse of personally identifiable information. Some proposals would create a private civil cause of action that would allow an injured party to recover damages sustained as a result of a violation of the new law. A number of states have also considered, or are in the process of considering, prohibitions or limitations on the disclosure of medical or other information to individuals or entities located outside of the U.S. Further, as a result of concerns regarding the possible misuse of personally identifiable information, some of our customers have contractually limited our ability to use MTs and MEs located outside of the U.S. The effect of these proposals would be to limit our ability to utilize our lower-cost offshore production facilities for affected customers, which could adversely affect our operating margins.
 
Any change in legislation, regulation or market practices in the United States affecting healthcare or healthcare insurance may materially adversely affect our business and results of operations.
 
Over the past twenty years the U.S. healthcare industry has experienced a variety of regulatory and market driven changes to how it is operated and funded. Further changes, whether by government policy shift, insurance company changes or otherwise, may happen, and any such changes may adversely affect the U.S. healthcare information and services market. As business process outsourcing and “off-shoring” have grown in recent years, concerns have also grown about the impact of these phenomena on jobs in the United States. These concerns could drive government policy in a way which is disadvantageous to us. Further, if government regulation or market practices leads to fewer individuals seeking medical treatment, we could experience a decline in our processed volumes.
 
Our business, financial condition and results of operations could be adversely affected by the political and economic conditions in India.
 
A significant portion of our operations is located in India. Multiple factors relating to our Indian operations could have a material adverse effect on our business, financial condition and results of operations. These factors include:
 
  •  changes in political, regulatory, legal or economic conditions;
 
  •  governmental actions, such as restrictions on the transfer or repatriation of funds and foreign investments;


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  •  civil disturbances, including terrorism or war;
 
  •  political instability;
 
  •  public health emergencies;
 
  •  changes in employment practices and labor standards;
 
  •  local business and cultural factors that differ from our customary standards and practices; and
 
  •  changes in tax laws.
 
In addition, the Indian economy may differ favorably or unfavorably from other economies in several respects, including the growth rate of GDP, the rate of inflation, resource self-sufficiency and balance of payments position. The Indian government has traditionally exercised and continues to exercise a significant influence over many aspects of the Indian economy. Further actions or changes in policy, including taxation, of the Indian central government or the respective Indian state governments could have a significant effect on the Indian economy, which could adversely affect private sector companies, market conditions and the success of our operations.
 
U.S. and Indian transfer pricing regulations require that any international transactions involving associated enterprises are undertaken at an arm’s length price. Applicable income tax authorities review our tax returns and if they determine that the transfer prices we have applied are not appropriate, we may incur increased tax liabilities, including accrued interest and penalties, which would cause our tax expense to increase, possibly materially, thereby materially reducing our profitability and cash flows. Indian tax authorities reviewed our transfer pricing practices at Spheris India Pvt. Ltd. for tax years ended March 2004 and 2005, prior to our ownership of Spheris, and concluded that the transfer price was not at arms’ length. They assessed additional taxes for these years, which we have paid or fully reserved. However, we continue to dispute this assessment and the matter is currently under appeal.
 
We are exposed to fluctuations of the value of the Indian rupee against the U.S. dollar, which could adversely affect our operations.
 
Although our accounts are prepared in U.S. dollars, much of our operations are carried out in India with payments to staff and suppliers made in Indian Rupees. The exchange rate between the Indian Rupee and the U.S. dollar has changed substantially and could fluctuate in the future. Movements in the rate of exchange between the Indian Rupee and the U.S. dollar could result in increases or decreases in our costs and earnings, and may also affect the book value of our assets located outside the United States and the amount of our equity.
 
We are highly dependent on certain key personnel, and the loss of any or all of these key personnel may have an adverse impact upon future performance.
 
Our operations and future success are dependent upon the existence and expertise in this sector of certain key personnel. The loss of services of any of these individuals for any reason or our inability to attract suitable replacements would have a material adverse effect on the financial condition of our business and operations.
 
We have grown, and may continue to grow, through acquisitions, which could dilute existing stockholders and could involve substantial integration risks.
 
As part of our business strategy, we have in the past acquired, and expect to continue to acquire, other businesses and technologies. We may issue equity securities for future acquisitions, which would dilute existing stockholders, perhaps significantly depending on the terms of the acquisition. We may also incur additional debt in connection with future acquisitions, which may place additional restrictions on the ability to operate the business. Furthermore, prior acquisitions have required substantial integration and management efforts. Acquisitions involve a number of risks, including:
 
  •  difficulty in integrating the operations and personnel of the acquired businesses, including different and complex accounting and financial reporting systems;
 
  •  potential disruption of ongoing business and distraction of management;
 
  •  potential difficulty in successfully implementing, upgrading and deploying in a timely and effective manner new operational information systems and upgrades of finance and accounting systems;


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  •  difficulty in incorporating acquired technology and rights into products and technology;
 
  •  unanticipated expenses and delays in completing acquired development projects and technology integration;
 
  •  management of geographically remote offices and operations;
 
  •  impairment of relationships with partners and customers;
 
  •  customers delaying purchases or seeking concessions pending resolution of integration between existing and newly acquired services or technology platforms;
 
  •  entering markets or types of businesses in which management has limited experience; and
 
  •  potential loss of customers or key employees of the acquired company.
 
As a result of these and other risks, we may not realize anticipated benefits from acquisitions. Any failure to achieve these benefits or failure to successfully integrate acquired businesses and technologies could materially and adversely affect our business and results of operations.
 
We will be subject to additional regulatory compliance requirements, including section 404 of the Sarbanes-Oxley Act of 2002, as a result of this offering. If we fail to maintain an effective system of internal controls, our reputation and our business could be harmed.
 
As a U.S. public company, our ongoing compliance with various rules and regulations, including the Sarbanes-Oxley Act of 2002, will increase our legal and finance compliance costs and will make some activities more time-consuming and costly. These rules and requirements may be modified, supplemented or amended from time to time. Implementing these changes may take a significant amount of time and may require specific compliance training of our personnel. For example, Section 404 of the Sarbanes-Oxley Act requires that our management report on, and our independent auditors attest to, the effectiveness of our internal control over financial reporting in our annual reports filed with the SEC. Section 404 compliance may divert internal resources and will take a significant amount of time and effort to complete. We may not be able to successfully complete the procedures and certification and attestation requirements of Section 404 by the time we will be required to do so. If we fail to do so, or if in the future our Chief Executive Officer, Chief Financial Officer or independent registered public accounting firm determines that our internal controls over financial reporting are not effective as defined under Section 404, we could be subject to sanctions or investigations by The NASDAQ Global Market, the SEC, or other regulatory authorities. As a result, investor perceptions of our company may suffer, and this could cause a decline in the market price of our stock. Irrespective of compliance with these rules and regulations, including the requirements under the Sarbanes-Oxley Act, any failure of our internal controls could have a material adverse effect on our stated results of operations and harm our business and reputation. If we are unable to implement these changes effectively or efficiently, it could harm our operations, financial reporting or financial results and could result in an adverse opinion on internal controls from our independent auditors.
 
The historical and unaudited pro forma financial information included elsewhere in this prospectus may not be representative of our results as a combined company after the Spheris Acquisition, and accordingly, you have limited financial information on which to evaluate the combined company and your investment decision.
 
We and Spheris operated as separate companies prior to the Spheris Acquisition. We have had no prior history as a combined company and our operations have not previously been managed on a combined basis. The pro forma financial information included elsewhere in this prospectus, which was prepared in accordance with Article 11 of the SEC’s Regulation S-X, is presented for informational purposes only and is not necessarily indicative of the financial position or results of operations that would have actually occurred had the Spheris Acquisition been completed at or as of the dates indicated, nor is it indicative of the future operating results or financial position of the combined company. The unaudited pro forma condensed combined consolidated statement of operations does not reflect future events that may occur after the Spheris Acquisition, including the potential realization of operating cost savings (synergies) or restructuring activities or other costs related to the planned integration of Spheris, and do not consider potential impacts of current market conditions on revenues, expense efficiencies or asset dispositions. The pro forma financial information presented in this prospectus is based in part on certain


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assumptions regarding the Spheris Acquisition that we believe are reasonable under the circumstances. We cannot assure you that our assumptions will prove to be accurate over time.
 
Our ability to use our net operating loss carryforwards may be limited.
 
As of December 31, 2009, we had approximately $130.0 million of federal net operating loss, or NOL, carryforwards to offset future taxable income, which will begin to expire in 2026 if not utilized and approximately $250.0 million of state NOLs. Under the relevant federal and state tax provisions currently in effect, certain substantial cumulative changes in our ownership may further limit the amount of NOL carryforwards that can be utilized annually in the future to offset taxable income. Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, imposes limitations on a company’s ability to use NOL carryforwards if such company experiences a more-than-50-percent ownership change, or an ownership change, over a three-year testing period. We believe that, as a result of this offering or as a result of future issuances of capital stock, it is possible that such an ownership change may occur. Although we do not currently anticipate a significant limitation as a result of an ownership change in connection with this offering, if we experience an ownership change in connection with or subsequent to this offering, our ability to use our United States federal NOL carryforwards in any future periods may be restricted. If we are limited in our ability to use our NOL carryforwards, we will pay more taxes than if we were able to utilize such NOL carryforwards fully. As a result, any inability to use our NOL carryforwards could adversely affect our financial condition and results of operations.
 
We may not own 100% of the stock of certain of our subsidiaries.
 
Unless the MedQuist Exchange closes and the Exchange Offer is completed at the highest acceptance level, we will not wholly own MedQuist Inc., and our ability to gain 100% ownership of MedQuist Inc. could be adversely affected by provisions of New Jersey corporate law that limit certain business combinations between corporations such as MedQuist Inc. organized in New Jersey and their significant shareholders. If we do not wholly own MedQuist Inc., our interests in MedQuist Inc. could conflict with the interests of MedQuist Inc.’s remaining noncontrolling stockholders. Also, MedQuist Inc. may need to seek the consent of its noncontrolling stockholders and/or independent members of its board of directors in order to take certain actions, and those consents may not be forthcoming. Our costs could also be adversely affected by our inability to fully integrate MedQuist Inc. into our consolidated operations and management structure.
 
Risks Related to Our Common Stock
 
Our stock price may fluctuate significantly.
 
An active U.S. public market for our common stock may not develop or be sustained after the completion of this offering and while our stock is currently listed on the Alternative Investment Market of the London Stock Exchange, or AIM, we intend to delist from AIM upon the completion of this offering or shortly thereafter. We will negotiate and determine the offering price of the shares offered hereby with the underwriters based on several factors. This price may vary from the market price of our common stock after this offering. You may be unable to sell your shares of common stock at or above the initial offering price. The stock market, particularly in recent years, has experienced significant volatility, and the volatility of stocks often does not relate to the operating performance of the companies represented by the stock. Factors that could cause volatility in the market price of our common stock include:
 
  •  market conditions affecting our customers’ businesses, including the level of mergers and acquisitions activity;
 
  •  the loss of any major customers or the acquisition of new customers for our services;
 
  •  announcements of new services or functions by us or our competitors;
 
  •  actual and anticipated fluctuations in our quarterly operating results;
 
  •  rumors relating to us or our competitors;
 
  •  actions of stockholders, including sales of shares by our directors and executive officers;


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  •  additions or departures of key personnel; and
 
  •  developments concerning current or future strategic alliances or acquisitions.
 
These and other factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against us that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management.
 
Our largest stockholder will exercise significant control over our company.
 
After this offering, affiliates of SAC PCG will beneficially own in the aggregate shares representing approximately  % of our outstanding capital stock. Furthermore, we have entered into a Stockholders Agreement with affiliates of SAC PCG pursuant to which they will have the right to nominate to our board three, two or one directors for so long as they own at least 20%, 10% or 5% of our voting power, respectively. This concentration of ownership of our shares and the Stockholders’ Agreement could delay or prevent proxy contests, mergers, tender offers, open-market purchase programs or other purchases of shares of our common stock that might otherwise give you the opportunity to realize a premium over the then-prevailing market price of our common stock. This concentration of ownership may also adversely affect our stock price.
 
Future sales of shares by existing stockholders could cause our stock price to decline.
 
If our existing stockholders sell, or indicate an intent to sell, substantial amounts of our common stock in the public market after the 180-day contractual lock-up (if applicable) and other applicable legal restrictions on resale discussed in this prospectus lapse, the trading price of our common stock could decline significantly. Not all of our existing stockholders are subject to a contractual lock-up. Upon the completion of this offering, and, after giving effect to (i) the MedQuist Exchange, assuming it is consummated without any adjustments to the exchange ratio, (ii) the Exchange Offer, assuming a full exchange and (iii) the issuance of 4.5 million shares of our common stock pursuant to the Consulting Services Agreement, we will have outstanding           shares of common stock, assuming no exercise of outstanding options. Of these shares,           shares of common stock, plus any shares sold pursuant to the underwriters’ option to purchase additional shares, will be immediately freely tradable, without restriction, in the public market. Jefferies & Company, Inc. may, in its sole discretion, permit our officers, directors, employees and current stockholders to sell shares prior to the expiration of the lock-up agreements. We cannot predict the effect, if any, that public sales of these shares or the availability of these shares for sale will have on the market price of our common stock.
 
After the lock-up agreements pertaining to this offering expire, an additional           shares will be eligible for sale in the public market. In addition, the shares subject to outstanding options under our equity incentive plans and the shares reserved for future issuance under our equity incentive plans will become eligible for sale in the public market in the future, subject to certain legal and contractual limitations. Moreover, 180 days after the completion of this offering, holders of approximately      shares of our common stock will have the right to require us to register these shares under the Securities Act of 1933, as amended, pursuant to a registration rights agreement. If our existing stockholders sell substantial amounts of our common stock in the public market, or if the public perceives that such sales could occur, this could have an adverse impact on the market price of our common stock, even if there is no relationship between such sales and the performance of our business.
 
Provisions of Delaware law and our charter documents could delay or prevent an acquisition of our company, even if the acquisition would be beneficial to our stockholders, and could make it more difficult for you to change management.
 
Provisions of Delaware law and our certificate of incorporation and by-laws, which will be effective upon the completion of this offering, may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a


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premium for their shares. These provisions may also prevent or delay attempts by stockholders to replace or remove our current management or members of our board of directors. These provisions include:
 
  •  a classified board of directors;
 
  •  limitations on the removal of directors;
 
  •  advance notice requirements for stockholder proposals and nominations;
 
  •  the inability of stockholders to act by written consent or to call special meetings;
 
  •  the ability of our board of directors to make, alter or repeal our by-laws; and
 
  •  the authority of our board of directors to issue preferred stock with such terms as our board of directors may determine.
 
In addition, upon the closing of this offering, we will be subject to provisions of our certificate of incorporation similar to Section 203 of the Delaware General Corporation Law, which, subject to certain exceptions for our largest stockholder and its affiliates, limit business combination transactions with stockholders of 15% or more of our outstanding voting stock that our board of directors has not approved. These provisions and other similar provisions make it more difficult for stockholders or potential acquirers to acquire us without negotiation. These provisions may apply even if some stockholders may consider the transaction beneficial to them.
 
As a result, these provisions could limit the price that investors are willing to pay in the future for shares of our common stock. These provisions might also discourage a potential acquisition proposal or tender offer, even if the acquisition proposal or tender offer is at a premium over the then current market price for our common stock.
 
If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common stock, the price of our common stock could decline.
 
The trading market for our common stock will rely in part on the research and reports, if any, that equity research analysts publish about us and our business. The price of our stock could decline if one or more securities analysts downgrade our stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.
 
We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.
 
We do not intend to pay any cash dividends on our common stock for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth, including growth through acquisitions. The payment of any future dividends will be determined by the board of directors in light of conditions then existing, including our earnings, financial condition and capital requirements, business conditions, corporate law requirements and other factors. See “Dividend Policy.”
 
We may apply the proceeds of this offering to uses that do not improve our operating results or increase the value of your investment.
 
We currently intend to use a substantial portion of the net proceeds from this offering for general corporate purposes, including working capital and other general corporate purposes. We may also use a portion of the net proceeds for the execution of our strategic plans, either through the acquisition of companies or by other means that we believe will complement our business. However, we do not have more specific plans for the net proceeds from this offering. Our board of directors and management will have broad discretion in how we use the net proceeds of this offering and may spend the proceeds in a manner that our stockholders do not deem desirable. These proceeds could be applied in ways that do not improve our operating results or increase the value of your investment.


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Special Note Regarding Forward-Looking Statements
 
This prospectus contains “forward-looking statements” within the meaning of the federal securities laws. All statements other than statements of historical facts included in this prospectus, including statements regarding our future financial position, economic performance and results of operations, as well as our business strategy, and projected costs and plans and objectives of management for future operations, and the information referred to under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology, such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe” or “continue” or similar terminology.
 
Such forward-looking statements include but are not limited to statements regarding:
 
  •  potential synergies from the acquisition of Spheris;
 
  •  our ability to adopt and integrate new technologies;
 
  •  our expectation as to the future growth of the healthcare industry;
 
  •  increases in the productivity of MTs and MEs in order to outpace the decline in prices for medical transcription;
 
  •  customer retention;
 
  •  potential benefits of our size and scale;
 
  •  our ability to develop and adopt new technologies;
 
  •  our ability to gain new customers;
 
  •  our ability to increase sales;
 
  •  our intended use of proceeds from this offering; and
 
  •  our ability to consummate the MedQuist Exchange and the Exchange Offer.
 
The preceding list is not intended to be an exhaustive list of all of our forward-looking statements. Forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, you are cautioned that any forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Although we believe that the expectations reflected in our forward-looking statements are reasonable as of the date made, expectations may prove to have been materially different from the results expressed or implied by such forward-looking statements. Unless otherwise required by law, we also disclaim any obligation to update our view of any such risks or uncertainties or to announce publicly the result of any revisions to the forward-looking statements made in this prospectus.
 
All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements. You should evaluate all forward-looking statements made in this prospectus in the context of these risks and uncertainties.


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Corporate Reorganization
 
Recapitalization Transactions
 
On October 1, 2010, MedQuist Inc., as borrower, and our subsidiaries, MedQuist Transcriptions, Ltd. and CBay Inc., as co-borrowers and guarantors, and we and certain of our other subsidiaries, as guarantors, entered into the Senior Secured Credit Facility with General Electric Capital Corporation, as administrative agent, and the lenders party thereto, providing for (i) a $200.0 million Term Loan and (ii) a $25.0 million revolving credit facility. On September 30, 2010, MedQuist Inc., as issuer, and our subsidiaries, MedQuist Transcriptions, Ltd. and CBay Inc., as co-issuers and guarantors, and we and certain of our other subsidiaries, as guarantors, entered into a Note Purchase Agreement with BlackRock Kelso Capital Corporation, PennantPark Investment Corporation, Citibank, N.A., and THL Credit, Inc. providing for the issuance of $85.0 million aggregate principal amount of 13% Senior Subordinated Notes due 2016. Interest on the Senior Subordinated Notes is payable in quarterly installments at the issuers’ option at either (i) 13% in cash or (ii) 12% in cash plus 2% in the form of additional Senior Subordinated Notes. See “Description of Indebtedness” for a more detailed description of the Senior Secured Credit Facility and the Senior Subordinated Notes.
 
The closing and funding of the Term Loan and the Senior Subordinated Notes occurred on October 14, 2010. MedQuist Inc. used the proceeds to repay $80.0 million of indebtedness under its Acquisition Credit Facility, to repay $13.6 million of indebtedness under the Acquisition Subordinated Promissory Note it issued in connection with the Spheris Acquisition and to pay a $176.5 million special dividend to its stockholders. We received $122.6 million of this special dividend and used $104.1 million to redeem our 6% Convertible Notes, and $4.1 million to extinguish certain other lines of credit.
 
MedQuist Exchange
 
On September 30, 2010, we entered into an Exchange Agreement with certain of MedQuist Inc.’s noncontrolling stockholders that currently hold in the aggregate approximately 13% of MedQuist Inc.’s outstanding shares. Pursuant to the Exchange Agreement, those MedQuist Inc. stockholders will receive 4.2459 shares of our common stock for each MedQuist Inc. share, subject to certain adjustments, including adjustments related to MedQuist Inc.’s net debt at the closing of the MedQuist Exchange, and will enter into a stockholders agreement with us that, among other things, provides them with registration rights and contains provisions regarding their voting in the election of our directors. Every $10.0 million decrease below $304.0 million in MedQuist Inc.’s net debt at the closing of the MedQuist Exchange would increase the exchange ratio by approximately 0.05 shares of our common stock. The closing under the Exchange Agreement is conditioned upon, among other conditions, our completion of an initial public offering, the listing of our shares on The NASDAQ Global Market and our reincorporation in Delaware and would increase our ownership in MedQuist Inc. from 69.5% to 82.5%.
 
Exchange Offer
 
On October 18, 2010, we filed with the SEC a registration statement on Form S-4 offering those noncontrolling MedQuist Inc. stockholders that did not participate in the MedQuist Exchange shares of our common stock in exchange for their MedQuist Inc. shares. Assuming the MedQuist Exchange is consummated, a full exchange in the Exchange Offer would increase our ownership in MedQuist Inc. from 82.5% to 100.0%. We can give no assurance regarding the level of participation in the Exchange Offer.
 
Reincorporation and Share Conversion
 
Immediately prior to the consummation of this offering, we intend to convert from a British Virgin Islands company to a Delaware corporation. In connection with that conversion, we may adjust the number of our shares outstanding through a reverse share split or similar action. The conversion and any such reverse share split or similar action will result in no change to our stockholders’ relative ownership interests in us.
 
We also intend to delist our common stock from AIM upon completion of this offering or shortly thereafter and to apply to list our shares on The NASDAQ Global Market.


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Use of Proceeds
 
We estimate that the net proceeds from this offering, after deducting the underwriting discounts and commissions and estimated offering expenses, will be approximately $      million, assuming an initial public offering price of $      per share, the midpoint of the estimated price range set forth on the cover page of this prospectus. We intend to use the net proceeds from this offering for working capital and other general corporate purposes. We may also use a portion of the net proceeds for the acquisition of complementary companies or businesses, although we currently do not have any acquisition or investment planned. We will not receive any proceeds from the sale of shares of common stock by the selling stockholders if the underwriters exercise the over-allotment option.
 
Dividend Policy
 
We currently expect to retain future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Payments of future dividends, if any, will be at the sole discretion of our board of directors after taking into account various factors, including our business, operating results and financial condition, current and anticipated cash needs, plans for expansion and any legal or contractual limitations on our ability to pay dividends. Our ability to pay dividends on our common stock is limited by the covenants of the agreements governing our indebtedness and may be further restricted by any future debt or preferred securities. See “Description of Indebtedness.”


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Capitalization
 
The following table sets forth our capitalization as of June 30, 2010:
 
  •  on an actual basis;
 
  •  on a pro forma basis to give effect to the Corporate Reorganization and the issuance of stock pursuant to the Consulting Services Agreement; and
 
  •  on a pro forma as adjusted basis to give effect to the completion of this offering and the application of the net proceeds as described under “Use of Proceeds.”
 
You should read this table together with the information contained in this prospectus, including “Corporate Reorganization,” “Use of Proceeds,” “Unaudited Pro Forma Condensed Combined Financial Information,” “Selected Consolidated Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes thereto included elsewhere in this prospectus.
 
                           
 
    As of June 30, 2010  
                  Pro Forma As
 
($ in thousands)   Actual       Pro Forma(5)     Adjusted  
 
Cash and cash equivalents(1)
  $ 22,457       $ 25,889     $        
                         
Short-term debt(2)
    41,527         23,112          
Long-term debt
                         
Term loans
    1,019                  
Senior Secured Credit Facility
    60,000         185,000          
Senior Subordinated Notes
    13,570         85,000          
6% Convertible Notes
    96,419                  
Other debt(3)
    1,557         1,861          
                         
Total debt
    214,092         294,973          
                         
Equity
                         
CBaySystems Holdings Limited stockholders’ equity
                         
Common stock; 1 billion shares authorized, 158.2 million shares issued and outstanding (actual); 1 billion shares authorized, 211.4 million shares issued and outstanding (pro forma);           shares authorized,           shares issued and outstanding (pro forma as adjusted)
    15,821         21,142          
Additional paid in capital
    137,333         115,195          
Accumulated deficit
    (115,133 )       (128,538 )        
Accumulated other comprehensive loss
    (849 )       (849 )        
                         
Total CBaySystems Holdings Limited stockholders’ equity
    37,172         6,950          
Noncontrolling interests
    37,762         405          
                         
Total equity
    74,934         7,355          
                         
Total capitalization(4)
  $ 289,026       $ 302,328     $    
                         
 
(1) Pro forma as adjusted gives effect to a $5.0 million payment to SAC PCG in connection with the Corporate Reorganization.
 
(2) Short-term debt includes amount outstanding under our short-term credit facilities, the current portion of long-term borrowings and the current portion of capital lease obligations.
 
(3) Other debt includes capital lease obligations and indebtedness outstanding under our credit agreement with ICICI Bank and with Induslnd Bank.
 
(4) A $1.00 increase (decrease) in the assumed initial public offering price of $      per share would increase (decrease) total stockholders’ capital and total capitalization by $      million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and estimated expenses payable by us.
 
(5) Pro forma basis reflects (i) the $200.0 million borrowings under the Term Loan, (ii) the issuance of $85.0 million of Senior Subordinated Notes, (iii) our repayment of the 6% Convertible Notes, (iv) the issuance of approximately 20.3 million shares of our common stock in the MedQuist Exchange, (v) the issuance of approximately 28.4 million shares of our common stock in the Exchange Offer, and (vi) the issuance of approximately 4.5 million shares of our common stock pursuant to the Consulting Services Agreement.


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Unaudited Pro Forma Condensed Combined Financial Information
 
The following unaudited pro forma condensed consolidated financial information includes our unaudited pro forma condensed combined statements of operations for the year ended December 31, 2009 and the six months ended June 30, 2010 and our unaudited pro forma condensed consolidated balance sheet as of June 30, 2010. The unaudited pro forma condensed combined statements of operations and the unaudited pro forma condensed consolidated balance sheet have been derived from the historical consolidated financial information of us and Spheris, which are included elsewhere in this prospectus.
 
The pro forma combined statements of operations and other operating data for the year ended December 31, 2009 and the six months ended June 30, 2010 give effect to the following transactions as if they had occurred on January 1, 2009:
 
  •  the Spheris Acquisition and the incurrence by MedQuist Inc. of $113.6 million of debt to finance the Spheris Acquisition;
 
  •  the incurrence by MedQuist Inc. of $285.0 million of indebtedness under the Senior Secured Credit Facility and Senior Subordinated Notes, the simultaneous repayment of $90.0 million of indebtedness under the Acquisition Credit Facility, the repayment of $13.6 million of indebtedness under the Acquisition Subordinated Promissory Notes, the payment of a $176.5 million special dividend to MedQuist Inc.’s stockholders, of which we received $122.6 million and the noncontrolling stockholders of MedQuist Inc. received $53.9 million, and the repayment by us, using the proceeds of such dividend, of $104.1 million to extinguish our 6% Convertible Notes including a $7.7 million premium on early prepayment and $4.1 million under certain of our other lines of credit;
 
  •  the issuance of 20.3 million shares of our common stock in exchange for 4.8 million shares of MedQuist Inc. common stock pursuant to the terms of the Exchange Agreement with certain noncontrolling stockholders of MedQuist Inc., assuming the MedQuist Exchange is consummated without any adjustments, which will increase our ownership in MedQuist Inc. from 69.5% to 82.5%; 
 
  •  the issuance of 4.5 million shares of our common stock pursuant to the Consulting Services Agreement; and
 
  •  the issuance of 28.4 million shares of our common stock in exchange for 6.7 million shares of MedQuist Inc. common stock pursuant to the terms of the Exchange Offer, assuming an exchange ratio equal to the exchange ratio applicable under the Exchange Agreement and a full exchange. This would increase our ownership in MedQuist Inc. from 82.5% to 100%.
 
The pro forma combined statements of operations and other operating data for the year ended December 31, 2009 and the six months ended June 30, 2010 do not give effect to the following:
 
  •  the impact on net revenues from volume declines resulting from Spheris’ customer terminations prior to the Spheris Acquisition. The pro forma net revenues for the year ended December 31, 2009 and for the six months ended June 30, 2010 include $24.6 million and $2.3 million, respectively, of net revenues associated with such terminations; and
 
  •  the full impact on Adjusted EBITDA of cost savings and synergies resulting from the Spheris Acquisition, which we have implemented since the Spheris Acquisition and expect to yield $7.0 million of cost savings in the fourth quarter of 2010, representing an annualized benefit of $28.0 million. Our results for the six months ended June 30, 2010 reflect $0.9 million of such cost savings.
 
The pro forma balance sheet data as of June 30, 2010 gives effect to the Corporate Reorganization, and the shares of our common stock issuable pursuant to the Consulting Services Agreement, as if they occurred as of June 30, 2010.
 
The pro forma as adjusted balance sheet data as of June 30, 2010 also gives effect to the issuance of        shares of common stock in this offering at an assumed initial public offering price of $      per share, the midpoint of the price range shown on the cover of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us as if such transaction occurred as of June 30, 2010.
 
Our historical consolidated financial information has been adjusted in the unaudited pro forma condensed combined financial information to give effect to pro forma events that are (1) directly attributable to the Spheris Acquisition, the Corporate Reorganization the shares of our common stock issuable pursuant to the Consulting


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Services Agreement, (2) factually supportable and (3) with respect to the statements of operations, expected to have a continuing impact on the combined results. The pro forma information does not reflect revenue opportunities and cost savings that may be realized after the Spheris Acquisition. The pro forma financial information also does not reflect expenses related to integration activity that may be incurred by us in connection with the Spheris Acquisition.
 
The pro forma data is based upon available information and certain assumptions that we believe are reasonable. The pro forma data is for informational purposes only and does not purport to represent what our results of operations or financial position actually would have been if such events had occurred on the dates specified above and does not purport to project the results of operations or financial position for any future period or date. The unaudited pro forma condensed combined statements of operations and the unaudited pro forma condensed consolidated balance sheet should be read in conjunction with the accompanying notes, our historical consolidated financial statements, and related notes included elsewhere in this prospectus as adjusted for the acquisition of Spheris using the acquisition method of accounting.
 
You should read the following unaudited pro forma condensed consolidated financial information with our consolidated financial statements and related notes included elsewhere in this prospectus and the information under the section “Capitalization,” “Selected Consolidated Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus.


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CBaySystems Holdings Limited and Subsidiaries
Unaudited Pro Forma Condensed Combined Statement of Operations
For the year ended December 31, 2009
(In thousands, except per share amounts)
 
                                                                 
                            Recapitalization
                   
                            Transactions
                   
    Historical     Spheris
    Spheris
    and MedQuist
    Pro Forma
    Exchange
       
    CBaySystems
          Acquisition
    Acquisition
    Exchange
    Before
    Offer
       
    Holdings
          Pro Forma
    Pro Forma
    Pro Forma
    Exchange
    Pro Forma
       
    Limited     Spheris     Adjustments     Combined     Adjustments     Offer     Adjustments     Pro Forma  
 
Net revenues
  $ 371,768     $ 156,596           $ 528,364           $ 528,364           $ 528,364  
Cost of revenues
    239,549       109,059             348,608             348,608             348,608  
                                                                 
Gross profit
    132,219       47,537             179,756             179,756             179,756  
                                                                 
Operating expenses
                                                               
Selling, general and administrative
    60,632       19,093             79,725             79,725             79,725  
Research and development
    9,604                   9,604             9,604             9,604  
Depreciation and amortization
    26,977       7,230       6,530 (a)     40,737             40,737             40,737  
Cost of legal proceedings and settlements
    14,943       1,246             16,189             16,189               16,189  
Acquisition and bankruptcy related charges
    1,246       6,961       (8,207 )(d)                              
Goodwill impairment charge
          198,872       (198,872 )(c)                              
Restructuring charges
    2,727       775             3,502             3,502             3,502  
                                                                 
Total operating expenses
    116,129       234,177       (200,549 )     149,757             149,757             149,757  
                                                                 
Operating income
    16,090       (186,640 )     200,549       29,999             29,999             29,999  
Interest expense, net
    (9,132 )     (17,439 )     6,611 (b)     (19,960 )     (11,291 )(g)     (31,251 )           (31,251 )
Equity in income of affiliated companies
    1,933                   1,933             1,933             1,933  
Other income
    11       2,125             2,136             2,136             2,136  
                                                                 
Income (loss) before income taxes and noncontrolling interests
    8,902       (201,954 )     207,160       14,108       (11,291 )     2,817             2,817  
Income tax provision (benefit)
    1,082       (14,571 )     15,204 (e)     1,715       (1,373 )(i)     342             342  
                                                                 
Net income (loss)
    7,820       (187,383 )     191,956       12,393       (9,918 )     2,475               2,475  
Less: Net income attributable to noncontrolling interests
    (7,085 )           (347 )(f)     (7,432 )     5,960 (h)     (1,472 )     1,472 (k)      
                                                                 
Net income (loss) attributable to CBaySystems Holdings Limited
  $ 735     $ (187,383 )   $ 191,609     $ 4,961     $ (3,958 )   $ 1,003     $ 1,472     $ 2,475  
                                                                 
Net income (loss) per common share attributable to CBaySystems Holdings Limited:
                                                               
Basic
  $ (0.01 )                   $ 0.01             $ 0.00             $ 0.00  
Diluted
  $ (0.01 )                   $ 0.01             $ 0.00             $ 0.00  
Weighted average shares outstanding:
                                                               
Basic
    156,116                       156,116       24,789 (h,j)     180,905       28,421 (k)     209,326  
Diluted
    156,116                       156,116       24,789 (h,j)     180,905       28,421 (k)     209,326  
 
The accompanying notes are an integral part of the unaudited pro forma condensed combined financial statements.


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CBaySystems Holdings Limited and Subsidiaries
Unaudited Pro Forma Condensed Combined Statement of Operations
For the six months ended June 30, 2010
(In thousands, except per share amounts)
 
                                                                 
                            Recapitalization
                   
                            Transactions
                   
    Historical     Spheris
    Spheris
    and MedQuist
    Pro Forma
    Exchange
       
    CBaySystems
          Acquisition
    Acquisition
    Exchange
    Before
    Offer
       
    Holdings
          Pro Forma
    Pro Forma
    Pro Forma
    Exchange
    Pro Forma
       
    Limited     Spheris     Adjustments     Combined     Adjustments     Offer     Adjustments     Pro Forma  
 
Net revenues
  $ 200,592     $ 43,371           $ 243,963           $ 243,963           $ 243,963  
Cost of revenues
    128,641       31,343             159,984             159,984             159,984  
                                                                 
Gross profit
    71,951       12,028             83,979             83,979             83,979  
                                                                 
Operating expenses
                                                               
Selling, general and administrative
    32,706       6,163             38,869             38,869             38,869  
Research and development
    5,593       192             5,785             5,785             5,785  
Depreciation and amortization
    15,068       1,850       1,992 (l)     18,910             18,910             18,910  
Cost of legal proceedings and settlements
    2,152                   2,152             2,152             2,152  
Acquisition and bankruptcy related charges
    6,045       1,730       (7,775 )(n)                              
Restructuring charges
    966                     966             966             966  
                                                                 
Total operating expenses
    62,530       9,935       (5,783 )     66,682             66,682             66,682  
                                                                 
Operating income
    9,421       2,093       5,783       17,297             17,297             17,297  
Interest expense, net
    (7,351 )     (3,459 )     139 (m)     (10,671 )     (5,645 )(q)     (16,316 )           (16,316 )
Equity in income of affiliated companies
    546                   546             546             546  
Other income (expense)
    108       (48 )           60             60             60  
                                                                 
Income (loss) before reorganization items and income taxes
    2,724       (1,414 )     5,922       7,232       (5,645 )     1,587             1,587  
Reorganization items
          (5,762 )     5,762 (n)                              
                                                                 
Income (loss) before income taxes and noncontrolling interests
    2,724       (7,176 )     11,684       7,232       (5,645 )     1,587             1,587  
Income tax provision (benefit)
    (326 )     (2,822 )     2,283 (o)     (865 )     675 (t)     (190 )           (190 )
                                                                 
Net income (loss)
    3,050       (4,354 )     9,401       8,097       (6,320 )     1,777             1,777  
Less: Net income attributable to noncontrolling interests
    (2,497 )           (952 )(p)     (3,449 )     2,927 (r)     (522 )     533 (u)     11  
                                                                 
Net income (loss) attributable to CBaySystems Holdings Limited
  $ 553     $ (4,354 )   $ 8,449     $ 4,648     $ (3,393 )   $ 1,255     $ 533     $ 1,788  
                                                                 
Net income (loss) per common share attributable to CBaySystems Holdings Limited:
                                                               
Basic
  $ (0.01 )                   $ 0.02             $ 0.01             $ 0.01  
Diluted
  $ (0.01 )                   $ 0.02             $ 0.01             $ 0.01  
Weighted average shares outstanding:
                                                               
Basic
    157,705                       157,705       24,789 (r,s)     182,494       28,421 (u)     210,915  
Diluted
    157,705                       157,705       24,789 (r,s)     182,494       28,421 (u)     210,915  
 
The accompanying notes are an integral part of the unaudited pro forma condensed combined financial statements.


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CBaySystems Holdings Limited and Subsidiaries
Unaudited Pro Forma Condensed Consolidated Balance Sheet
As of June 30, 2010
(In thousands)
 
                                         
          Recapitalization
                   
          Transactions
                   
    Historical
    and MedQuist
          Exchange
       
    CBaySystems
    Exchange
    Pro Forma
    Offer
       
    Holdings
    Pro Forma
    Before
    Pro Forma
       
    Limited     Adjustments     Exchange Offer     Adjustments     Pro Forma  
 
ASSETS
                                       
Current assets
                                       
Cash and cash equivalents
  $ 22,457     $ 3,432 (v,w,x,y)   $ 25,889           $ 25,889  
Accounts receivable, net
    72,187             72,187             72,187  
Other current assets
    19,110       604 (v)     19,714             19,714  
                                         
Total current assets
    113,754       4,036       117,790             117,790  
                                         
Property and equipment, net
    26,217             26,217             26,217  
Goodwill
    99,376             99,376             99,376  
Other intangible assets, net
    118,042             118,042             118,042  
Deferred income taxes
    2,880             2,880             2,880  
Other assets
    19,882       7,104 (v)     26,986             26,986  
                                         
Total assets
  $ 380,151     $ 11,140     $ 391,291           $ 391,291  
                                         
                                         
LIABILITIES AND EQUITY                                        
Current liabilities
                                       
Current portion of debt
  $ 41,527     $ (18,415 )(w)   $ 23,112           $ 23,112  
Accounts payable
    11,462             11,462             11,462  
Accrued expenses and other current liabilities
    40,195             40,195             40,195  
Accrued compensation
    23,906             23,906             23,906  
Deferred revenue
    8,981             8,981             8,981  
                                         
Total current liabilities
    126,071       (18,415 )     107,656             107,656  
                                         
Due to related parties
    2,162       (2,162 )(z)                  
Long term portion of debt
    172,565       99,296 (w)     271,861             271,861  
Deferred income taxes
    2,667             2,667             2,667  
Other non-current liabilities
    1,752             1,752             1,752  
                                         
Total liabilities
    305,217       78,719       383,936             383,936  
                                         
Equity
                                       
CBaySystems Holdings Limited stockholders’ equity
                                       
Common stock
    15,821       2,479 (y,z)     18,300       2,842 (aa)     21,142  
Additional paid-in capital
    137,333       (9,689 )(y,z)     127,644       (12,449 )(aa)     115,195  
Accumulated deficit
    (115,133 )     (13,405 )(v,w)     (128,538 )           (128,538 )
Accumulated other comprehensive loss
    (849 )           (849 )           (849 )
                                         
Total CBaySystems Holdings Limited stockholders’ equity
    37,172       (20,615 )     16,557       (9,607 )     6,950  
Noncontrolling interests
    37,762       (46,964 )(x,y)     (9,202 )     9,607 (aa)     405  
                                         
Total equity
    74,934       (67,579 )     7,355             7,355  
                                         
Total liabilities and equity
  $ 380,151     $ 11,140     $ 391,291           $ 391,291  
                                         
 
The accompanying notes are an integral part of the unaudited pro forma condensed consolidated balance sheet.


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CBaySystems Holdings Limited and Subsidiaries
 
Notes to Unaudited Pro Forma Condensed Combined Financial Information
 
1.  Basis of Presentation
 
The unaudited pro forma condensed combined financial information is based on our and Spheris’ historical financial information, and it is prepared and presented pursuant to the regulations of the SEC regarding pro forma financial information. The 2009 unaudited pro forma condensed combined financial information includes our audited consolidated statement of operations for the year ended December 31, 2009. Spheris’ historical financial information includes its audited consolidated statement of operations for the year ended December 31, 2009. The 2010 presentation includes our unaudited historical consolidated statement of operations for the six months ended June 30, 2010. Spheris’ historical information includes its unaudited historical consolidated statement of operations for the period January 1, 2010 through April 21, 2010, the date prior to the date of the Spheris Acquisition. The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2009 and for the six months ended June 30, 2010 also include the effects of the Corporate Reorganization and the shares of our stock issuable under the Consulting Services Agreement. The unaudited pro forma condensed consolidated balance sheet as of June 30, 2010 is our historical unaudited consolidated balance sheet as of June 30, 2010 and is adjusted as if the Corporate Reorganization and the shares of our stock issuable under the Consulting Services Agreement had occurred as of June 30, 2010.
 
The unaudited pro forma condensed combined financial information was prepared using the acquisition method of accounting under Financial Accounting Standards Board Accounting Standards Codification, or ASC, Topic 805, Business Combinations. ASC Topic 805 requires, among other things, that identifiable assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date, which is presumed to be the closing date of the Spheris Acquisition. Accordingly, the pro forma adjustments reflected in the accompanying unaudited pro forma condensed combined financial information may be materially different from the actual acquisition accounting adjustments required as of the acquisition date.
 
Under ASC Topic 820, Fair Value Measurements and Disclosures, “fair value” is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 specifies a hierarchy of valuation techniques based on the nature of the inputs used to develop the fair value measures. This is an exit price concept for the valuation of the asset or liability. In addition, market participants are assumed to be unrelated buyers and sellers in the principal or the most advantageous market for the asset or liability. Fair value measurements for an asset assume the highest and best use by these market participants. Many of these fair value measurements can be highly subjective, and it is also possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts.
 
Total acquisition-related transaction costs incurred by us are expensed in the periods in which the costs are incurred. Under ASC Topic 805, acquisition-related transaction costs (such as advisory, legal, valuation and other professional fees) are not included as components of consideration transferred but are accounted for as expenses in the periods in which the costs are incurred.
 
Reorganization items for Spheris directly relate to the process of reorganizing Spheris under voluntary Chapter 11 Bankruptcy petitions filed by Spheris and certain subsidiaries on February 3, 2010.
 
The historical consolidated financial information has been adjusted in the unaudited pro forma condensed combined financial information to give effect to pro forma events that are (1) directly attributable to the Corporate Reorganization and the shares of our stock issuable under the Consulting Services Agreement, (2) factually supportable, and (3) with respect to the statement of operations, expected to have a continuing impact on the combined results. The pro forma financial information does not reflect revenue opportunities and cost savings that we may realize after the Spheris Acquisition. No assurance can be given with respect to the estimated revenue opportunities and operating cost savings that may be realized as a result of the Spheris Acquisition. The pro forma financial information also does not reflect expenses related to integration activity or exit costs that may be incurred by us in connection with integrating the businesses.


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CBaySystems Holdings Limited and Subsidiaries
 
Notes to Unaudited Pro Forma Condensed Combined Financial Information—(Continued)
 
Certain Spheris amounts have been reclassified to conform to our presentation. These reclassifications had no effect on previously reported net income (loss). There were no material transactions between us and Spheris during the periods presented in the unaudited pro forma condensed combined financial information that would need to be eliminated.
 
2.  Description of the Spheris Acquisition
 
On April 22, 2010, we, together with our MedQuist Inc. subsidiary, completed the acquisition of substantially all of the domestic assets of Spheris and the stock of certain of its foreign affiliates, pursuant to the terms of the Stock and Asset Purchase Agreement entered into on April 15, 2010. The purchase price consisted of approximately $98.8 million of cash and MedQuist Inc.’s issuance of a promissory note, net of discount, totaling $13.6 million, or the Acquisition Subordinated Promissory Note. We had no prior material relationship with Spheris other than the agreements related to the Spheris Acquisition described elsewhere in this prospectus.
 
In connection with the Spheris Acquisition, MedQuist Transcriptions, Ltd., a subsidiary of MedQuist Inc., and certain other subsidiaries of MedQuist Inc., or collectively, the Loan Parties, entered into a credit agreement, or the Acquisition Credit Facility, with General Electric Capital Corporation, CapitalSource Bank, and Fifth Third Bank. The Acquisition Credit Facility provided for up to $100.0 million in senior secured credit facilities, consisting of a $50.0 million term loan, and a revolving credit facility of up to $50.0 million. The credit facilities were secured by a first priority lien on substantially all of the property of the Loan Parties. Borrowings under the revolving credit facility were able to be made from time to time, subject to availability under such facility, until the fourth anniversary of the closing date. Amounts borrowed under the Acquisition Credit Facility bore interest at a rate selected by MedQuist Transcriptions, Ltd. equal to the Base Rate or the Eurodollar Rate (each as defined in the Acquisition Credit Facility agreement) plus a margin. At June 30, 2010, the revolving credit facility and the term loan had interest rates of 6.25% and 6.75%, respectively. The Acquisition Credit Facility was repaid in full in October 2010 in connection with the Recapitalization Transactions.
 
In connection with the Spheris Acquisition, MedQuist Inc. also entered into the Acquisition Subordinated Promissory Note, with Spheris Inc. The note was to mature in five years from the date of the Spheris Acquisition. The face amount of the Acquisition Subordinated Promissory Note was $17.5 million with provisions for prepayment at discounted amounts, ranging from 77.5% of the principal if paid within six months, 87.5% from six to nine months, 97.5% from nine to twelve months, 102.0% between the first and second year, 101.0% between the second and third year and 100.0% thereafter. For purposes of the purchase price allocation, the note was discounted at 77.5% of the principal, or $13.6 million. The Acquisition Subordinated Promissory Note bore interest at 8.0% for the first six months. The Acquisition Subordinated Promissory Note was repaid at 77.5% of the face amount on October 14, 2010 in connection with the Recapitalization Transactions.
 
On April 22, 2010, we transferred the following consideration for the purchase of Spheris:
 
         
 
    (In thousands)  
 
Cash consideration paid
  $ 98,834  
Fair value of unsecured Acquisition Subordinated Promissory Note
    13,570  
         
Total consideration transferred
  $ 112,404  
         
 
The Acquisition Subordinated Promissory Note would have matured in five years from the date of closing, and it had provisions for prepayment at discounted amounts. We estimated the fair value of the Acquisition Subordinated Promissory Note to be $13.6 million. The fair value was determined using a Monte Carlo simulation valuation model with the following key assumptions: volatility of 3.9% and cost of debt of 10.5%. The fair value of the Acquisition Subordinated Promissory Note is included in the total purchase price.


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CBaySystems Holdings Limited and Subsidiaries
 
Notes to Unaudited Pro Forma Condensed Combined Financial Information—(Continued)
 
The following table summarizes the consideration the amounts of identified assets acquired and liabilities assumed at the acquisition date. The amounts recorded are subject to finalization of assumed liabilities. The total amount assigned to identified intangible assets and the related amortization period is shown below:
 
         
 
Fair value of Spheris net assets acquired   (In thousands)  
 
Cash
  $ 797  
Trade receivables
    22,407  
Other current assets
    4,142  
Property, plant and equipment
    9,133  
Deposits
    1,036  
Developed technology (included in intangibles)
    11,390  
Customer relationships (included in intangibles)
    37,210  
Trademarks and trade name (included in intangibles)
    1,640  
Goodwill
    45,344  
Trade and other payables
    (20,695 )
         
Identifiable assets acquired and liabilities assumed
  $ 112,404  
         
 
The total assigned to identified intangible assets and the related amortization period is as follows:
 
                 
 
          Amortization
 
    Fair Value     Period  
    (In thousands)        
 
Developed technology
  $ 11,390       9 years  
Customer relationships
  $ 37,210       7-9 years  
Trademarks and Tradenames
  $ 1,640       4 years  
Goodwill
  $ 45,344       Indefinite  
 
The amounts and lives of the identified intangibles other than goodwill were valued at fair value. The analysis included a combination of the cost approach and an income approach. We used discount rates from 15% to 17%. The goodwill is attributable to the workforce and synergies expected to occur after the Spheris Acquisition. The goodwill and intangible assets are deductible for tax purposes.
 
We have performed a review of Spheris’s accounting policies and procedures. As a result of that review, we did not identify any differences between the accounting policies and procedures of the two companies that, when conformed, would have a material impact on the future operating results.
 
3.  The Recapitalization Transactions
 
On September 30, 2010, MedQuist Inc., as issuer, and our subsidiaries MedQuist Transcription Ltd., and CBay Inc., as co-issuers and guarantors, and we and certain of our other subsidiaries, as guarantors, entered into the Note Purchase Agreement for the issuance of $85.0 million aggregate principal amount of 13% Senior Subordinated Notes due 2016 to BlackRock Kelso Capital Corporation, PennantPark Investment Corporation, Citibank, N.A., and THL Credit, Inc. Interest on the notes is payable in quarterly installments at the issuers’ option at either (i) 13% in cash or (ii) 12% in cash plus 2% in the form of additional Senior Subordinated Notes. Closing and funding of the Senior Subordinated Notes occurred on October 14, 2010.
 
On October 1, 2010, MedQuist Inc., as borrower, and our subsidiaries MedQuist Transcriptions, Ltd., and CBay Inc., as co-borrowers and guarantors, and we and certain of our other subsidiaries, as guarantors, entered into the


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CBaySystems Holdings Limited and Subsidiaries
 
Notes to Unaudited Pro Forma Condensed Combined Financial Information—(Continued)
 
Senior Secured Credit Facility with General Electric Capital Corporation, as administrative agent, and the parties thereto, consisting of (i) a $200.0 million Term Loan and (ii) a $25.0 million Revolving Credit Facility. Closing and funding under the Term Loan occurred on October 14, 2010. The Senior Secured Credit Facility bears an interest rate of LIBOR plus 5.50% and a LIBOR floor of 1.75%. In addition, the Revolving Credit Facility bears a fee of 50 basis points on undrawn amounts.
 
The proceeds from the borrowings from the Term Loan and the Senior Subordinated Notes were used as follows:
 
  •  Repayment of the then outstanding indebtedness under the Acquisition Credit Facility of $90.0 million as of June 30, 2010. With the repayment on October 14, 2010, the Acquisition Credit Facility was terminated.
 
  •  Repayment of the Acquisition Subordinated Promissory Note on October 14, 2010. The amount paid to satisfy and extinguish the principal amount of the Acquisition Subordinated Promissory Note was $13.6 million.
 
  •  Declaration and payment of a special dividend on October 18, 2010 by MedQuist Inc. of $4.70 per share. The total amount of the MedQuist Inc. dividend was $176.5 million, of which $122.6 million was paid to us.
 
  •  Repayment on October 14, 2010 of our 6% Convertible Notes due to Philips. The 6% Convertible Notes were settled at $104.1 million including $7.7 million as a negotiated prepayment premium to the outstanding balance at the time of the repayment.
 
  •  Repayment of $4.1 million on certain of our other lines of credit.
 
The sources and uses of funds related to the Recapitalization Transactions are shown as if they had occurred as of June 30, 2010 (in millions):
 
                     
Sources     Uses  
 
Term Loan
  $   200.0    
Extinguishment of Acquisition Credit Facility
  $ 90.0  
Senior Subordinated Notes
    85.0    
Extinguishment of Acquisition Subordinated Promissory Note
    13.6  
           
Extinguishment of 6% Convertible Notes (includes premium on early prepayment)
    104.1  
           
Extinguishment of other debt agreements
    4.1  
           
Dividend distribution to noncontrolling stockholders
    53.9  
           
Cash to working capital
    3.4  
           
Expenses (MedQuist Exchange)
    2.5  
           
Fees and expenses (Recapitalization Transactions)
    13.4  
                     
Total Sources
  $ 285.0    
Total Uses
  $   285.0  
                     
 
4.  MedQuist Exchange
 
On September 30, 2010, we entered into the Exchange Agreement with certain MedQuist Inc. stockholders that hold in the aggregate approximately 13% of MedQuist Inc.’s outstanding shares. Assuming the MedQuist Exchange is consummated without any adjustments, the MedQuist Exchange would increase our ownership in


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CBaySystems Holdings Limited and Subsidiaries
 
Notes to Unaudited Pro Forma Condensed Combined Financial Information—(Continued)
 
MedQuist Inc. from 69.5% to 82.5%. Pursuant to the Exchange Agreement, those MedQuist Inc. stockholders will receive 4.2459 shares of our common stock for each MedQuist Inc. share, subject to certain adjustments, including adjustments related to MedQuist’s net capital debt at the closing of the MedQuist Exchange, and will enter into a stockholders agreement with us that, among other things, provides them with registration rights and contains provisions regarding their voting in the election of our directors. The closing under the Exchange Agreement is conditioned upon, among other conditions, our completion of an initial public offering, listing our shares on The NASDAQ Global Market and our reincorporation in Delaware.
 
5.  Exchange Offer
 
On October 18, 2010, we filed with the SEC a registration statement on Form S-4 offering those noncontrolling MedQuist Inc. stockholders who did not participate in the MedQuist Exchange shares of our common stock in exchange for their MedQuist Inc. shares. The terms of the registered exchange offer are described in such registration statement. Assuming the MedQuist Exchange is consummated, a full exchange in the Exchange Offer would increase our ownership in MedQuist Inc. from 82.5% to 100.0%.
 
6.  Pro Forma Adjustments Related to the Unaudited Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 2009
 
Spheris Acquisition Pro Forma Adjustments:
 
  a.  Adjustment to reflect increased amortization of acquired intangibles as shown in the table below:
 
                         
 
                Annual
 
    Amount     Estimated Life     Amortization  
    (In thousands)              
 
Trademarks and Tradenames
  $ 1,640       4 years     $ 410  
Developed technology
    11,390       9 years       1,266  
Customer relationships
    37,210       7-9 years       4,651  
                         
    $ 50,240             $ 6,327  
                         
 
Additional depreciation of approximately $203,000 would be incurred related to fair value adjustments for certain tangible assets, primarily equipment and leasehold improvements.
 
 
  b.  Adjustment to reflect interest expense related to the Spheris Acquisition, as shown in the table below:
 
         
 
    (In thousands)  
 
Acquisition Credit Facility interest
  $ 6,177  
Interest on the Acquisition Subordinated Promissory Note
    2,678  
Amortization of deferred financing costs
    1,973  
         
      10,828  
Less: Spheris historical interest expense
    17,439  
         
Adjustment to interest expense
  $ (6,611 )
         
 
The Acquisition Credit Facility and the Acquisition Subordinated Promissory Note were repaid in connection with the Recapitalization Transactions.


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CBaySystems Holdings Limited and Subsidiaries
 
Notes to Unaudited Pro Forma Condensed Combined Financial Information—(Continued)
 
  c.  Adjustment to eliminate the 2009 Spheris goodwill impairment charge.
 
  d.  Adjustment to eliminate the direct incremental acquisition related costs incurred by us and Spheris for bankruptcy related and reorganization costs.
 
  e.  Adjustment to eliminate the historical income tax benefit of Spheris and to record the income tax provision of the combined entities at our historical effective tax rate in effect for the respective period. However, the effective tax rate of the combined company could be different depending on post-acquisition activities.
 
  f.  Adjustment to recognize noncontrolling interest in MedQuist Inc.
 
Recapitalization Transactions and the MedQuist Exchange Pro Forma Adjustments:
 
  g.  Adjustment to reflect interest expense as shown below:
 
         
 
    (In thousands)  
 
Interest on Term Loan
  $ 14,500  
Interest on Senior Subordinated Notes
    11,050  
Amortization of related deferred financing fees
    2,692  
         
Total
    28,242  
         
Less: Interest that would not have been incurred under the prior debt agreements, as follows:
       
Acquisition Credit Facility
    6,177  
Acquisition Subordinated Promissory Note
    2,678  
6% Convertible Notes
    5,447  
Other debt agreements
    676  
Amortization of previous deferred financing fees
    1,973  
         
Adjustment to interest expense
  $ 11,291  
         
 
The Term Loan bears a variable interest rate. Each 1/8% increase in the base rate (prime or LIBOR) would result in a $0.3 million increase in annual interest expense.
 
In connection with our repayment and termination of the Acquisition Credit Facility, Acquisition Subordinated Promissory Note and 6% Convertible Notes we wrote off approximately $5.7 million of deferred financing fees and recorded a loss of $7.7 million on the repayment of the 6% Convertible Notes. As these amounts are non recurring and resulted directly from the Recapitalization Transactions they have not been reflected in the pro forma adjustments.
 
  h.  In connection with the MedQuist Exchange, noncontrolling stockholders holding 4.8 million shares of MedQuist Inc. have agreed to exchange their MedQuist Inc. shares for shares of our common stock whereby they will receive 4.2459 shares of our common stock for each share of MedQuist Inc., which will result in approximately 20.3 million additional shares outstanding assuming the MedQuist Exchange is consummated without any adjustments. After the MedQuist Exchange, we will own approximately 82.5% of MedQuist Inc., and the noncontrolling interest will decrease from approximately 30.5% to 17.5%. As we hold a controlling interest in MedQuist Inc. before and after the MedQuist Exchange, the exchange is recorded as an equity transaction. Additionally, we agreed to pay up to $2.5 million of expenses incurred by certain stockholders who are party to the Exchange Agreement. We will account for the payment as a capital transaction.


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CBaySystems Holdings Limited and Subsidiaries
 
Notes to Unaudited Pro Forma Condensed Combined Financial Information—(Continued)
 
Basic and diluted weighted average shares outstanding and net income (loss) per share amounts have been adjusted to reflect the issuance of 20.3 million shares of our common stock in exchange for MedQuist Inc. shares as if the shares had been outstanding from January 1, 2009.
 
  i.  Adjustment to record the income tax provision of the Recapitalization Transactions at our historical effective tax rate in effect for the respective period. However, the effective tax rate after the Recapitalization Transactions could be different.
 
  j.  Adjustment to satisfy our obligations under the Consulting Services Agreement. Based upon the closing price for our shares on October 14, 2010, the number of shares of our common stock issuable would be approximately 4.5 million. Basic and diluted weighted average shares outstanding and net income (loss) per share amounts have been adjusted to reflect the issuance of 4.5 million shares of our common stock.
 
Exchange Offer Pro Forma Adjustments:
 
  k.  Adjustments to eliminate the net income attributable to noncontrolling interests assuming 100% of the MedQuist Inc. stockholders participate in the Exchange Offer.
 
Basic and diluted weighted average shares outstanding and net income (loss) per share amounts have been adjusted to reflect the issuance of 28.4 million of our shares issued in exchange for MedQuist Inc. shares as if the shares had been outstanding from January 1, 2009.
 
7.  Pro forma Adjustments Related to the Unaudited Pro forma Condensed Combined Statement of Operations for the six months ended June 30, 2010
 
Spheris Acquisition Pro Forma Adjustments:
 
  l.  Adjustment to reflect increased amortization of acquired intangibles as shown in the table below:
 
                         
 
                Annual
 
    Amount     Estimated Life     Amortization  
          (In thousands)        
 
Trademarks and Tradenames
  $ 1,640       4 years     $ 410  
Developed technology
    11,390       9 years       1,266  
Customer relationships
    37,210       7-9 years       4,651  
                         
    $ 50,240             $ 6,327  
                         
Amortization for the period January 1, 2010 to April 21, 2010
                  $ 1,924  
                         
Additional depreciation of $68,000 would be incurred related to fair value adjustments for certain tangible assets, primarily equipment and leasehold improvements.


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CBaySystems Holdings Limited and Subsidiaries
 
Notes to Unaudited Pro Forma Condensed Combined Financial Information—(Continued)
 
  m.  Adjustment to reflect interest expense related to the Spheris Acquisition, as shown in the table below:
 
         
 
    (In thousands)  
 
Acquisition Credit Facility interest January 1, 2010 to April 21, 2010
  $ 1,894  
Interest on Acquisition Subordinated Promissory Note January 1, 2010 to April 21, 2010
    821  
Amortization of deferred financing costs
    605  
         
      3,320  
Less: Spheris historical interest expense
    3,459  
         
Adjustment to interest expense
  $ (139 )
         
 
  n.  Adjustment to eliminate direct incremental acquisition related costs incurred by us and Spheris for bankruptcy related and reorganization costs.
 
  o.  Adjustment to eliminate the historical income tax benefit of Spheris and to record the income tax provision of the combined entities at our historical effective tax rate in effect for the respective period. However, the effective tax rate of the combined company could be different depending on post-acquisition activities.
 
  p.  Adjustment to reflect the noncontrolling interest in MedQuist Inc.
 
Recapitalization Transactions and MedQuist Exchange Pro Forma Adjustments
 
  q.  Adjustment to reflect interest expense as shown below:
 
         
 
    (In thousands)  
 
Interest on Term Loan for six months
  $ 7,250  
Interest on Senior Subordinated Notes for six months
    5,525  
Amortization of related deferred financing fees
    1,346  
         
Total
    14,121  
         
Less: Interest that would not have been incurred under the prior debt agreements as follows:
       
Acquisition Credit Facility
    3,089  
Acquisition Subordinated Promissory Note
    1,339  
6% Convertible Notes
    2,723  
Other debt agreements
    338  
Amortization of previous deferred financing fees
    987  
         
Adjustment to interest expense
  $ 5,645  
         
 
The Term Loan bears a variable interest rate. Each 1/8% increase in the base rate (prime or LIBOR) would result in a $0.3 million increase in annual interest expense.
 
In connection with our repayment and termination of the Acquisition Credit Facility, Acquisition Subordinated Promissory Note and 6% Convertible Notes we wrote off $5.7 million of deferred financing fees and recorded a loss of $7.7 million on the repayment of the 6% Convertible Notes. As these amounts are nonrecurring and resulted directly from the Recapitalization Transactions, they have not been reflected in the pro forma adjustment.


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CBaySystems Holdings Limited and Subsidiaries
 
Notes to Unaudited Pro Forma Condensed Combined Financial Information—(Continued)
 
  r.  In connection with the MedQuist Exchange, noncontrolling stockholders holding 4.8 million shares of MedQuist Inc. have agreed to exchange their MedQuist Inc. shares for shares of our common stock whereby they will receive 4.2459 shares of our common stock for each share of MedQuist Inc., which will result in approximately 20.3 million additional shares outstanding. After the MedQuist Exchange, we will own approximately 82.5% of MedQuist Inc., and the noncontrolling interest will decrease from approximately 30.5% to 17.5%. As we hold a controlling interest in MedQuist Inc. before and after the MedQuist Exchange, the exchange is recorded as an equity transaction. Additionally, we agreed to pay up to $2.5 million of expenses incurred by certain stockholders who are party to the Exchange Agreement. We will account for the payment as a capital transaction.
 
Basic and diluted weighted average shares outstanding and net income (loss) per share amounts have been adjusted to reflect the issuance of 20.3 million shares of our common stock in exchange for MedQuist Inc. shares as if the shares had been outstanding from January 1, 2009.
 
  s.  Adjustment to satisfy our obligations under the Consulting Services Agreement. Based upon the closing price for our shares on October 14, 2010, the number of shares of our common stock issuable would be approximately 4.5 million. Basic and diluted weighted average shares outstanding and net income loss per share amounts have been adjusted to reflect the issuance of 4.5 million shares of our common stock.
 
  t.  Adjustment to record the tax provision of the Recapitalization Transactions at our historical effective tax rate in effect for the respective period. However, the effective tax rate after the Recapitalization Transactions could be different.
 
Exchange Offer Pro Forma Adjustments:
 
  u.  Adjustment to eliminate the net income attributable to noncontrolling interests assuming 100% of the MedQuist Inc. noncontrolling stockholders participate in the Exchange Offer.
 
Basic and diluted weighted average shares outstanding and net income (loss) per share amounts have been adjusted to reflect the issuance of 28.4 million shares of our common stock in exchange for MedQuist Inc. shares as if the shares had been outstanding from January 1, 2009.
 
8.  Pro Forma Adjustments Related to the Unaudited Pro Forma Condensed Consolidated Balance Sheet as of June 30, 2010
 
Recapitalization Transactions and MedQuist Exchange Pro Forma Adjustments
 
  v.  We incurred debt issuance costs of $13.4 million in connection with the Term Loan and Senior Subordinated Notes. These amounts will be capitalized as other assets. Since the previous Acquisition Credit Facility and Acquisition Subordinated Promissory Notes were extinguished, previously incurred and capitalized fees of $5.7 million will be written off. This adjustment reflects the incremental debt issuance costs to be capitalized.
 
  w.  The proceeds of the Term Loan and Senior Subordinated Notes were used to repay debt consisting of the Acquisition Credit Facility, the Acquisition Subordinated Promissory Note and other term loans and credit facilities maintained by us at the parent company level. We recorded a loss of $7.7 million on the


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CBaySystems Holdings Limited and Subsidiaries
 
Notes to Unaudited Pro Forma Condensed Combined Financial Information—(Continued)
 
  extinguishment of our 6% Convertible Notes related to an early redemption premium. The adjustment is as follows:
 
                         
 
    Classification  
    Current     Non current     Total  
    (In thousands)  
 
New Debt
                       
Term Loan
  $ 15,000     $ 185,000     $ 200,000  
Senior Subordinated Notes
          85,000       85,000  
Debt Repayment
                       
Acquisition Credit Facility
    30,000       60,000       90,000  
Acquisition Subordinated Promissory Notes
          13,570       13,570  
6% Convertible Notes
          96,419       96,419  
Other debt repayment
    3,415       715       4,130  
                         
Net Adjustment
  $ (18,415 )   $ 99,296     $ 80,881  
                         
 
  x.  Adjustment reflects the dividend paid to noncontrolling stockholders of MedQuist Inc. totaling $53.9 million which reduces our noncontrolling interest.
 
  y.  Reflects the issuance of 20.3 million shares of our common stock in exchange for 4.8 million shares of MedQuist Inc. common stock, assuming an exchange ratio of 4.2459 for 1. The impact of the MedQuist Exchange is a reclassification of $6.9 million between noncontrolling interest and additional paid in capital. Additionally, we agreed to pay up to $2.5 million of expenses incurred by certain stockholders who are party to the Exchange Agreement. We will account for the payment as a capital transaction.
 
  z.  Reflects the issuance of 4.5 million shares of our common stock issuable pursuant to the Consulting Services Agreement, assuming a share conversion at $2.38 per share, based upon the closing price for our shares on October 14, 2010.
 
Exchange Offer Pro Forma Adjustments
 
  aa.  Adjustment to reduce noncontrolling interest assuming 100% of the MedQuist Inc. noncontrolling stockholders participate in the Exchange Offer. Reflects the issuance of 28.4 million shares of our common stock in exchange for 6.7 million shares of MedQuist Inc. common stock. The impact of the Exchange Offer is a reclassification of $9.6 million between noncontrolling interest and additional paid in capital.


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Selected Consolidated Financial and Other Data
 
The following tables summarize our consolidated financial data for the periods presented. You should read the following selected consolidated financial data in conjunction with our consolidated financial statements and the related notes included elsewhere in this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this prospectus.
 
We derived the statement of operations data for the years ended December 31, 2007, 2008 and 2009 and the balance sheet data as of December 31, 2008 and 2009 from our audited consolidated financial statements, which are included elsewhere in this prospectus. We derived the statement of operations data for the years ended December 31, 2005 and 2006 and the balance sheet data as of December 31, 2005, 2006 and 2007 from our audited consolidated financial statements, which are not included in this prospectus. We derived the statement of operations data for the six months ended June 30, 2009 and 2010 and the balance sheet data as of June 30, 2010 from our unaudited consolidated financial statements, which are included elsewhere in this prospectus. In the opinion of our management, the unaudited consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments that we consider necessary to present fairly the financial information set forth in those statements. Our historical results for any prior period are not necessarily indicative of results to be expected for a full year or any future period.
 
Our summary historical consolidated statements of operations and other operating data reflect the consolidation of the results of operations of MedQuist Inc. since August 6, 2008 and Spheris since April 22, 2010, the respective dates of their acquisitions.


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    Years Ended December 31,     Six Months Ended June 30,  
    2005     2006     2007     2008     2009     2009     2010  
                                  (Unaudited)  
    (In thousands, except per share amounts)  
 
Statement of Operations Data
                                                       
Net revenues
  $ 31,806     $ 41,862     $ 57,694     $ 193,673     $ 371,768     $ 188,539     $ 200,592  
Cost of revenues
    15,999       20,613       30,209       125,074       239,549       121,755       128,641  
                                                         
Gross profit
    15,807       21,249       27,485       68,599       132,219       66,784       71,951  
                                                         
Operating expenses
                                                       
Selling, general and administrative
    13,237       17,318       25,137       51,243       60,632       31,764       32,706  
Research and development
                      6,099       9,604       4,796       5,593  
Depreciation and amortization
    2,635       2,258       2,915       14,906       26,977       13,610       15,068  
Cost of legal proceedings and settlements
                      5,311       14,943       12,158       2,152  
Acquisition related charges
                            1,246             6,045  
Goodwill impairment charge
                      98,972                    
Restructuring charges
                      2,106       2,727             966  
                                                         
Total operating expenses
    15,872       19,576       28,052       178,637       116,129       62,328       62,530  
                                                         
Operating income (loss)
    (65 )     1,673       (567 )     (110,038 )     16,090       4,456       9,421  
Interest expense, net
    (606 )     (1,628 )     (2,108 )     (3,954 )     (9,132 )     (4,660 )     (7,351 )
Equity in income (loss) of affiliated companies
                (105 )     66       1,933       408       546  
Other income
    18       18       14       9       11             108  
                                                         
Income (loss) before income taxes and noncontrolling interests
    (653 )     63       (2,766 )     (113,917 )     8,902       204       2,724  
Income tax provision (benefit)
    45       (46 )     (113 )     (5,398 )     1,082       639       (326 )
                                                         
Net income (loss)
    (698 )     109       (2,653 )     (108,519 )     7,820       (435 )     3,050  
Less: Net (income) loss attributable to noncontrolling interest
    (6 )     31       57       (5,154 )     (7,085 )     (2,335 )     (2,497 )
                                                         
Net income (loss) attributable to CBaySystems Holdings Limited
  $ (704 )   $ 140     $ (2,596 )   $ (113,673 )   $ 735     $ (2,770 )   $ 553  
                                                         
Net income (loss) per common share attributable to CBaySystems Holdings Limited
                                                       
Basic
  $ (.06 )   $ 0.00     $ (0.04 )   $ (1.13 )   $ (0.01 )   $ (0.03 )   $ (0.01 )
Diluted
  $ (.06 )   $ 0.00     $ (0.04 )   $ (1.13 )   $ (0.01 )   $ (0.03 )   $ (0.01 )
Weighted average shares outstanding:
                                                       
Basic
    12,289       12,310       57,929       101,669       156,116       154,991       157,705  
Diluted
    12,289       12,310       57,929       101,669       156,116       154,991       157,705  
Other Operating Data (unaudited)
                                                       
Adjusted EBITDA(1)
  $ 2,576     $ 4,009     $ 2,362     $ 18,886     $ 60,130     $ 27,970     $ 33,760  
(1) See below for reconciliations of net income (loss) attributable to CBaySystems Holdings Limited to Adjusted EBITDA.


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                                  As of
 
    As of December 31,     June 30,
 
    2005     2006     2007     2008     2009     2010  
                                  (Unaudited)  
    (In thousands)  
Cash and cash equivalents
  $ 2,344     $ 515     $ 2,667     $ 42,868     $ 29,633     $ 22,457  
Working capital (deficit)(a)
    2,832       6,166       10,870       1,128       (5,114 )     6,753  
Total assets
    20,722       31,817       51,420       279,177       253,068       380,151  
Long term debt, including current portion of debt
    3,899       21,283       14,075       126,008       107,340       214,092  
Total equity
    13,708       5,326       29,854       79,350       72,301       74,934  
(a) Working capital is defined as total current assets, excluding cash and cash equivalents, minus total current liabilities, excluding current portion of debt.


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The following table presents a reconciliation of net income (loss) attributable to CBaySystems Holdings Limited:
 
                                                         
          Six Months Ended
 
    Years Ended December 31,     June 30,  
    2005     2006     2007     2008     2009     2009     2010  
                                  (Unaudited)  
    (In thousands)  
 
Net income (loss) attributable to CBaySystems Holdings Limited
  $ (705 )   $ 138     $ (2,596 )   $ (113,673 )   $ 735     $ (2,770 )   $ 553  
Net income (loss) attributable to noncontrolling interests
    (6 )     31       (57 )     5,154       7,085       2,335       2,497  
Income tax provision (benefit)(a)
    45       (46 )     (113 )     (5,398 )     1,082       639       (326 )
Interest expense, net
    607       1,628       2,108       3,954       9,132       4,660       7,351  
Depreciation and amortization
    2,635       2,258       2,915       14,906       26,977       13,610       15,068  
Cost of legal proceedings and settlements
                      5,311       14,943       12,158       2,152  
Acquisition related charges
                      5,620       1,246             6,045  
Goodwill impairment charge
                      98,972                    
Restructuring charges
                      2,106       2,727             966  
Equity in (income) loss of affiliated companies
                105       (66 )     (1,933 )     (408 )     (546 )
Asset impairment charge, severance charges and accrual reversals(b)
                      2,000       (1,864 )     (2,254 )      
                                                         
Adjusted EBITDA
  $ 2,576     $ 4,009     $ 2,362     $ 18,886     $ 60,130     $ 27,970     $ 33,760  
                                                         
(a) We have $130.0 million of federal net operating loss carry forwards as of December 31, 2009 and will record approximately $30.0 million of annual tax amortization related to intangible assets, including goodwill, that will reduce future taxable income. Due to the existence of federal net operating loss carry forwards and the impact of tax amortization related to intangible assets, including goodwill, cash taxes paid (refunded) were $84,000, $160,000, $796,000 for the years ended December 31, 2007, 2008 and 2009, respectively, and $497,000 and $(478,000) for the six months ended June 30, 2009 and 2010, respectively.
 
(b) Includes an impairment charge to write-off the amount paid related to severance of one of our former executives and the reversal of certain accruals, related to litigation claims, as a result of the expiration of the applicable statute of limitations.


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Adjusted EBITDA is a metric used by management to measure operating performance. Adjusted EBITDA is defined as net income (loss) attributable to CBaySystems Holdings Limited plus net income (loss) attributable to noncontrolling interests, income taxes, interest expense, depreciation and amortization, cost of legal proceedings and settlements, acquisition related charges, goodwill impairment charge, restructuring charges, equity in income (loss) of affiliated company, asset impairment charge, severance costs, and certain unusual or nonrecurring items. We present Adjusted EBITDA as a supplemental performance measure because we believe it facilitates operating performance comparisons from period to period and company to company by backing out the following:
 
  •  potential differences caused by variations in capital structures (affecting interest expense, net), tax positions (such as the impact on periods or companies for changes in effective tax rates), the age and book depreciation of fixed assets (affecting depreciation expense);
 
  •  the impact of non-cash charges, such as goodwill impairment charges and asset impairment charges; and
 
  •  the impact of unusual expenses or events, such as acquisition related charges, restructuring charges, severance costs and certain unusual or nonrecurring items.
 
Because Adjusted EBITDA facilitates internal comparisons of operating performance on a more consistent basis, we also use Adjusted EBITDA in measuring our performance relative to that of our competitors. Adjusted EBITDA is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net income, operating income or any other performance measures derived in accordance with GAAP or as an alternative to cash flow from operating activities as measures of our profitability or liquidity. We understand that although Adjusted EBITDA is frequently used by securities analysts, lenders and others in their evaluation of companies, Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
 
  •  Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;
 
  •  Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
 
  •  although depreciation is a non-cash charge, the assets being depreciated will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; and
 
  •  other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.


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Market Price Information for Our Shares
 
We expect our shares to be listed on The NASDAQ Global Market upon consummation of this offering. They have not previously been listed on The NASDAQ Global Market or any other U.S. market. However, our shares are currently listed on AIM under the symbol “CBAY.” Our shares began trading on AIM in June 2007.
 
As of October 11, 2010, there were 158.2 million shares outstanding and approximately 127 holders of record of our shares. On a fully diluted basis, there would be 218 million shares outstanding, which includes (i) 5.8 million shares issuable upon exercise of all outstanding options under our equity incentive plan, (ii) 0.4 million shares issuable upon the exercise of outstanding options under certain individual option grants to certain members of management, (iii) 20.3 million shares issuable pursuant to the MedQuist Exchange, (iv) 28.4 million shares issuable pursuant to the Exchange Offer, assuming a full exchange, (v) 4.5 million shares issuable pursuant to the Consulting Services Agreement and (vi) 0.4 million shares issuable pursuant to a warrant agreement between us and Oosterveld International B.V.
 
On October 15, 2010, the last reported sale price of our shares listed on AIM was £1.50 per share.
 
The following table shows the high and low market prices for our shares for each fiscal quarter for the two most recent fiscal years. Market prices for our shares have fluctuated significantly since they were listed on AIM and trading volume on AIM have been very small in relation to the number of our total outstanding shares. As a result, the market prices shown in the following table may not be indicative of the market prices at which our shares will trade after this offering.
 
                 
    Share Price  
    (pence)  
    High     Low  
 
Year
               
2009
    84.5       33.5  
2008
    84.5       40.5  
2007
    112.0 (1)     63.5 (1)
2006
           
2005
           
                 
Quarter
               
Third Quarter 2010
    136.0       112.5  
Second Quarter 2010
    155.0       86.5  
First Quarter 2010
    212.5       62.5  
Fourth Quarter 2009
    84.5       69.0  
Third Quarter 2009
    82.0       38.5  
Second Quarter 2009
    40.5       33.5  
First Quarter 2009
    46.0       36.5  
Fourth Quarter 2008
    74.0       40.5  
Third Quarter 2008
    79.5 (2)     62.5 (2)
Second Quarter 2008
    74.5 (2)     71.0 (2)
First Quarter 2008
    84.5       72.0  
(1) We were admitted to AIM on June 18, 2007. Data for 2007 reflects closing prices from June 18, 2007 to December 31, 2007.
 
(2) As a result of the reverse takeover rules of AIM, our shares were temporarily suspended from trading on AIM on May 22, 2008 in connection with the execution of the stock purchase agreement by and among us, CBay Inc. and Philips for our acquisition of 69.5% of the outstanding shares of MedQuist Inc. common stock. The shares resumed trading on July 21, 2008 with the increased share capital and were admitted to trading on August 6, 2008.


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Management’s Discussion and Analysis of
Financial Condition and Results of Operations
 
The following discussion and analysis of our financial condition and results of operation should be read in conjunction with the consolidated financial statements and related notes of each of us, MedQuist Inc. and Spheris Inc. and with the information under “Unaudited Pro Forma Condensed Consolidated Financial Information” and “Selected Consolidated Financial and Other Data” appearing elsewhere in this prospectus. In addition to historical information, this discussion and analysis contains forward looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward looking statements as a result of certain factors. We discuss factors that we believe could cause or contribute to these differences below and elsewhere in this prospectus, including those set forth under “Risk Factors.”
 
Overview
 
We are a leading provider of integrated clinical documentation solutions for the U.S. healthcare system. Our end-to-end solutions convert physicians’ dictation of patient interactions, or the physician narrative, into a high quality and customized electronic record. These solutions integrate technologies and services for voice capture and transmission, ASR, medical transcription and editing, workflow automation, and document management and distribution to deliver a complete managed service for our customers. Our solutions enable hospitals, clinics, and physician practices to improve the quality of clinical data as well as accelerate and automate the documentation process, and we believe our solutions improve physician productivity and satisfaction, enhance revenue cycle performance, and facilitate the adoption and meaningful use of electronic health records.
 
Key Factors Affecting Our Performance
 
In 2008 and 2010, we completed two large acquisitions which have materially impacted our financial results. Our results have also been impacted by volume and pricing trends, operating improvements and selling, general and administrative expense savings. These key factors are described below for the years ended December 31, 2007, 2008 and 2009 and the six months ended June 30, 2009 and 2010.
 
MedQuist Inc. Acquisition
 
In August 2008, an affiliate of SAC PCG invested $124.0 million to acquire a majority interest in us. Concurrent with this investment, we acquired a 69.5% interest in MedQuist Inc., the largest medical transcription service provider by revenue in the United States at the time. The purchase price was $239.7 million of which $118.3 million was allocated to goodwill. The transaction was financed using a combination of the investment proceeds and debt financing.
 
MedQuist Inc. was more than four times the size of us as measured by lines processed in 2008. Additionally, MedQuist Inc. offered a complete integrated solution for clinical documentation, which was a strong complement to our low-cost service offering. However, prior to the acquisition, MedQuist Inc. was facing deteriorating financial performance from declining volumes, customer attrition issues, ongoing litigation and a lack of offshore capabilities.
 
We believed that MedQuist Inc., despite its operational challenges and substantial overhead, had strong underlying technology, deep healthcare domain expertise, and a long-tenured customer base. Following our acquisition of MedQuist Inc., we embarked upon a strategy to enhance the management team, streamline operations, improve relationships with customers, leverage our offshore resources, increase the utilization of ASR technology, and resolve all outstanding litigation. This strategy resulted in a stabilization of volume trends starting in the second


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quarter of 2009. The following table shows the percentage change in MedQuist Inc.’s volume for the nine quarters ended March 31, 2010, the last quarter prior to the Spheris Acquisition.
 
                                                                           
 
    2008     2009     2010  
    Prior to the MedQuist Inc.
                                       
MedQuist Inc.
  Acquisition                                        
    Q1     Q2     Q3       Q4     Q1     Q2     Q3     Q4     Q1  
Volume % Change over Previous Year
    (3.3 )%     (4.7 )%     (0.1 )%       (0.4 )%     (2.2 )%     0.8 %     2.5 %     2.8 %     4.0 %
 
Our operational improvements and integration efforts have resulted in tangible financial improvements to our profitability. MedQuist Inc.’s Adjusted EBITDA grew from $3.5 million in 2007 to $55.6 million in 2009. See “Summary Historical and Unaudited Pro Forma Consolidated Financial Data” for a reconciliation of Adjusted EBITDA to net income. Gross profit margin has increased from 23% in 2007 to 33% in 2009. Selling, general and administrative expense for MedQuist Inc. has decreased from $62.3 million or 18% of revenue in 2007 to $33.4 million or 11% of revenue in 2009.
 
Spheris Acquisition
 
On April 22, 2010, we acquired certain assets, principally customer contracts, from Spheris in a transaction conducted under Section 363 of the Bankruptcy Code. The purchase price was $112.4 million of which $45.3 million was allocated to goodwill. Spheris was the second largest U.S. medical transcription service provider by revenue at the time. Spheris had experienced declines in volumes due principally to customer attrition, which we believed was attributable to quality issues and underinvestment in product development caused by financial constraints leading up to its bankruptcy Some volume declines continued after the date of our acquisition as the result of notices of termination given prior to that date. The following table shows the percentage change in Spheris’ volume for the nine quarters ended March 31, 2010, the last quarter prior to the Spheris Acquisition.
 
                                                                           
 
Spheris
  2008     2009       2010  
    Q1     Q2     Q3     Q4     Q1     Q2     Q3     Q4       Q1  
 
Volume % Change over Previous Year
    (4.8 )%     (4.7 )%     (5.9 )%     (11.6 )%     (13.3 )%     (10.9 )%     (7.9 )%     (6.5 )%       (5.5 )%
                                                                           
 
We considered the negative volume trend for Spheris in our acquisition valuation. Net revenues for Spheris were $156.6 million and $35.2 million for the year ended December 31, 2009 and the three months ended March 31, 2010, respectively. Customers who submitted notices of termination prior to the acquisition generated revenues of $24.6 million and $1.7 million during the year ended December 31, 2009 and the three months ended March 31, 2010, respectively. Therefore, net revenues for the year ended December 31, 2009 and for the three months ended March 31, 2010, less revenue attributable to customers who submitted notices of termination prior to the Spheris Acquisition, were $132.0 million and $33.5 million, respectively.
 
Our Spheris integration efforts have focused on merging the new customer base acquired, integrating systems and eliminating cost redundancies. We expect the measures we have implemented since the Spheris Acquisition to yield $7.0 million of cost savings in the fourth quarter of 2010, representing an annualized impact of $28.0 million. We expect that the integration of Spheris will be fully completed by the first half of 2011.
 
Volume and Pricing Trends
 
The vast majority of our revenue is generated by providing clinical documentation services to our customers. Medical transcription by our MTs and MEs accounted for 87.7% of our net revenues for the six months ended June 30, 2010. Product sales and related maintenance contracts, patient financial services revenues and other made up the balance of our revenues. Our customers are generally charged a rate per character multiplied by the number of characters that we process. MedQuist Inc. volume had been declining prior to the MedQuist Inc. Acquisition, and we have been able to reverse this trend by increasing our sales (through the acquisition of new accounts and additional work types from existing customers) and decreasing our losses of existing customers. We have reduced losses of MedQuist Inc. customers primarily by improving our quality and improving our account management efforts. MedQuist Inc. volume increased 1% in 2009 compared to 2008, and increased 2.1% for the six months ended June 30, 2010 compared to the


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comparable period in 2009.
 
We base our pricing on various factors, principally market forces, the extent to which we can utilize our offshore production facilities, the extent to which customers utilize the ASR technology available in our solutions, the scope of services provided, and turnaround times requested by a particular customer. We work with our customers to evaluate how different solutions affect pricing and to determine what for them is an optimal mix of service level and price. Higher utilization of offshore production and ASR leads to lower costs for us, which permits us to offer better pricing to our customers while at the same time contributing to margin growth. We have successfully migrated a significant portion of MedQuist Inc.’s volume offshore and we will continue these efforts in relation to our combined businesses.
 
As technological advances and increased use of offshore resources have driven down industry costs, the average price per character has also declined as healthcare providers have sought to participate in the economic gains. We intend to monitor and adjust our pricing accordingly to remain competitive as these industry trends continue.
 
Operating Improvements
 
We have executed significant operational improvements since the MedQuist Inc. Acquisition. Cost of revenue on a per unit basis has declined due to the increased utilization of ASR technology and the increased percentage of volume produced offshore. Our use of speech recognition technology has increased from 31% to 62% over the eight quarters ended June 30, 2010. Additionally we have increased our offshore production as a percentage of our volume from 33% to 39% for the same period. As we continue to increase the use of ASR technology and move volume offshore, we expect to continue to reduce costs.
 
Some of our contracts specify lower prices for work performed offshore or using speech recognition technology. Therefore, our operating income will not increase by the full amount of the savings we realize. Additionally, management has been reducing support staff headcount in order to further reduce operating costs.
 
These improvements have resulted in gross margin percentages which have improved from 30.4% to 35.6% over the eight quarters ended June 30, 2010 despite lower average prices.
 
Selling, General and Administrative Expense Savings
 
We have made significant reductions in selling, general and administrative expenses since 2008. Such expenses were 26% of revenue in 2008 compared to 16% of revenue for the six months ended June 30, 2010. These savings were achieved primarily through headcount reductions and aggressive efforts to reduce other administrative expenses.
 
In connection with the Spheris Acquisition we have identified potential specific savings in the sales and marketing and general and administrative areas. We anticipate that these savings will be implemented throughout the remainder of 2010 and 2011.
 
Basis of Presentation
 
Revenue
 
We derive revenue primarily from providing clinical documentation solutions to health systems, hospitals and large group medical practices. Our customers are generally charged a fixed rate multiplied by the volume of work that we transcribe or edit. To a lesser extent we earn revenue by providing maintenance contracts, digital dictation solutions, speech recognition solutions and revenue cycle services. Approximately 95% of our revenue is from recurring services.
 
Cost of Revenues
 
Cost of revenue includes compensation of our direct employees and subcontractors involved in production, other production costs primarily related to operational and production management, quality assurance, quality control and customer and field service personnel and telecommunication and facility costs. Cost of revenue also includes


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the direct cost of technology products sold to customers. Compensation costs for personnel in the United States are directly related to clinical documentation revenue and are generally based on lines transcribed or edited multiplied by a specific rate, while personnel at our offshore production centers are generally paid fixed wages. Cost of revenues does not include depreciation or amortization.
 
Selling, General and Administrative Expense
 
Our selling, general and administrative expense consists primarily of marketing and sales costs, accounting costs, information technology costs, professional fees, corporate facility costs and corporate payroll and benefits expense.
 
Research and Development Expense
 
Our research and development expense consists primarily of personnel and related costs, including salaries and employee benefits for software engineers and consulting fees paid to independent consultants who provide software engineering services to us. To date, our research and development efforts have been devoted to new products and service offerings and increases in features and functionality of our existing products and services.
 
Depreciation and Amortization
 
Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets, which range from two to seven years for furniture, equipment and software, and the lesser of the lease term or estimated useful life for leasehold improvements. Intangible assets are being amortized using the straight-line method over their estimated useful lives which range from three to twenty years.
 
Cost of Legal Proceedings and Settlements
 
Cost of legal proceedings and settlements includes settlement of claims, ongoing litigation, and associated legal and other professional fees incurred.
 
Critical Accounting Policies and Use of Estimates
 
We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the United States, or GAAP. We believe there are several accounting policies that are critical to understanding our historical and future performance, as these policies affect the reported amounts of revenue and other significant areas that involve management’s judgments and estimates. These critical accounting policies and estimates have been discussed with our audit committee.
 
The preparation of our consolidated financial statements requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, expense and related disclosure of contingent liabilities. On an ongoing basis, we evaluate these estimates and judgments. We base these estimates on historical experience and on various other assumptions that are believed to be reasonable at such time, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other independent sources. Actual results may ultimately differ from these estimates. Critical accounting policies are those policies that require management’s subjective and complex judgments, often as a result of the need to make estimates about the effect of inherently uncertain matters that may change in subsequent periods. While there are a number of accounting policies, methods and estimates affecting our consolidated financial statements as addressed in Note 2 to our consolidated financial statements, our critical accounting policies include the following:
 
Revenue Recognition
 
We recognize medical transcription services revenue when persuasive evidence of an arrangement exists, the price is fixed or determinable, services have been rendered and collectability is reasonably assured. These services are recorded using contracted rates and are net of estimates for customer credits. Historically, our estimates have been reasonably accurate. If actual results are higher or lower than our estimates, we would have to adjust our estimates and financial statements in future periods.


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Accounts Receivable and Allowance for Doubtful Accounts
 
Accounts receivable are recorded at the invoiced amount and do not bear interest. The carrying value of accounts receivable approximates fair value. The allowance for doubtful accounts is our best estimate of potential losses resulting from the inability of our customers to make required payments due. This allowance is used to state trade receivables at estimated net realizable value.
 
We estimate uncollectible amounts based upon our historical write-off experience, current customer receivable balances, aging of customer receivable balances, the customer’s financial condition and current economic conditions. Historically, our estimates have been adequate to provide for our accounts receivable exposure.
 
Additionally, we enter into medical transcription service contracts that may contain provisions for performance penalties in the event we do not meet certain required service levels, primarily related to turnaround time on transcribed reports. We reduce revenue for any such performance penalties and service level credits incurred and have included an estimate of such penalties and credits in our allowance for uncollectible accounts.
 
Valuation of Long-Lived and Other Intangible Assets and Goodwill
 
In connection with acquisitions, we allocate portions of the purchase price to tangible and intangible assets, consisting primarily of acquired technologies and customer relationships, based on independent appraisals received after each acquisition, with the remainder allocated to goodwill. As of June 30, 2010, we had $99.4 million of goodwill and $118.0 million of intangible assets. We assess the realizability of goodwill and intangible assets with indefinite useful lives at least annually, or sooner if events or changes in circumstances indicate that the carrying amount may not be recoverable. We have determined that we have three reporting units but a sole operating segment.
 
We review our long-lived assets, including amortizable intangibles, for impairment when events indicate that their carrying amount may not be recoverable. When we determine that one or more impairment indicators are present for an asset, we compare the carrying amount of the asset to net future undiscounted cash flows that the asset is expected to generate. If the carrying amount of the asset is greater than the net future undiscounted cash flows that the asset is expected to generate, we then compare the fair value to the book value of the asset. If the fair value is less than the book value, we recognize an impairment loss. The impairment loss is the excess of the carrying amount of the asset over its fair value.
 
Some of the events that we consider as impairment indicators for our long-lived assets, including goodwill, are:
 
  •  our net book value is greater than the fair value;
 
  •  significant adverse economic and industry trends;
 
  •  significant decrease in the market value of the asset;
 
  •  the extent that we use an asset or changes in the manner that we use it;
 
  •  significant changes to the asset since we acquired it; and
 
  •  other changes in circumstances that potentially indicate all or a portion of our business will be sold.
 
Deferred Income Taxes
 
Deferred tax assets represent future tax benefits that we expect to be able to apply against future taxable income. Our ability to utilize the deferred tax assets is dependent upon our ability to generate future taxable income. To the extent that we believe it is more likely than not that all or a portion of the deferred tax asset will not be utilized, we record a valuation allowance against that asset. In making that determination we consider all positive and negative evidence and give stronger consideration to evidence that is objective in nature.
 
Commitments and Contingencies
 
We routinely evaluate claims and other potential litigation to determine if a liability should be recorded in the event it is probable that we will incur a loss and can estimate the amount of such loss.


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Customer Accommodation Program
 
In response to customers’ concerns regarding historical billing matters, MedQuist Inc. established a plan to offer financial accommodations to certain of its customers during 2005 and 2006 and recorded the related liability at such time. In 2008 MedQuist Inc. reached an agreement on customer litigation resolving all claims by the named parties. Since then we have not made additional offers. The liability balance was $11.5 million as of June 30, 2010.
 
MedQuist Inc. is unable to predict how many customers, if any, may accept the outstanding accommodation offers on the terms proposed by it, nor it is able to predict the timing of the acceptance (or rejection) of any outstanding accommodation offers. Until any offers are accepted, MedQuist Inc. may withdraw or modify the terms of the accommodation program or any outstanding offers at any time. In addition, MedQuist Inc. is unable to predict how many future offers, if made, will be accepted on the terms proposed by it. We regularly evaluate whether to proceed with, modify or withdraw the accommodation program or any outstanding offers. To the extent the program were withdrawn or modified, our financial statements would be affected.


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Consolidated Results of Operations
 
Comparison of Six Months Ended June 30, 2009 and 2010
 
The following tables set forth our unaudited consolidated results of operations for the periods indicated below:
 
                                 
 
    Six Months Ended June 30,  
    2009     2010  
          % of Net
          % of Net
 
    Amount     Revenues     Amount     Revenues  
          (Unaudited)        
          (In thousands)        
 
Net revenues
  $ 188,539       100 %   $ 200,592       100 %
Cost of revenues
    121,755       65 %     128,641       64 %
                                 
Gross profit
    66,784       35 %     71,951       36 %
                                 
Operating expenses
                               
Selling, general and administrative
    31,764       17 %     32,706       16 %
Research and development
    4,796       3 %     5,593       3 %
Depreciation and amortization
    13,610       7 %     15,068       8 %
Cost of legal proceedings and settlements
    12,158       6 %     2,152       1 %
Acquisition related charges
                6,045       3 %
Restructuring charges
                966       0 %
                                 
Total operating expenses
    62,328       33 %     62,530       31 %
                                 
Operating income
    4,456       2 %     9,421       5 %
Interest expense, net
    (4,660 )     (2 )%     (7,351 )     (4 )%
Equity in income (loss) of affiliated companies
    408       0 %     546       0 %
Other income
                108       0 %
                                 
Income before income taxes and noncontrolling interests
    204       0 %     2,724       1 %
Income tax provision (benefit)
    639       0 %     (326 )     0 %
                                 
Net income (loss)
    (435 )     0 %     3,050       2 %
Less: Net income attributable to noncontrolling interests
    (2,335 )     (1 )%     (2,497 )     (1 )%
                                 
Net income (loss) attributable to CBaySystems Holdings Limited
  $ (2,770 )     (1 )%   $ 553       0 %
                                 
Adjusted EBITDA(1)
  $ 27,970       15 %   $ 33,760       17 %
 
(1) See “Selected Consolidated Financial and Other Data” for a reconciliation of net income (loss) attributable to CBaySystems Holdings Limited to Adjusted EBITDA.
 
Net Revenues
 
Net revenues increased by $12.1 million, or 6%, to $200.6 million for the six months ended June 30, 2010 compared to $188.5 million for the six months ended June 30, 2009. The Spheris Acquisition contributed $26.4 million in incremental revenue for the six months ended June 30, 2010 which was partially offset primarily by a decrease of $9.0 million in revenues from clinical documentation solutions due to lower prices, as well as lower revenue cycle management, product and maintenance contract revenue.


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Cost of Revenues
 
Cost of revenues increased $6.9 million, or 6%, to $128.6 million for the six months ended June 30, 2010 compared to $121.8 million for the six months ended June 30, 2009. This was attributable primarily to:
 
  •  the Spheris Acquisition which added $18.8 million in costs;
 
  •  the impact of cost savings of $10.4 million from the increased use of offshore resources, increased use of speech recognition and reduced staffing levels; and
 
  •  reduction of other costs of $1.5 million.
 
Selling, General and Administrative
 
Selling, general and administrative expense increased $942,000, or 3%, to $32.7 million for the six months ended June 30, 2010 compared to $31.8 million for the six months ended June 30, 2009. The Spheris Acquisition added $3.1 million in costs, offset by $1.9 million in cost reductions in our revenue cycle management business and $1.0 million in cost reductions for professional fees and staffing.
 
Research and Development
 
Research and development expense increased $797,000, or 17%, to $5.6 million for the six months ended June 30, 2010 compared to $4.8 million for the six months ended June 30, 2009. The increase was primarily due to the Spheris Acquisition, which added $1.1 million in research and development expense.
 
Depreciation and Amortization
 
Depreciation and amortization increased $1.5 million, or 11%, to $15.1 million for the six months ended June 30, 2010 compared to $13.6 million for the six months ended June 30, 2009. The increase was primarily due to the amortization of acquired intangible assets of $1.2 million associated with the Spheris Acquisition.
 
Cost of Legal Proceedings and Settlements
 
Cost of legal proceedings and settlements decreased $10.0 million, or 82%, to $2.2 million for the six months ended June 30, 2010 compared to $12.2 million for the six months ended June 30, 2009. The decrease was due to the costs incurred in 2009 related to the Anthurium settlement of $5.9 million, related legal fees of $3.8 million and other legal fees of $1.2 million partially offset by the 2010 accrual of $900,000 related to the Kaiser litigation which was settled.
 
Acquisition Related Charges
 
We incurred acquisition related charges of $6.0 million related to the Spheris Acquisition for the six months ended June 30, 2010.
 
Restructuring Charges
 
During the six months ended June 30, 2010, we recorded restructuring charges of $1.0 million primarily related to employee severance. We expect that restructuring activities and related charges will continue into early 2011 as management identifies opportunities for synergies resulting from the Spheris Acquisition including the elimination of redundant functions.
 
Interest Expense, net
 
Interest expense, net increased $2.7 million, or 58%, to $7.4 million for the six months ended June 30, 2010 compared to $4.7 million for the six months ended June 30, 2009. The increase was due to $3.8 million, which is related to the debt incurred in connection with the Spheris Acquisition, partially offset by a decrease of $1.2 million in interest expense as a result of the 2009 repayment of the bridge note incurred in connection with the MedQuist Inc. Acquisition.


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Income Tax Provision
 
Our consolidated income tax expense consists principally of an increase in deferred tax liabilities related to goodwill amortization deductions for income tax purposes during the applicable period as well as state and foreign income taxes, offset by a tax benefit related to the reversal of reserves for various state jurisdictions as agreements on the liabilities were reached. The tax benefit for the six months ended June 30, 2010 includes the reversal of approximately $500,000 from our accrual for various state uncertain tax positions as a result of filing voluntary disclosure agreements with state jurisdictions. We recorded a valuation allowance to reduce our net deferred tax assets to an amount that is more likely than not to be realized in future years.
 
We expect that our consolidated income tax expense for the year ended December 31, 2010, similar to the year ended December 31, 2009, will consist principally of an increase in deferred tax liabilities related to goodwill amortization deductions for income tax purposes during the applicable year as well as state and foreign income taxes. We regularly assess the future realization of deferred taxes and whether the valuation allowance against the majority of domestic deferred tax assets is still warranted. To the extent sufficient positive evidence, including past results and future projections, exists to benefit all or part of these benefits, the valuation allowance will be released accordingly.
 
Net Income Attributable to Noncontrolling Interests
 
Net income attributable to noncontrolling interests for the six months ended June 30, 2010 increased by $200,000 to $2.5 million compared to $2.3 million for the six months ended June 30, 2009. The increase in net income attributable to noncontrolling interests was due to the increase in the net income of MedQuist Inc.


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Comparison of Years Ended December 31, 2008 and 2009
 
The following table sets forth our consolidated results of operations for the periods indicated below:
 
                                 
 
    Years Ended December 31,  
    2008     2009  
          % of Net
          % of Net
 
    Amount     Revenues     Amount     Revenues  
          (In thousands)        
 
Net revenues
  $ 193,673       100 %   $ 371,768       100 %
Cost of revenues
    125,074       65 %     239,549       64 %
                                 
Gross profit
    68,599       35 %     132,219       36 %
                                 
Operating expenses
                               
Selling, general and administrative
    51,243       26 %     60,632       16 %
Research and development
    6,099       3 %     9,604       3 %
Depreciation and amortization
    14,906       8 %     26,977       7 %
Cost of legal proceedings and settlements
    5,311       3 %     14,943       4 %
Acquisition related charges
                1,246       0 %
Goodwill impairment charge
    98,972       51 %            
Restructuring charges
    2,106       1 %     2,727       1 %
                                 
Total operating expenses
    178,637       92 %     116,129       31 %
                                 
Operating income (loss)
    (110,038 )     (57 )%     16,090       4 %
Interest expense, net
    (3,954 )     (2 )%     (9,132 )     (2 )%
Equity in income of affiliated companies
    66       0 %     1,933       1 %
Other income
    9       0 %     11       0 %
                                 
Income (loss) before income taxes and noncontrolling interests
    (113,917 )     (59 )%     8,902       2 %
Income tax (provision) benefit
    5,398       3 %     (1,082 )     0 %
                                 
Net income (loss)
    (108,519 )     (56 )%     7,820       2 %
Less: Net income attributable to noncontrolling interest
    (5,154 )     (3 )%     (7,085 )     (2 )%
                                 
Net income (loss) attributable to CBaySystems Holdings Limited
  $ (113,673 )     (59 )%   $ 735       0 %
                                 
Adjusted EBITDA(1)
  $ 18,886       10 %   $ 60,130       16 %
 
(1) See “Selected Consolidated Financial and Other Data” for a reconciliation of net income (loss) attributable to CBaySystems Holdings Limited to Adjusted EBITDA.
 
Net Revenues
 
Net revenues increased $178.1 million, or 92%, to $371.8 million for the year ended December 31, 2009 compared to $193.7 million for the year ended December 31, 2008. This increase was attributable primarily to:
 
  •  $171.5 million from the consolidation of MedQuist Inc. for a full year resulting from our acquisition of MedQuist Inc. in August 2008; and
 
  •  an increase in clinical documentation revenue of $11.0 million due to organic volume growth partially offset by a decrease in our revenue cycle management revenue by $4.4 million largely due to customer attrition.


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Cost of Revenues
 
Cost of revenues increased $114.5 million, or 92%, to $239.5 million for the year ended December 31, 2009 compared to $125.1 million for the year ended December 31, 2008. This increase was attributable primarily to:
 
  •  $110.8 million from the consolidation of MedQuist Inc. for a full year; and
 
  •  an increase of $5.7 million in clinical documentation cost of revenue, primarily due to increased personnel cost to support expansion of capacity, partially offset by a reduction on $2.1 million in our revenue cycle management business costs to better align costs with revenue.
 
Selling, General and Administrative
 
Selling, general and administrative expense increased $9.4 million, or 18%, to $60.6 million for the year ended December 31, 2009 compared to $51.2 million for the year ended December 31, 2008. This increase was primarily attributable to:
 
  •  consolidation of a full-year of MedQuist Inc. selling, general and administrative expense of $13.9 million;
 
  •  increase in share based compensation charge of $798,000;
 
  •  full year impact of the cost of our new management team and corporate costs in 2009 amounting to $2.6 million; offset by
 
  •  charges in 2008 amounting to $7.6 million comprised of $5.6 million of acquisition related costs incurred in connection with the MedQuist Inc. Acquisition and $2.1 million for the write-off of uncollectible accounts receivable.
 
Research and Development
 
Research and development expense increased $3.5 million, or 57%, to $9.6 million for the year ended December 31, 2009 compared to $6.1 million for the year ended December 31, 2008. This increase was attributable primarily to the consolidation of a full-year of MedQuist Inc.’s research and development expenses.
 
Depreciation and Amortization
 
Depreciation and amortization expense increased $12.1 million, or 81%, to $27.0 million for the year ended December 31, 2009 compared to $14.9 million for the year ended December 31, 2008. This increase was attributable primarily to the consolidation of a full-year of MedQuist Inc. depreciation and amortization expense including the impact of amortization of acquired intangible assets amounting to $12.5 million.
 
Cost of Legal Proceedings and Settlement