-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RinLQelAKBwJ1poTXJafJhz8xP1w17S18jWpaZ2RS7k87x42w4mgrBuI5JTOW93U IO9nKztcXZTAehckCWa4rg== 0000950116-99-000503.txt : 19990326 0000950116-99-000503.hdr.sgml : 19990326 ACCESSION NUMBER: 0000950116-99-000503 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19990325 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDQUIST INC CENTRAL INDEX KEY: 0000884497 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 222531298 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3 SEC ACT: SEC FILE NUMBER: 333-75005 FILM NUMBER: 99571980 BUSINESS ADDRESS: STREET 1: FIVE GREENTREE CENTRE STE 311 STREET 2: STATE HIGHWAY 73 N CITY: MARLTON STATE: NJ ZIP: 08053 BUSINESS PHONE: 6095968877 MAIL ADDRESS: STREET 1: 5 GREENTREE CENTRE SUITE 311 STREET 2: ATTN BRUCE VAN FOSSEN CITY: MARLTON STATE: NJ ZIP: 08053 S-3 1 As filed with the Securities and Exchange Commission on March 24, 1999 Registration No. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------- MEDQUIST INC. (Exact name of registrant as specified in its charter) NEW JERSEY 22-2531298 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) Five Greentree Centre, Suite 311, Marlton, NJ 08053 (609) 596-8877 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ------------------------------ John M. Suender Senior Vice President, General Counsel and Secretary MedQuist Inc. Five Greentree Centre, Suite 311 Marlton, NJ 08053 (609) 596-8877 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------------ With copies to: James D. Epstein, Esq. Robert S. Risoleo, Esq. Pepper Hamilton LLP Sullivan & Cromwell 3000 Two Logan Square 125 Broad Street Philadelphia, PA 19103 New York, NY 10004 (215) 981-4000 (212) 558-4000 ------------------------------ Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. ------------------------------ If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. / / If any of the securities registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / 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. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / CALCULATION OF REGISTRATION FEE - --------------------------------------------------------------------------------
Proposed Proposed maximum maximum Title of shares Amount to be aggregate price aggregate offering Amount of to be registered registered per share (1) price (1) registration fee Common Stock, no par value .. 4,830,000 shares $27.69 $133,742,700 $37,181
- -------------------------------------------------------------------------------- (1) Calculated in accordance with Rule 457(c) based on the average of the high and low sale prices of the common stock as reported on the Nasdaq National Market on March 23, 1999. 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 Securities and Exchange Commission, acting pursuant to Section 8(a), may determine. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- This information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. Subject to Completion. Dated March 24, 1999. [GRAPHIC OMITTED] 4,193,467 Shares MedQuist Inc. Common Stock -------------------- This prospectus relates to an offering of 4,193,467 shares of common stock of MedQuist Inc. MedQuist is offering 1,000,000 of the shares to be sold in the offering. The selling shareholders identified in the table on page 26 of this prospectus are offering an additional 3,193,467 of the shares to be sold in the offering. MedQuist will not receive any of the proceeds from the sale of the shares sold by the selling shareholders. The common stock is quoted on the Nasdaq National Market under the symbol "MEDQ". On March 22, 1999, the last reported sale price for MedQuist's common stock on the Nasdaq National Market was $30.06 per share. See "Risk Factors" beginning on page 6 to read about certain factors you should consider before buying shares of the common stock. -------------------- Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense. --------------------
Per Share Total ----------- ------ Initial public offering price ............................... $ $ Underwriting discount ....................................... $ $ Proceeds, before expenses, to MedQuist ...................... $ $ Proceeds, before expenses, to selling shareholders .......... $ $
The underwriters may, under certain circustances, purchase up to an additional 629,020 shares from MedQuist at the initial public offering price less the underwriting discount. -------------------- The underwriters expect to deliver the shares against payment in New York, New York on , 1999. Goldman, Sachs & Co. BancBoston Robertson Stephens Donaldson, Lufkin & Jenrette Volpe Brown Whelan & Company -------------------- Prospectus dated , 1999. [THIS PAGE INTENTIONALLY LEFT BLANK] PROSPECTUS SUMMARY The following summary highlights information contained elsewhere in this prospectus. Because this is a summary, it is not complete and does not contain all of the information that you should consider before investing in the common stock. You should read the entire prospectus carefully. Unless stated otherwise, the information in this prospectus assumes no exercise of the underwriters' option to purchase additional shares. MedQuist MedQuist is the leading national provider of medical transcription services, a key component in the provision of healthcare services. Transcription is the process by which dictation is converted into an electronic medical report. The timely production of accurate reports is necessary for patient care and for healthcare providers to receive reimbursement. Through our approximately 6,000 transcriptionists, proprietary software, sophisticated digital dictation equipment and ability to interface with healthcare providers' computer systems, we provide customized solutions to shorten our customers' billing cycles and reduce their overhead and other administrative costs. We serve approximately 2,300 clients nationwide through our 77 client service centers. As a result of internal growth and acquisitions, our revenue has increased from $61.5 million in 1996 (before restatements for acquisitions accounted for as pooling of interests) to $271.7 million in 1998. In December 1998, we acquired The MRC Group, Inc. adding approximately 500 clients and 2,400 experienced medical transcriptionists. MRC had revenue of approximately $108.0 million for the year ended December 31, 1997. Our experienced management team and operating structure have enabled us to improve our operating margins. Our growth has enabled us to take advantage of efficiencies such as a larger network of transcriptionists and increased negotiating power with our vendors, including telecommunication providers. We believe that the demand for outsourced medical transcription services will increase due to: o continued consolidation among healthcare service providers; o increased need for a diverse group of healthcare providers to communicate and share medical data; o increased importance of reducing overall healthcare costs; and o increased focus of government agencies on detecting fraud and abuse in the billing practices of healthcare providers. Our objective is to maintain our position as the leading national provider of medical transcription services and to enhance that position as the information needs of healthcare providers continue to expand and evolve. Our strategy contains five major initiatives. First, we will continue to focus on increasing sales to our existing clients, including both medical records departments and other departments of hospitals. Second, we will pursue new clients, including additional hospital departments and non-hospital healthcare companies. Third, we will continue to focus on improving the profitability of our business by spreading the fixed portion of our overhead over a growing revenue base. Fourth, we will pursue strategic relationships with companies that provide new technologies or relationships that can enhance the services we provide to our clients. Fifth, we will continue to pursue acquisitions that will expand our client base, network of qualified transcriptionists and geographic presence. MedQuist was incorporated in New Jersey in 1984 and reorganized in 1987. Our executive offices are located at Five Greentree Centre, Suite 311, Marlton, New Jersey 08053 and our telephone number is (609) 596-8877. 3 The Offering Common stock offered by MedQuist ......................... 1,000,000 shares Common stock offered by the selling shareholders ......... 3,193,467 shares ----------------- Total shares offered ..................................... 4,193,467 shares ================= Common stock outstanding after the offering .............. 34,727,120 shares
Use of Proceeds........... MedQuist intends to use the net proceeds from the offering for working capital and general corporate purposes, including acquisitions. MedQuist will not receive any proceeds from the sale of common stock by the selling shareholders. Risk Factors.............. An investment in the common stock involves substantial risks. You should carefully read "Risk Factors" beginning on page 6 before buying shares of the common stock. Nasdaq National Market Symbol............ MEDQ 4 Summary Financial Data The following financial information is derived from MedQuist's audited financial statements for the years ended December 31, 1996, 1997 and 1998 included in this prospectus, from its audited financial statements for the year ended December 31, 1995, and from its unaudited financial statements for the year ended December 31, 1994. The Company's financial statements have been restated to reflect MedQuist's 1998 acquisitions accounted for as pooling of interests. This information is only a summary and you should read it in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" beginning on page 12, MedQuist's financial statements and related notes and other information that MedQuist has filed with the SEC. See "Where You Can Find More Information" on page 31.
Year Ended December 31, -------------------------------------------------------------------- (In thousands, except per share data) 1994 1995 1996 1997 1998 ---------- ----------- ----------- ------------- ----------- Statement of Operations Data: Revenue ....................................... $59,228 $109,657 $152,109 $ 216,158 $271,655 Costs and expenses: Cost of revenue .............................. 46,873 86,265 118,978 169,235 209,587 Selling, general and administrative .......... 6,184 9,144 11,908 14,362 16,061 Depreciation ................................. 2,581 5,752 7,372 10,339 12,697 Amortization of intangible assets ............ 264 896 3,150 5,652 3,757 Transaction costs and restructuring charges ..................................... -- 347 644 2,075 18,221 ------- -------- -------- --------- -------- Total operating expenses .................... 55,902 102,404 142,052 201,663 260,323 ------- -------- -------- --------- -------- Operating income .............................. 3,326 7,253 10,057 14,495 11,332 Interest expense (income), net ................ 2,648 4,252 2,049 469 (325) ------- -------- -------- --------- -------- Income from continuing operations before income taxes ................................. 678 3,001 8,008 14,026 11,657 Income tax provision (benefit) ................ (529) 640 2,720 5,293 8,472 ------- -------- -------- --------- -------- Income from continuing operations ............. 1,207 2,361 5,288 8,733 3,185 Discontinued operations ....................... 1,612 (1,729) -- -- -- Extraordinary item ............................ -- (545) -- -- -- ------- -------- -------- --------- -------- Net income .................................... 2,819 87 5,288 8,733 3,185 Inducement of warrant exercise ................ -- -- (707) -- -- ------- -------- -------- --------- -------- Net income available to common shareholders ................................. $ 2,819 $ 87 $ 4,581 $ 8,733 $ 3,185 ======= ======== ======== ========= ======== Basic income per share: Continuing operations ........................ $ 0.12 $ 0.23 $ 0.22 $ 0.28 $ 0.10 Discontinued operations ...................... 0.17 (0.17) -- -- -- Extraordinary item ........................... -- (0.05) -- -- -- Inducement of warrant exercise ............... -- -- (0.03) -- -- ------- -------- -------- --------- -------- $ 0.29 $ 0.01 $ 0.19 $ 0.28 $ 0.10 ======= ======== ======== ========= ======== Diluted income per share: Continuing operations ........................ $ 0.12 $ 0.22 $ 0.20 $ 0.26 $ 0.09 Discontinued operations ...................... 0.17 (0.16) -- -- -- Extraordinary item ........................... -- (0.05) -- -- -- Inducement of warrant exercise ............... -- -- (0.03) -- -- ------- -------- -------- --------- -------- $ 0.29 $ 0.01 $ 0.17 $ 0.26 $ 0.09 ======= ======== ======== ========= ======== Balance Sheet Data: As of December 31, ----------------------------------------------------------------------- (In thousands) 1994 1995 1996 1997 1998 -------- -------- -------- --------- -------- Working capital ................................ $ 6,453 $ 13,142 $ 33,483 $ 36,608 $ 41,852 Total assets ................................... 85,811 91,191 158,551 173,773 187,311 Long-term debt, net of current portion ......... 39,577 23,342 9,964 7,589 215 Shareholders' equity ........................... 12,096 30,572 120,710 131,373 151,186
5 RISK FACTORS An investment in the common stock involves many risks including market, liquidity, credit, operational, legal and regulatory risks. These risks may be substantial and are inherent in the business of MedQuist. You should consider carefully the following information about these risks, together with the other information in this prospectus, before buying shares of common stock. If any of the following risks actually occur, our business and prospects could be materially adversely affected, the trading price of our common stock could decline, and you might lose all or part of your investment. Our success depends upon our ability to recruit and retain qualified transcriptionists Our success depends, in part, upon our ability to attract and retain qualified transcriptionists who can provide accurate transcription quickly. Competition for skilled transcriptionists is intense. In addition, we require that transcriptionists have substantial experience or receive substantial training before being hired. Our growth strategy includes acquisitions As part of our growth strategy, we have made, and plan to continue to make, acquisitions of other companies. A portion of our recent growth in revenue is a result of acquisitions of other medical transcription companies. The number of large acquisition candidates is decreasing. As a result, our acquisition activities may not be as significant in the future and our growth rate could decline. In addition, if we are successful in pursuing acquisitions, we may need to borrow money or incur other liabilities to finance our acquisition activity. This could limit our financial flexibility. We may also be required to issue additional shares of stock which could result in dilution to our shareholders. We depend on our senior management team Our senior management team is crucial to our success. David A. Cohen, our chief executive officer, and John A. Donohoe, our chief operating officer, have 56 years of combined experience in the medical transcription industry. New services or products using new technologies could adversely affect the demand for our services The introduction of competing services or products incorporating new technologies, such as voice recognition capabilities or other alternative means of data entry, could adversely affect the demand for our services. To maintain our leadership position, we must improve our services to keep pace with technological developments and changes in the marketplace. We depend on a single line of business We anticipate that we will continue to derive substantially all of our revenue from providing medical transcription services. A reduction in demand or an increase in competition in the market for our transcription services could have a material adverse effect on our business, financial condition and results of operations. Our growth strategy includes the expansion of our customer base Our core customer base has been the medical records departments of hospitals. We plan to continue the recent expansion of our client base to include additional outpatient clinics, physician practice groups and direct patient care departments within hospitals. The success of our ongoing expansion is important to our future because we expect an increase in the provision of healthcare services at sites other than hospitals. If we are not able to maintain our current rate of growth in revenue and earnings, the market price of our common stock could decline Our revenue and profits have grown in recent periods as a result of both internal growth and acquisitions. The rate of growth in revenue and profits may decline as a result of a variety of factors, including: o our ability to hire and retain transcriptionists; o size and timing of acquisitions; o integration of acquired businesses into our operations; o changes in demand for our services; and o competitive conditions in the industry. 6 It is possible that our future operating results may be below the expectations of stock market analysts and investors. Any shortfall could cause a decline in the price of our common stock. In addition, a decline in the price of our common stock could make it more difficult or expensive for us to acquire companies by issuing common stock. The market price of our common stock may be volatile The market price of our common stock has been volatile in the past and may be volatile in the future. Our common stock price may be affected by many factors, including the following: o fluctuations in our operating results; o acquisitions; o technological innovations or new product or service introductions by us or our competitors; o government regulations; o healthcare legislation and reforms; and o general market and economic conditions. The stock market in recent years has experienced substantial price and volume fluctuations. This has been accompanied by extreme volatility in the stock prices of healthcare service companies that often has been unrelated to the operating performance of these companies. Similar market activity could adversely affect the market price of our common stock in the future. We compete with many others in the market for medical transcription services We compete with approximately 1,500 medical transcription service companies in the United States. These companies offer services that are similar to ours and compete with us for both clients and qualified transcriptionists. We also compete with the in-house transcription staffs of our current and potential clients. Increased competition may result in lower prices for our services, higher payroll costs, reduced operating margins and the inability to increase our market share. Although many of our competitors are small local or regional companies, several of our competitors are large national companies. These companies include Transcend Services, Inc., Rodeer Systems, Inc., and Lanier Transcription Services, a subsidiary of Harris Corp. In addition, we anticipate increasing competition from other large companies that were not traditionally in the medical transcription business, such as IDX Systems Corporation. Current and potential competitors may have financial, technical and marketing resources that are greater than ours. As a result, competitors may be able to respond more quickly to evolving technological developments or changing customer needs or devote greater resources to the development, promotion or sale of their services than we can. In addition, competition may increase due to consolidation of transcription companies. Current and potential competitors may establish cooperative relationships with third parties to increase their ability to attract our current and prospective clients. A change in law or a challenge to our classification of our at-home transcriptionists may result in additional employment costs, taxes or penalties All at-home transcriptionists hired by MedQuist and the At-home transcriptionists who came to work for MedQuist as a result of our acquisition of MRC and all at-home transcriptionists hired by our MedQuist MRC subsidiary are treated as employees for state tax, benefits, unemployment, federal income tax and social security tax purposes. Other at-home transcriptionists hired by MedQuist are treated as independent contractors for state tax, benefits and unemployment purposes and as statutory employees for federal income tax and social security tax purposes. If there is a change in law or a successful challenge to our position regarding treatment of at-home transcriptionists as independent contractors, we may have to pay or incur additional employment costs, taxes and penalties. Competitors and software providers may claim that we are infringing on their proprietary rights Defending these claims, even if they have no merit, can be time-consuming and expensive. In addition, in the event of infringement claims, we may be required to enter into royalty or licensing agreements or cease the claimed infringing activities. 7 We may be subject to liability if we fail to comply with confidentiality requirements We are subject to many laws, regulations and contractual provisions that require us to keep the medical information that we transcribe confidential. We may be subject to liability if we fail to comply with confidentiality requirements. Our customers and suppliers may not be Year 2000 compliant We rely heavily on the computer systems of our customers, suppliers and other organizations such as telephone companies in operating our business. If these systems are not Year 2000 compliant, our business, operating results and financial position could be materially and adversely affected. Significant number of shares eligible for future sale could lower the market price for our common stock Sales of large numbers of shares of common stock after the offering, or even the potential of those sales, would likely lower the market price of our common stock. After the offering, we will have 34,727,120 shares of common stock outstanding, substantially all of which will be freely tradeable. In addition, 4,433,000 shares which may be issued upon the exercise of outstanding options may be sold at various times after the offering. Anti-takeover provisions may make it more difficult for a third party to acquire control of us and could reduce the amount that shareholders would receive if we are sold Anti-takeover provisions contained in New Jersey law and in our charter, bylaws and contracts could make it more difficult for a third party to acquire control of MedQuist, even if that change in control would be beneficial to shareholders. These provisions could reduce the amount that shareholders would receive if we are sold. These anti-takeover provisions include the following: o New Jersey law prohibits us from entering into certain business combination transactions with any shareholder that owns 10% or more of our outstanding voting securities, except under limited circumstances. o Our charter gives our board of directors the authority to issue shares of preferred stock without shareholder approval. Any preferred stock could have rights, preferences and privileges that could adversely affect the voting power and the other rights of the holders of our common stock. o Our charter provides for staggered terms for the members of the board of directors, with each board member serving a three year term. o We have entered into severance arrangements with most of our senior management which provide for significant payments upon a change in control. o All outstanding options to purchase our stock would become exercisable immediately upon a change in control. FORWARD-LOOKING STATEMENTS Some of the information in this prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. These statements include forward-looking language such as "will likely result," "may," "are expected to," "is anticipated," "estimated," "projected," "intends to" or other similar words. Our actual results are likely to differ, and could differ materially, from the results expressed in, or implied by, these forward-looking statements. There are many factors that could cause these forward-looking statements to be incorrect, including but not limited to the risks described above under "Risk Factors". When considering these forward-looking statements, you should keep in mind these risk factors and the other cautionary statements in this prospectus, and should recognize that those forward-looking statements speak only as of the date made. Neither MedQuist nor the underwriters undertakes any obligation to update any forward-looking statement included in this prospectus. 8 USE OF PROCEEDS We estimate that the net proceeds from our sale of shares of common stock in this offering will be approximately $28,787,000 million (approximately $46,939,000 million if the underwriters exercise their option to purchase additional shares in full), after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. This estimate assumes an initial public offering price of $30.06 per share, which is the last reported sales price for the common stock on the Nasdaq National Market on March 22, 1999. We will not receive any proceeds from the sale of common stock by the selling shareholders. We currently intend to use the net proceeds of this offering for working capital and general corporate purposes, including possible acquisitions of businesses and assets that are complementary to ours. Although we have no current agreements to make any significant acquisitions, we regularly pursue acquisition opportunities and engage in negotiations. Pending such uses, we expect to invest the net proceeds from this offering in government securities and other short-term, investment-grade, interest-bearing instruments. 9 MARKET FOR THE COMMON STOCK AND DIVIDEND POLICY The common stock is traded on the Nasdaq National Market under the symbol "MEDQ". The following table sets forth the high and low reported prices for the Common Stock for the last two fiscal years and for the first quarter of 1999. The bid quotations for the Nasdaq National Market reflect inter-dealer prices, do not include retail mark-ups, mark-downs or commissions and may not necessarily reflect actual transactions. High Low ---------- ---------- 1997 First Quarter ............................ $ 9.33 $ 7.17 Second Quarter ........................... 10.42 6.33 Third Quarter ............................ 12.00 9.33 Fourth Quarter ........................... 17.56 10.81 1998 First Quarter ............................ $ 19.56 $ 15.00 Second Quarter ........................... 29.38 17.63 Third Quarter ............................ 33.00 20.50 Fourth Quarter ........................... 40.00 21.75 1999 First Quarter (through March 22) ......... $ 39.00 $ 29.25 The above noted bid quotations reflect a three for two stock split effected on September 9, 1997 and a two for one stock split effected on June 15, 1998. On March 22, 1999 the closing sale price for the Common Stock, as reported on the Nasdaq National Market, was $30.06 per share. We have never declared or paid any cash dividends on our capital stock. We expect to retain any future earnings to fund operations and the continued development of our business and, therefore, do not anticipate paying any cash dividends in the foreseeable future. In addition, our agreements with our senior lender restrict the payment of dividends. 10 CAPITALIZATION The table below sets forth our capitalization as of December 31, 1998 on an actual basis and as adjusted to reflect our sale of 1,000,000 shares of common stock in the offering at an assumed public offering price of $30.06 per share (the last reported sale price on the Nasdaq National Market on March 22, 1999), after deducting underwriting discounts and commissions and estimated offering expenses payable by us. This table should be read in conjunction with our consolidated financial statements and the other financial information included in this prospectus.
As of December 31, 1998 --------------------------- Actual As Adjusted ------------ ------------ (In thousands, except share data) Long-term debt, excluding current portion ............................. $ 215 $ 215 -------- ------- Shareholders' equity: Common stock, no par value, 60,000,000 shares authorized, 33,258,000 shares issued and outstanding (actual), and 34,258,000 shares issued and outstanding (as adjusted) (1) ......... -- -- Additional paid-in capital ........................................... 136,603 165,390 Retained earnings .................................................... 14,536 14,536 Unrealized gain on marketable securities ............................. 585 585 Deferred compensation ................................................ (538) (538) -------- -------- Total shareholder's equity ......................................... 151,186 179,973 -------- Total capitalization .............................................. $151,401 $180,188 ======== ========
- ------------ (1) Excludes approximately 4,433,000 shares of common stock which may be issued upon exercise of options outstanding as of December 31, 1998, and an additional 273,000 shares of common stock reserved for issuance upon exercise of options that may be granted in the future. As of December 31, 1998, the weighted average exercise price of all outstanding options was approximately $12.00 per share. 11 MANAGEMENT'S DISCUSSION AND ANALYISIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview We are the leading national provider of medical transcription services. Our fees are based primarily on contracted rates with our customers. We recognize revenue when we render services and deliver reports to our customers. Cost of revenue consists of all direct costs associated with providing transcription related services, including payroll, telecommunications, repairs and maintenance, rent and other direct costs. Most of our cost of revenue is variable. Selling, general and administrative expenses include costs associated with our senior executive management, marketing, accounting, legal and other administrative functions. Selling, general and administrative expenses are mostly fixed, but include certain variable components. From 1995 through 1998, we completed 18 acquisitions. Five acquisitions completed in 1998, including the acquisition of MRC, were accounted for as pooling of interests. Four of these acquisitions were material and, accordingly, we restated our financial statements. On December 10, 1998, MedQuist acquired MRC through the issuance of approximately 8.61 million shares of the Company's common stock. We believe that the MRC acquisition will better enable us to better utilize crucial resources and reduce corporate overhead by combining accounting, legal and human resources. Further, the additional transcriptionists should permit a more efficient workflow and faster customer service. In 1997, MRC's revenue and operating income, before its restructuring charge, were $108.0 million and $1.2 million, or 1.1% of its revenue. MedQuist's operating income, before restating for its pooling of interests acquisitions, was 14.1% of revenue in 1997. We believe that, over time, the operating margins of the combined company will continue to improve and achieve levels comparable to MedQuist's historical performance as a stand-alone company. Results of Operations The following table sets forth, for the periods indicated, certain financial data as a percentage of revenue, as restated for our acquisitions accounted for as a pooling of interests:
Year Ended December 31, --------------------------------------- 1996 1997 1998 ----------- ----------- ----------- Revenue .............................................. 100.0% 100.0% 100.0% Costs and expenses: Cost of revenue ..................................... 78.2 78.3 77.2 Selling, general and administrative ................. 7.8 6.6 5.9 Depreciation ........................................ 4.9 4.8 4.7 Amortization of intangible assets ................... 2.1 2.6 1.4 Transaction costs and restructuring charges ......... 0.4 1.0 6.7 ------ ------ ------ Operating income ..................................... 6.6 6.7 4.1 Interest income (expense), net ....................... ( 1.4) ( 0.2) 0.1 ------ ------ ------ Income before income taxes ........................... 5.2 6.5 4.2 Income tax provision ................................. 1.8 2.5 3.1 ------ ------ ------ Net income ........................................... 3.4% 4.0% 1.1% ====== ====== ======
--------------------------------- Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 Revenue. Revenue increased 25.7% from $216.2 million in 1997 to $271.7 million in 1998. The $55.5 million increase as compared to 1997 was composed of $43.5 million from internally generated growth and $12.0 million from acquisitions accounted for as purchase transactions. Cost of Revenue. Cost of revenue increased 23.9% from $169.2 million in 1997 to $209.6 million in 1998 and was directly related to the increase in revenue. As a percentage of revenue, cost of revenue decreased from 78.3% in 1997 to 77.2% in 1998 due primarily to the improved direct margins of MRC's business in 1998 versus 1997. 12 Selling, General and Administrative. Selling, general and administrative expenses increased 11.8% from $14.4 million in 1997 to $16.1 million in 1998. The increase was due primarily to increased administrative costs to support the increase in revenue, in addition to increased technology development costs. This increase was partially offset by decreased marketing costs at MRC. As a percentage of revenue, selling, general and administrative expenses decreased from 6.6% in 1997 to 5.9% in 1998. The percentage decrease was due primarily to our ability to spread the fixed portion of our overhead over a larger revenue base. Depreciation. Depreciation increased 23.3% from $10.3 million in 1997 to $12.7 million in 1998. The increase in depreciation was a result of increased capital expenditures to support the growth in revenue. As a percentage of revenue, depreciation remained relatively constant at 4.7% in 1998 compared to 4.8% in 1997. Amortization. Amortization of intangible assets was $5.7 million in 1997 compared to $3.8 million in 1998. The amount in 1997 includes amortization of noncompete agreements from prior business acquisitions that were fully amortized in late 1997. Interest. We had interest expense of $469,000 in 1997 and interest income of $325,000 in 1998. We repaid a significant portion of our debt in 1997 and invested our excess cash in 1998. Transaction Costs and Restructuring Charges. In 1998, we (1) incurred $11.0 million of transaction costs associated with pooling of interests business combinations, (2) incurred $682,000 of transaction costs related to MRC's terminated initial public offering and (3) recorded a $6.5 million restructuring charge associated with the MRC acquisition. As of December 31, 1998, $10.5 million of transaction costs associated with the pooling of interests acquisitions had been paid, with $500,000 included in accrued expenses for payments scheduled to be made in 1999. In June 1998, MRC filed a registration statement for an initial public offering that was terminated in September 1998 upon signing the merger agreement with the Company. All transaction costs related to MRC's terminated initial public offering were paid in 1998. In December 1998, our board of directors approved a restructuring plan associated with the MRC acquisition. When the board approved the plan, we recorded a $6.5 million charge, of which $3.8 million related to non-cancelable lease obligations on duplicate facilities, $1.6 million related to employee severance and $1.1 million related to contract cancellations and other exit costs. We expect to complete the restructuring in 1999. As of December 31, 1998, $567,000 of the employee severance and $410,000 in other restructuring costs had been paid. At December 31, 1998, $5.6 million was included in accrued expenses related to the restructuring. In 1997, MRC incurred a restructuring charge of $2.1 million related to the closure and consolidation of less profitable or redundant client service centers and other non-recurring acquisition and integration costs incurred in connection with MRC's acquisition of Medical Records Corp. As of December 31, 1998, $1.2 million related to closed facility leases remained in accrued expenses. Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 Revenue. Revenue increased 42.1% from $152.1 million in 1996 to $216.2 million in 1997. The $64.1 million increase as compared to 1996 was composed of $53.1 million from internally generated growth and $11.0 million from acquisitions accounted for as purchase transactions. Cost of Revenue. Cost of revenue increased 42.2% from $119.0 million in 1996 to $169.2 million in 1997. This increase was directly related to the increase in revenue. As a percentage of revenue, cost of revenue remained relatively constant at 78.2% in 1996 as compared to 78.3% in 1997. Selling, General and Administrative. Selling, general and administrative expenses increased 21.0% from $11.9 million in 1996 to $14.4 million in 1997. The increase was due primarily to increased administrative costs to support the increase in revenue, in addition to increased marketing costs and technology development costs incurred by MRC. As a percentage of revenue, selling, general and administrative expenses decreased from 7.8% in 1996 to 6.6% in 1997. The percentage decrease was due primarily to our ability to spread the fixed portion of our overhead over a larger revenue base. 13 Depreciation. Depreciation increased 39.2% from $7.4 million in 1996 to $10.3 million in 1997. The increase in depreciation was a result of capital expenditures made to support the growth in revenue. As a percentage of revenue, depreciation remained relatively constant at 4.8% in 1997 compared to 4.9% in 1996. Amortization. Amortization of intangible assets was $5.7 million in 1997 as compared to $3.2 million in 1996. The increase in 1997 was attributable to the acquisitions made in 1996 and 1997 accounted for as purchase transactions. Interest. Interest expense decreased from $2.0 million in 1996 to $469,000 in 1997. The decrease in 1997 was primarily related to the payment of our senior term loans, reduced borrowings under our revolving credit facility and the payment of the cash portion of the deferred purchase price on May 30, 1996 for our 1994 acquisition of Transcriptions, Ltd. This deferred purchase price was paid using a portion of the proceeds from our 1996 common stock offering. In 1996 we recorded $640,000 of non-cash imputed interest expense associated with the Transcriptions, Ltd. deferred purchase price. Restructuring Charges. MRC incurred restructuring charges of $2.1 million in 1997 and $644,000 in 1996. These charges were related to the closure and consolidation of less profitable or redundant facilities. In addition, the 1997 restructuring charge included other acquisition and integration costs incurred in connection with MRC's acquisition of Medical Records Corp. Liquidity and Capital Resources At December 31, 1998, we had working capital of $41.9 million, including $15.9 million of cash and cash equivalents, and no outstanding bank debt. During 1998, our operating activities provided cash of $22.9 million and during 1997, our operating activities provided cash of $ 21.4 million. Our cash flow from operating activities is generated primarily from our net income before depreciation and amortization, partially offset by increases in accounts receivable. In 1998, the increase in operating cash flow was also affected by increased accrued expenses, primarily related to the restructuring charge. During 1998, we used cash for investing activities of $15.9 million, consisting primarily of $14.0 million of capital expenditures. In addition, we generated $4.0 million in cash from sales of short-term investments and used $4.4 million for the acquisition of three transcription businesses accounted for under the purchase method. In addition, we paid $1.4 millon to a dissenting shareholder in connection with the Signal acquisition. During 1997, we used cash for investing activities of $18.4 million, consisting primarily of $13.7 million of capital expenditures. In addition, in 1997 we generated $1.0 million in cash from sales of short-term investments and used $5.6 million for the acquisition of eight transcription businesses accounted for under the purchase method. During 1998, cash used in financing activities was $5.5 million, consisting primarily of $10.0 million of debt repayments and $1.0 million of distributions to former stockholders of acquired S-corporations, offset by $5.5 million in proceeds from the issuance of common stock, including option and warrant exercises and sales in connection with employee benefit plans. During 1997, cash used in financing activities was $3.5 million, consisting primarily of $3.8 million of debt repayments, and $1.1 million of shareholder distributions to former stockholders of acquired S-corporations, and $676,000 to purchase and retire common stock, offset by $2.0 million in proceeds from the issuance of common stock, including option and warrant exercises and sales in connection with employee benefit plans. We have a borrowing facility with Chase Manhattan Bank. The Chase facility provides for a $10.0 million senior unsecured revolving credit facility expiring April 23, 2000. The Chase facility bears interest at resetting rates selected by the Company from various alternatives. The interest rate alternatives are either (1) the greater of (a) prime rate, (b) the federal funds rate plus 0.5%, and (c) the bank's certificate of deposit rate plus 1%, or (2) LIBOR plus 0.75%. The Chase facility also allows us to finance up to 100% of any acquisitions of companies that are in the business of providing transcriptions-related services. The financing of these acquisitions may be carved out of the Chase facility and amortized over five-year periods (20 consecutive quarters). Each acquisition term loan that is created would permanently reduce the remaining Chase facility commitment by a like amount. We can use the Chase facility for working capital and general corporate purposes. If any amounts under the Chase facility are repaid, other 14 than acquisition term loans, we may reborrow such amounts. The Chase facility includes financial and other covenants applicable to us, including limitations on capital expenditures and dividends. As of March 22, we had no outstanding borrowings under the Chase facility. We believe that cash flow generated from operations and borrowing capacity under the Chase facility will be sufficient to meet our current working capital and capital expenditure requirements. We expect capital expenditure requirements to be consistent with prior years as a percentage of revenue in 1999. Year 2000 Compliance We are aware of the issues associated with the programming code in existing computer systems as 2000 approaches. The Year 2000 problem is pervasive and complex as virtually every computer operation will be affected in some way by the rollover of the two digit year value to 00. The issue is whether computer systems will recognize date sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. We rely on our systems in operating and monitoring all aspects of our business. We also rely on the external systems of our customers, suppliers, telecommunication carriers, utilities and other organizations with which we do business. We have approached the Year 2000 problem in the following manner: o assessing, correcting and testing our internal systems; o obtaining assurance or information on the state of Year 2000 readiness of our material clients and suppliers; and o developing contingency plans, when practical, to address expected Year 2000 failures. A discussion of each of these areas follows. Internal Systems. In 1998, we conducted an assessment of our internal systems. This assessment covered embedded computer chips, computer software, computer hardware, telephones, communications equipment, facsimile equipment, scanners, copiers and voice recording systems which we own and were able to identify as critical to our ability to provide services to our clients. The assessment identified a variety of software and hardware issues that we needed to address to be prepared for 2000. Some of these issues include the need to: o upgrade or modify the BIOS (programs which allow personal computers to run) on some of our PCs (or replace the PC); o modify some of our server operating systems; o reset the dates or modify some of our voice capture systems; o modify the date fields of some of our interfaces; o upgrade the version level of the transcription software of some of our users and clients; o accelerate the conversion of some clients from outdated software applications to compliant software applications; and o upgrade some of the financial systems. June 30, 1999 is our internal target for rectifying Year 2000 issues for all mission critical applications. From July 1 to December 31, 1999, we plan to retest critical systems and evaluate non-critical applications for potential Year 2000 compliance issues. Clients and Suppliers. We also have exposure to Year 2000 problems that may be experienced by others. These risks include the inability to exchange electronic data and the risk of disruptions and failures of persons with whom we do business or on whom we or our clients rely. Our business interacts with or depends on the systems of clients, suppliers, telecommunication carriers, utilities, vendors, financial institutions and others. If we are not able to exchange information electronically with our clients and transcriptionists our business may be materially impacted. For example, our business relies heavily on telephone services. If phone service is lost, we will be unable to provide services until phone service is restored or contingency plans can be put in place. If our clients, suppliers, vendors and financial institutions are not Year 2000 compliant, there may be a material disruption to their businesses. These disruptions could negatively impact us in many ways, including: o a client may be unable to pay us; 15 o a financial institution may be unable to process checks drawn on our bank accounts, accept deposits or process wire transfers; o vendor deliveries of computer equipment and other supplies may be delayed or cease; o voice and data connections we use to share information may be interrupted; and o brokers who make a market in our stock may not be able to trade our stock. This list is not comprehensive. Other interruptions to our normal business activities may occur, the nature and extent of which we cannot foresee. In an effort to minimize the exposure to such third party Year 2000 problems, we have initiated a process of obtaining written assurances from these third parties that they will be Year 2000 compliant. Based on the response we receive from the third parties, we are identifying the associated risks to our business and making necessary changes. Contingency Plans. We are developing Year 2000 contingency plans where practical. These plans address alternatives to electronic processing of medical information, payroll, vendor payments, cash receipts from clients and communicating without e-mail. These plans include identifying alternative sources of goods and services and performing certain tasks manually. For example, these contingency plans include requiring physicians to dictate into hand held devices, delivering tapes from these devices to transcriptionists and printing paper copies of reports to be delivered to clients. In some situations, however, it is impractical to have an effective contingency plan. For example, a failure of our primary banking institution may interrupt our cash receipts and our ability to pay our employees and vendors in a timely manner. Our contingency plan may call for paying employees in cash, but may not be practical due to the amount of cash involved, the number of locations and the number of individuals to be paid. The number of Year 2000 failures we suffer may exceed our ability to address them all at one time. In addition, significant Year 2000 failures by third parties, including clients, may jeopardize our financial strength. In severe circumstances, our ability to continue as a going concern may be threatened or we may fail. We believe, however, that we are taking reasonable and prudent steps to address the Year 2000 problem based on information currently available to us. We will continue to monitor this issue and plan to modify our approach if we believe the circumstances warrant such a change. Based on the information available to date, we expect to incur approximately $200,000 in expense to correct operational problems such as BIOS fixes. We also believe we will incur approximately $1.2 million to replace and upgrade voice capture systems, which will be capitalized and depreciated over their estimated useful lives of five years. Quantitative And Qualitative Disclosure About Market Risk We generally do not use derivative financial instruments in our investment portfolio. We make investments in instruments that meet credit quality standards, as specified in our investment policy guidelines; the policy also limits the amount of credit exposure to any one issue, and type of instrument. We do not expect any material loss with respect to our investment portfolio. The following table provides information about our investment portfolio at December 31, 1998. For investment securities, the table presents principal amounts and related weighted average interest rates (dollars in thousands). Cash and cash equivalents ......... $15,936 Average interest rate ............ 4.0% Warrant investment ................ $ 900 Average interest rate ............ -- Total portfolio ................... $16,836 Weighted average interest rate ... 3.8% The majority of our debt obligations were repaid in February 1999. Remaining obligations consist primarily of relatively insignificant capital lease obligations that mature through 2002. Inflation We believe that the effects of inflation and changing prices generally do not have a material adverse effect on our results of operations or financial condition. 16 BUSINESS MedQuist is the leading national provider of medical transcription services, a key component in the provision of healthcare services. Transcription is the process by which dictation is converted into an electronic medical report. The timely production of accurate reports is necessary for patient care and for healthcare providers to receive reimbursement. Through our approximately 6,000 transcriptionists, proprietary software, sophisticated digital dictation equipment and ability to interface with healthcare providers' computer systems, we provide customized solutions to shorten our customers' billing cycles and reduce their overhead and other administrative costs. We serve approximately 2,300 clients nationwide through our 77 client service centers. As a result of internal growth and acquisitions, our revenue has increased from $61.5 million in 1996 (before restatements for acquisitions accounted for as pooling of interests) to $271.7 million in 1998. Our experienced management team and operating structure have enabled us to improve our operating margins. Our growth has enabled us to take advantage of efficiencies such as a larger network of transcriptionists and increased negotiating power with our vendors, including telecommunication providers. Recent Developments On December 10, 1998, MedQuist acquired The MRC Group, Inc. in a pooling of interests transaction issuing approximately 8.61 million shares of common stock. MRC, now a subsidiary of MedQuist, serves approximately 500 clients and employs approximately 2,400 experienced medical transcriptionists. For the year ended December 31, 1997, MRC had revenue of approximately $108.0 million. We believe that the MRC acquisition will enable us to better utilize key resources. In addition to the reduction of corporate overhead costs by combining accounting, legal and human resources, the addition of transcriptionists will permit a more efficient workflow and faster customer service. In 1997, MRC's operating income, before its restructuring charge, was 1.1% of total revenue while MedQuist's operating income, before restating for the pooling of interests acquisitions, was 14.1% of total revenue. We believe that, over time, the operating margins of the combined company will continue to improve and achieve levels comparable to MedQuist's historical performance as a stand-alone company. History MedQuist was incorporated in New Jersey in 1984 and reorganized in 1987 as a group of out-patient healthcare businesses affiliated with a non-profit healthcare provider. In May 1994, we acquired our first medical transcription business, Transcriptions, Ltd. By the end of 1995, we had divested all of our non-medical transcription businesses, and through December 31, 1998, we had acquired MRC and 17 other medical transcription companies. Industry Overview Medical transcription is the process by which free-form dictated patient information is recorded and converted into a useable format, electronically routed to the appropriate location and added to a patient's medical record. Physicians and other healthcare providers use this information for delivery of patient care. Administrative personnel use the information for billing and other administrative purposes. Accurate and prompt transcribed records are required for reimbursement and to avoid healthcare fraud and abuse penalties. We expect that, as the percentage of medical records that are stored electronically continues to grow, the information management uses for such records will increase. The majority of dictated reports are generated within the medical records departments of hospitals. Historically, transcription services were performed by hospital employees and were costly and difficult to manage. Examples of these reports include patient histories, discharge summaries, operative reports and consultation reports. Increasingly, other hospital departments, such as radiology, emergency, oncology, pediatrics and cardiology, are dictating reports to improve delivery of care and administrative functions. Health maintenance organizations, out-patient clinics and physician practice groups are also expanding their use of transcribed medical reports. 17 We believe the market for outsourced transcription services will expand due in part to the following trends: Consolidation. As healthcare providers consolidate and increase in size, their information management needs become more complex and they increasingly require larger and more sophisticated vendors. Connectivity. The exchange of patient information and the delivery of patient care must be coordinated among many entities, including physicians, hospitals and managed care companies. Increasingly, healthcare organizations are centralizing patient data into an accessible system creating economies of scale to reduce overall healthcare costs and to improve the efficient delivery of patient care. Accurate medical transcription and distribution and storage of transcribed records are critical to such coordination. Cost Containment. Outsourcing services in the healthcare industry continues to increase as a means to reduce administrative burdens and fixed costs. Hospitals and other healthcare organizations increasingly are outsourcing their electronic transcription of dictated patient records as their information needs and volume of dictated reports expand. Outsourcing transcription services permits providers: o to reduce overhead and other administrative costs; o to improve the quality of reports; o to access leading technologies without development and investment risk; and o to obtain the expertise to implement and manage a system tailored to the providers' specific requirements. Compliance. Government agencies are increasingly focused on fraud and abuse in the healthcare industry. For example, under Medicare, providers must submit detailed documentation in order to receive reimbursement. In many instances, providers have been fined and penalized for failing to substantiate claims for reimbursement in an audit. As a result, Medicare, the insurance industry and, in some cases healthcare accreditation organizations, are requiring transcribed reports: o to support claims for reimbursement; o to facilitate communication between various parts of a healthcare network; o to improve the quality and efficiency of patient care; and o to retain and provide reliable information in the event of malpractice litigation. Strategy Our objective is to maintain our position as the leading national provider of medical transcription services and to enhance that position as the information needs of healthcare providers continue to expand and evolve. The key elements of our strategy include the following: Expand Existing Client Relationships. We provide most of our transcription services to hospital medical records departments. We seek to increase our share of transcription services through our close and continuing client relationships as these departments outsource more of their transcription requirements and as the volume of patient records continues to grow. In addition, we will continue to penetrate the direct care departments at hospitals such as radiology, emergency, oncology, pathology, pediatrics and cardiology, within our existing client base. Historically, these departments have not dictated their patient data or outsourced the transcription of their patient data to the same extent as medical records departments. Extend Current Client Base. We will continue to extend our base of traditional hospital clients and to pursue additional clients such as health maintenance organizations, out-patient clinics and physician practice groups which we believe will represent a growing percentage of the available market. Based upon input from new clients, we believe that references from our existing client base represent a key component of our sales and marketing efforts. Capitalize on Operating Expertise. Our experienced management team and our operating structure have enabled us to consistently improve our operating margins by spreading the fixed portion of our overhead over a growing revenue base. We will focus on continuing to grow our revenue to take advantage of efficiencies such as 18 a larger network of transcriptionists and increased negotiating power with our vendors, including telecommunication providers. Pursue Strategic Relationships. We have initiated relationships with developers and end-users of emerging technologies to create enhanced services for our clients. We will continue to incorporate advances in technology to improve the efficiency of our operations, reduce our costs, expand the breadth and functionality of our services and enhance our competitive position. Pursue Strategic Acquisitions. The medical transcription industry is highly fragmented with approximately 1,500 providers of outsourced medical transcription services. Most of these are small companies that lack the financial resources or the technological capabilities necessary to provide transcription services nationwide. We will continue to pursue acquisitions that will expand our client base, network of qualified transcriptionists and geographic presence. MedQuist Services Through our approximately 6,000 transcriptionists, proprietary software, sophisticated digital dictation equipment and ability to interface with healthcare providers' computer systems, we provide customized solutions to shorten our customers' billing cycles and reduce their overhead and other administrative costs. In addition to hospital medical records departments, our target markets include patient care departments, such as radiology, emergency rooms, oncology, pathology, pediatrics and cardiology departments, health maintenance organizations, physician practice groups and out-patient clinics. We record and store free-form medical dictation, transcribe the dictation into reports, and electronically receive, review and distribute final reports to a client. Authorized individuals at multiple locations can access this electronic information when needed for administrative, billing and patient care purposes. We have designed our system to enable clients and individual healthcare providers to review the status of particular patient data and transcribed reports at any point in time and to advise us whether the production of a particular report requires acceleration. In addition, our system permits us to monitor our on-time performance, especially with respect to critical reports requiring turnaround times of less than 24 hours. Typical Medical Transcription Process (1) A physician identifies himself and dictates the required patient reports using any telephone. (2) The dictation is recorded on a digital dictation system located in a MedQuist client service center. (3) The transcriptionist, working at home, accesses the dictated voice file. The transcriptionist uses our proprietary software to verify, match and import patient demographic information. (4) The transcriptionist transcribes the dictation. (5) Finished transcription text files are transferred electronically to the client service center. (6) Our software categorizes and records the details of the transcribed document for use by our automatic payroll and billing systems. (7) The transcription is subject to our quality assurance program. (8) The work is automatically verified against patient demographic information and transferred to the client's system using a variety of interfaces. (9) The transcribed report is electronically transferred to the physician for review and signature. (10) Copies of the report may be distributed across the provider's network. The work can be transmitted to out-patient clinics or is available for view using browser-based technology. 19 We serve approximately 2,300 clients through 77 client service centers nationwide. Each client service center is run by a manager who is supported by three additional levels of operating management. Due to the large number of trained transcriptionists and our ability to allocate work among them efficiently, we believe that we are able to reduce the production turnaround times for transcribed medical reports. An in-house staff or small transcription company generally cannot achieve these efficiencies to the extent that we can. Our system provides editing and electronic review capabilities, such as specific reference to pages or clauses to alert clients to potential deficiencies, that increase accuracy and reliability. Our system provides flexibility to address individual client needs. We are capable of modifying the system to interface with existing client systems. Our technical staff works closely with our clients, both before and after installation, to develop system modifications and refinements. Medical Transcriptionist Recruitment One of the most significant challenges to our continued growth is the successful recruitment and retention of qualified transcriptionists. To address this challenge, we have enhanced our recruitment process, increased training and formed strategic relationships with various schools across the country. We have hired a Director of National Recruitment and at least two recruiters in each of our three regional groups. In addition, each client service center has at least one person designated to monitor and manage recruitment efforts. Currently, we are experimenting with software that monitors transcriptionist quality and should allow us to implement an accelerated training program so that less experienced transcriptionists can be hired and trained efficiently. In addition, we have established a "Partners in Education" program with adult education programs, vocational technology schools, and colleges offering medical transcription training programs. Sales and Marketing Efforts Our existing client base is a key component of our marketing and sales strategy. Based on input from new clients, we believe that new clients have utilized our services in large part due to recommendations and references by our existing national client base. All office managers and operational vice presidents, as well as our senior management, including Mr. Cohen, have sales responsibilities. We utilize a consultative sales and marketing approach by establishing a working relationship with our clients through a series of direct meetings with the chief financial officer, health information manager, chief information officer and other key individuals at the client's organization. In this manner, we obtain information concerning the particular needs of a client and educate the client as to how our services can be customized to meet those needs. As part of our marketing efforts, we also advertise in national healthcare trade publications (including those sponsored by the American Health Information Management Association) and participate in industry conventions. Business Partners and Relationships We are always evaluating emerging technologies and apply them as appropriate to make our services more reliable, efficient and cost-effective, and to assist our clients in meeting their transcription and document management needs. We have initiated relationships with developers and end-users of emerging technologies, such as voice-recognition, data mining and outcomes analysis and Internet based telecommunications to create value added services for our clients and to participate in the development of the computer based patient record. Our Senior Vice President-New Business Development oversees our strategic partnerships and manages our research and development department that integrates these partnerships into useable product and service offerings. Some of our current business partners and relationships in exploring these emerging technologies are described below. WebMD is an Internet-based healthcare network that connects physicians, hospitals, third-party payers, and consumers to a virtual marketplace of medical information, tools, and services. WebMD provides its subscribers with access to our medical transcription services on its website. Lernout & Hauspie Speech Products, N.V. is a global leader in advanced speech and 20 language solutions for vertical markets, computers, automobiles, telecommunications, embedded products, consumer goods and the Internet.Lernout & Hauspie is making the speech user interface the keystone of simple, convenient interaction between humans and technology, and is using advanced translation technology to break doen language barriers. With Lernout & Hauspie, we have developed a clinical workstation that integrates voice recognition, structured input and free-form dictation. Synthesys Technologies, Inc. develops innovative clinical data repository solutions for the healthcare industry. We have a co-marketing agreement with Synthesys to sell Synthesys' data mining and outcomes analysis software to our customer base. The software includes a search engine that provides for analysis of transcribed clinical data. MasterChart is a provider of solution-based technology to leading healthcare system providers. Through an agreement with MasterChart, we offer the Physassist Portable Dictation, a hand-held digital recorder; Respond, an Internet document management system; and MasterChart Integration Engine, a message translation control and monitoring middleware. MasterChart also provides product development and software design services to MedQuist. 21 MANAGEMENT MedQuist's executive officers and directors are as follows:
Year of Term Expiration Name Position as Director David A. Cohen ........................ Chief Executive Officer and Chairman of 1999 the Board John A. Donohoe, Jr. .................. President, Chief Operating Officer and 2001 Director John R. Emery ......................... Senior Vice President, Treasurer and -- Chief Financial Officer Ronald F. Scarpone .................... Senior Vice President, New Business -- Development John M. Suender ....................... Senior Vice President, General Counsel -- and Secretary Bruce K. Anderson ..................... Director 2000 William T. Carson, Jr. (1)(3) ......... Director 2001 John T. Casey (2) ..................... Director 2001 Richard J. Censits (1) ................ Director 2001 James R. Emshoff (1) .................. Director 2000 Terrence J. Mulligan (2) .............. Director 1999 A. Fred Ruttenberg (3) ................ Director 2000 Edward L. Samek ....................... Director 1999 R. Timothy Stack (3) .................. Director 2000 Richard H. Stowe ...................... Director 2001 John H. Underwood (2) ................. Director 1999
- ------------------------- (1) Member of Audit Committee (2) Member of Compensation Committee (3) Member of Nominating Committee David A. Cohen joined MedQuist in May 1994 as President of our Transcriptions, Ltd. subsidiary and has been an executive officer and a director of MedQuist since July 1994, our Chief Executive Officer since November 1995 and Chairman of the Board of Directors since July 1996. Mr. Cohen also served as our President from November 1995 to August 1998. Mr. Cohen joined Transcriptions, Ltd. in 1973 and served as its Chief Executive Officer for more than 15 years. John A. Donohoe, Jr. has been a member of the Board of Directors since May 1998. Mr. Donohoe joined MedQuist in May 1994 as Executive Vice President of our Transcriptions, Ltd. subsidiary. Mr. Donohoe became Chief Operating Officer in November 1995 and President in August 1998. Mr. Donohoe was employed by Transcriptions, Ltd. since 1974, serving in numerous management capacities. Mr. Donohoe is a member of the board of directors of the Medical Transcription Industry Alliance. John R. Emery has been our Treasurer and Chief Financial Officer since March 1997 and was promoted from Vice President to Senior Vice President in December 1998. Prior to joining MedQuist, Mr. Emery served in various executive positions with Integra LifeSciences Corporation beginning in 1994, most recently as Senior Vice President -- Operations and Finance. From 1987 to 1994, Mr. Emery served in various operational and financial positions with Chemical Waste Management, Inc., an environmental remediation firm. Ronald F. Scarpone has been Senior Vice President - New Business Development since 22 December 1998 and a Vice President of MedQuist since January 1996. Mr. Scarpone joined MedQuist in May 1994 as Vice President -- Information Services. Mr. Scarpone was employed by Transcriptions, Ltd. since 1989 and served as its Vice President of Information Services since September 1993. John M. Suender has been our General Counsel and Secretary since September 1992. In December 1998, Mr. Suender was promoted to Senior Vice President. Mr. Suender also serves as our Senior Vice President -- Acquisitions. Prior to joining MedQuist, Mr. Suender was with the law firm of Pepper Hamilton LLP, Philadelphia, Pennsylvania. Bruce K. Anderson has been a director of MedQuist since December 1998. He was a director of The MRC Group from July 1993 until MRC was acquired by MedQuist on December 10, 1998. Since 1979, Mr. Anderson has been partner of Welsh, Carson, Anderson & Stowe, an investment firm specializing in the acquisition of companies in the information services and health care industries. Mr. Anderson is also Chairman, Chief Executive Officer and a director of AMDOCS Ltd., a software and services company focused on the telephone industry, and a director of several private companies. William T. Carson, Jr., a director of MedQuist since January 1991, is currently a business consultant and is Vice Chairman of CIC Investment Co., a capital investment firm. In 1988, he co-founded and became Vice President and corporate secretary of Covenant Bank, Haddonfield, New Jersey, positions he held until January 1998 when Covenant Bank was acquired by First Union Bank. Mr. Carson is also a director of the Coriell Institute of Medical Research, a genetic research firm and a former director of the Rutgers University School of Business. John T. Casey, a director of MedQuist since June 1997, has been Chairman and Chief Executive Officer of Physician Reliance Network Inc. since October 1997. PRN is a Dallas-based provider of management facilities, administration and technical support and ancillary services necessary to establish and maintain a fully integrated network of oncology care. Mr. Casey formerly served as President and Chief Executive Officer of American Medical International from 1991 until 1995, when it was acquired by Tenet Healthcare. Prior to that, Mr. Casey was Chief Executive Officer of Samaritan Health Services in Phoenix, Arizona, Methodist Health Services in Memphis, Tennessee, and Presbyterian/St. Luke's Medical Center in Denver, Colorado. From 1995 until September 1997, Mr. Casey served as Chairman and Chief Executive Officer of Intecare. Richard J. Censits has been a director of MedQuist since January 1987. Mr. Censits was our Chief Executive Officer from January 1, 1987 until March 1995, and was President of MedQuist until September 1994. He served as the Vice President and Chief Financial Officer of Campbell Soup Company from 1975 to 1986. Mr. Censits currently serves as a director of Checkpoint Systems, Inc. and as a Trustee of the University of Pennsylvania. James R. Emshoff has been a director of MedQuist since December 1992. Mr. Emshoff also served as our acting President and Chief Executive Officer from April 1995 through November 1995 and as our Chairman of the Board of Directors from November 1995 through July 1996. Since August 1992, Mr. Emshoff has been the Chairman and Chief Executive Officer of IndeCap Enterprises, Inc., a firm providing consulting services on corporate restructuring issues and venture participation in the outsourcing of management service functions. From February 1991 to August 1992, Mr. Emshoff was Chairman and Chief Executive Officer of Wellesley Medical Management Inc., an owner and operator of primary healthcare centers. From January 1985 to February 1991, Mr. Emshoff was President and Chief Executive Officer of Citicorp Diners Club. Terrence J. Mulligan has been a director of MedQuist since May 1996. Mr. Mulligan is currently a management consultant and private investor. Mr. Mulligan had held several senior executive positions with Baxter International, Inc. from 1986 until his retirement in 1996, including Group Vice President, Health Systems, from 1994 to 1996, Group Vice President, Multi-Hospital Systems from 1993 to 1994, and Senior Vice President, Corporate Sales and Marketing from 1988 to 1993. Mr. Mulligan also served on the Senior Management Committee and the Operating Management Committee at Baxter. Mr. Mulligan currently serves as a member of the Board of Visitors of the University of Iowa College of Business Administration, and a past President of 23 the University of Iowa Alumni Association, and currently serves a Trustee of Lake Forest College. Mr. Mulligan is a member of the Board of Directors of Physician Reliance Network and Physicians Dynamics Inc. A. Fred Ruttenberg has been a director of MedQuist since December 1991. Mr. Ruttenberg has, since September 1986, been a partner in the law firm of Blank, Rome, Comisky & McCauley, Cherry Hill, New Jersey, which has acted as special counsel to MedQuist for certain matters. Edward L. Samek has been a director of MedQuist since December 1998. Prior to our acquisition of The MRC Group, Mr. Samek had been employed at MRC since 1994, most recently as Chairman and Chief Executive Officer. Mr. Samek had also been a director of MRC since 1994. Prior to MRC's December 1994 acquisition of SecrePhone, Ltd., a provider of medical transcription services, Mr. Samek served as SecrePhone's Chairman, President and Chief Executive Officer. Mr. Samek has been President of The Medical Transcription Alliance, the medical transcription association, since 1996. R. Timothy Stack has been a director of MedQuist since May 1997. Since 1987, Mr. Stack has been the President and Chief Executive Officer of Borgess Health Alliance, an integrated health delivery and finance system that includes a 469 bed regional referral center, seven community hospitals, two long-term care facilities, financing/risk products, a medical foundation and physician group practices, representing over 1,000 acute care and nursing beds. Prior to joining Borgess, Mr. Stack served as President and Chief Executive Officer of South Side Healthcare System from 1981-1987 and as Senior Vice President and Chief Operating Officer of Central Medical Center and Hospital from 1979-1981. Richard H. Stowe has been a director of MedQuist since December 1998. He was a director of The MRC Group from July 1993 until MRC was acquired by MedQuist on December 10, 1998. Mr. Stowe was a partner of Welsh, Carson, Anderson & Stowe from 1979 until January 1999. Mr. Stowe serves on the Board of Directors of The Cerplex Group, Inc., which provides repair and parts distribution services for electronic equipment, and Health Management Systems, Inc., a provider of revenue enhancement services to health care providers and payors, New American Healthcare Corporation, a company that services and manages non-urban hospitals, and several private companies. John H. Underwood has been a director of MedQuist since July 1994. Mr. Underwood is currently Managing Director with Pfingsten Partners, L.L.C., a firm which originates and manages private equity investments in middle market companies. Prior to joining Pfingsten Partners in December 1996, Mr. Underwood had been, since 1989, a Vice President with Heller Equity Capital Corporation and a Senior Vice President of its parent, Heller Financial, Inc. From 1986 to 1989, Mr. Underwood served as a Vice President of Citicorp North America, Inc. as a member of its leveraged capital group. DESCRIPTION OF CAPITAL STOCK MedQuist is authorized to issue up to 60,000,000 shares of common stock. As of March 22, 1999, MedQuist had 33,727,120 outstanding shares of common stock and approximately 4,700,000 shares of common stock reserved for issuance upon exercise of options granted under MedQuist's option plans. Holders of common stock are entitled to one vote per share on all matters to be voted upon by the shareholders. Subject to the rights of any preferred stock holders, holders of common stock are entitled to receive such dividends as the Board of Directors may declare in its discretion. In the event of a liquidation, dissolution or winding up of MedQuist, after payment of liabilities and any liquidation preference on any shares of preferred stock then outstanding, the holders of shares of common stock are entitled to a distribution of any remaining assets of MedQuist. Holders of common stock have no cumulative voting or preemptive rights. All outstanding shares of common stock are, and the shares of common stock offered hereby, when issued and paid for will be, fully paid and non-assessable. MedQuist is also authorized to issue up to 12,111,975 shares of preferred stock, no par value. We do not currently contemplate the issuance of any shares of preferred stock. Without any further action by the shareholders, our board of directors may issue from time to time the authorized and unissued shares of preferred stock 24 in one or more series, and may determine as to each series the designation and number of shares to be issued and the relative rights, preferences and limitations of the shares of each series, including provisions with respect to voting powers, redemption, conversion, dividend rights and liquidation preferences. The issuance of preferred stock could adversely affect the voting power of the holders of common stock or could have the effect of deterring or delaying any attempt by a person or group to obtain control of MedQuist. Registration Rights Under the terms of a registration rights agreement between MedQuist and the sellers of Transcriptions, Ltd., Mr. Cohen is entitled to incidental registration rights with respect to the resale of up to approximately 1,330,000 shares of their common stock. These registration rights will expire on August 1, 2002. MedQuist is obligated to pay the registration expenses in any such registration unless the registration is initiated by another shareholder. Mr. Cohen has waived the right to include any of his common stock in this offering. Takeover Protection The New Jersey Shareholders Protection Act prohibits, subject to certain exceptions, New Jersey corporations, such as MedQuist, from engaging in any business combination with any interested shareholder for a period of five years following the date that such shareholder becomes an interested shareholder. A business combination includes mergers, asset sales and other transactions that may result in a financial benefit to shareholders. A person will be deemed an interested shareholder if the person, with any affiliate or associate, beneficially owns, directly or indirectly, 10% or more our outstanding stock. However, if our board of directors approves the business combination or the transaction that results in the shareholder becoming an interested shareholder, then the restrictions do not apply. After the five year waiting period, we could enter into a business combination with an interested shareholder if o shareholders holding at least 662/3% of our outstanding stock approve the business combination, or o the business combination provides that all shareholders, other than the interested shareholder, get a fair price for their shares. This protection does not apply to business combinations with persons who became interested shareholders before o the corporation began filing under the Securities Act, or o the corporation's securities were traded on a national exchange. We have no additional anti-takeover protection other than o the ability of the board of directors to issue, from time to time, up to 12,111,975 shares of preferred stock in one or more series without shareholder approval, and o the separation of the board of directors into three classes. Our option plan, in certain circumstances, provides for the automatic vesting of all outstanding options upon a change in control of MedQuist. A change in control includes a liquidation, a sale of all or substantially all of our assets, an acquisition of MedQuist, the election of a majority of the members of the board of directors as a result of proxy contests within any period of three years, approval of a merger or a tender offer. The ability to accelerate the vesting or exercise of options could be utilized as a method of discouraging, delaying or preventing a change in control of our stock. MedQuist has a severance plan for certain executive officers. The plan provides that, under certain circumstances, the termination of covered executives within 12 months after a change in control will trigger payments to the terminated executive that will increase the cost of acquiring MedQuist and that could discourage a change in control of our stock. Transfer Agent and Registrar The transfer agent and registrar for the common stock is American Stock Transfer & Trust Company, New York, New York. 25 PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth certain information regarding beneficial ownership of the common stock as of March 22, 1999 adjusted to reflect the sale of shares offered hereby for o each person who is known by us to own beneficially more than five percent of the common stock, o each executive officer listed below, o each director, o all current executive officers and directors as a group; and o each selling shareholder. The selling shareholders have furnished to us the information set forth below and this information is accurate to the best of our knowledge.
Shares of Common Stock Shares of Common Stock Beneficially Owned Beneficially Owned Before Shares to After Name and Address(2) the Offering(1) be Sold the Offering(1) - -------------------------------------------- -------------------------------------- ----------- ---------------------- Number Percentage(3) Number Percentage(3) -------------------- --------------- -------- -------------- Pilgram Baxter & Associates, Ltd. ......... 2,371,900(4) 7.0% -- 2,371,900 6.8% 825 Duportial Road Wayne, PA 19087 Welsh, Carson, Anderson & Stowe, VI, LP(3) 3,275,884(5) 9.7 1,000,000 2,275,884 9.4 320 Park Avenue Suite 2500 New York, NY 10022 David A. Cohen ............................ 1,574,723(6) 4.6 -- 1,574,723 4.5 John A. Donohoe, Jr. ...................... 283,279(7) * -- 282,279 * John R. Emery ............................. 11,034(8) * -- 11,034 * Ronald F. Scarpone ........................ 80,135(9) * -- 80,135 * John M. Suender ........................... 45,079(10) * -- 45,079 * Bruce K. Anderson ......................... 3,295,301(11) 9.8 1,000,000 2,295,301 6.6 William T. Carson, Jr. .................... 100,570(12) * -- 100,570 * John T. Casey ............................. 17,685(13) * -- 17,685 * Richard J. Censits ........................ 339,145(14) 1.0 -- 339,145 * James R. Emshoff .......................... 140,795(15) * -- 140,795 * Terrence J. Mulligan ...................... 32,023(16) * -- 32,023 * A. Fred Ruttenberg ........................ 96,026(17) * -- 96,026 * Edward L. Samek ........................... 784,830(18) 2.3 2,350,000 434,830 1.2 R. Timothy Stack .......................... 19,807(19) * -- 19,807 * Richard H. Stowe .......................... 3,282,194(20) 9.7 1,000,000 2,282,194 6.6 John H. Underwood ......................... 18,676(21) * -- 18,676 * All executive officers and directors as a group (16 persons)....................... 6,845,418(22) 19.5% 1,350,000 5,495,418 15.2 Other selling shareholders: William Blair Capital Partners V, L.P. .... 1,122,077(23) 3.3 350,000 772,077 2.2 H. and R. Marcus Family Limited Partnership 1,099,202(24) 3.3 750,000 349,202 * M. and L. Marcus Family Limited Partnership 649,961(25) 1.9 500,000 149,961 * John H. Dayani, Sr. ....................... 618,891(26) 1.8 243,467 375,424 *
26 * Less than 1%. (1) Beneficial ownership is determined in accordance with the rules of the Commission, and includes voting or investment power with respect to the shares beneficially owned. Shares of common stock subject to options or warrants currently exercisable within 60 days after March 22, 1999 are deemed outstanding for computing the percentage ownership of the person holding such options or warrants but are not deemed outstanding for computing the percentage ownership of any other person. (2) Except where otherwise noted, the address of all persons listed is c/o MedQuist Inc., Five Greentree Centre, Suite 311, Marlton, New Jersey 08053. (3) Applicable percentage of ownership as of March 22, 1999 is based upon 33,727,120 shares of common stock outstanding before the offering and 34,727,120 shares of common stock outstanding after the offering. (4) Reflects information set forth in a Schedule 13G filed by Pilgrim, Baxter & Associates, Ltd. (5) The general partners of WCAS VI are Patrick I. Welsh, Russell L. Carson, Andrew M. Paul, Thomas E. McInerney, Laura van Buren, James B. Hoover, Bruce K. Anderson, Robert A. Minicucci, Anthony J. de Nicola, Paul B. Queally and Richard H. Stowe. (6) Includes 246,000 shares of common stock issuable upon the exercise of options granted to Mr. Cohen. Mr. Cohen owns 1,328,116 shares jointly with his spouse. (7) Includes 169,392 shares of common stock issuable upon the exercise of options granted to Mr. Donohoe and 41,000 shares of common stock owned by Mr. Donohoe's children. (8) Includes 11,000 shares of common stock issuable upon the exercise of options granted to Mr. Emery. (9) Includes 59,088 shares of common stock issuable upon the exercise of options granted to Mr. Scarpone. (10) Includes 27,000 shares of common stock issuable upon the exercise of options granted to Mr. Suender. (11) Includes 3,275,884 shares of common stock held by WCAS, VI and 455 shares issuable under MedQuist's Deferred Compensation Plan for Non-Employee Directors (the "Deferred Stock Plan"). Mr. Anderson disclaims beneficial ownership of WCAS, VI shares except to the extent of his pecuniary interest therein. (12) Includes 55,000 shares of common stock issuable upon the exercise of options granted to Mr. Carson and 28,700 shares of common stock held for Mr. Carson's benefit in individual retirement accounts. (13) Includes 15,000 shares of common stock issuable upon the exercise of options granted to Mr. Casey and 2,685 shares issuable under the Deferred Stock Plan. (14) Includes 201,300 shares of common stock owned by Mr. Censits' spouse. (15) Includes 101,806 shares of common stock issuable upon the exercise of options granted to Mr. Emshoff and 3,231 shares issuable under the Deferred Stock Plan. (16) Includes 24,000 shares of common stock issuable upon the exercise of options granted to Mr. Mulligan and 5,023 shares issuable under the Deferred Stock Plan. (17) Includes 79,200 shares of common stock issuable upon the exercise of options granted to Mr. Ruttenberg and 7,828 shares issuable under the Deferred Stock Plan. (18) Includes 618,795 shares of common stock issuable upon the exercise of options granted to Mr. Samek. (19) Includes 15,000 shares of common stock issuable upon the exercise of options granted to Mr. Stack and 814 shares issuable under the Deferred Stock Plan. (20) Includes 3,275,884 shares of common stock held by WCAS, VI and 455 shares issuable under the Deferred Stock Plan. Mr. Stowe disclaims beneficial ownership of the WCAS, VI shares, except to the extent of his pecuniary interest therein. (21) Includes 15,000 shares of common stock issuable upon the exercise of options granted to Mr. Underwood and 3,673 shares issuable under the Deferred Stock Plan. (22) Includes 1,436,281 options granted to directors and executive officers, 24,164 shares issuable under the Deferred Stock Plan and 3,275,880 shares beneficially owned by WCAS, VI. See Note 5 above. (23) The general partner of William Blair Capital Partners V, L.P. is William Blair Capital Partners LLC. The members of William Blair Capital Partners LLC are William Blair & Company, L.L.C., Wilblairco, Ellen Carnahan, David G. Chandler, James M. Denny, Samuel B. Guren, Edgar D. Jannotta, Edgar D. Jannotta, Jr., Ian M. Larkin, Timothy M. Murray, Gregg S. Newmark, Lawrence I. Shagrin, and Thomas C. Theobold. (24) The 1991 L.W. Marcus Living Trust is the general partner of the M. and L. Marcus Family Limited Partnership. Lois W. Marcus is the sole trustee of the 1991 L.W. Marcus Living Trust. Mrs. Marcus is the wife of Martin H. Marcus. (25) The Herbert L. Marcus Living Trust is the general partner of the H. and R. Marcus Family Limited Partnership. Herbert L. Marcus is the sole trustee of the Herbert L. Marcus Living Trust. (26) Includes 90,353 shares of Common Stock issuable upon the exercise of options granted to Mr. Dayani. 27 U.S. TAX CONSEQUENCES TO NON-U.S. HOLDERS OF COMMON STOCK The following discussion summarizes certain U.S. federal income and estate tax consequences of the ownership and disposition of common stock by a "non-U.S. holder." You are a "non-U.S. holder" if you are, for United States federal income tax purposes: o a non-resident alien individual, o foreign corporation, o a foreign partnership, or o a foreign estate or trust. This discussion does not consider the specific facts and circumstances that may be relevant to a particular non-U.S. holder and does not address the treatment of a non-U.S. holder under the laws of any state, local or foreign taxing jurisdiction. The discussion is based on the tax laws of the United States, which include the Internal Revenue Code of 1986, as amended, existing regulations (some of which do not become effective until January 1, 2000), and administrative interpretations and judicial decisions. The tax laws are subject to change, and the changes can be applied on a retroactive basis. You should consult a tax advisor regarding the U.S. federal tax consequences of acquiring, holding and disposing of common stock in your particular circumstances, as well as any tax consequences that may arise under the laws of any state, local or foreign taxing jurisdiction. Dividends If you are a non-U.S. holder of common stock, dividends paid to you before January 1, 2000 will be subject to withholding of United States federal income tax at a 30% rate unless: o you are eligible for the benefits of an income tax treaty that provides for a lower rate, or o the dividends are "effectively connected" with your conduct of a trade or business in the United States. If the dividends are "effectively connected" with your conduct of a trade or business within the United States and you provide us a form 4224 on which you certify that the dividends are "effectively connected" to your U.S. trade or business, no federal income tax will be withheld (unless we know the form is inaccurate). Unless an applicable income tax treaty provides otherwise, the "effectively connected" dividends will be subject to federal income tax at the rates applicable to U.S. resident individuals or domestic corporations. If you are a foreign corporation and the dividends are "effectively connected" to your U.S. trade or business, in addition to the corporate income tax, you may, under certain circumstances, be subject to the "branch profits tax." The branch profits tax, to the extent it applies, is generally 30% of the effectively connected income (after reduction for the federal corporate income taxes paid by you on the income). The branch profits tax may be reduced if you are eligible for the benefits of an income tax treaty that provides for a lower rate. If the dividends paid on your common stock before January 1, 2000, are paid to an address in a foreign country, and you have not provided us with a form 4224 (claiming that the dividends are effectively connected to your U.S. trade or business), we will assume that the dividend is subject to the 30% withholding tax, or the lower rate provided in the income tax treaty between the United States and the country to which we send the dividend. For dividends paid on or after January 1, 2000, you will generally be subject to either the 30% withholding tax described above, or the 31% "back-up" withholding tax (which generally applies only to U.S. persons), unless; o you provide us with certification on form w-8 (or its successor form) that you are a foreign person, so that the "back-up" withholding does not apply, or you are a person that is not subject to back-up withholding even if you are a U.S. person (such as a corporation), and, with respect to the 30% withholding tax, o you provide us with certification on form w-8 (or its successor form) that the dividends are "effectively connected" to your conduct of a U.S. trade or business (which will require that you have a U.S. Taxpayer Identification Number), or 28 o you provide us with certification on form W-8 (or its successor form) that the 30% withholding tax should be reduced under an applicable income tax treaty that you are eligible to use. So long as the common stock is traded in on a recognized exchange, an individual or corporation does not have to have a U.S. Taxpayer Identification Number to complete this certification. If you are a foreign partnership, the certifications required for dividends paid on or after January 1, 2000 generally will apply to the partners of the partnership, and the partnership will be required to provide certain information. Under certain circumstances, (which require an agreement be filed with the Internal Revenue Service), a foreign partnership that owns common stock may be able to assume our withholding obligations on dividend payments made on or after January 1, 2000. If you are eligible for a reduced rate of U.S. withholding tax under a tax treaty, you may obtain a refund of any amounts withheld in excess of that rate by filing a refund claim with the Internal Revenue Service. Gain on Disposition of Common Stock If you are a non-U.S. holder, you generally will not be subject to United States federal income tax on gain that you recognize on a disposition of Common Stock unless: o the gain is "effectively connected" with your conduct of a trade or business in the United States (and the gain is attributable to a permanent establishment that you maintain in the United States, if that is required by an applicable income tax treaty as a condition for subjecting you to U.S. taxation on a net income basis), o you are an individual, you hold the common stock as a capital asset, and you are present in the United States for 183 or more days in the taxable year of the sale and certain other conditions exist, or o MedQuist is or has been a "United States real property holding corporation" for federal income tax purposes and you held, directly or indirectly at any time during the five-year period ending on the date of disposition, more than 5% of the common stock (and you are not eligible for any treaty exemption). If you are a foreign corporation, "effectively connected" gains that you recognize may also, under certain circumstances, be subject to an additional "branch profits tax." The branch profits tax, to the extent it applies, is generally 30% of the "effectively connected income" (after reduction for the federal corporate income taxes paid by you on the income). The branch profits tax may be reduced if you are eligible for the benefits of an income tax treaty that provides for a lower rate. The Company has not been, is not, and does not anticipate becoming a "United States real property holding corporation" for federal income tax purposes. Federal Estate Taxes Common Stock held by a non-U.S. holder at the time of death will be included in the holder's gross estate for United States federal estate tax purposes, unless an applicable estate tax treaty provides otherwise. Information Reporting and Backup Withholding In general, dividends paid to you before January 1, 2000 will not be subject to U.S. information reporting requirements and backup withholding tax if the dividend is paid to you outside the United States (unless we know you are a U.S. person). For payments of dividends made on or after January 1, 2000, as described above in the "Dividends" section, back-up withholding will apply unless we receive a certification that you are a foreign person, or you are otherwise exempt from the backup withholding rules. If you sell your common stock outside of the United States through a non-U.S. office of a non-U.S. broker, and the sale proceeds are paid to you outside the United States, then U.S. backup withholding and information reporting requirements generally will not apply to that payment. However, U.S. information reporting (but not backup withholding) will apply to a payment of sales proceeds (even if that payment is made to you outside the United States) if you sell your common stock through a non-U.S. office of a broker that: 29 o is a U.S. person, o derives 50% or more of its gross income for certain periods from the conduct of a trade or business in the United States o is a "controlled foreign corporation" as to the United States, or o with respect to payments made after December 31, 1999, is a foreign partnership, if at any time during its tax year: o one or more of its partners are U.S. persons (as defined in U.S. Treasury regulations) who in the aggregate hold more than 50% of the income or capital interest in the partnership, or o such foreign partnership is engaged in a U.S. trade or business, unless the broker has documentary evidence in its files that you are a non-U.S. person or you otherwise establish an exemption. If you receive payment of the proceeds of a sale of common stock to or through a U.S. office of a broker, the payment is subject to both United States backup withholding of 31% and information reporting unless you certify that you are a non-U.S. person (under penalties of perjury) or you otherwise establish an exemption. You generally may obtain a refund of any amounts withheld under the backup withholding rules that exceed your income tax liability by filing a refund claim with the Internal Revenue Service. LEGAL MATTERS Pepper Hamilton LLP will issue an opinion that the shares offered by MedQuist and the selling stockholders are validly issued. The validity of the common stock offered hereby will be passed upon for the underwriters by Sullivan & Cromwell, New York, New York. Sullivan & Cromwell will rely as to all matters of New Jersey law on Pepper Hamilton LLP. EXPERTS The audited consolidated financial statements of MedQuist Inc. and subsidiaries included in this prospectus and elsewhere in this registration statement of which this prospectus is a part, have been audited by Arthur Andersen LLP, independent public accounts, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. The audited financial statements of The MRC Group, Inc. and subsidiary incorporated by reference in this prospectus and elsewhere in this registration statement of which this prospectus is a part, have been audited by Arthur Andersen LLP, independent public accounts, as indicated in their reports with respect thereto, and are incorporated by reference in this prospectus in reliance upon the authority of said firm as experts in giving said reports. 30 WHERE YOU CAN FIND ADDITIONAL INFORMATION MedQuist Inc. files annual, quarterly and special reports, proxy statements and other information with the SEC. You may read and copy any reports, statements and other information MedQuist files with the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C., 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. MedQuist's SEC filings are also available on the SEC's Internet site (http://www.sec.gov). MedQuist has filed a registration statement on Form S-3 to register the shares of MedQuist common stock offered under this prospectus. This prospectus is a part of the registration statement on Form S-3 and constitutes a prospectus of MedQuist. As allowed by SEC rules, this prospectus does not contain all the information you can find in the registration statement on Form S-3 or the exhibits to the registration statement on Form S-3. The SEC also allows MedQuist to "incorporate by reference" the information it files with the SEC, which means MedQuist can disclose information to you by referring you to another document filed separately with the SEC. Information incorporated by reference is deemed to be part of this prospectus. Later information filed by MedQuist with the SEC updates and supersedes this prospectus. This prospectus incorporates important business and financial information about MedQuist that is not included in or delivered with this prospectus. Copies of any of that information are available without charge to any person to whom this prospectus is delivered, upon written or oral request. Written requests for those documents should be directed to the Corporate Secretary, MedQuist Inc., Five Greentree Centre, Suite 311, Marlton, New Jersey, 08053, and telephone requests may be directed to the Corporate Secretary at (609) 596-8877. The following documents previously filed by MedQuist with the SEC are incorporated herein by this reference:
SEC Filing Period (or Date Filed) - ----------------------------------------------------------- ----------------------------- Current Report on Form 8-K March 25, 1999 Annual Report on Form 10-K (including those portions of Year ended December 31, 1998 MedQuist's proxy statement for its 1999 annual meeting of shareholders incorporated by reference in the Annual Report on Form 10-K) Registration Statement on Form S-4 (but only with respect October 30, 1998 to the audited financial statements of The MRC Group, Inc. included therein) Registration Statement on Form 8-A filed pursuant to March 11, 1992 Section 12(g) of the Exchange Act
- ---------- All documents filed by MedQuist pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this prospectus and prior to the termination of the offering will be deemed to be incorporated by reference in this prospectus and to be a part of this prospectus from the date that document is filed. 31 MEDQUIST INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Public Accountants ................ F-2 Consolidated Balance Sheets ............................. F-3 Consolidated Statements of Operations ................... F-4 Consolidated Statements of Shareholders' Equity ......... F-5 Consolidated Statements of Cash Flows ................... F-6 Notes to Consolidated Financial Statements .............. F-7 F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To MedQuist Inc.: We have audited the accompanying consolidated balance sheets of MedQuist Inc. (a New Jersey corporation) and Subsidiaries as of December 31, 1997 and 1998, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MedQuist Inc. and Subsidiaries as of December 31, 1997 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Philadelphia, Pa., February 1, 1999 F-2 MEDQUIST INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands)
December 31, --------------------------- 1997 1998 ----------- ------------- ASSETS Current assets: Cash and cash equivalents .......................................... $ 14,489 $ 15,936 Short-term investments ............................................. 4,003 -- Accounts receivable, net of allowance of $1,298 and $2,274 ......... 41,819 52,477 Deferred income taxes .............................................. 3,177 6,438 Prepaid expenses and other ......................................... 307 233 --------- --------- Total current assets ............................................ 63,795 75,084 Property and equipment, net ........................................... 25,442 27,022 Intangible assets, net ................................................ 82,382 82,216 Other ................................................................. 2,154 2,989 --------- --------- $ 173,773 $ 187,311 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt .................................. $ 6,792 $ 2,372 Accounts payable ................................................... 5,777 5,010 Accrued expenses ................................................... 14,618 25,850 --------- --------- Total current liabilities ....................................... 27,187 33,232 --------- --------- Long-term debt ........................................................ 7,589 215 --------- --------- Other long-term liabilities ........................................... 1,130 697 --------- --------- Deferred income taxes ................................................. 6,494 1,981 --------- --------- Commitments and contingencies (Note 10) Shareholders' equity: Common stock, no par value, 60,000 shares authorized, 32,138 and 33,258 shares issued and outstanding .......................... -- -- Additional paid-in capital ......................................... 119,008 136,603 Retained earnings .................................................. 12,365 14,536 Unrealized gain on marketable securities ........................... -- 585 Deferred compensation .............................................. -- (538) --------- --------- Total shareholders' equity ...................................... 131,373 151,186 --------- --------- $ 173,773 $ 187,311 ========= =========
The accompanying notes are an integral part of these statements. F-3 MEDQUIST INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
Year Ended December 31, -------------------------------------------- 1996 1997 1998 ------------ -------------- ------------ Revenue ................................................ $ 152,109 $ 216,158 $ 271,655 --------- ---------- --------- Costs and expenses: Cost of revenue ..................................... 118,978 169,235 209,587 Selling, general and administrative ................. 11,908 14,362 16,061 Depreciation ........................................ 7,372 10,339 12,697 Amortization of intangible assets ................... 3,150 5,652 3,757 Transaction costs and restructuring charges ......... 644 2,075 18,221 --------- ---------- --------- Total operating expenses ......................... 142,052 201,663 260,323 --------- ---------- --------- Operating income ....................................... 10,057 14,495 11,332 Interest expense (income), net ......................... 2,049 469 (325) --------- ---------- --------- Income before income taxes ............................. 8,008 14,026 11,657 Income tax provision ................................... 2,720 5,293 8,472 --------- ---------- --------- Net income ............................................. 5,288 8,733 3,185 Inducement of warrant exercise ......................... (707) -- -- --------- ---------- --------- Net income available to common shareholders ............ $ 4,581 $ 8,733 $ 3,185 ========= ========== ========= Basic income per share: Net income .......................................... $ 0.22 $ 0.28 $ 0.10 Inducement of warrant exercise ...................... ( 0.03) -- -- --------- ---------- --------- Net income available to common shareholders ......... $ 0.19 $ 0.28 $ 0.10 ========= ========== ========= Diluted income per share: Net income .......................................... $ 0.20 $ 0.26 $ 0.09 Inducement of warrant exercise ...................... ( 0.03) -- -- --------- ---------- --------- Net income available to common shareholders ......... $ 0.17 $ 0.26 $ 0.09 ========= ========== =========
The accompanying notes are an integral part of these statements. F-4 MEDQUIST INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands)
Additional Unrealized Common Stock Gain on -------------------- Paid-in Retained Marketable Deferred Shares Amount Capital Earnings Securities Compensation Total ---------- -------- ------------ ------------ ------------ -------------- ------------- BALANCE, DECEMBER 31, 1995 ........... 13,182 $ -- $ 29,493 $ 1,079 $ -- $ -- $ 30,572 Net income .......................... -- -- -- 5,288 -- -- 5,288 Exercise of common stock options, including tax benefit ............. 98 -- 336 -- -- -- 336 Issuance of common stock in connection with business acquisitions ...................... 4,773 -- 10,751 -- -- -- 10,751 Sale of common stock, net of expenses .......................... 10,395 -- 68,714 -- -- -- 68,714 Distributions ....................... -- -- -- (928) -- -- (928) Exercise of warrants, including inducement charge ................. 3,016 -- 6,980 (707) -- -- 6,273 Purchase and retirement of common stock, at cost ............. (36) -- (296) -- -- -- (296) ------ ---- --------- -------- ----- -------- --------- BALANCE, DECEMBER 31, 1996 ........... 31,428 -- 115,978 4,732 -- -- 120,710 Net income .......................... -- -- -- 8,733 -- -- 8,733 Exercise of common stock options and warrants, including tax benefit ........................... 759 -- 3,455 -- -- -- 3,455 Issuance of common stock, net of expenses .......................... 33 -- 251 -- -- -- 251 Distributions ....................... -- -- -- (1,100) -- -- (1,100) Purchase and retirement of common stock, at cost ............. (82) -- (676) -- -- -- (676) ------ ---- --------- -------- ----- -------- --------- BALANCE, DECEMBER 31, 1997 ........... 32,138 -- 119,008 12,365 -- -- 131,373 Comprehensive income: Net income ........................ -- -- -- 3,185 -- -- 3,185 Unrealized gain on available for sale securities, net of tax ...... -- -- -- -- 585 -- 585 ------ ---- --------- -------- ----- -------- --------- Total comprehensive income ....... -- -- -- 3,185 585 -- 3,770 ------ ---- --------- -------- ----- -------- --------- Exercise of common stock options and warrants, including tax benefit ........................... 917 -- 9,662 -- -- -- 9,662 Issuance of common stock, net of expenses .......................... 203 -- 1,701 -- -- -- 1,701 Distributions ....................... -- -- -- (1,014) -- -- (1,014) Grant of common stock options below fair value .................. -- -- 1,078 -- -- (1,078) -- Amortization of deferred compensation ...................... -- -- -- -- -- 540 540 Cash paid to dissenting stockhold- ers in pooling of interests transaction ....................... -- -- (1,438) -- -- -- (1,438) Transaction costs paid by acquired company stockholder ............... -- -- 1,540 -- -- -- 1,540 Income tax asset recognized in pooling of interests transaction .. -- -- 5,052 -- -- -- 5,052 ------ ---- --------- -------- ----- -------- --------- BALANCE, DECEMBER 31, 1998 ........... 33,258 $ -- $ 136,603 $ 14,536 $ 585 $ (538) $ 151,186 ====== ==== ========= ======== ===== ======== =========
The accompanying notes are an integral part of these statements. F-5 MEDQUIST INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Year Ended December 31, --------------------------------------- 1996 1997 1998 ----------- ----------- ----------- OPERATING ACTIVITIES: Net income ........................................................ $ 5,288 $ 8,733 $ 3,185 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization ................................... 10,522 15,991 16,454 Amortization of debt discounts .................................. 704 -- -- Amortization of deferred compensation ........................... -- -- 540 Deferred income tax provision (benefit) ......................... 1,105 (200) (3,213) Loss on disposal of property and equipment ...................... -- 223 -- Transaction costs paid by acquired company stockholder .......... -- -- 1,540 Changes in assets and liabilities, excluding effects of acquisitions and divestitures-- Accounts receivable, net ..................................... (5,571) (7,230) (10,345) Prepaid expenses and other ................................... 1,403 631 97 Other assets ................................................. 182 (362) 65 Accounts payable ............................................. (1,983) 543 (767) Accrued expenses ............................................. (832) 3,175 15,729 Other long-term liabilities .................................. (79) (87) (433) --------- --------- --------- Net cash provided by operating activities ................... 10,739 21,417 22,852 --------- --------- --------- INVESTING ACTIVITIES: Purchases of property and equipment ............................... (6,553) (13,716) (14,027) Acquisitions, net of cash acquired ................................ (26,205) (5,628) (5,839) Sale (purchase) of short-term investments ......................... (5,893) 973 4,003 --------- --------- --------- Net cash used in investing activities ....................... (38,651) (18,371) (15,863) --------- --------- --------- FINANCING ACTIVITIES: Repayments of long-term debt and subordinated payable ............. (38,728) (3,757) (10,006) Proceeds from issuance of long-term debt .......................... 7,121 -- -- Distributions ..................................................... (928) (1,100) (1,014) Proceeds from exercise of common stock options and warrants ........................................................ 226 1,785 5,065 Net proceeds from issuance of common stock ........................ 68,714 251 413 Purchase and retirement of common stock ........................... (296) (676) -- --------- --------- --------- Net cash provided by (used in) financing activities ......... 36,109 (3,497) (5,542) --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....................................................... 8,197 (451) 1,447 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ....................... 6,743 14,940 14,489 --------- --------- --------- CASH AND CASH EQUIVALENTS, END OF YEAR ............................. $ 14,940 $ 14,489 $ 15,936 ========= ========= =========
The accompanying notes are an integral part of these statements. F-6 MEDQUIST INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) 1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Background and Basis of Presentation MedQuist Inc. (the "Company" or "MedQuist") is the leading national provider of medical transcription services. MedQuist was incorporated in New Jersey in 1984 and reorganized in 1987. From 1995 through 1998, the Company completed 18 acquisitions, of which 13 were accounted for as purchase transactions and five were accounted for as pooling of interests (see Note 2). The pooling of interests transactions, all of which occurred in 1998, include the acquisitions of Digital Dictation, Inc. ("DDI"), Signal Transcriptions Network, Inc. ("Signal"), Transcriptions Ltd. of Florida, Inc. ("TLF") and The MRC Group, Inc. ("MRC") which required restatement of the Company's financial statements. Accordingly, the accompanying financial statements have been restated to reflect these 1998 acquisitions accounted for under the pooling of interests method. Principles of Consolidation The accompanying consolidated financial statements include the accounts of MedQuist and its subsidiaries. All material intercompany balances and transactions have been eliminated. Common Stock Splits On September 9, 1997, the Company effected a three-for-two stock split for all shares of common stock. Further, on June 15, 1998, the Company effected a two-for-one stock split for all shares of common stock. All share data in the accompanying financial statements has been retroactively adjusted to reflect both stock splits. Use of Estimates The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported assets and liabilities and contingency disclosures at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition Fees for transcription-related services are based primarily on contracted rates, and revenue is recognized upon the rendering of services and delivery of reports. Pro Forma Presentation for Income Taxes Prior to their mergers with the Company, Signal and TLF were taxed as "S" Corporations. Accordingly, no tax provision is included in the accompanying financial statements related to their income prior to their respective acquisition dates. The following pro forma presentation sets forth the Company's income tax provision, net income and net income per share as if Signal and TLF had been taxed as "C" Corporations for all periods presented. F-7 MEDQUIST INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (in thousands, except per share amounts) 1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
Year Ended December 31, -------------------------------------------- 1996 1997 1998 ------------ ------------- ------------- Income before income taxes, as reported ......... $ 8,008 $ 14,026 $ 11,657 Pro forma income tax provision .................. 3,357 5,975 8,766 -------- --------- --------- Pro forma net income ............................ $ 4,651 $ 8,051 $ 2,891 ======== ========= ========= Pro forma net income per share: Basic .......................................... $ 0.19 $ 0.25 $ 0.09 Diluted ........................................ $ 0.18 $ 0.24 $ 0.08
Cash and Cash Equivalents Cash and cash equivalents include cash and highly liquid investments purchased with an original maturity of three months or less, consisting primarily of cash on deposit with banks. At December 31, 1997, cash and cash equivalents included a restricted certificate of deposit of $1,339 which was used to repay a note payable in January 1998. Investments Short-term investments held by the Company at December 31, 1997 consisted primarily of investments in high-quality, fixed-income bonds with varying maturities and rates. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the Company classified their investments as held-to-maturity since the Company had both the intent and ability to hold to maturity. Accordingly, such investments were carried at amortized cost. Included in other assets at December 31, 1998, is a warrant to purchase common stock in Learnout and Hauspie, Inc. ("L&H"). The warrant has been classified as available-for-sale. Pursuant to SFAS No. 115, available-for-sale securities are carried at fair value, with unrealized gains and losses, net of tax, reported as a separate component of shareholders' equity. The unrealized gain, net of taxes, at December 31, 1998 was $585. Property and Equipment Property and equipment are recorded at cost. Depreciation and amortization have been provided using the straight-line method over the estimated useful lives of the assets, which range from two to seven years for furniture, equipment and software, and the lease term for leasehold improvements. Repairs and maintenance costs are charged to expense as incurred. Additions and betterments are capitalized. Gains or losses on disposals are charged to operations. Intangible Assets Intangible assets consist primarily of goodwill, customer lists, non-compete agreements and employee bases. The goodwill related to the May 1994 acquisition of Transcriptions, Ltd. (see Note 2) is being amortized over 40 years. All other goodwill is being amortized over 20-30 years. Customer lists and employee bases are being amortized over 10-20 years and five years, respectively. Non-compete agreements are amortized over their terms, ranging from 1.5 years to four years. Subsequent to its acquisitions, the Company continually evaluates whether later events and circumstances have occurred that indicate that the remaining estimated useful life of intangible assets may warrant revision or that the remaining balance may not be recoverable. When factors indicate that intangible assets should be evaluated for possible impairment, the Company uses an estimate of the related undiscounted cash flows F-8 MEDQUIST INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (in thousands, except per share amounts) 1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued) in measuring whether the intangible asset should be written down to fair value. Measurement of the amount of the impairment will be based on generally accepted valuation methodologies, as deemed appropriate. As of December 31, 1998, management believes that no revision to the remaining useful lives or write-down of intangible assets is required. Transaction Costs and Restructuring Charges During 1996, 1997 and 1998, the Company incurred certain charges resulting from restructurings and in 1998 incurred transaction costs associated with pooling of interests acquisitions and professional fees in connection with MRC's terminated initial public offering, as follows:
Year Ended December 31, ---------------------------------- 1996 1997 1998 -------- ---------- ---------- Restructuring charges .......................................... $ 644 $ 2,075 $ 6,539 Transaction costs associated with pooling of interests ......... -- -- 11,000 Terminated initial public offering costs ....................... -- -- 682 ----- ------- -------- $ 644 $ 2,075 $ 18,221 ===== ======= ========
In December 1998, the Company's board of directors approved management's restructuring plan associated with the MRC merger. Costs associated with the plan of approximately $6,539 have been recognized in 1998 in accordance with Emerging Issues Task Force ("EITF") 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity," as follows: Non-cancelable leases ................................. $ 3,835 Severance ............................................. 1,618 Non-cancelable contracts and other exit costs ......... 1,086 ------- $ 6,539 ======= The plan relates primarily to the closure of several redundant customer service centers as well as certain corporate offices in order to improve operating efficiencies. The Company expects to complete the plan in 1999. The severance costs are attributable to 41 individuals from various levels of operational and senior management. As of December 31, 1998, $567 of severance had been paid and $410 of other restructuring costs had been paid. The consolidated balance sheet at December 31, 1998 reflects $5,562 in accrued expenses related to the 1998 restructuring charge. In 1997, MRC approved a separate management plan to close and/or merge several redundant customer service centers in order to further reduce costs and improve operating efficiencies. The plan was completed during 1998 and included the cost of exiting certain facilities, primarily related to non-cancelable leases, the disposition of fixed assets and employee severance costs. Costs associated with the plan of approximately $2,075 were recognized in 1997 in accordance with EITF 94-3. Included in this amount is approximately $705 for the disposal of assets and approximately $800 in severance and employee contract buy outs. The balance is primarily related to non-cancelable lease costs. The severance costs are attributable to eight individuals from various levels of operational and senior management. At December 31, 1997 and 1998, approximately $1,773 and $1,213, respectively, related to MRC's restructuring charge is included in accrued expenses. F-9 MEDQUIST INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (in thousands, except per share amounts) 1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued) In 1996, MRC approved a separate management plan to close and/or merge several redundant customer service centers as well as certain corporate offices in order to reduce costs and improve operating efficiencies. The plan was essentially completed during 1997 and included the cost of exiting certain facilities, primarily related to non-cancelable leases, and employee severance costs. Costs associated with the plan of approximately $644 were recognized in 1996 in accordance with EITF 94-3. In 1998, the Company incurred the following transaction costs associated with business combinations accounted for using the pooling of interests method: Investment banker fees .................................. $ 7,200 Accounting, legal and other professional fees ........... 2,260 Broker fee paid by acquired company stockholder ......... 1,540 -------- $ 11,000 ======== At December 31, 1998, $500,000 of such costs are included in accrued expenses for payments scheduled to be made in 1999. Advertising Costs The Company charges advertising costs to expense as incurred. Advertising expense was $329, $678 and $650 for the years ended December 31, 1996, 1997 and 1998, respectively. Research and Development Costs Research and development costs are charged to expense as incurred. Total research and development costs were approximately $450, $550 and $813 for the years ended December 31, 1996, 1997 and 1998, respectively. Statements of Cash Flow Information For the years ended December 31, 1996, 1997 and 1998, the Company paid interest of $1,404, $1,027 and $695, respectively, and income taxes of $1,700, $3,162 and $6,705, respectively. Capital lease obligations of $191, $174 and $98 were incurred on equipment leases entered into in 1996, 1997 and 1998, respectively. In 1996, the Company exchanged $500 of debt for shares of capital stock. In 1998, convertible notes totaling $1,288 were converted into 172 shares of common stock. The following table displays the net noncash financing activities resulting from the Company's business acquisitions (see Note 2):
Year Ended December 31, ------------------------------------- 1996 1997 1998 ----------- ---------- ---------- Noncash net assets acquired ........................................ $ 40,274 $ 8,965 $ 4,401 Less -- Seller notes and payables .................................. (3,318) (3,337) -- Common stock issued ................................................ (10,751) -- -- Cash paid to dissenting stockholder in pooling transaction ......... -- -- 1,438 --------- -------- ------- Net cash paid for business acquisitions ........................... $ 26,205 $ 5,628 $ 5,839 ========= ======== =======
Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. F-10 MEDQUIST INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (in thousands, except per share amounts) 1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued) Earnings Per Share The Company follows SFAS No. 128, "Earnings per Share," which requires a dual presentation of "basic" and "diluted" earnings per share on the face of the income statement. Basic earnings per share is calculated by dividing net income by the weighted average number of shares of common stock outstanding for the period. Diluted earnings per share is calculated by dividing net income by the weighted average number of shares of common stock outstanding for the period, adjusted for the dilutive effect of common stock equivalents, which consists primarily of stock options, using the treasury stock method. The table below sets forth the reconciliation of the numerators and denominators of the Company's basic and diluted income per share computations:
Year Ended December 31, ------------------------------------------------------------------------------------------------------- 1996 1997 1998 --------------------------------- --------------------------------- --------------------------------- Per Per Per Net Share Share Net Share Income Shares Amount Income Shares Amount Income Shares Amount ---------- -------- ----------- ---------- -------- ----------- ---------- -------- ----------- Basic ............... $ 5,288 24,138 $ 0.22 $ 8,733 31,726 $ 0.28 $ 3,185 33,087 $ 0.10 Effect of dilutive securities ......... -- 1,906 ( 0.02) -- 1,632 ( 0.02) -- 1,818 ( 0.01) ------- ------ ------- ------- ------ ------- ------- ------ ------- Diluted ............. $ 5,288 26,044 $ 0.20 $ 8,733 33,358 $ 0.26 $ 3,185 34,905 $ 0.09 ======= ====== ======= ======= ====== ======= ======= ====== =======
For the years ended December 31, 1996, 1997 and 1998, 1,288, 1,961 and 654 common stock options and warrants were excluded from the diluted computation because their effect would be anti-dilutive. Fair Value of Financial Instruments Cash, accounts receivable, accounts payable and accrued expenses are reflected in the accompanying financial statements at fair value due to the short-term nature of those instruments. Available-for-sale investments are also reflected at fair value in accordance with SFAS No. 115. The carrying amount of long-term notes receivable and debt obligations approximate fair value at the balance sheet dates. Comprehensive Income In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and presentation of comprehensive income and its components in a full set of general-purpose financial statements that is presented with equal prominence as other financial statements. The Company's comprehensive income consists of net income and unrealized holding gains on available-for-sale securities. The adoption of SFAS No. 130 had no impact on total shareholders' equity and is presented on the accompanying Consolidated Statements of Shareholders' Equity. During 1996 and 1997, there were no other comprehensive items. For the years ended December 31, 1998, the pre-tax unrealized gain on available-for-sale securities was $900 and the deferred tax recorded on the unrealized gain was $315. Segment Reporting In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." This statement establishes additional standards for segment reporting in the financial statements and is effective for fiscal years beginning after December 15, 1997. As the Company operates in one reportable segment, SFAS No. 131 had no effect on the Company's financial statements. F-11 MEDQUIST INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (in thousands, except per share amounts) 1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued) Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation. 2. ACQUISITIONS Effective May 1, 1994, the Company purchased substantially all of the assets of Transcriptions, Ltd. and Affiliates ("Transcriptions"), as well as assumed certain liabilities for $16,930 in cash, including acquisition costs of $322, plus the payment of Transcriptions' interest bearing debt of $5,816, plus a deferred purchase price based on future operating results. Effective December 29, 1995, the Company fixed the deferred purchase price by agreeing to pay the former owners of Transcriptions $18,375 in cash and issue 2,584 shares of common stock (valued at $4,550 for financial reporting purposes) on August 31, 1996. The total purchase price for the Transcriptions acquisition was $44,797. The acquisition has been accounted for using the purchase method with the purchase price allocated to the fair value of the acquired assets and liabilities. In July 1996, MRC acquired all of the outstanding capital stock of Medical Records Corp. The former shareholders of Medical Records Corp. received total consideration of approximately $27,000, consisting of cash, notes and shares of common stock. The acquisition was accounted for as a purchase, and the results of Medical Records Corp. are included in the accompanying consolidated financial statements from the date of the acquisition. In connection with the acquisition, MRC assumed certain acquisition-related liabilities from Medical Records Corp. The cost of the acquisition has been allocated on the basis of the estimated fair market value of the assets acquired and liabilities assumed. The allocation resulted in goodwill and other intangible assets of approximately $33,015, which are being amortized over lives of 1.5 to 30 years. The following unaudited pro forma summary presents the results of operations of the Company as if the payment of the Transcriptions deferred purchase price, which causes additional amortization and interest expense, and the Medical Records Corp. acquisition had occurred on January 1, 1996. Year Ended December 31, 1996 ------------------ Revenue ............................. $ 179,683 Net income .......................... 726 Net income per share ................ .03 On May 28, 1998, the Company completed the acquisition of approximately 94% of the outstanding capital stock of DDI and on July 31, 1998 acquired the remaining shares. The Company issued 912 shares in exchange for all DDI shares. The acquisition was accounted for using the pooling of interests method of accounting. Accordingly, the Company's historical financial statements were retroactively restated to reflect the combination with DDI. On August 18, 1998, the Company completed the acquisition of Signal, which was accounted for using the pooling of interests method of accounting. The Company issued 619 shares of its common stock and approximately $1,400 in cash to a dissenting Signal stockholder in exchange for all Signal capital stock. The Company's historical financial statements have been restated to reflect the combination with Signal. Signal and the Company elected to treat their merger as an asset purchase for income tax purposes. The Company recorded a deferred tax asset of $5,052 that was credited directly to shareholders' equity to reflect the tax effect of goodwill that was recorded for income tax purposes. F-12 MEDQUIST INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (in thousands, except per share amounts) 2. ACQUISITIONS -- (Continued) On November 30, 1998, the Company completed the acquisition of TLF, which was accounted for using the pooling of interests method. The Company issued 800 shares of its common stock for all TLF capital stock. Accordingly, the Company's consolidated financial statements have been restated to reflect the combination with TLF. On September 18, 1998 the Company signed a definitive merger agreement with MRC and on December 10, 1998, the merger was consummated. Pursuant to the agreement, each share of MRC common stock and each share of MRC preferred stock on an as-converted basis was exchanged for 0.5163 shares of the Company's Common stock. In total, the Company issued 8,662 shares of its common stock to the former MRC shareholders and options to purchase an aggregate of 1,543 shares to the former MRC option holders. The MRC merger was accounted for as a pooling of interests. Accordingly, the Company's consolidated financial statements have been restated to reflect the merger with MRC. Revenue and net income as previously reported for the years ended December 31, 1996, 1997 and 1998 and as restated for the pooling of interests transactions are as follows: Year Ended December 31, 1998 ------------------------------ Revenue Net Income ----------- ---------- MedQuist, as previously reported ......... $164,779(a) $ (305)(a) DDI ...................................... 6,165(b) 253(b) Signal ................................... 5,281(b) 543(b) TLF ...................................... 3,688(c) 522(c) MRC ...................................... 91,742(c) 2,172(c) --------- ------ Restated ................................. $ 271,655 $3,185 ========= ====== - ------------ (a) Includes (i) DDI and Signal amounts from July 1, 1998, (ii) TLF and MRC amounts from October 1, 1998 and (iii) $18,221 of pre-tax transaction and restructuring costs. (b) Reflects amounts from January 1, 1998 to June 30, 1998. (c) Reflects amounts from January 1, 1998 to September 30, 1998. Year Ended December 31, 1997 ------------------------- Revenue Net Income ----------- ----------- MedQuist, as previously reported ......... $ 84,495 $ 7,631 DDI ...................................... 10,026 616 Signal ................................... 9,294 1,100 TLF ...................................... 4,226 712 MRC ...................................... 108,117 (1,326) --------- -------- Restated ................................. $ 216,158 $ 8,733 ========= ======== F-13 MEDQUIST INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (in thousands, except per share amounts) 2. ACQUISITIONS -- (Continued) Year Ended December 31, 1996 ------------------------- Revenue Net Income ----------- ----------- MedQuist, as previously reported ......... $ 61,480 $ 3,477 DDI ...................................... 6,937 440 Signal ................................... 8,058 842 TLF ...................................... 3,934 882 MRC ...................................... 71,700 (1,060) --------- -------- Restated ................................. $ 152,109 $ 4,581 ========= ======== Prior to their mergers with the Company, Signal and TLF were taxed as "S" Corporations. The above net income amounts do not include an aggregate "C" Corporation income tax provision for Signal and TLF of approximately $637, $682 and $294 for the years ended December 31, 1996, 1997 and 1998, respectively (see Note 1). From 1996 through 1998, the Company completed several smaller acquisitions accounted for using the purchase method. Pro forma information is not presented as these acquisitions are not material to the Company. Certain of the acquisitions provide for additional consideration to be paid if net future billings to defined customers exceed specified contractual levels. These provisions expire in 2000 and 2001, and are generally payable on a quarterly basis. When the contingency is resolved and additional consideration is due, the Company will account for the payments as additional purchase price and amortize the additional amount paid over the remaining life of the asset. 3. PROPERTY AND EQUIPMENT December 31, ------------------------- 1997 1998 ----------- ----------- Furniture, equipment and software .................... $ 46,608 $ 52,571 Leasehold improvements ............................... 1,341 1,553 --------- --------- 47,949 54,124 Less -- Accumulated depreciation and amortization .... (22,507) (27,102) --------- --------- $ 25,442 $ 27,022 ========= ========= 4. INTANGIBLE ASSETS December 31, ------------------------- 1997 1998 ----------- ----------- Goodwill ................................. $ 64,600 $ 67,109 Customer lists ........................... 21,552 22,640 Non-compete agreements ................... 3,405 3,405 Employee base ............................ 2,514 2,514 Other .................................... 137 150 -------- --------- 92,208 95,818 Less -- Accumulated amortization ......... (9,826) (13,602) -------- --------- $ 82,382 $ 82,216 ======== ========= F-14 MEDQUIST INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (in thousands, except per share amounts) 5. ACCRUED EXPENSES: December 31, ----------------------- 1997 1998 ---------- ---------- Accrued payroll and related taxes ......... $ 7,175 $ 9,329 Restructuring charges ..................... 1,733 6,775 Other ..................................... 5,710 9,746 -------- -------- $ 14,618 $ 25,850 ======== ======== 6. LONG-TERM DEBT
December 31, ------------------------ 1997 1998 ---------- ----------- Note payable to bank, repaid in 1998 .................................... $ 5,250 $ -- Note payable to former shareholders of Medical Records Corp., repaid in 1999 ......................................................... 2,000 2,000 Promissory notes, repaid or converted into common stock in 1998 ......... 5,085 -- Capital lease obligations ............................................... 1,786 468 Other ................................................................... 260 119 -------- -------- 14,381 2,587 Less -- current portion ................................................. (6,792) (2,372) -------- -------- $ 7,589 $ 215 ======== ========
On April 23, 1997, the Company amended its credit facility to provide for a $10 million unsecured senior revolving line of credit through April 23, 2000. The revolver bears interest at resetting rates selected by the Company from various alternatives. The interest rate alternatives are either (i) the greater of (a) prime rate, (b) the federal funds rate plus 0.5% (c) the bank's certificate of deposit rate plus 1%, or (ii) LIBOR plus 0.75%. The credit facility also allows for the Company to finance up to 100% of any acquisitions of companies that are in the business of providing transcriptions-related services. The financing of these acquisitions may be carved out of the revolver and amortized over 20 consecutive quarters. Each acquisition term loan that is created would permanently reduce the remaining borrowings under the revolver. In addition to acquisitions, the revolver can be used for working capital and general corporate purposes. To the extent any amounts under the revolver are repaid, other than acquisition term loans, the Company may reborrow such amounts. The credit facility requires the Company to maintain certain financial and non-financial covenants, including limitations on capital expenditures and dividends. For the year ended December 31, 1997 and 1998, the Company did not incur any interest expense on the revolving credit facility, as there were no borrowings on the credit facility. For the year ended December 31, 1996, the Company incurred interest expense of $49 on the revolving credit facility, at a weighted average interest rate of 9.78%. The highest outstanding borrowing under the revolver during 1996 was $2,534. In connection with the acquisition of Medical Records Corp., MRC entered into a note agreement with a bank. The note was for $7,000 with an interest rate of LIBOR plus 1.65%, which totaled approximately 7.3% at December 31, 1997. The note was secured by substantially all of MRC's assets. The agreement required the payment of interest quarterly along with equal monthly principal payments of $117 through September 2001. The note was repaid in 1998. F-15 MEDQUIST INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (in thousands, except per share amounts) 6. LONG-TERM DEBT -- (Continued) Also, in connection with the acquisition of Medical Records Corp., MRC issued seven year, 8% unsecured notes to former shareholders of Medical Records Corp. for $2,000. The notes require the payment of interest quarterly, with annual principal payments of $500 beginning in July 2000. The Company repaid these notes in 1999. In January 1998, subordinated convertible 6% promissory notes in the amount of $1,288 were converted into 172 shares of common stock at a conversion price of $7.48 per share. Long-term debt maturities as of December 31, 1998, are as follows: 1999 ................... $ 2,372 2000 ................... 138 2001 ................... 48 2002 ................... 29 ------- $ 2,587 ======= 7. SHAREHOLDERS' EQUITY In May 1996, MedQuist consummated a secondary public offering of its common stock, selling 6,600 shares at a price of $5.67 per share. In June 1996, the underwriters exercised their overallotment option for an additional 922 shares. After deducting the underwriters' discount and offering expenses, the net proceeds to the Company were $39,442. In July 1996, MRC issued shares of preferred stock for total consideration, net of offering expenses, of $29,272. Such preferred stock was exchanged for MedQuist common in the merger (see Note 2). In connection with the 1992 issuance of a senior subordinated note, the Company sold to the holder for $1,100, warrants to purchase 1,732 shares of Class A and 1,068 shares of Class B preferred stock at an exercise price of $2.50 per share. Each share of Class A and Class B preferred stock was convertible into one share of common stock. During 1994, the holder was issued additional warrants and all warrant exercise prices were reset at $2.43, in accordance with the antidilution provisions of the original warrant agreement. Simultaneous with the closing of the secondary public offering, the company and the holder agreed that the holder would exercise the warrants by tendering the $7,000 principal amount of the senior subordinated notes and simultaneously converting the shares of preferred stock received upon such exercise into 2,888 shares of common stock. As an inducement for the holder to exercise the warrants and convert the preferred stock, the Company issued the holder 128 additional shares of common stock. This inducement, valued at $707 or $0.03 per diluted share, has been recorded as a deduction from the net income available to common shareholders in 1996. In connection with the Company's May 1994 credit agreement, the Company issued the agent bank warrants to purchase 226 shares of common stock at an exercise price of $2.25 per share. These warrants were exercised on June 12, 1997 by the agent bank for proceeds to the Company of $508. In connection with the sale of equity securities to certain investors in 1992 and 1993, warrants to purchase common stock at $12.69 per share were issued by MRC. The warrants were fully vested and exercisable at the date of issuance and have terms which permit conversion into common stock at specified prices during periods ranging from four to five years. The fair value of the warrants at the date of grant was de minimis and therefore no compensation expense has been recorded in the accompanying financial statements. During 1998, 157 warrants were exercised and 37 were cancelled. At December 31, 1998, no warrants were outstanding. F-16 MEDQUIST INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (in thousands, except per share amounts) 8. STOCK OPTION PLANS The Company has six stock option plans that provide for the granting of options to purchase shares of common stock to eligible employees (including officers) and nonemployee directors of the Company. Options granted may be at fair market value of the common stock or at a price determined by a committee of the Company's board of directors. The stock options vest and are exercisable over periods determined by the committee. In February 1998, MRC granted 165 stock options to employees with exercise prices below the fair market value of MRC's common stock. Accordingly, MRC recorded deferred compensation totaling $1,078, of which $540 was amortized to expense in 1998. Information with respect to the Company's common stock options is as follows:
Option Price Aggregate Shares Per Share Proceeds --------- ----------------- ------------ Outstanding, December 31, 1995 ......... 2,407 $1.14 - $8.31 $ 7,141 Granted ............................... 1,670 2.71 - 10.48 10,810 Exercised ............................. (98) 2.17 - 5.13 (220) Canceled .............................. (156) 2.71 - 3.17 (271) ----- ----------------- -------- Outstanding, December 31, 1996 ......... 3,823 1.14 - 10.48 17,460 Granted ............................... 1,240 5.21 - 16.49 13,345 Exercised ............................. (533) 1.56 - 10.42 (1,018) Canceled .............................. (193) 3.17 - 8.67 (412) ----- ----------------- -------- Outstanding, December 31, 1997 ......... 4,337 1.14 - 16.49 29,375 Granted ............................... 1,015 5.21 - 31.19 26,012 Exercised ............................. (760) 1.14 - 16.49 (1,887) Canceled .............................. (159) 5.21 - 25.63 (391) ----- ----------------- -------- Outstanding, December 31, 1998 ......... 4,433 $ 1.34 - $31.19 $ 53,109 ===== ================= ========
At December 31, 1998, there were 2,172 exercisable options with an aggregate exercise price of $16,204 and 273 additional options available for grant under the plans. The options outstanding and exercisable by exercise price at December 31, 1998 are as follows:
Weighted Average Weighted Weighted Range Of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life Price Exercisable Price - ------------------ ------------- ------------- ---------- ------------- ----------- $0.00 - $3.11 463 5.9 $ 2.36 321 $ 2.20 3.12 - 6.23 845 7.0 4.56 488 4.42 6.24 - 9.35 833 5.9 8.12 650 8.17 9.36 - 12.47 935 7.4 10.48 567 10.48 12.48 - 15.59 524 9.0 14.34 144 14.26 15.60 - 18.71 11 8.8 15.90 2 15.94 18.72 - 21.83 52 9.4 21.43 -- -- 21.84 - 24.95 116 9.6 23.11 -- -- 24.96 - 28.06 43 9.6 25.63 -- -- 28.07 - 31.18 611 9.7 31.13 -- -- --- --- -------- --- ------- 4,433 7.5 $ 12.00 2,172 $ 7.46 ===== === ======== ===== =======
F-17 MEDQUIST INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (in thousands, except per share amounts) 8. STOCK OPTION PLANS -- (Continued) The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and the related interpretations in accounting for its stock option plans. Had compensation cost for the Company's common stock options been determined based upon the fair value of the options at the date of grant, as prescribed under SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net income and net income per share would have been the following pro forma amounts: Year Ended December 31, ------------------------------------ 1996 1997 1998 ---------- ---------- ---------- Net income: As reported ................ $ 5,288 $ 8,733 $ 3,185 Pro forma .................. 4,454 7,613 1,705 Basic net income per share: As reported ................ .22 .28 .10 Pro forma .................. .18 .24 .05 Diluted net income per share: As reported ................ .20 .26 .09 Pro forma .................. .17 .23 .05 The fair value of the options granted is estimated using the Black-Scholes option pricing model with the following assumptions: dividend yield of 0.0%, volatility of 50.0%-55.0%, risk-free interest rates of 4.5% to 8.0%, and expected lives of five to ten years. The above pro forma amounts may not be indicative of future amounts because option grants prior to January 1, 1995 have not been included and because future option grants are expected. 9. INCOME TAXES The income tax provision consists of the following: Year Ended December 31, ---------------------------------- 1996 1997 1998 -------- ---------- ---------- Current: State and local ......... $ 79 $ 1,176 $ 1,596 Federal ................. 1,536 4,317 10,089 ------ ------- -------- 1,615 5,493 11,685 Deferred ................. 1,105 (200) (3,213) ------ ------- -------- $2,720 $ 5,293 $ 8,472 ====== ======= ======== F-18 MEDQUIST INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (in thousands, except per share amounts) 9. INCOME TAXES -- (Continued) A reconciliation of the statutory federal income tax rate to the effective income tax rate is as follows:
Year Ended December 31, ------------------------------------ 1996 1997 1998 ---------- ---------- ---------- Statutory federal income tax rate ....................... 34.0% 35.0% 35.0% State income taxes, net of federal benefit .............. 3.0 3.0 3.7 Non-deductible merger costs ............................. -- -- 30.8 Impact of Signal and TLF "S" Corporation status ......... (8.0) (4.9) (4.4) Other ................................................... 5.0 4.6 7.6 ----- ----- ----- 34.0% 37.7% 72.7% ===== ===== =====
Signal and TLF were taxed as an "S" Corporation prior to their mergers with MedQuist. Accordingly, the former Signal and TLF shareholders were taxed individually on their companies' taxable income. Therefore, no tax provision is included in the accompanying financial statements related to Signal and TLF's net income prior to their mergers with the Company (see Note 1). At December 31, 1997, the tax bases of Signal's net assets approximated their reported amount for financial statement purposes. However, Signal and the Company elected to treat their merger as an asset purchase for income tax purposes. Accordingly, the Company recorded a deferred tax asset and an increase in additional paid-in capital of $5,052, which represents the tax effect of goodwill that was recorded for income tax purposes. The tax effected temporary differences that give rise to deferred income taxes are as follows: December 31, ----------------------------- 1997 1998 ------------- ------------- Deferred tax asset: Restructuring accruals ........... $ 602 $ 2,722 Carryforwards .................... 338 -- Accruals and reserves ............ 2,237 3,716 --------- --------- $ 3,177 $ 6,438 ========= ========= Deferred tax liability: Accumulated depreciation ......... $ (1,475) $ (1,725) Accumulated amortization ......... (3,518) 1,124 Deferred compensation ............ 210 289 Marketable security .............. -- (315) Other ............................ (1,711) (1,354) --------- --------- $ (6,494) $ (1,981) ========= ========= 10. COMMITMENTS AND CONTINGENCIES Rent expense for operating leases was $5,053, $4,599 and $5,618 for the years ended December 31, 1996, 1997 and 1998, respectively. Minimum annual rental commitments for noncancelable operating leases having terms in excess of one year as of December 31, 1998, are as follows: F-19 MEDQUIST INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (in thousands, except per share amounts) 10. COMMITMENTS AND CONTINGENCIES -- (Continued) 1999............................................. $ 4,857 2000............................................. 3,590 2001............................................. 2,564 2002............................................. 1,616 2003............................................. 550 2004............................................. 29 -------- $ 13,206 ======== The Company has an employment agreement, as amended, with a former Chief Executive Officer who is currently a director of the Company. The agreement entitles this individual to receive retirement benefits of $75 per year for life plus certain other benefits, as defined. Included in other long-term liabilities is $544 and $457at December 31, 1997 and 1998, respectively, related to these retirement benefits. The employment agreement also requires the Company to loan the former Chief Executive Officer's estate the necessary funds to exercise any options owned by the individual at the time of his death. The Company has a severance plan for certain executive officers that provides for one-time payments in the event of a change in control, as defined. No liabilities are currently required to be recorded with respect to this plan. In the normal course of business, the Company is a party to various claims and legal proceedings. Although the ultimate outcome of these matters is presently not determinable, management of the Company, after consultation with legal counsel, does not believe that the resolution of these matters will have a material effect upon the Company's financial position or results of operations. 11. EMPLOYEE BENEFIT PLANS Savings Plan The Company offers a savings plan under section 401(k) of the Internal Revenue Code. This savings plan allows eligible employees to contribute up to 15% of their compensation on a pre-tax basis. The Company matches 50% of participant's contribution, up to 5% of the participant's total compensation. Effective October 1, 1996, the Company's matching contribution is made in the form of the Company's common stock. The charge to operations for the Company's matching contributions was $63, $80 and $125 in 1996, 1997 and 1998, respectively. The Company issued approximately five thousand shares in both 1997 and 1998, in connection with the Company's matching contribution. The Company did not issue shares in 1996 in connection with the savings plan. MRC has two defined contribution 401(k) plans, covering substantially all employees. Eligible employees of MRC may contribute certain amounts of their annual compensation. During 1996, 1997 and 1998, MRC made matching contributions to the plans of $171,000, $117,000 and $114,000, respectively. Stock Purchase Plan All full-time employees except those who own five percent or more of the voting stock of the Company are eligible to participate in the Company's Employee Stock Purchase Plan (SPP). The SPP provides that participants may authorize the Company to withhold up to 10% of their earnings for the purchase of the Company's common stock. The purchase price of the common stock is determined by the Compensation Committee but shall not be less than eighty-five percent of the fair market value of the common stock. Through the SPP, five and 15 shares of common stock have been purchased in 1997 and 1998, respectively. In connection with the SPP, the Company did not issue any shares in 1996. F-20 MEDQUIST INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (in thousands, except per share amounts) 12. QUARTERLY SUPPLEMENTAL FINANCIAL DATA (UNAUDITED)
Three Months Ended Year Ended December 31, 1997: ------------------------------------------------------------- March 31 June 30 September 30 December 31 ------------- ------------- -------------- ------------ Revenue .............................. $ 49,914 $ 52,999 $ 55,269 $ 57,976 Income before income taxes ........... 3,283 4,557 4,632 1,554 Net income ........................... 2,058 2,931 2,910 834 Basic net income per share ........... 0.07 0.10 0.10 0.02 Diluted net income per share ......... 0.06 0.09 0.09 0.02
Three Months Ended Year Ended December 31, 1998: ------------------------------------------------------------- March 31 June 30 September 30 December 31 ------------- ------------- -------------- ------------ Revenue .............................. $ 63,915 $ 66,870 $ 69,005 $ 71,865 Income before income taxes ........... 6,214 6,327 6,155 (7,039) Net income ........................... 4,004 3,969 3,776 (8,564) Basic net income per share ........... 0.12 0.12 0.12 (0.24) Diluted net income per share ......... 0.12 0.12 0.11 (0.24)
F-21 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Medquist Inc.: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of Medquist, Inc. and Subsidiaries included in this Registration Statement, and have issued our report thereon dated February 1, 1999. Our audits were made for the purpose of forming an opinion on those financial statements taken as a whole. The Schedule on page S-2 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to auditing procedures applied in the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP Philadelphia, Pa. February 1, 1999 S-1 MEDQUIST INC. AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Charged to Balance at beginning costs and other end of of period expenses Accounts Write-offs Period ------------ ------------ ------------------- ------------ ----------- Allowance for doubtful accounts: Year ended December 31, 1996 ......... $ 1,040 $ 409 $ (208) (a) $ 169 $ 1,072 Year ended December 31, 1997 ......... 1,072 812 20 606 1,298 Year ended December 31, 1998 ......... 1,298 1,217 -- 241 2,274 Accrued restructuring costs: Year ended December 31, 1996 ......... $ 347 $ 644 $ -- $ 121 $ 870 Year ended December 31, 1997 ......... 870 2,075 (289) (b) 923 1,733 Year ended December 31, 1998 ......... 1,733 6,539 -- 1,497 6,775
- ------------ (a) Amount includes the addition of $64 relating to purchase accounting adjustment in connection with MRC's acquisition of Medical Records, Inc. offset by a write-off of $272 relating to MedQuist's discontinued operations. (b) Reclassified to other long-term liabilities. S-2 UNDERWRITING MedQuist, the selling shareholders and the underwriters for the offering named below have entered into an underwriting agreement with respect to the shares being offered. Subject to certain conditions, each underwriter has severally agreed to purchase the number of shares indicated in the following table. Goldman, Sachs & Co., BancBoston Robertson Stephens Inc., Donaldson, Lufkin & Jenrette Securities Corporation and Volpe Brown Whelan & Company, LLC are the representatives of the underwriters.
Underwriters Number of Shares - ------------------------------------------------------------------ ----------------- Goldman, Sachs & Co. ......................................... BancBoston Robertson Stephens Inc. ........................... Donaldson, Lufkin & Jenrette Securities Corporation .......... Volpe Brown Whelan & Company, LLC ............................ ----------------- Total ....................................................... =================
------------------------------------------ If the underwriters sell more shares than the total number set forth in the table above, the underwriters have an option to buy up to an additional 629,020 shares from MedQuist to cover such sales. They may exercise that option for 30 days. If any shares are purchased pursuant to this option, the underwriters will severally purchase shares in approximately the same proportion as set forth in the table above. The following tables show the per share and total underwriting discounts and commissions to be paid to the underwriters by MedQuist and the selling shareholders. Such amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase additional shares. Paid by MedQuist ------------------------------ No Exercise Full Exercise ------------- -------------- Per Share $ $ Total $ $ Paid by the selling shareholders ------------------------------ No Exercise Full Exercise ------------- -------------- Per Share $ $ Total $ $ Shares sold by the underwriters to the public will initially be offered at the initial public offering price set forth on the cover of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to $ per share from the initial public offering price. Any such securities dealers may resell any shares purchased from the underwriters to certain other brokers or dealers at a discount of up to $ per share from the initial public offering price. If all the shares are not sold at the initial offering price, the representatives may change the offering price and the other selling terms. MedQuist and the selling shareholders, without the prior written consent of Goldman, Sachs & Co., have agreed not to sell or dispose of or hedge any of their common stock or securities convertible into or exchangeable for shares of common stock during the period from the date of this prospectus continuing through the date 90 days after the date of this prospectus, except that MedQuist may issue common stock upon the exercise of outstanding options or in connection with an acquisition. This agreement does not apply to any existing employee benefit plans. In connection with the offering, the underwriters may purchase and sell shares of common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. Stabilizing transactions consist of certain bids or purchases made for the purpose of preventing or retarding a decline in the market price of the common stock while the offering is in progress. The underwriters also may impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the U-1 representatives have repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions. These activities by the underwriters may stabilize, maintain or otherwise affect the market price of the common stock. As a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the underwriters at any time. These transactions may be effected on the Nasdaq National Market, in the over-the-counter market or otherwise. MedQuist and the selling shareholders estimate that their shares of the total expenses of the offerings, excluding underwriting discounts and commissions, will be approximately $73,252 and $233,929, respectively. MedQuist and the selling shareholders have agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act of 1933. U-2 ================================================================================ No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date. -------------------------------------------- TABLE OF CONTENTS Page ---- Prospectus Summary ....................... 3 Risk Factors ............................. 6 Forward-looking Statements................ 8 Use of Proceeds .......................... 9 Market for the Common Stock and Dividend Policy ................................. 10 Capitalization ........................... 11 Management's Discussion and Analysis of Financial Condition and Results of Operations ............................ 12 Business ................................. 17 Management ............................... 22 Description of Capital Stock ............. 24 Principal and Selling Shareholders ....... 26 U.S. Tax Consequences to Non-U.S. Holders of Common Stock........................ 28 Legal Matters ............................ 30 Experts .................................. 30 Where You Can Find Additional Information Index to Consolidated Financial 31 Statements ............................ F-1 Underwriting ............................. U-1 ================================================================================ ================================================================================ 4,193,467 Shares MedQuist Inc. Common Stock [GRAPHIC OMITTED] Goldman, Sachs & Co. BancBoston Robertson Stephens Donaldson, Lufkin & Jenrette Volpe Brown Whelan & Company Representatives of the Underwriters ================================================================================ PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS Item 14. Other Expenses of Issuance and Distribution The following table shows the estimated expenses of the issuance and distribution of the securities offered. SEC registration fee $ 37,181 NASD fee 14,000 Nasdaq fee for listing of additional shares 17,500 Legal fees and expenses 80,000 Blue Sky expenses and counsel fees 5,000 Accounting fees and expenses 76,000 Transfer agent and registrar fees 7,500 Printing and engraving fees 60,000 Miscellaneous 10,000 -------- TOTAL $307,181 ======== Item 15. Indemnification of Directors and Officers Section 14A:3-5 of the Business Corporation Act of the State of New Jersey ("NJBCA") permits each New Jersey business corporation to indemnify its directors, officers, employees and agents against expenses and liability for each such person's acts taken in his or her capacity as a director, officer, employee or agent of the corporation if such actions were taken in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal proceeding, if he or she had no reasonable cause to believe his or her conduct was unlawful. Article 10 of MedQuist's Bylaws provides that MedQuist, to the full extent permitted by Section 14A:3-5 of the NJBCA, shall indemnify all past and present directors or officers of MedQuist and may indemnify all past or present employees or other agents of MedQuist. To the extent that a director, officer, employee or agent of MedQuist has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in such Article 10, or in defense of any claim, issue, or matter therein, he or she shall be indemnified by MedQuist against expenses in connection therewith. Such expenses shall be paid by MedQuist in advance of the final disposition of the action, suit or proceeding as authorized by MedQuist's Board of Directors upon receipt of an undertaking to repay the advance if it is ultimately determined that such person is not entitled to indemnification. The Company has a policy insuring it and its directors and officers against certain liabilities, including liabilities under the Securities Act. Reference is made to Item 17 of this Registration Statement for additional information regarding indemnification of directors and officers. Item 16. Exhibits 1.1 Underwriting Agreement 4.1 Specimen Stock Certificate (Incorporated by reference to Exhibit 4.1 to MedQuist's Registration Statement No. 333-3050 on Form S-1) 5.1 Opinion of Pepper Hamilton LLP 23.1 Consent of Arthur Andersen LLP 23.2 Consent of Arthur Andersen LLP 23.3 Consent of Pepper Hamilton LLP (included in Exhibit 5.1) 24.1 Powers of Attorney (included on signature page)
II-1 Item 17. Undertakings (a) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement; (i) To include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the information required to be included in a post-effective amendment by those clauses is contained in periodic reports filed with or furnished to the Commission by MedQuist pursuant to Section 13 or Section 15(d) of the Exchange Act that are incorporated by reference in this Registration Statement; (2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act, each filing of the registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-2 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Marlton, State of New Jersey, on March 24, 1999. MEDQUIST INC. By: /s/ DAVID A. COHEN -------------------------------------------- David A. Cohen Chairman and Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints David A. Cohen and John R. Emery, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, or any registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons on March 24, 1999 in the capacities indicated:
Signatures Title /s/ David A. Cohen - ------------------------ Chairman and Chief Executive Officer (principal executive officer) David A. Cohen /s/ John R. Emery Senior Vice President, Treasurer and Chief Financial Officer (principal - ------------------------ financial officer and principal accounting officer) John R. Emery /s/ John A. Donohoe, Jr. President, Chief Operating Officer and Director - ------------------------ John A. Donohoe, Jr. /s/ Bruce K. Anderson Director - ------------------------ Bruce K. Anderson /s/ William T. Carson, Jr. Director - ------------------------- William T. Carson, Jr. /s/ John T. Casey Director - ------------------------ John T. Casey /s/ Richard J. Censits Director - ------------------------ Richard J. Censits /s/ James R. Emshoff Director - ------------------------ James R. Emshoff
II-3 Signatures Title /s/ Terrence J. Mulligan Director - ------------------------ Terrence J. Mulligan /s/ A. Fred Ruttenberg Director - ------------------------ A. Fred Ruttenberg Director - ------------------------ Edward L. Samek /s/ R. Timothy Stack Director - ------------------------ R. Timothy Stack /s/ Richard H. Stowe Director - ------------------------ Richard H. Stowe /s/ John H. Underwood Director - ------------------------ John H. Underwood II-4 EX-1.1 2 UNDERWRITING AGREEMENT EXHIBIT 1.1 MedQuist Inc. Common Stock (no par value) --------------------------- Underwriting Agreement April....., 1999 Goldman, Sachs & Co., BancBoston Robertson Stephens, Donaldson, Lufkin & Jenrette, Volpe Brown Whelan & Company, As representatives of the several Underwriters named in Schedule I hereto, c/o Goldman, Sachs & Co., 85 Broad Street, New York, New York 10004. Ladies and Gentlemen: MedQuist Inc., a New Jersey corporation (the "Company"), proposes, subject to the terms and conditions stated herein, to issue and sell to the Underwriters named in Schedule I hereto (the "Underwriters") an aggregate of . . . . . . shares and, at the election of the Underwriters, up to . . . . . . additional shares of Common Stock, no par value ("Stock") of the Company and the shareholders of the Company named in Schedule II hereto (the "Selling Shareholders") propose, subject to the terms and conditions stated herein, to sell to the Underwriters an aggregate of . . . . . . . shares of Stock. The aggregate of . . . . shares to be sold by the Company and the Selling Shareholders is herein called the "Firm Shares" and the aggregate of . . . . . . additional shares to be sold by the Company is herein called the "Optional Shares". The Firm Shares and the Optional Shares that the Underwriters elect to purchase pursuant to Section 2 hereof are herein collectively called the "Shares". 1. (a) The Company represents and warrants to, and agrees with, each of the Underwriters that: (i) A registration statement on Form S-3 (File No. 333-....) (the "Initial Registration Statement") in respect of the Shares has been filed with the Securities and Exchange Commission (the "Commission"); the Initial Registration Statement and any post-effective amendment thereto, each in the form heretofore delivered, and, excluding 1 exhibits thereto but including all documents incorporated by reference in the prospectus contained therein, to you for each of the other Underwriters, have been declared effective by the Commission in such form; other than a registration statement, if any, increasing the size of the offering (a "Rule 462(b) Registration Statement"), filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the "Act"), which became effective upon filing, no other document with respect to the Initial Registration Statement or document incorporated by reference therein has heretofore been filed with the Commission; and no stop order suspending the effectiveness of the Initial Registration Statement, any post-effective amendment thereto or the Rule 462(b) Registration Statement, if any, has been issued and to the Company's knowledge no proceeding for that purpose has been initiated or threatened by the Commission (any preliminary prospectus included in the Initial Registration Statement or filed with the Commission pursuant to Rule 424(a) of the rules and regulations of the Commission under the Act is hereinafter called a "Preliminary Prospectus"; the various parts of the Initial Registration Statement and the Rule 462(b) Registration Statement, if any, including all exhibits thereto and including (i) the information contained in the form of final prospectus filed with the Commission pursuant to Rule 424(b) under the Act in accordance with Section 5(a) hereof and deemed by virtue of Rule 430A under the Act to be part of the Initial Registration Statement at the time it was declared effective and (ii) the documents incorporated by reference in the prospectus contained in the Initial Registration Statement at the time such part of the Initial Registration Statement became effective, each as amended at the time such part of the Initial Registration Statement became effective or such part of the Rule 462(b) Registration Statement, if any, became or hereafter becomes effective, are hereinafter collectively called the "Registration Statement"; such final prospectus, in the form first filed pursuant to Rule 424(b) under the Act, is hereinafter called the "Prospectus"; any reference herein to any Preliminary Prospectus or the Prospectus shall be deemed to refer to and include the documents incorporated by reference therein pursuant to Item 12 of Form S-3 under the Act, as of the date of such Preliminary Prospectus or Prospectus, as the case may be; any reference to any amendment or supplement to any Preliminary Prospectus or the Prospectus shall be deemed to refer to and include any documents filed after the date of such Preliminary Prospectus or Prospectus, as the case may be, under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and incorporated by reference in such Preliminary Prospectus or Prospectus, as the case may be; and any reference to any amendment to the Registration Statement shall be deemed to refer to and include any annual report of the Company filed pursuant to Section 13(a) or 15(d) of the Exchange Act after the effective date of the Initial Registration Statement that is incorporated by reference in the Registration Statement; 2 (ii) No order preventing or suspending the use of any Preliminary Prospectus has been issued by the Commission, and each Preliminary Prospectus, at the time of filing thereof, (a) conformed in all material respects to the requirements of the Act and the rules and regulations of the Commission thereunder, and (b) did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by an Underwriter through Goldman, Sachs & Co. expressly for use therein or by a Selling Shareholder expressly for use in the preparation of the answers therein to Item 7 of Form S-3; (iii) The documents incorporated by reference in the Prospectus, when they became effective or were filed with the Commission, as the case may be, conformed in all material respects to the requirements of the Act or the Exchange Act as applicable, and the rules and regulations of the Commission thereunder, and none of such documents contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading at the time they were filed or became effective; and any further documents so filed and incorporated by reference in the Prospectus or any further amendment or supplement thereto, when such documents become effective or are filed with the Commission, as the case may be, will conform in all material respects to the requirements of the Act or the Exchange Act, as applicable, and the rules and regulations of the Commission thereunder and (a) if part of the Registration Statement, will not contain an untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (b) if not part of the Registration Statement, will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary, in light of the circumstance under which they are made, to make the statements therein not misleading; provided, however, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by an Underwriter through Goldman, Sachs & Co. expressly for use therein; (iv) The Registration Statement conforms, and the Prospectus and any further amendments or supplements to the Registration Statement or the Prospectus will conform, in all material respects to the requirements of the Act and the rules and regulations of the 3 Commission thereunder and (a) the Registration Statement does not and will not, as of its applicable effective date as to the Registration Statement and any amendment thereto contain an untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (b) the Prospectus and any amendment or supplement thereto as of its applicable filing date does not and will not, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements, in light of the circumstance under which they were made, therein not misleading; provided, however, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by an Underwriter through Goldman, Sachs & Co. expressly for use therein or by a Selling Shareholder expressly for use in the preparation of the answers therein to Item 7 of Form S-3; (v) Neither the Company nor any of its subsidiaries has sustained since the date of the latest audited financial statements included or incorporated by reference in the Prospectus any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus; and, since the respective dates as of which information is given in the Registration Statement and the Prospectus, there has not been any change in the capital stock or long-term debt of the Company or any of its subsidiaries or any material adverse change, or any development involving a prospective material adverse change, in or affecting the general affairs, management, financial position, shareholders' equity or results of operations of the Company and its subsidiaries, otherwise than as set forth or contemplated in the Prospectus; (vi) The Company and its subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them, in each case free and clear of all liens, encumbrances and defects except such as are described in the Prospectus or such as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company and its subsidiaries and any real property and buildings held under lease by the Company and its subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries; 4 (vii) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of New Jersey, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus, and has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each other jurisdiction in which it owns or leases properties or conducts any business so as to require such qualification, or is subject to no liability or disability by reason of the failure to be so qualified in any such jurisdiction that would have a material adverse effect on the current or future consolidated financial position, shareholders equity or results of operations of the Company and its Subsidiaries (a "Material Adverse Effect"); and each subsidiary of the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation; (viii) The Company has an authorized capitalization as set forth in the Prospectus, and all of the issued shares of capital stock of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and conform to the description of the Stock contained in the Prospectus; and all of the issued shares of capital stock of each subsidiary of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and (except for directors' qualifying shares) are owned directly or indirectly by the Company, free and clear of all liens, encumbrances, equities or claims; (ix) All issued and outstanding shares of Stock of the Company (including the Shares to be sold by the selling Shareholders) have been issued in compliance with all federal and state securities laws, were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities granted by the Company or the result of agreements or arrangements by which the Company is bound, and the authorized and outstanding capital Stock of the Company as of December 31, 1998 is as set forth in the Prospectus under the caption "Capitalization" and conforms in all material respects to the statements relating thereto contained in the Registration Statement and the Prospectus (and such statements correctly state the substance of the instruments defining the capitalization of the Company); the Shares to be sold by the Company have been duly authorized for issuance and sale to the Underwriters pursuant to this Agreement and, when issued and delivered by the Company against payment therefor in accordance with the terms of this Agreement, will be duly and validly issued and fully paid and nonassessable, and will be sold to the Underwriters free and clear of any pledge, lien, security interest, encumbrance, claim or equitable 5 interest; and no preemptive right, co-sale right, registration right, right of first refusal or other similar right of shareholders exists with respect to any of the Shares or the issuance and sale thereof. No further approval or authorization of any shareholder, the Board of Directors of the Company or others is required for the issuance and sale or transfer of the Shares to be sold by the Company except as may be required under the Act, the Exchange Act or under state or other securities or Blue Sky laws. All issued and outstanding shares of capital stock of each subsidiary of the Company have been duly authorized and validly issued and are fully paid and nonassessable, and were not issued in violation of or subject to any preemptive right, or other rights to subscribe for or purchase shares and are owned by the Company free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest. Except as disclosed in the Prospectus and the financial statements of the Company, and the related notes thereto, included in the Prospectus, neither the Company nor any subsidiary has outstanding any options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of its capital stock or any such options, rights, convertible securities or obligations. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted and exercised thereunder, set forth in the Prospectus accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights. (x) The issue and sale of the Shares to be sold by the Company and the compliance by the Company with all of the provisions of this Agreement and the consummation of the transactions herein contemplated will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other material agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries is subject, nor will such action result in any violation of the provisions of the Articles of Incorporation or By-laws of the Company or any of its subsidiaries or any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries or any of their properties; and no consent, approval, authorization, order, registration or qualification of or with any such court or governmental agency or body is required for the issue and sale of the Shares or the consummation by the Company of the transactions contemplated by this Agreement, except the registration under the Act of the Shares and such consents, approvals, authorizations, registrations or qualifications as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the Underwriters; 6 (xi) Neither the Company nor any of its subsidiaries is in violation of its Certificate of Incorporation or By-laws or in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any indenture, mortgage, deed of trust, loan agreement, material lease or other material agreement or instrument to which it is a party or by which it or any of its properties may be bound; (xii) The statements set forth in the Prospectus under the caption "Description of Capital Stock", insofar as they purport to constitute a summary of the terms of the Stock and under the caption "Certain Federal Tax Considerations for Non-United States Holders of Common Stock", insofar as they purport to describe the provisions of the laws and documents referred to therein, are accurate, complete and fair; (xiii) Other than as set forth in the Prospectus, there are no legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or of which any property of the Company or any of its subsidiaries is the subject which, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a Material Adverse Effect; and, to the best of the Company's knowledge, no such proceedings are threatened by governmental authorities or threatened by others; (xiv) The Company is not and, after giving effect to the offering and sale of the Shares, will not be an "investment company", as such term is defined in the Investment Company Act of 1940, as amended (the "Investment Company Act"); (xv) Neither the Company nor any of its affiliates does business with the government of Cuba or with any person or affiliate located in Cuba within the meaning of Section 517.075, Florida Statutes; (xvi) Arthur Anderson LLP, which has audited certain financial statements of the Company and its subsidiaries, are independent accountants within the meaning of the Act and the rules and regulations of the Commission thereunder; the audited consolidated financial statements of the Company, together with the related schedules and notes, forming part of the Registration Statement and Prospectus, fairly present in all material respects the financial position and the results of operations of the Company and its 7 subsidiaries at the respective dates and for the respective periods to which they apply; and all audited consolidated financial statements of the Company, together with the related schedule and notes, forming part of the Registration Statement and Prospectus, have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved and except as may be otherwise stated therein. The selected and summary financial and statistical data included in the Registration Statement present fairly the information shown therein and have been compiled on a basis consistent with the audited financial statements referred to above. No other financial statements or schedules are required to be included in the Registration Statement. (xvii) The Company has reviewed its operations and that of its subsidiaries and any third parties with which the Company or any of its subsidiaries has a material relationship to evaluate the extent to which the business or operations of the Company or any of its subsidiaries will be affected by the Year 2000 Problem. As a result of such review, the Company has no reason to believe, and does not believe, except as described in the Prospectus, that the Year 2000 Problem will have a Material Adverse Effect or result in any material loss or interference with the Company's business or operations. The "Year 2000 Problem" as used herein means any significant risk that computer hardware or software used in the receipt, transmission, processing, manipulation, storage, retrieval, retransmission or other utilization of data or in the operation of mechanical or electrical systems of any kind will not, in the case of dates or time periods occurring after December 31, 1999, function at least as effectively as in the case of dates or time periods occurring prior to January 1, 2000. (xviii) The Company and its subsidiaries have timely filed all necessary federal, state and foreign income and franchise tax returns and have paid all taxes shown thereon as due, and there is no tax deficiency that has been or, to the best of the Company's knowledge, might be asserted against the Company or any of its subsidiaries that might have a Material Adverse Effect; and all tax liabilities are adequately provided for on the books of the Company and its subsidiaries. (xix) The Company and its subsidiaries maintain insurance with insurers of recognized financial responsibility of the types and in the amounts generally deemed adequate for their respective businesses including, but not limited to, insurance covering real and personal property owned or leased by the Company or its subsidiaries against theft, damage, destruction, acts of vandalism and all other risks 8 customarily insured against, including "tail insurance" covering medical incidents for certain discontinued operations all of which insurance is in full force and effect; neither the Company nor any of its subsidiaries has been refused any insurance coverage sought or applied for; and neither the Company nor any of its subsidiaries has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a Material Adverse Effect. (xx) To the best of Company's knowledge, no organized labor disturbance by the employees or independent contractors (including, without limitation, its medical transcriptionists) of the Company or any of its subsidiaries exists or is imminent that would have a Material Adverse Effect. No collective bargaining agreement exists with any of the Company's employees or independent contractors (including, without limitation, its medical transcriptionists) and, to the best of the Company's knowledge, no such agreement is imminent. (xxi) Each of the Company and its subsidiaries owns or possesses adequate rights to use all patents, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names and copyrights which are necessary to conduct its businesses as described in the Registration Statement and Prospectus; the expiration of any patents, patent rights, trade secrets, trademarks, service marks, trade names or copyrights would not have a Material Adverse Effect; the Company has not received any notice of, and has no knowledge of, any infringement of or conflict with asserted rights of the Company by others with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights; and the Company has not received any notice of, and has no knowledge of, any infringement of or conflict with asserted rights of others by the Company or any of its subsidiaries with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, might have a Material Adverse Effect. (xxii) Each of the Company and its subsidiaries is in possession of all authorizations, licenses, certificates, consents, orders and permits from state, federal and other regulatory authorities which are material to the conduct of its business as currently conducted or proposed to be conducted, all of which are valid and in full force and effect in all material respects. The Company and its subsidiaries are operating in compliance with, all such licenses, certificates, authorizations, approvals, permits, franchises, orders and consents 9 and no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination thereof or result in any impairment of the rights of the holder thereof, except to the extent that any such non-compliance, revocation, termination or impairment would not have a Material Adverse Effect. No such licenses, certificates, authorizations, approvals, permits, franchises, orders or consents contain any restrictions that have or may have a Material Adverse Effect. (xxiii) The Stock is registered pursuant to Section 12(g) of the Exchange Act and is listed for quotation on the National Association of Securities Dealers Automated Quotations National Market System ("Nasdaq") and the Company has taken no action designed to, or likely to have the effect of, terminating the registration of the Stock under the Exchange Act or delisting the Stock from the Nasdaq nor has the Company received any notification that the Commission or the National Association of Securities Dealers, Inc. (the "NASD") is contemplating terminating such registration or listing. (xxiv) The Company has not distributed and will not distribute prior to the later of (a) the Closing Date and (b) completion of the distribution of the Shares, any offering material in connection with the offering and sale of the Shares other than any Preliminary Prospectuses, the Prospectus, the Registration Statement and other materials, if any, permitted by the Act. (xxv) Neither the Company nor any of its subsidiaries has at anytime during the last five (5) years (a) made any unlawful contribution to any candidate for foreign office or failed to disclose fully any contribution in violation of law, or (b) made any payment to any federal or state governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States or any jurisdiction thereof. (xxvi) Neither the Company nor any of its subsidiaries has taken or will take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the to facilitate the sale or resale of the Shares. (xxvii) Each officer and director of the Company listed in Annex I hereto has agreed in writing with each of the Underwriters and the Company that during the period beginning from the date hereof and continuing to and including the date 90 days after the date of the Prospectus, such officer or director will not, except as provided hereunder, offer, sell contract to sell or otherwise dispose of, or enter into any agreement or arrangement that has the effect of 10 transferring the economic effects of holding, any securities of the Company that are substantially similar to the Shares, including but not limited to any securities that are convertible into or exchangeable for, or that represent the right to receive, Stock or any such substantially similar securities without the written consent of Goldman, Sachs & Co. Furthermore, such persons have also agreed and consented to the entry of stop transfer instructions with the Company's transfer agent against the transfer of the Securities held by such person except in compliance with this restriction. The Company has provided to counsel for the Underwriters true, accurate and complete copies of all of the agreements pursuant to which its officers, directors and shareholders have agreed to such or similar restrictions (the "Lock-up Agreements") presently in effect or effected hereby. (xxviii) The Company and each of its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurances that (a) transactions are executed in accordance with management's general or specific authorizations, (b) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets, (c) access to assets is permitted only in accordance with management's general or specific authorization, and (d) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (xxix) There are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business) or guarantees of indebtedness by the Company to or for the benefit of any of the officers or directors of the Company or any of the members of the families of any of them that are required to be disclosed in the Registration Statement or the Prospectus and are not disclosed in the Registration Statement and the Prospectus. (xxx) To the best of the Company's knowledge, no officer, director or security holder of the Company has an "association" or "affiliation" with any member of the NASD, within the meaning of Article III, Section 44 of the Rules of Fair Practice of the NASD. The Company does not have an "association" or "affiliation" with any member of the NASD, within the meaning of Article III, Section 44 of the Rules of Fair Practice of the NASD. (xxxi) This Agreement has been duly authorized, executed and delivered by the Company. 11 (b) Each of the Selling Shareholders severally represents and warrants to, and agrees with, each of the Underwriters and the Company that: (i) All consents, approvals, authorizations and orders necessary for the execution and delivery by such Selling Shareholder of this Agreement and the Power of Attorney and the Custody Agreement hereinafter referred to, and for the sale and delivery of the Shares to be sold by such Selling Shareholder hereunder, have been obtained; and such Selling Shareholder has full right, power and authority to enter into this Agreement, the Power-of-Attorney and the Custody Agreement and to sell, assign, transfer and deliver the Shares to be sold by such Selling Shareholder hereunder; (ii) The sale of the Shares to be sold by such Selling Shareholder hereunder and the compliance by such Selling Shareholder with all of the provisions of this Agreement, the Power of Attorney and the Custody Agreement and the consummation of the transactions herein and therein contemplated will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any statute, indenture, mortgage, deed of trust, loan agreement or other material agreement or instrument to which such Selling Shareholder is a party or by which such Selling Shareholder is bound or to which any of the property or assets of such Selling Shareholder is subject, nor will such action result in any violation of the provisions of or any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over such Selling Shareholder or the property of such Selling Shareholder; (iii) Such Selling Shareholder has, and immediately prior to each Time of Delivery (as defined in Section 4 hereof) such Selling Shareholder will have, good and valid title to the Shares to be sold by such Selling Shareholder hereunder, free and clear of all liens, encumbrances, equities or claims; and, upon delivery of such Shares and payment therefor pursuant hereto, good and valid title to such Shares, free and clear of all liens, encumbrances, equities or claims, will pass to the several Underwriters; (iv) During the period beginning from the date hereof and continuing to and including the date 90 days after the date of the Prospectus, not to offer, sell contract to sell or otherwise dispose of, or enter into any agreement or arrangement that has the effect of transferring the economic effects of holding, except as provided hereunder, any securities of the Company that are substantially similar to the Shares, including but not limited to any securities that are convertible into or exchangeable for, or that represent the right to receive, Stock or any such substantially similar securities without your prior written consent; 12 (v) Such Selling Shareholder has not taken and will not take, directly or indirectly, any action which is designed to or which has constituted or which might reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares; (vi) To the extent that any statements or omissions made in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto are made in reliance upon and in conformity with written information furnished to the Company by such Selling Shareholder expressly for use therein, such Preliminary Prospectus and the Registration Statement did, and the Prospectus and any further amendments or supplements to the Registration Statement and the Prospectus, when they become effective or are filed with the Commission, as the case may be, will conform in all material respects to the requirements of the Act and the rules and regulations of the Commission thereunder and will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; (vii) In order to document the Underwriters' compliance with the reporting and withholding provisions of the Tax Equity and Fiscal Responsibility Act of 1982 with respect to the transactions herein contemplated, such Selling Shareholder will deliver to you prior to or at the Time of Delivery (as hereinafter defined) a properly completed and executed United States Treasury Department Form W-9 (or other applicable form or statement specified by Treasury Department regulations in lieu thereof); (viii) Certificates in negotiable form representing all of the Shares to be sold by such Selling Shareholder hereunder have been placed in custody under a Custody Agreement, in the form heretofore furnished to you (the "Custody Agreement"), duly executed and delivered by such Selling Shareholder to [Name of Custodian], as custodian (the "Custodian"), and such Selling Shareholder has duly executed and delivered a Power of Attorney, in the form heretofore furnished to you (the "Power of Attorney"), appointing the persons indicated in Schedule II hereto, and each of them, as such Selling Shareholder's attorneys-in-fact (the "Attorneys-in-Fact") with authority to execute and deliver this Agreement on behalf of such Selling Shareholder, to determine the purchase price to be paid by the Underwriters to the Selling Shareholders as provided in Section 2 hereof, to authorize the delivery of the Shares to be sold by such Selling Shareholder hereunder and otherwise to act on behalf of such Selling Shareholder in connection with the transactions contemplated by this Agreement and the Custody Agreement; and 13 (ix) The Shares represented by the certificates held in custody for such Selling Shareholder under the Custody Agreement are subject to the interests of the Underwriters hereunder; the arrangements made by such Selling Shareholder for such custody, and the appointment by such Selling Shareholder of the Attorneys-in-Fact by the Power of Attorney, are to that extent irrevocable; the obligations of the Selling Shareholders hereunder shall not be terminated by operation of law, whether by the death or incapacity of any individual Selling Shareholder or, in the case of an estate or trust, by the death or incapacity of any executor or trustee or the termination of such estate or trust, or in the case of a partnership or corporation, by the dissolution of such partnership or corporation, or by the occurrence of any other event; if any individual Selling Shareholder or any such executor or trustee should die or become incapacitated, or if any such estate or trust should be terminated, or if any such partnership or corporation should be dissolved, or if any other such event should occur, before the delivery of the Shares hereunder, certificates representing the Shares shall be delivered by or on behalf of the Selling Shareholders in accordance with the terms and conditions of this Agreement and of the Custody Agreements; and actions taken by the Attorneys-in-Fact pursuant to the Powers of Attorney shall be as valid as if such death, incapacity, termination, dissolution or other event had not occurred, regardless of whether or not the Custodian, the Attorneys-in-Fact, or any of them, shall have received notice of such death, incapacity, termination, dissolution or other event. 2. Subject to the terms and conditions herein set forth, (a) the Company and each of the Selling Shareholders agree, severally and not jointly, to sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company and each of the Selling Shareholders, at a purchase price per share of $.............., the number of Firm Shares (to be adjusted by you so as to eliminate fractional shares) determined by multiplying the aggregate number of Firm Shares to be sold by the Company and each of the Selling Shareholders as set forth opposite their respective names in Schedule II hereto by a fraction, the numerator of which is the aggregate number of Firm Shares to be purchased by such Underwriter as set forth opposite the name of such Underwriter in Schedule I hereto and the denominator of which is the aggregate number of Firm Shares to be purchased by all of the Underwriters from the Company and all of the Selling Shareholders hereunder and (b) in the event and to the extent that the Underwriters shall exercise the election to purchase Optional Shares as provided below, the Company 14 agrees to sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company, at the purchase price per share set forth in clause (a) of this Section 2, that portion of the number of Optional Shares as to which such election shall have been exercised (to be adjusted by you so as to eliminate fractional shares) determined by multiplying such number of Optional Shares by a fraction the numerator of which is the maximum number of Optional Shares which such Underwriter is entitled to purchase as set forth opposite the name of such Underwriter in Schedule I hereto and the denominator of which is the maximum number of Optional Shares that all of the Underwriters are entitled to purchase hereunder. The Company hereby grants to the Underwriters the right to purchase at their election up to . . . . . . Optional Shares, at the purchase price per share set forth in the paragraph above, for the sole purpose of covering overallotments in the sale of the Firm Shares. Any such election to purchase Optional Shares may be exercised only by written notice from you to the Company, given within a period of 30 calendar days after the date of this Agreement and setting forth the aggregate number of Optional Shares to be purchased and the date on which such Optional Shares are to be delivered, as determined by you but in no event earlier than the First Time of Delivery (as defined in Section 4 hereof) or, unless you and the Company otherwise agree in writing, earlier than two or later than ten business days after the date of such notice. 3. Upon the authorization by you of the release of the Firm Shares, the several Underwriters propose to offer the Firm Shares for sale upon the terms and conditions set forth in the Prospectus. 4. (a) The Shares to be purchased by each Underwriter hereunder, in definitive form, and in such authorized denominations and registered in such names as Goldman, Sachs & Co. may request upon at least forty-eight hours' prior notice to the Company and the Selling Shareholders shall be delivered by or on behalf of the Company and the Selling Shareholders to Goldman, Sachs & Co., through the facilities of the Depository Trust Company ("DTC"), for the account of such Underwriter, against payment by or on behalf of such Underwriter of the purchase price therefor by wire transfer of Federal (same-day) funds to the account specified by the Company and each of the Selling Shareholders, as their interests may appear, to Goldman, Sachs & Co. at least forty-eight hours in advance. The Company will cause the certificates representing the Shares to be made available for checking and packaging at least twenty-four hours prior to the Time of Delivery (as defined below) with respect thereto at the office of DTC or its designated custodian (the "Designated Office"). The time and date of such delivery and payment shall be, with respect to the Firm Shares, 9:30 a.m., New York time, on April ...., 1999 or such other time and date as Goldman, Sachs & Co., the Company and the Selling Stockholders may agree upon in writing, and, with respect to the Optional Shares, 9:30 a.m., New York time, on the date 15 specified by Goldman, Sachs & Co. in the written notice given by Goldman, Sachs & Co. of the Underwriters' election to purchase such Optional Shares, or such other time and date as Goldman, Sachs & Co. and the Company may agree upon in writing. Such time and date for delivery of the Firm Shares is herein called the "First Time of Delivery", such time and date for delivery of the Optional Shares, if not the First Time of Delivery, is herein called the "Second Time of Delivery", and each such time and date for delivery is herein called a "Time of Delivery". (b) The documents to be delivered at each Time of Delivery by or on behalf of the parties hereto pursuant to Section 7 hereof, including the cross receipt for the Shares and any additional documents requested by the Underwriters pursuant to Section 7(k) hereof, will be delivered at the offices of Sullivan & Cromwell, 125 Broad Street, New York, New York, 10004 (the "Closing Location"), and the Shares will be delivered at the Designated Office, all at such Time of Delivery. A meeting will be held at the Closing Location at 4:30 p.m., New York City time, on the New York Business Day next preceding such Time of Delivery, at which meeting the final drafts of the documents to be delivered pursuant to the preceding sentence will be available for review by the parties hereto. For the purposes of this Section 4, "New York Business Day" shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in New York are generally authorized or obligated by law or executive order to close. 5. The Company agrees with each of the Underwriters: (a) To prepare the Prospectus in a form approved by you and to file such Prospectus pursuant to Rule 424(b) under the Act not later than the Commission's close of business on the second business day following the execution and delivery of this Agreement, or, if applicable, such earlier time as may be required by Rule 430A(a)(3) under the Act; to make no further amendment or any supplement to the Registration Statement or Prospectus prior to the last Time of Delivery which shall be disapproved by you promptly after reasonable notice thereof; to advise you, promptly after it receives notice thereof, of the time when any amendment to the Registration Statement has been filed or becomes effective or any supplement to the Prospectus or any amended Prospectus has been filed and to furnish you with copies thereof; to file on a timely basis all reports and any definitive proxy or information statements required to be filed by the Company with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of the Prospectus and for so long as the delivery of a prospectus is required in connection with the offering or sale of the Shares; to advise you, promptly after it receives notice thereof, of the issuance by the Commission of any stop order or of any order 16 preventing or suspending the use of any Preliminary Prospectus or prospectus, of the suspension of the qualification of the Shares for offering or sale in any jurisdiction, of the initiation or threatening of any proceeding for any such purpose, or of any request by the Commission for the amending or supplementing of the Registration Statement or Prospectus or for additional information; and, in the event of the issuance of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or prospectus or suspending any such qualification, promptly to use its best efforts to obtain the withdrawal of such order; (b) Promptly from time to time to take such action as you may reasonably request to qualify the Shares for offering and sale under the securities laws of such jurisdictions as you may request and to comply with such laws so as to permit the continuance of sales and dealings therein in such jurisdictions for as long as may be necessary to complete the distribution of the Shares, provided that in connection therewith the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction; (c) Prior to 10:00 A.M., New York City time, on the New York Business Day next succeeding the date of this Agreement and from time to time, to furnish the Underwriters with copies of the Prospectus in New York City in such quantities as you may reasonably request, and, if the delivery of a prospectus is required at any time prior to the expiration of nine months after the time of issue of the Prospectus in connection with the offering or sale of the Shares and if at such time any events shall have occurred as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such Prospectus is delivered, not misleading, or, if for any other reason it shall be necessary during such period to amend or supplement the Prospectus or to file under the Exchange Act any document incorporated by reference in the Prospectus in order to comply with the Act or the Exchange Act, to notify you and upon your request to file such document and to prepare and furnish without charge to each Underwriter and to any dealer in securities as many copies as you may from time to time reasonably request of an amended Prospectus or a supplement to the Prospectus which will correct such statement or omission or effect such compliance, and in case any Underwriter is required to deliver a prospectus in connection with sales of any of the Shares at any time nine months or more after the time of issue of the Prospectus, upon your request but at the expense of such Underwriter, to prepare and deliver to such Underwriter as many copies as you may request of an amended or supplemented Prospectus complying with Section 10(a)(3) of the Act; 17 (d) To make generally available to its securityholders as soon as practicable, but in any event not later than eighteen months after the effective date of the Registration Statement (as defined in Rule 158(c) under the Act), an earning statement of the Company and its subsidiaries (which need not be audited) complying with Section 11(a) of the Act and the rules and regulations of the Commission thereunder (including, at the option of the Company, Rule 158); (e) During the period beginning from the date hereof and continuing to and including the date 90 days after the date of the Prospectus, not to offer, sell, contract to sell or otherwise dispose of, or enter into any agreement or arrangement that has the effect of transferring the economic effects of holding, any securities of the Company that are substantially similar to the Shares, including but not limited to any securities that are convertible into or exchangeable for, or that represent the right to receive, Stock or any such substantially similar securities without the prior written consent of Goldman, Sachs & Co. except pursuant to employee benefit plans in effect on the date hereof and in connection with acquisitions or as otherwise provided hereunder; (f) To furnish to its shareholders as soon as practicable after the end of each fiscal year an annual report (including a balance sheet and statements of income, shareholders, equity and cash flows of the Company and its consolidated subsidiaries certified by independent public accountants) and, as soon as practicable after the end of each of the first three quarters of each fiscal year (beginning with the fiscal quarter ending after the effective date of the Registration Statement), to make available to its shareholders consolidated summary financial information of the Company and its subsidiaries for such quarter in reasonable detail; (g) During a period of five years from the effective date of the Registration Statement, to furnish to you copies of all reports or other communications (financial or other) furnished to shareholders and to deliver to you (i) as soon as they are available, copies of any reports and financial statements furnished to or filed with the Commission or any national securities exchange on which any class of securities of the Company is listed; and (ii) such additional information concerning the business and financial condition of the Company as you may from time to time reasonably request (such financial statements to be on a consolidated basis to the extent the accounts of the Company and its subsidiaries are consolidated in reports furnished to its shareholders generally or to the Commission); 18 (h) To use the net proceeds received by it from the sale of the Shares pursuant to this Agreement in the manner specified in the Prospectus under the caption "Use of Proceeds"; and (i) To use its best efforts to qualify for quotation the Shares to be sold by the Company on the Nasdaq. 6. The Company and each of the Selling Shareholders covenant and agree with one another and with the several Underwriters that (a) the Company and such Selling Shareholder will pay or cause to be paid a pro rata share (based on the number of Shares to be sold by the Company and such Selling Shareholder hereunder) of the following: (i) the fees, disbursements and expenses of the Company's counsel and accountants in connection with the registration of the Shares under the Act and all other expenses in connection with the preparation, printing and filing of the Registration Statement, any Preliminary Prospectus and the Prospectus and amendments and supplements thereto and the mailing and delivering of copies thereof to the Underwriters and dealers; (ii) the cost of printing or producing any Agreement among Underwriters, this Agreement, the Blue Sky Memorandum, closing documents (including any compilations thereof) and any other documents in connection with the offering, purchase, sale and delivery of the Shares; (iii) all expenses in connection with the qualification of the Shares for offering and sale under state securities laws as provided in Section 5(b) hereof, including the fees and disbursements of counsel for the Underwriters in connection with such qualification and in connection with the Blue Sky survey (iv) all fees and expenses in connection with listing the Shares on the Nasdaq; (v) all fees and expenses incurred by the Company in connection with the marketing of the Shares; and (vi) the filing fees incident to, and the fees and disbursements of counsel for the Underwriters in connection with, securing any required review by the National Association of Securities Dealers, Inc. of the terms of the sale of the Shares; (b) the Company will pay or cause to be paid: (i) the cost of preparing stock certificates; (ii) the cost and charges of any transfer agent or registrar and (iii) all other costs and expenses incident to the performance of its obligations hereunder which are not otherwise specifically provided for in this Section; and (c) such Selling Shareholder will pay or cause to be paid all costs and expenses incident to the performance of such Selling Shareholder's obligations hereunder which are not otherwise specifically provided for in this Section, including (i) any fees and expenses of counsel for such Selling Shareholder, (ii) such Selling Shareholder's pro rata share of the fees and expenses of the Attorneys-in-Fact and the Custodian, and (iii) all expenses and taxes incident to the sale and delivery of the Shares to be sold by such Selling Shareholder to the Underwriters hereunder. In connection with clause (c) (iii) 19 of the preceding sentence, Goldman, Sachs & Co. agrees to pay New York State stock transfer tax, and the Selling Shareholder agrees to reimburse Goldman, Sachs & Co. for associated carrying costs if such tax payment is not rebated on the day of payment and for any portion of such tax payment not rebated. It is understood, however, that the Company shall bear, and the Selling Shareholders shall not be required to pay or to reimburse the Company for, the cost of any other matters not directly relating to the sale and purchase of the Shares pursuant to this Agreement, and that, except as provided in this Section, and Sections 8 and 11 hereof, the Underwriters will pay all of their own costs and expenses, including the fees of their counsel, stock transfer taxes on resale of any of the Shares by them, and any advertising expenses connected with any offers they may make. 7. The obligations of the Underwriters hereunder, as to the Shares to be delivered at each Time of Delivery, shall be subject, in their discretion, to the condition that all representations and warranties and other statements of the Company and of the Selling Shareholders herein are, at and as of such Time of Delivery, true and correct, the condition that the Company and the Selling Shareholders shall have performed all of its and their obligations hereunder theretofore to be performed, and the following additional conditions: (a) The Prospectus shall have been filed with the Commission pursuant to Rule 424(b) within the applicable time period prescribed for such filing by the rules and regulations under the Act and in accordance with Section 5(a) hereof; if the Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration Statement shall have become effective by 10:00 P.M., Washington, D.C. time, on the date of this Agreement; no stop order suspending the effectiveness of the Registration Statement or any part thereof shall have been issued and no proceeding for that purpose shall have been initiated or threatened by the Commission; and all requests for additional information on the part of the Commission shall have been complied with to your reasonable satisfaction; (b) Sullivan & Cromwell, counsel for the Underwriters, shall have furnished to you such written opinion or opinions (a draft of each such opinion is attached as Annex II-A hereto), dated such Time of Delivery, with respect to the matters covered in paragraphs (i), (ii), (vii), (xi), (xiii) and (xiv) of subsection (c) below as well as such other related matters as you may reasonably request, and such counsel shall have received such papers and information as they may reasonably request to enable them to pass upon such matters; (c) Pepper Hamilton LLP, counsel for the Company, shall have furnished to you their written opinion (a draft of such opinion is attached as Annex II-B hereto), dated such Time of Delivery, in form and substance satisfactory to you, to the effect that: 20 (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of New Jersey, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus; (ii) The Company has an authorized capitalization as set forth in the Prospectus, and the Shares conform to the description of the Stock contained in the Prospectus; (iii) To the best of such counsel's knowledge and other than as set forth in the Prospectus, there are no legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or of which any property of the Company or any of its subsidiaries is the subject which, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a material adverse effect on the current or future consolidated financial position, shareholders' equity or results of operations of the Company and its subsidiaries; and, to the best of such counsel's knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others; (iv) This Agreement has been duly authorized, executed and delivered by the Company; (v) The issue and sale of the Shares being delivered at such Time of Delivery to be sold by the Company and the compliance by the Company with all of the provisions of this Agreement and the consummation of the transactions herein contemplated will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any of the agreements or other documents listed as an exhibit to the Registration Statement, nor will such action result in any violation of the provisions of the Certificate of Incorporation or By-laws of the Company or any statute or any order, rule or regulation known to such counsel of any court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries or any of their properties; (vi) No consent, approval, authorization, order, registration or qualification of or with any such court or governmental agency or body is required for the issue and sale of the Shares or the consummation by the Company of the transactions contemplated by this Agreement, except the registration under 21 the Act of the Shares, and such consents, approvals, authorizations, registrations or qualifications as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the Underwriters; (vii) The statements set forth in the Prospectus under the caption "Description of Capital Stock", insofar as they purport to constitute a summary of the terms of the Stock and, under the caption "Certain Federal Tax Considerations for Non-United States Holders of Common Stock", insofar as they purport to describe the provisions of the laws and documents referred to therein, are accurate, complete and fair; (viii) The Company is not an "investment company", as such term is defined in the Investment Company Act; (ix) The documents incorporated by reference in the Prospectus or any further amendment or supplement thereto made by the Company prior to such Time of Delivery (other than the financial statements and related schedules therein and statistical data, as to which such counsel need express no opinion), when they became effective or were filed with the Commission, as the case may be, complied as to form in all material respects with the requirements of the Act or the Exchange Act, as applicable and the rules and regulations of the Commission thereunder; and they have no reason to believe that any of such documents, when such documents became effective or were so filed, as the case may be, contained, in the case of a registration statement which became effective under the Act, an untrue statement of a material fact, or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or, in the case of other documents which were filed under the Exchange Act with the Commission, an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such documents were so filed, not misleading; and (x) The Registration Statement and the Prospectus and any further amendments and supplements thereto made by the Company prior to such Time of Delivery (other than the financial statements and related schedules therein and statistical data, as to which such counsel need express no opinion) comply as to form in all material respects with the requirements of the Act and the rules and regulations thereunder; although they do not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus, except for those 22 referred to in the opinion in subsection (xi) of this Section 7(c), such counsel shall further state they have no reason to believe that, as of its effective date, the Registration Statement or any further amendment thereto made by the Company prior to such Time of Delivery (other than the financial statements and related schedules therein and statistical data, as to which such counsel need express no opinion) contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that, as of its date, the Prospectus or any further amendment or supplement thereto made by the Company prior to such Time of Delivery (other than the financial statements and related schedules therein and statistical data, as to which such counsel need express no opinion) contained an untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading or that, as of such Time of Delivery, either the Registration Statement or the Prospectus or any further amendment or supplement thereto made by the Company prior to such Time of Delivery (other than the financial statements and related schedules therein and statistical data, as to which such counsel need express no opinion) contains an untrue statement of a material fact or omits to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and they do not know of any amendment to the Registration Statement required to be filed or of any contracts or other documents of a character required to be filed as an exhibit to the Registration Statement or required to be incorporated by reference into the Prospectus or required to be described in the Registration Statement or the Prospectus which are not filed or incorporated by reference or described as required; (d) John M. Suender, Senior Vice President, General Counsel and Secretary of the Company, shall have furnished to you their written opinion (a draft of such opinion is attached as Annex II-C hereto), dated such Time of Delivery, in form and substance satisfactory to you, to the effect that: (i) The Company has an authorized capitalization as set forth in the Prospectus, and all of the issued shares of capital stock of the Company (including the Shares being delivered at such Time of Delivery) have been duly and validly authorized and issued and are fully paid and non-assessable; (ii) The Company has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each other jurisdiction in which it owns or leases properties or conducts any business so as to require such qualification, or is subject to no liability or disability by 23 reason of the failure to be so qualified in any such jurisdiction that would have a material adverse effect on the current or future consolidated financial position, shareholders' equity or results of operations of the Company and its Subsidiaries (such counsel being entitled to rely in respect of the opinion in this clause upon opinions of local counsel and in respect of matters of fact upon certificates of officers of the Company, provided that such counsel shall state that they believe that both you and they are justified in relying upon such opinions and certificates); (iii) Each subsidiary of the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation; and all of the issued shares of capital stock of each such subsidiary have been duly and validly authorized and issued, are fully paid and non-assessable, and (except for directors' qualifying shares) are owned directly or indirectly by the Company, free and clear of all liens, encumbrances, equities or claims (such counsel being entitled to rely in respect of the opinion in this clause upon opinions of local counsel and in respect of matters of fact upon certificates of officers of the Company or its subsidiaries, provided that such counsel shall state that they believe that both you and they are justified in relying upon such opinions and certificates); (iv) The real property leased by the Company at Five Greentree Centre, Marlton, New Jersey is held by the Company under a valid, subsisting and enforceable lease with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries; (v) To the best of such counsel's knowledge and other than as set forth in the Prospectus, there are no legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or of which any property of the Company or any of its subsidiaries is the subject which, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a material adverse effect on the current or future consolidated financial position shareholders' equity or results of operations of the Company and its subsidiaries; and, to the best of such counsel's knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others; (vi) This Agreement has been duly authorized, executed and delivered by the Company; 24 (vii) The issue and sale of the Shares being delivered at such Time of Delivery to be sold by the Company and the compliance by the Company with all of the provisions of this Agreement and the consummation of the transactions herein contemplated will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other material agreement or instrument known to such counsel to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries is subject, nor will such action result in any violation of the provisions of the Certificate of Incorporation or By-laws of the Company or any statute or any order, rule or regulation known to such counsel of any court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries or any of their properties; (viii) Neither the Company nor any of its subsidiaries is in violation of its Certificate of Incorporation or By-laws or in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any indenture, mortgage, deed of trust, loan agreement, or material lease or material agreement or other instrument to which it is a party or by which it or any of its properties may be bound; (ix) The documents incorporated by reference in the Prospectus or any further amendment or supplement thereto made by the Company prior to such Time of Delivery (other than the financial statements and related schedules therein, as to which such counsel need express no opinion), when they became effective or were filed with the Commission, as the case may be, complied as to form in all material respects with the requirements of the Act or the Exchange Act, as applicable and the rules and regulations of the Commission thereunder; and they have no reason to believe that any of such documents, when such documents became effective or were so filed, as the case may be, contained, in the case of a registration statement which became effective under the Act, an untrue statement of a material fact, or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or, in the case of other documents which were filed under the Exchange Act with the Commission, an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such documents were so filed, not misleading; (x) The Registration Statement and the Prospectus and any further amendments and supplements thereto made by the Company prior to such 25 Time of Delivery (other than the financial statements and related schedules therein, as to which such counsel need express no opinion) comply as to form in all material respects with the requirements of the Act and the rules and regulations thereunder; although they do not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus, except for those referred to in the opinion in subsection (xi) of this Section 7(c), such counsel shall further state they have no reason to believe that, as of its effective date, the Registration Statement or any further amendment thereto made by the Company prior to such Time of Delivery (other than the financial statements and related schedules therein, as to which such counsel need express no opinion) contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that, as of its date, the Prospectus or any further amendment or supplement thereto made by the Company prior to such Time of Delivery (other than the financial statements and related schedules therein, as to which such counsel need express no opinion) contained an untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading or that, as of such Time of Delivery, either the Registration Statement or the Prospectus or any further amendment or supplement thereto made by the Company prior to such Time of Delivery (other than the financial statements and related schedules therein, as to which such counsel need express no opinion) contains an untrue statement of a material fact or omits to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and they do not know of any amendment to the Registration Statement required to be filed or of any contracts or other documents of a character required to be filed as an exhibit to the Registration Statement or required to be incorporated by reference into the Prospectus or required to be described in the Registration Statement or the Prospectus which are not filed or incorporated by reference or described as required; (e) The respective counsel for each of the Selling Shareholders, as indicated in Schedule II hereto, each shall have furnished to you their written opinion with respect to each of the Selling Shareholders for whom they are acting as counsel (a draft of each such opinion is attached as Annex II-D hereto), dated the First Time of Delivery, in form and substance satisfactory to you, to the effect that: (i) A Power-of-Attorney and a Custody Agreement have been duly executed and delivered by such Selling Shareholder and constitute valid and binding agreements of such Selling Shareholder in accordance with their terms; 26 (ii) This Agreement has been duly executed and delivered by or on behalf of such Selling Shareholder; and the sale of the Shares to be sold by such Selling Shareholder hereunder and the compliance by such Selling Shareholder with all of the provisions of this Agreement, the Power-of-Attorney and the Custody Agreement and the consummation of the transactions herein and therein contemplated will not conflict with or result in a breach or violation of any terms or provisions of, or constitute a default under, any statute, indenture, mortgage, deed of trust, loan agreement or other agreement or instrument known to such counsel to which such Selling Shareholder is a party or by which such Selling Shareholder is bound or to which any of the property or assets of such Selling Shareholder is subject, nor will such action result in any violation of the provisions of or any order, rule or regulation known to such counsel of any court or governmental agency or body having jurisdiction over such Selling Shareholder or the property of such Selling Shareholder; (iii) No consent, approval, authorization or order of any court or governmental agency or body is required for the consummation of the transactions contemplated by this Agreement in connection with the Shares to be sold by such Selling Shareholder hereunder, except such consents, approvals, authorizations or orders which have been duly obtained and are in full force and effect, such as have been obtained under the Act and such as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of such Shares by the Underwriters; (iv) Immediately prior to the First Time of Delivery, such Selling Shareholder had good and valid title to the Shares to be sold at the Time of Delivery by such Selling Shareholder under this Agreement, free and clear of all liens, encumbrances, equities or claims, and full right, power and authority to sell, assign, transfer and deliver the Shares to be sold by such Selling Shareholder hereunder; and (v) Good and valid title to such Shares, free and clear of all liens, encumbrances, equities or claims, has been transferred to each of the several Underwriters who have purchased such Shares in good faith and without notice of any such lien, encumbrance, equity or claim or any other adverse claim within the meaning of the Uniform Commercial Code. In rendering the opinion in paragraph (iv), such counsel may rely upon a certificate of such Selling Shareholder in respect of matters of fact as to ownership of, and liens, encumbrances, equities or claims on, the Shares sold by such Selling Shareholder, provided that such counsel shall state that they believe that both you and they are justified in relying upon such certificate; 27 (f) On the date of the Prospectus at a time prior to the execution of this Agreement, at 9:30 a.m., New York City time, on the effective date of any post-effective amendment to the Registration Statement filed subsequent to the date of this Agreement and also at the Time of Delivery, Arthur Anderson LLP shall have furnished to you a letter or letters, dated the respective dates of delivery thereof, in form and substance satisfactory to you, to the effect set forth in Annex III-A hereto (the executed copy of the letter delivered prior to the execution of this Agreement is attached as Annex III-B hereto and a draft of the form of letter to be delivered on the effective date of any post-effective amendment to the Registration Statement and as of each Time of Delivery is attached as Annex III-C hereto); (g) (i) Neither the Company nor any of its subsidiaries shall have sustained since the date of the latest audited financial statements included or incorporated by reference in the Prospectus any loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus, and (ii) since the respective dates as of which information is given in the Prospectus there shall not have been any change in the capital stock or long-term debt of the Company or any of its subsidiaries or any change, or any development involving a prospective change, in or affecting the general affairs, management, financial position, shareholders' equity or results of operations of the Company and its subsidiaries, otherwise than as set forth or contemplated in the Prospectus, the effect of which, in any such case described in clause (i) or (ii), is in the judgment of the Representatives so material and adverse as to make it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares being delivered at such Time of Delivery on the terms and in the manner contemplated in the Prospectus; (h) On or after the date hereof there shall not have occurred any of the following: (i) a suspension or material limitation in trading in securities generally on the New York Stock Exchange or on the Nasdaq; (ii) a suspension or material limitation in trading in the Company's securities on the Nasdaq; (iii) a general moratorium on commercial banking activities declared by either Federal or New York State authorities; or (iv) the outbreak or escalation of hostilities involving the United States or the declaration by the United States of a national emergency or war, if the effect of any such event specified in this clause (iv) in the judgment of the Representatives makes it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares being delivered at such Time of Delivery on the terms and in the manner contemplated in the Prospectus; 28 (i) The Shares at such Time of Delivery shall have been duly listed for quotation on Nasdaq; (j) The Company shall have complied with the provisions of Section 5(c) hereof with respect to the furnishing of prospectuses on the New York Business Day next succeeding the date of this Agreement; and (k) The Company and the Selling Shareholders shall have furnished or caused to be furnished to you at such Time of Delivery certificates of officers of the Company and of the Selling Shareholders, respectively, satisfactory to you as to the accuracy of the representations and warranties of the Company and the Selling Shareholders, respectively, herein at and as of such Time of Delivery, as to the performance by the Company and the Selling Shareholders of all of their respective obligations hereunder to be performed at or prior to such Time of Delivery, and as to such other matters as you may reasonably request, and the Company shall have furnished or caused to be furnished certificates as to the matters set forth in subsections (a) and (f) of this Section. 8. (a) The Company will indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Registration Statement or the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating or defending any such action or claim as such expenses are incurred; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any Preliminary Prospectus, the Registration Statement or the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by any Underwriter through Goldman, Sachs & Co. expressly for use therein. (b) Each of [insert names of appropriate Selling Shareholders], will indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue 29 statement of a material fact contained in any Preliminary Prospectus, the Registration Statement or the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in any Preliminary Prospectus, the Registration Statement or the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by such Selling Shareholder expressly for use therein; and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating or defending any such action or claim as such expenses are incurred; provided, however, that such Selling Shareholder shall not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any Preliminary Prospectus, the Registration Statement or the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by any Underwriter through Goldman, Sachs & Co. expressly for use therein. (c) Each Underwriter will indemnify and hold harmless the Company and each Selling Shareholder against any losses, claims, damages or liabilities to which the Company or such Selling Shareholder may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Registration Statement or the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in any Preliminary Prospectus, the Registration Statement or the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by such Underwriter through Goldman, Sachs & Co. expressly for use therein; and will reimburse the Company and each Selling Shareholder for any legal or other expenses reasonably incurred by the Company or such Selling Shareholder in connection with investigating or defending any such action or claim as such expenses are incurred. (d) Promptly after receipt by an indemnified party under subsection (a), (b) or (c) above of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify the indemnifying party in writing of the commencement thereof; but 30 the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party otherwise than under such subsection. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party under such subsection for any legal expenses of other counsel or any other expenses, in each case subsequently incurred by such indemnified party, in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the written consent of the indemnified party, effect the settlement or compromise of, or consent to the entry of any judgment with respect to, any pending or threatened action or claim in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified party is an actual or potential party to such action or claim) unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability arising out of such action or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of any indemnified party. (e) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under subsection (a), (b) or (c) above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Shareholders on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the notice required under subsection (d) above, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company and the Selling Shareholders on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Shareholders on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and the Selling Shareholders bear to the total 31 underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Selling Shareholders on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, each of the Selling Shareholders and the Underwriters agree that it would not be just and equitable if contributions pursuant to this subsection (e) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this subsection (e). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this subsection (e) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (e), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this subsection (e) to contribute are several in proportion to their respective underwriting obligations and not joint. (f) The obligations of the Company and the Selling Shareholders under this Section 8 shall be in addition to any liability which the Company and the respective Selling Shareholders may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any Underwriter within the meaning of the Act; and the obligations of the Underwriters under this Section 8 shall be in addition to any liability which the respective Underwriters may otherwise have and shall extend, upon the same terms and conditions, to each officer and director of the Company and to each person, if any, who controls the Company or any Selling Shareholder within the meaning of the Act. 9. (a) If any Underwriter shall default in its obligation to purchase the Shares which it has agreed to purchase hereunder at a Time of Delivery, you may in your discretion arrange for you or another party or other parties to purchase such Shares on the terms contained herein. If within thirty-six hours after such default by any Underwriter you do not arrange for the purchase of such Shares, then the Company 32 and the Selling Shareholders shall be entitled to a further period of thirty-six hours within which to procure another party or other parties satisfactory to you to purchase such Shares on such terms. In the event that, within the respective prescribed periods, you notify the Company and the Selling Shareholders that you have so arranged for the purchase of such Shares, or the Company and the Selling Shareholders notify you that they have so arranged for the purchase of such Shares, you or the Company and the Selling Shareholders shall have the right to postpone such Time of Delivery for a period of not more than seven days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees to file promptly any amendments to the Registration Statement or the Prospectus which in your opinion may thereby be made necessary. The term "Underwriter" as used in this Agreement shall include any person substituted under this Section with like effect as if such person had originally been a party to this Agreement with respect to such Shares. (b) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by you and the Company and the Selling Shareholders as provided in subsection (a) above, the aggregate number of such Shares which remains unpurchased does not exceed one-eleventh of the aggregate number of all the Shares to be purchased at such Time of Delivery, then the Company and the Selling Shareholders shall have the right to require each non-defaulting Underwriter to purchase the number of Shares which such Underwriter agreed to purchase hereunder at such Time of Delivery and, in addition, to require each non-defaulting Underwriter to purchase its pro rata share (based on the number of Shares which such Underwriter agreed to purchase hereunder) of the Shares of such defaulting Underwriter or Underwriters for which such arrangements have not been made; but nothing herein shall relieve a defaulting Underwriter from liability for its default. (c) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by you and the Company and the Selling Shareholders as provided in subsection (a) above, the aggregate number of such Shares which remains unpurchased exceeds one-eleventh of the aggregate number of all of the Shares to be purchased at such Time of Delivery, or if the Company and the Selling Shareholders shall not exercise the right described in subsection (b) above to require non-defaulting Underwriters to purchase Shares of a defaulting Underwriter or Underwriters, then this Agreement (or, with respect to the Second Time of Delivery, the obligations of the Underwriters to purchase and of the Company to sell the Optional Shares) shall thereupon terminate, without liability on the part of any non-defaulting Underwriter or the Company or the Selling Shareholders, except for the expenses to be borne by the Company and the Selling Shareholders and the 33 Underwriters as provided in Section 6 hereof and the indemnity and contribution agreements in Section 8 hereof; but nothing herein shall relieve a defaulting Underwriter from liability for its default. 10. The respective indemnities, agreements, representations, warranties and other statements of the Company, the Selling Shareholders and the several Underwriters, as set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement, shall remain in full force and effect, regardless of any investigation (or any statement as to the results thereof) made by or on behalf of any Underwriter or any controlling person of any Underwriter, or the Company, or any of the Selling Shareholders, or any officer or director or controlling person of the Company, or any controlling person of any Selling Shareholder, and shall survive delivery of and payment for the Shares. 11. If this Agreement shall be terminated pursuant to Section 9 hereof, neither the Company nor the Selling Shareholders shall then be under any liability to any Underwriter except as provided in Sections 6 and 8 hereof; but, if for any other reason any Shares are not delivered by or on behalf of the Company and the Selling Shareholders as provided herein, the Company and each of the Selling Shareholders pro rata (based on the number of Shares to be sold by the Company and such Selling Shareholder hereunder) will reimburse the Underwriters through you for all out-of-pocket expenses approved in writing by you, including fees and disbursements of counsel, reasonably incurred by the Underwriters in making preparations for the purchase, sale and delivery of the Shares, but the Company and the Selling Shareholders shall then be under no further liability to any Underwriter in respect of the Shares not so delivered except as provided in Sections 6 and 8 hereof. 12. In all dealings hereunder, you shall act on behalf of each of the Underwriters, and the parties hereto shall be entitled to act and rely upon any statement, request, notice or agreement on behalf of any Underwriter made or given by you [jointly or by Goldman, Sachs & Co. on behalf of you as the representatives]; and in all dealings with any Selling Shareholder hereunder, you and the Company shall be entitled to act and rely upon any statement, request, notice or agreement on behalf of such Selling Shareholder made or given by any or all of the Attorneys-in-Fact for such Selling Shareholder. All statements, requests, notices and agreements hereunder shall be in writing, and if to the Underwriters shall be delivered or sent by mail or facsimile transmission to you as the representatives in care of Goldman, Sachs & Co., 32 Old Slip, 9th Floor, New York, New York 10005, Attention: Registration Department; if to any Selling Shareholder shall be delivered or sent by mail or facsimile transmission to counsel for such Selling Shareholder at its address set forth in Schedule II hereto; and if to the 34 Company shall be delivered or sent by mail or facsimile transmission to the address of the Company set forth in the Registration Statement, Attention: Secretary; provided, however, that any notice to an Underwriter pursuant to Section 8(c) hereof shall be delivered or sent by mail or facsimile transmission to such Underwriter at its address set forth in its Underwriters' Questionnaire constituting such Questionnaire, which address will be supplied to the Company or the Selling Shareholders by you on request. Any such statements, requests, notices or agreements shall take effect upon receipt thereof. 13. This Agreement shall be binding upon, and inure solely to the benefit of, the Underwriters, the Company and the Selling Shareholders and, to the extent provided in Sections 8 and 10 hereof, the officers and directors of the Company and each person who controls the Company, any Selling Shareholder or any Underwriter, and their respective heirs, executors, administrators, successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. No purchaser of any of the Shares from any Underwriter shall be deemed a successor or assign by reason merely of such purchase. 14. Time shall be of the essence of this Agreement. As used herein, the term "business day" shall mean any day when the Commission's office in Washington, D.C. is open for business. 15. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. 16. This Agreement may be executed by any one or more of the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. If the foregoing is in accordance with your understanding, please sign and return to us one for the Company and each of the Representatives plus one for each counsel and the Custodian, if any counterparts hereof, and upon the acceptance hereof by you, on behalf of each of the Underwriters, this letter and such acceptance hereof shall constitute a binding agreement among each of the Underwriters, the Company and each of the Selling Shareholders. It is understood that your acceptance of this letter on behalf of each of the Underwriters is pursuant to the authority set forth in a form of Agreement among Underwriters, the form of which shall be submitted to the Company and the Selling Shareholders for examination, upon request, but without warranty on your part as to the authority of the signers thereof. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 35 Any person executing and delivering this Agreement as Attorney-in-Fact for a Selling Shareholder represents by so doing that he has been duly appointed as Attorney-in-Fact by such Selling Shareholder pursuant to a validly existing and binding Power-of-Attorney which authorizes such Attorney-in-Fact to take such action. Very truly yours, MEDQUIST INC. By: ................................... Name: Title: [Names of Selling Shareholders] By: ................................... Name: Title: As Attorney-in-Fact acting on behalf of each of the Selling Shareholders named in Schedule II to this Agreement. Accepted as of the date hereof: Goldman, Sachs & Co. BancBoston Robertson Stephens Donaldson, Lufkin & Jenrette Volpe Brown Whelan & Company By: ................................... (Goldman, Sachs & Co.) On behalf of each of the Underwriters 36 SCHEDULE I
Number of Optional Shares Total Number of to be Purchased Firm Shares if Maximum Underwriter to be Purchased Option Exercised ----------- --------------- ---------------- Goldman, Sachs & Co............................................... BancBoston Robertson Stephens..................................... Donaldson, Lufkin & Jenrette...................................... Volpe Brown Whelan & Company...................................... [Names of other underwriters]..................................... --------------- --------------- Total.................................................. =============== ===============
37 SCHEDULE II
Number of Optional Shares to Total Number be Sold of Firm Shares if Maximum Underwriter to be Sold Option Exercised ----------- ---------- ---------------- The Company.......................................................... The Selling Shareholder(s):..................................... [Name of Selling Shareholder](a)]........................... [Name of Selling Shareholder](b)]........................... [Name of Selling Shareholder](c)]........................... [Name of Selling Shareholder](d)]........................... [Name of Selling Shareholder](e)]........................... --------------- --------------- Total..................................................... =============== ===============
- ------------------ (a) This Selling Shareholder is represented by [Name and Address of Counsel] and has appointed [Names of Attorneys-in-Fact (not less than two)], and each of them, as the Attorneys-in-Fact for such Selling Shareholder. (b) This Selling Shareholder is represented by [Name and Address of Counsel] and has appointed [Names of Attorneys-in-Fact (not less than two)], and each of them, as the Attorneys-in-Fact for such Selling Shareholder. (c) This Selling Shareholder is represented by [Name and Address of Counsel] and has appointed [Names of Attorneys-in-Fact (not less than two)], and each of them, as the Attorneys-in-Fact for such Selling Shareholder. 38 (d) This Selling Shareholder is represented by [Name and Address of Counsel] and has appointed [Names of Attorneys-in-Fact (not less than two)], and each of them, as the Attorneys-in-Fact for such Selling Shareholder. (e) This Selling Shareholder is represented by [Name and Address of Counsel] and has appointed [Names of Attorneys-in-Fact (not less than two)], and each of them, as the Attorneys-in-Fact for such Selling Shareholder. 39 EX-5.1 3 EXHIBIT 5.1 Exhibit 5.1 March 24, 1999 MedQuist Inc. Five Greentree Centre Suite 311 Marlton, NJ 08053 Re: Registration Statement on Form S-3 ---------------------------------- Ladies and Gentlemen: We have acted as special counsel to MedQuist Inc., a New Jersey corporation (the "Company"), in connection with the registration under the Securities Act of 1933, as amended (the "Act") of a public offering (the "Offering") of up to 4,193,467 shares (the "Primary Shares") of the Company's Common Stock, no par value (the "Common Stock"), to be sold by the Company and by certain shareholders of the Company (the "Selling Shareholders"), and up to an additional 629,020 shares of Common Stock (the "Additional Shares" and, together with the Primary Shares, the "Shares") subject to an over-allotment option which may be sold by the Company. The opinion is delivered in accordance with the requirements of Item 601(b)(5) of Regulation S-K under the Act. We have examined originals or copies, certified or otherwise identified to our satisfaction, of (i) the Registration Statement on Form S-3 originally filed under the Act with the Securities and Exchange Commission (the "Commission") on March 24, 1999; (ii) the form of underwriting agreement, filed as Exhibit 1 to the Registration Statement (the "Underwriting Agreement"), to be entered into by and among the Company, the Selling Shareholders and Goldman, Sachs & Co., Bancboston Robertson Stevens, Donaldson, Lufkin & Jenrette, and Volpe Brown Whelan & Company (the "Underwriters"); (iii) the Company's Certificate of Incorporation and By-Laws, as in effect on the date hereof; (iv) certain resolutions of the Board of Directors of the Company relating to, among other things, the issuance of the Shares; (v) a specimen certificate representing the shares of Common Stock; and (vi) such other documents as we have deemed necessary or appropriate as a basis for the opinions set forth below. In our examination, we have assumed the legal capacity of all natural persons, the genuineness of all signatures, the authenticity of all documents submitted to us as certified or photostatic copies and the Page 2 March 24, 1999 authenticity of the originals of such latter documents. As to any facts material to the opinions expressed herein which were not independently established or verified, we have relied upon statements and representations of officers and other representatives of the Company, the Selling Shareholders and others. In addition, we have assumed the conformity of the certificates representing the Shares to the form of the specimen thereof examined by us and the due execution and delivery of such certificates. This opinion is limited to the laws of the State of New Jersey and the Federal laws of the United States of America. Based upon and subject to the foregoing, we are of the opinion that: 1. When (i) the Board of Directors of the Company authorizes the price per Primary Share, (ii) the duly appointed officers of the Company and the Selling Shareholders execute and deliver the Underwriting Agreement and (iii) the Primary Shares are issued and delivered against payment therefor in accordance with the terms of the Underwriting Agreement, the Primary Shares will be duly authorized, validly issued, fully paid and nonassessable. 2. When the Company delivers the Additional Shares against payment therefor in accordance with the terms of the Underwriting Agreement, the Additional Shares will be duly authorized, validly issued, fully paid and nonassessable. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to this firm under the caption "Legal Opinions" in the prospectus filed as part of the Registration Statement. In giving such consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Act or the Rules and Regulations promulgated thereunder. Page 3 March 24, 1999 This opinion is furnished by us, as special counsel to the Company, in connection with the filing of the Registration Statement and, except as provided in the immediately preceding paragraph, is not to be used, circulated, quoted or otherwise referred to for any other purpose without our express written permission or relied upon by any other person. Very truly yours, /s/ Pepper Hamilton LLP --------------------------- PEPPER HAMILTON LLP EX-23.1 4 EXHIBIT-23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports and to all references to our Firm included in or made part of this registration statement. /s/ ARTHUR ANDERSEN LLP Philadelphia, PA March 23, 1999 EX-23.2 5 EXHIBIT-23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this registration statement of our report dated March 3, 1998 (except with respect to the matters discussed in Note 11, as to which the date is September 18, 1998), on the consolidated financial statements of The MRC Group, Inc. and Subsidiary included on pages F-27 through F-46 of the S-4 Registration Statement of MedQuist Inc. for the years ended December 31, 1995, 1996 and 1997 and to all references to our Firm included in or made part of this registration statement. /s/ ARTHUR ANDERSEN LLP Cleveland, Ohio, March 23, 1999 -----END PRIVACY-ENHANCED MESSAGE-----