-----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, EJneuziL4JakYVTN420hIAW2Hg2JKazoRG0d4+l3Q7XNZClVrIQP0EqQqD9biUxu zEiTjcbKjpzjT7dfCj0UaA== 0000950116-01-501086.txt : 20020410 0000950116-01-501086.hdr.sgml : 20020410 ACCESSION NUMBER: 0000950116-01-501086 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011109 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19941 FILM NUMBER: 1780073 BUSINESS ADDRESS: STREET 1: FIVE GREENTREE CENTRE STE 311 STREET 2: STATE HIGHWAY 73 N CITY: MARLTON STATE: NJ ZIP: 08053 BUSINESS PHONE: 8568108000 MAIL ADDRESS: STREET 1: 5 GREENTREE CENTRE SUITE 311 STREET 2: ATTN BRUCE VAN FOSSEN CITY: MARLTON STATE: NJ ZIP: 08053 10-Q 1 ten-q.txt 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q ----------------- (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ----------------- For the quarterly period Commission file number ended September 30, 2001 0-19941 MedQuist Inc. ------------------------------------------------------ (Exact name of registrant as specified in its charter) New Jersey 22-2531298 - ------------------------------- ----------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification no.) Five Greentree Centre, Suite 311, Marlton, NJ 08053 --------------------------------------------------- (Address of principal executive offices) (Zip Code) (856) 810-8000 ---------------------------------------------------- (Registrant's telephone number, including area code) ---------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ------ Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: 36,887,235 shares of common stock, no par value, as of November 6, 2001. MedQuist Inc. INDEX TO QUARTERLY REPORT ON FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE NO. - ------- --------------------- -------- Item 1. Consolidated Financial Statements Consolidated Balance Sheets at September 30, 2001 (Unaudited) and 1 December 31, 2000 Consolidated Statements of Income for the nine months ended September 30, 2001 2 and 2000 (Unaudited) Consolidated Statements of Income for the three months ended September 30, 2001 3 and 2000 (Unaudited) Consolidated Statements of Cash Flows for the nine months ended September 30, 2001 4 and 2000 (Unaudited) Notes to Condensed Consolidated Financial Statements (Unaudited) 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosure About Market Risk 13 Special Note Concerning Forward Looking Statements 13 PART II. OTHER INFORMATION - -------------------------- Item 1. Legal Proceedings 14 Item 2. Changes in Securities and Use of Proceeds 14 Item 3. Defaults upon Senior Securities 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Item 5. Other Information 14 Item 6. Exhibits and Reports on Form 8-K 14 SIGNATURE 15 - ---------
MEDQUIST INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands)
September 30, December 31, 2001 2000 ---- ---- (Unaudited) Assets Current assets: Cash and cash equivalents $ 89,804 $ 77,321 Cash equivalent with related party --- 20,044 Accounts receivable, net of allowance of $3,559 and $3,565 76,637 75,155 Prepaid expenses and other current assets 8,653 12,099 -------- -------- Total current assets 175,094 184,619 Property and equipment - net 34,557 35,013 Other assets 8,363 6,861 Intangible assets - net 169,466 123,408 -------- -------- $387,480 $349,901 ======== ======== Liabilities and Shareholders' Equity Current Liabilities: Current portion of long-term debt $1,427 $433 Accounts payable 6,736 4,232 Accrued expenses 21,373 23,985 -------- -------- Total current liabilities 29,536 28,650 -------- -------- Long-term debt 1,089 22 -------- -------- Other liabilities 1,088 704 -------- -------- Deferred income taxes 1,511 2,719 -------- -------- Shareholders' equity: Common stock, no par value, 60,000 shares authorized, 36,880 and 36,769 issued and outstanding --- --- Additional paid-in capital 225,299 223,286 Retained earnings 129,013 94,648 Deferred compensation (56) (128) -------- -------- Total shareholders' equity 354,256 317,806 -------- -------- $387,480 $349,901 ======== ========
See Accompanying Notes to Condensed Consolidated Financial Statements. 1 MEDQUIST INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In thousands, except per share amounts)
Nine Months Ended September 30, 2001 2000 ---- ---- Revenue $295,772 $274,149 -------- -------- Costs and expenses: Cost of revenue 218,111 198,569 Selling, general and administrative 9,607 8,311 Depreciation 12,265 10,703 Amortization of intangible assets 6,840 5,467 Restructuring charges (600) (1,013) Lawsuit settlement (3,000) --- Tender offer costs --- 6,255 -------- -------- Total costs and expenses 243,223 228,292 -------- -------- Operating income 52,549 45,857 Other income: Loss on sale of equipment --- (3) Gain on sale of securities --- 3,675 Interest income, net 3,327 2,650 -------- -------- Income before income taxes 55,876 52,179 Income tax provision 21,511 22,802 -------- -------- Net income $ 34,365 $ 29,377 ======== ======== Basic net income per common share $ 0.93 $ 0.80 ======== ======== Diluted net income per common share $ 0.91 $ 0.79 ======== ========
See Accompanying Notes to Condensed Consolidated Financial Statements. 2 MEDQUIST INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In thousands, except per share amounts)
Three Months Ended September 30, 2001 2000 ---- ---- Revenue $102,695 $90,648 -------- ------- Costs and expenses: Cost of revenue 75,435 68,145 Selling, general and administrative 3,328 2,720 Depreciation 4,378 3,742 Amortization of intangible assets 2,559 1,857 Tender offer costs --- 6,255 --- ----- Total costs and expenses 85,700 82,719 -------- ------- Operating income 16,995 7,929 Other income: Loss on sale of equipment --- (3) Interest income, net 662 1,183 --- ----- Income before income taxes 17,657 9,109 Income tax provision 6,797 5,575 -------- ------- Net income $ 10,860 $ 3,534 ======== ======= Basic net income per common share $ 0.29 $ 0.10 ======== ======= Diluted net income per common share $ 0.29 $ 0.10 ======== =======
See Accompanying Notes to Condensed Consolidated Financial Statements. 3 MEDQUIST INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands)
Nine Months Ended September 30, ------------- 2001 2000 ---- ---- Operating activities: Net income $34,365 $29,377 Adjustments to reconcile net income to net cash provided by operating activities, net of business acquisitions: Depreciation and amortization 19,105 16,170 Gain on sale of securities --- (3,675) Amortization of deferred compensation 72 122 Tax benefit for exercise of employee stock options 226 17,381 Changes in assets and liabilities: Accounts receivable, net 3,361 1,123 Prepaid expenses and other current assets 5,279 (1,621) Other assets (1,474) (1) Accounts payable 138 (976) Accrued expenses (3,272) (17,866) Other liabilities 385 (62) --- ---- Net cash provided by operating activities 58,185 39,972 ------- ------- Investing activities: Purchases of property and equipment, net (9,713) (12,947) Purchase of investments --- (728) Investment in A-Life Medical, Inc. --- (6,051) Proceeds from sale of securities --- 4,403 Acquisitions, net of cash acquired (56,104) (7,628) ------- ------- Net cash used in investing activities (65,817) (22,951) ------- ------- Financing activities: Repayments of long-term debt (561) (1,542) Proceeds from the exercise of common stock options 632 18,906 Purchase and retirement of common stock, at cost --- (15,466) ------- ------- Net cash provided by financing activities 71 1,898 ------- ------- Net increase (decrease) in cash, cash equivalents, and cash equivalent with related party (7,561) 18,919 Cash, cash equivalents and cash equivalent with related party, beginning of period 97,365 62,024 ------- ------- Cash, cash equivalents and cash equivalent with related party, end of period $89,804 $80,943 ======= ======= Supplemental disclosure of cash flow information: Cash paid during period for: Interest $ 41 $ 36 ======= ======= Income taxes $16,391 $17,364 ======= =======
See Accompanying Notes to Condensed Consolidated Financial Statements. 4 MedQuist Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements September 30, 2001 (Unaudited - amounts in thousands, except per share amounts) Note 1. Basis of Presentation and Restructuring Charges - ------------------------------------------------------- The information set forth in these statements is unaudited. The information reflects all adjustments that, in the opinion of management, are necessary to present a fair statement of operations of MedQuist Inc. and its consolidated subsidiaries for the periods indicated. Results of operations for the interim periods ended September 30, 2001 are not necessarily indicative of the results of operations for the full year. Certain information in footnote disclosures normally included in financial statements have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission. From 1995 through September 30, 2001, we completed 43 acquisitions. Six acquisitions, including the acquisition of The MRC Group (MRC), were accounted for as pooling of interests. Four of the acquisitions accounted for as pooling of interests were material and, accordingly, we restated our financial statements. In December 1998, the Company's board of directors approved management's restructuring plan associated with the MRC merger. Costs associated with the plan of approximately $6,539 were recognized in 1998 in accordance with Emerging Issues Task Force ("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 related primarily to the closure of several redundant customer service centers as well as certain corporate offices in order to improve operating efficiencies. The plan was completed in 1999. The severance costs are attributable to 41 individuals from various levels of operational and senior management. The activity in the restructuring account is as follows: 5
Non-Cancelable Non-Cancelable Contracts and Leases Severance Other Exit Costs Total ------ --------- ---------------- ----- 1998 Restructuring Charge $3,835 $1,618 $1,086 $6,539 Payments against Restructuring accrual: 1998 0 (567) (410) (977) 1999 (437) (723) (17) (1,177) 2000 (556) (20) --- (576) 2001 (140) -- --- (140) Revision to estimate recorded in 1999: (1,492) (182) (659) (2,333) Revision to estimate recorded in 2000: (471) --- --- (471) Revision to estimate recorded in 2001: (44) (126) --- (170) ------ ------ ------ ------ 1998 Restructuring accrual balance, at September 30, 2001: $ 695 $ 0 $ 0 $ 695 ======= ====== ====== ======
In 1997, MRC approved a separate management plan to close and/or merge several redundant customer service centers in order to further reduce costs and improve operating efficiencies. The plan was completed during 1998 and included the cost of exiting certain facilities, primarily related to non-cancelable leases, the disposition of fixed assets and employee severance costs. During 2001, we revised our accrual estimates and $430 of the restructure accruals were reversed in connection with the revision. At September 30, 2001, the accrual has been fully utilized. Note 2. Acquisitions - -------------------- During 2000, we completed eight acquisitions accounted for using the purchase method. Pro forma information is not presented as the acquisitions were not material to the Company. During the nine months ended September 30, 2001, we completed six acquisitions accounted for using the purchase method. Pro forma information is not presented as the acquisitions were not material to the Company. Note 3. Net Income Per Common Share - ----------------------------------- Basic net income per share is calculated by dividing net income by the weighted average number of shares of Common Stock outstanding for the period. Diluted net income per share is calculated by dividing net income by the weighted average number of shares of Common Stock outstanding for the period, adjusted for the dilutive effective of Common Stock equivalents, which consist of stock options, using the treasury stock method. 6 The table below sets forth the reconciliation of the numerators and denominators of the basic and diluted net income per share computations:
Nine Months Ended September 30, ------------------------------------------------------------------------------ 2001 2000 ------------------------------------ -------------------------------- Net Per Share Net Per Share Income Shares Amount Income Shares Amount ------ ------ ------ ------ ------ ------ Basic $34,365 36,831 $0.93 $29,377 36,649 $0.80 Effect of dilutive securities --- 872 (0.02) --- 483 (0.01) ------- ------ ----- ------- ------ ----- Diluted $34,365 37,703 $0.91 $29,377 37,132 $0.79 ======= ====== ===== ======= ====== =====
Three Months Ended September 30, ------------------------------------------------------------------------------- 2001 2000 ------------------------------------ -------------------------------- Net Per Share Net Per Share Income Shares Amount Income Shares Amount ------ ------ ------ ------ ------ ------ Basic $10,860 36,868 $0.29 $ 3,534 36,519 $0.10 Effect of dilutive securities --- 1,002 --- --- 850 --- ------- ------ ----- ------- ------ ----- Diluted $10,860 37,870 $0.29 $ 3,534 37,369 $0.10 ======= ====== ===== ======= ====== =====
Note 4. New Accounting Pronouncement - ------------------------------------ On June 29, 2001, the Financial Accounting Standards board issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and Statement No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that all business combinations consummated after June 30, 2001 be accounted for under the purchase method of accounting. SFAS No. 142 provides for the discontinuance of amortization of goodwill effective January 1, 2002 and establishes methodologies for determining the impairment of the carrying value of goodwill. During the nine months ended September 30, 2001 and 2000, the Company recorded intangible amortization of approximately $6.8 million and $5.5 million, respectively. Management is currently evaluating the methodologies for determining the impairment of the carrying value of goodwill. Any adjustments as a result of the new impairment tests will be recorded as a cumulative effective of a change in accounting principle effective January 1, 2002. Net unamortized goodwill at September 30, 2001 is approximately $110.6 million. Note 5. Shareholders' Equity - ---------------------------- During the year ended December 31, 2000, we repurchased 600 shares of our outstanding Common Stock for $15,466 at an average price of $25.78 per share. All Common Stock acquired was subsequently retired. In July 2000, Koninklijke Philips Electronics, N.V. (Philips) completed a tender offer in which they acquired approximately 60% of MedQuist's outstanding Common Stock for $51.00 per share. 7 Since July 2000, Philips has purchased shares in the open market, at various prices, which has increased their ownership in MedQuist stock to approximately 71%. Note 6. Cash, Cash Equivalent and Cash with Related Party - ---------------------------------------------------------- Cash and cash equivalents include cash and highly liquid investments purchased with an original maturity of three months or less. Cash equivalent with related party consists of cash deposited with Philips for the purpose of optimizing income from temporary excess cash. We maintain a Deposit Facility with Philips which allows us to invest up to $150 million at LIBOR less 0.125%, for periods up to 365 days. At September 30, 2001, we had no cash in such an investment. For the nine months ended September 30, 2001, we recorded approximately $410 of interest income from this investment. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General - ------- We are the leading national provider of medical transcription services. Substantially all of our revenue to date has been derived from the provision of medical transcription services, which we recognize when we render services and deliver reports. We also derive revenue from services other than traditional transcription services, such as coding revenue, interfacing fees, equipment rentals, equipment sales, referral fees and commissions from strategic partners. Fees for medical transcription services are based primarily on contracted rates and revenue is recognized upon the rendering of services and delivery of transcribed reports. Revenues from other sources are recognized when earned. Cost of revenue consists of all direct costs associated with providing services, including payroll, telecommunications, repairs and maintenance, rent and other direct costs. Most of our cost of revenue is variable in nature, but includes certain fixed components. Selling, general and administrative expenses include costs associated with our senior executive management, marketing, accounting, legal and other administrative functions. Selling, general and administrative expenses are mostly fixed in nature, but include certain variable components. 8 Results of Operations - --------------------- The following table sets forth for the periods indicated, certain financial data in the Company's Unaudited Consolidated Statements of Income as a percentage of net revenue:
Nine Months Ended Three Months Ended September 30, September 30, ------------- ------------- 2001 2000 2001 2000 ---- ---- ---- ---- Revenue 100.0% 100.0% 100.0% 100.0% Costs and expenses: Cost of revenue 73.7 72.5 73.5 75.2 Selling, general and administrative 3.3 3.0 3.2 3.0 Depreciation 4.1 3.9 4.3 4.1 Amortization of intangible assets 2.3 2.0 2.4 2.0 Restructuring charges (0.2) (0.4) -- -- Lawsuit settlement (1.0) -- -- -- Tender offer costs -- 2.3 -- 6.9 ----- ----- ----- ----- Operating income 17.8 16.7 16.6 8.8 Gain on sale of securities -- 1.3 -- -- Interest income, net 1.1 1.0 0.6 1.3 ----- ----- ----- ----- Income before income taxes 18.9 19.0 17.2 10.1 Income tax provision 7.3 8.3 6.6 6.2 ----- ----- ----- ----- Net income 11.6% 10.7% 10.6% 3.9% ===== ===== ===== ====
Nine Months Ended September 30, 2001 - ------------------------------------ Revenue. Revenue increased 7.9% from $274.1 million for the nine months ended September 30, 2000 to $295.8 million for the comparable 2001 period. The increase resulted from increased sales to existing customers, sales to new customers and additional revenue from acquisitions. Cost of Revenue. Cost of revenue increased 9.8% from $198.6 million for the nine months ended September 30, 2000 to $218.1 million for the comparable 2001 period. As a percentage of revenue, cost of revenue increased from 72.5% for the nine months ended September 30, 2000 to 73.7% for the comparable 2001 period. The increase resulted primarily from costs associated with the ongoing development of our new transcription platform, partially offset by a reduction in transcription related payroll and telephone expense. Selling, general and administrative. Selling, general and administrative expenses increased 15.6% from $8.3 million for the nine months ended September 30, 2000 to $9.6 million for the comparable 2001 period. As a percentage of revenues, selling, general and administrative expenses increased from 3.0% for the nine months ended September 30, 2000 to 3.3% for the comparable 2001 period. The increase primarily resulted from increased spending to support our existing and new businesses. Depreciation. Depreciation expense increased 14.6% from $10.7 million for the nine months ended September 30, 2000 to $12.3 million for the comparable 2001 period. As a percentage of revenues, depreciation increased from 3.9% for the nine months ended September 30, 2000 to 4.1% for the comparable period in 2001. The increase was due to increased capital purchases late in 2000. 9 Amortization. Amortization of intangible assets increased from $5.5 million for the nine months ended September 30, 2000 to $6.8 million for the comparable 2001 period. The increase is attributable to the amortization of intangible assets associated with the Company's acquisitions, which were accounted for using the purchase method in 2000 and 2001. Restructuring charge. During the nine months ended September 30, 2001, we revised our accrual estimates for the restructuring reserves, which were established in 1997 and 1998. As a result, $600,000 of the reserves were reversed into income in 2001. We will continue to evaluate the restructuring reserve estimates. Lawsuit settlement. During the nine months ended September 30, 2001, we settled a lawsuit, in our favor, for a non-recurring gain of $3.0 million, net of legal expenses. Interest income, net. We had net interest income of $2.7 million for the nine months ended September 30, 2000 and net interest income of $3.3 million for the comparable 2001 period. The increase is due to increased cash available for investment, partially offset by decreased rates of return on liquid investments. Income tax provision. Income taxes decreased from $22.8 million or 43.7% of income before income taxes to $21.5 million or 38.5% of income before income taxes. The decrease primarily resulted from state tax planning, and the majority of the tender offer costs incurred during 2000 not being deductible for income tax purposes. Three Months Ended September 30, 2001 - ------------------------------------- Revenue. Revenue increased 13.3% from $90.6 million for the three months ended September 30, 2000 to $102.7 million for the comparable 2001 period. The increase resulted from increased sales to existing customers, sales to new customers and additional revenue from acquisitions. Cost of Revenue. Cost of revenue increased 10.7% from $68.1 million for the three months ended September 30, 2000 to $75.4 million for the comparable 2001 period. As a percentage of revenue, cost of revenue decreased from 75.2% for the three months ended September 30, 2000 to 73.5% for the comparable 2001 period. The decrease primarily resulted from the reduction of transcription related payroll and telephone expense, partially offset by cost associated with ongoing development of our new transcription platform. Selling, general and administrative. Selling, general and administrative expenses increased 22.4% from $2.7 million for the three months ended September 30, 2000 to $3.3 million for the comparable 2001 period. As a percentage of revenues, selling, general and administrative expenses increased from 3.0% for the three months ended September 30, 2000 to 3.2% for the comparable 2001 period. The increase primarily resulted from increased spending to support our existing and new businesses. Depreciation. Depreciation expense increased 17.0% from $3.7 million for the three months ended September 30, 2000 to $4.4 million for the comparable 2001 period. As a percentage of revenues, depreciation increased from 4.1% for the three months ended September 30, 2000 to 4.3% for the comparable period in 2001. The increase was due to increased capital purchases late in 2000. 10 Amortization. Amortization of intangible assets increased from $1.9 million for the three months ended September 30, 2000 to $2.6 million for the comparable 2001 period. The increase is attributable to the amortization of intangible assets associated with the Company's acquisitions, which were accounted for using the purchase method in 2000 and 2001. Interest income, net. We had net interest income of $1.2 million for the three months ended September 30, 2000 and net interest income of $662,000 for the comparable 2001 period. The decrease is due to decreased rates of return on liquid investments, partially offset by a greater amount of cash available for investment. Income tax provision. Income taxes increased from $5.6 million or 61.2% of income before income taxes to $6.8 million or 38.5% of income before income taxes. The increase in income tax expense resulted primarily from increased pre-tax earnings partially offset by decreased effective tax rates resulting from state tax planning. Liquidity and Capital Resources - ------------------------------- At September 30, 2001, we had working capital of $145.6 million, including $89.8 million of cash and cash equivalents. During the nine months ended September 30, 2001, our operating activities provided cash of $58.2 million and during the nine months ended September 30, 2000 our operating activities provided cash of $40.0 million. The increase is primarily due to increased cash receipts on accounts receivable and refunds on income taxes paid. During the nine months ended September 30, 2001, we used cash in investing activities of $65.8 million, consisting of $9.7 million of capital expenditures and $56.1 million for acquisitions accounted for under the purchase method. During the nine months ended September 30, 2000, we used cash for investing activities of $23.0 million, consisting of $12.9 million of capital expenditures, $6.1 million investment in A-Life Medical, Inc., $7.6 million for acquisitions accounted for under the purchase method, $728,000 for the purchase of investments, offset by $4.4 million in cash proceeds from the sale of securities. During the nine months ended September 30, 2001, net cash provided by financing activities was $71,000. During the nine months ended September 30, 2000, cash provided by financing activities was $1.9 million, consisting of $18.9 million in proceeds from the issuance of Common Stock and issuances in connection with employee benefit plans offset by $15.5 million from the purchase and retirement of MedQuist stock, and $1.5 million for repayment of long-term debt. 11 We believe that our cash and cash equivalents generated from operations and our borrowing capacity will be sufficient to meet our current working capital and capital expenditure requirements. New Accounting Pronouncement - ---------------------------- On June 29, 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that all business combinations consummated after June 30, 2001 be accounted for under the purchase method of accounting. SFAS No. 142 provides for the discontinuance of amortization of goodwill effective January 1, 2002 and establishes methodologies for determining the impairment of the carrying value of goodwill. Management is currently evaluating the methodologies for determining the impairment of the carrying value of goodwill. Any adjustments as a result of the new impairment tests will be recorded as a cumulative effect of a change in accounting principle effective January 1, 2002. 12 Item 3. Quantitative and Qualitative Disclosure About Market Risk We generally do not use derivative financial instruments in our investment portfolio. We make investments in instruments that meet credit quality standards, as specified in our investment policy guidelines; the policy also limits the amount of credit exposure to any one issue, and type of instrument. We do not expect any material loss with respect to our investment portfolio. The following table provides information about our investment portfolio at September 30, 2001. For investment securities, the table presents principal amounts and related weighted average interest rates (dollars in thousands). Cash and cash equivalents $89,804 Average interest rate 4.21% Special Note Concerning Forward Looking Statements Some of the information in this Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. We also have referred you to this note in other written or oral disclosures we have made. These statements include forward-looking language such as "will likely result," "may," "are expected to," "is anticipated," "estimated," "projected," "intends to," "consensus earnings estimates," or other similar words. Our actual results are likely to differ, and could differ materially, from the results expressed in, or implied by, these forward-looking statements. There are many factors that could cause these forward-looking statements to be incorrect, including but not limited to the following risks: risks associated with (1) our ability to recruit and retain qualified transcriptionists; (2) inability to complete and assimilate acquisitions of businesses; (3) dependence on our senior management team; (4) the impact of new services or products on the demand for our services; (5) our dependence on medical transcription for substantially all of our business; (6) our ability to expand our customer base; (7) our ability to maintain our current growth rate in revenue and earnings; (8) the volatility of our stock price; (9) our ability to compete with others; (10) changes in law, including without limitation, the impact of the Health Information Portability and Accountability Act ("HIPAA"); (11) infringement on the proprietary rights of others; (12) our failure to comply with confidentiality requirements; (13) our customers' and suppliers' failure to be Year 2000 compliant; and (14) risks inherent in diversifying into other businesses, such as from the acquisitions of DVI (digital dictation equipment), Speech Machines (ASP transcription platform and business) and entering into the medical record coding reimbursement business. When considering these forward-looking statements, you should keep in mind these risk factors and other cautionary statements in this report, and should recognize that those forward-looking statements speak only as of the date made. MedQuist does not undertake any obligation to update any forward-looking statement included in this Form 10-Q or elsewhere. Other risk factors and cautionary statements are set forth in our other filings with the SEC, and you are encouraged to read those. 13 Part II Other Information Item 1. - Legal Proceedings - Not Applicable Item 2. - Changes in Securities and Use of Proceeds - Not Applicable Item 3. - Defaults upon Senior Securities - Not Applicable Item 4. - Submission of Matters to a Vote of Security Holders - Not Applicable Item 5. - Other Information MedQuist has chosen to obtain insurance coverage through Philips for general liability, property, business interruption, auto liability, umbrella and associated stop loss coverages. In consideration of this, MedQuist will pay Philips approximately $108,000 in 2001. Item 6. - Exhibits and Reports on Form 8-K a) Exhibits: b) The Company filed the following Reports on Form 8-K during the quarter for which this report is filed. File Date Item Reported --------- ------------- July 25, 2001 Regulation FD Disclosure in connection with earnings release and conference call 14 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MedQuist Inc. Registrant Date: November 9, 2001 By: /s/ Brian J. Kearns ------------------------- Brian J. Kearns Chief Financial Officer 15 -----END PRIVACY-ENHANCED MESSAGE-----