As
filed with the Securities and Exchange Commission on October 18,
2010
Registration
No. 333-
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
CBAYSYSTEMS
HOLDINGS LIMITED
(Exact name of Registrant as
specified in its charter)
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British Virgin Islands (prior to reincorporation)
Delaware (after reincorporation)
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7374
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98-0676666
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(State or other jurisdiction
of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I. R. S. Employer
Identification No.)
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9009
Carothers Parkway
Franklin, TN 37067
(866)
295-4600
(Address, including zip code,
and telephone number, including area code, of Registrants
principal executive offices)
Robert
Aquilina
Chairman and Chief Executive Officer
CBaySystems Holdings Limited
9009 Carothers Parkway
Franklin, TN 37067
(866)
295-4600
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
With
copies to:
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D. Rhett Brandon, Esq.
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, NY 10017
(212) 455-2000
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Colin Diamond, Esq.
White & Case LLP
1155 Avenue of the Americas
New York, NY 10036
(212) 819-8200
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after the effective date of
this Registration Statement.
If any of the securities being registered on this form are being
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box. o
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, check
the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
Indicate by check mark whether the registrant is a large
accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definition of large accelerated
filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act.
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Large
accelerated filer
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Accelerated filer
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Non-accelerated filer
þ
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Smaller
reporting company
o
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(Do not check if a smaller
reporting company)
CALCULATION OF REGISTRATION
FEE
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Title of Each Class of
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Proposed Maximum
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Amount of
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Securities to be Registered
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Aggregate Offering Price(1)
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Registration Fee(1)
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Common stock, par value U.S.$0.10 per share
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$115,000,000
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$8,199.50
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(1) |
Estimated pursuant to Rule 457(o) under the Securities Act
of 1933, as amended, solely for the purpose of calculating the
registration fee. Includes shares issuable upon exercise of the
underwriters option to purchase additional shares of
common stock.
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The registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933, as amended, or until this
Registration Statement shall become effective on such date as
the Commission, acting pursuant to said Section 8(a), may
determine.
The
information in this prospectus is not complete and may be
changed. This prospectus is not an offer to sell these
securities and is not soliciting an offer to buy these
securities in any jurisdiction where such offer or sale is not
permitted.
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SUBJECT
TO COMPLETION, DATED OCTOBER 18, 2010
Preliminary
Prospectus
Shares
CBaySystems
Holdings Limited
Common
Stock
This is the initial public offering of our shares in the United
States. We are
offering shares
of our common stock.
Our shares are currently traded on the Alternative Investment
Market of the London Stock Exchange, or AIM. The closing price
of our shares on AIM on October 15, 2010 was £1.50,
which was equivalent to approximately $2.38 per share based on
the Federal Reserve noon buying rate of $1.5845 to £1.00 in
effect on October 12, 2010. We intend to delist our common
stock from AIM upon the completion of this offering or shortly
thereafter and to apply to list our shares on The NASDAQ Global
Market under the symbol
.
Investing in our shares involves significant
risks. See Risk Factors beginning on
page 16.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
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PER SHARE
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TOTAL
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Public offering price
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$
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$
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Underwriting discount
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$
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$
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Proceeds to CBaySystems Holdings Limited (before expenses)
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$
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$
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Delivery of the shares of common stock is expected to be made on
or
about .
The selling stockholders have granted the underwriters an option
for a period of 30 days to purchase on the same terms and
conditions set forth above, up to an
additional shares
of our common stock to cover overallotments.
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Jefferies &
Company |
Lazard Capital Markets |
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Macquarie
Capital |
RBC Capital Markets |
Prospectus
dated ,
2010.
Table of
Contents
We have not authorized anyone to give any information or to make
any representations other than those contained in this
prospectus or in any free-writing prospectus that we may
specifically authorize to be delivered or made available to you.
We and the underwriters have not authorized anyone to provide
you with additional or different information. We and the selling
stockholders are offering to sell, and seeking offers to buy,
shares of our common stock only in jurisdictions where such
offers and sales are permitted. The information in this
prospectus or a free-writing prospectus is accurate only as of
its date, regardless of its time of delivery or of any sale of
shares of our common stock. Our business, financial condition,
results of operations and prospects may have changed since that
date.
References in this prospectus to dollars or
$ are to the currency of the United States and
references to pounds, £,
pence or p are to the currency of the
United Kingdom. There are 100 pence to each pound.
Except where otherwise indicated, reference in this prospectus
to volume or volumes are to lines of
text edited or transcribed by our medical transcriptionists, or
MTs, and medical editors, or MEs.
Immediately prior to the consummation of this offering, we
intend to convert from a British Virgin Islands company to a
Delaware corporation. In connection with that conversion, we may
adjust the number of our shares outstanding through a reverse
share split or similar action. The conversion and any such
reverse share split or similar action will result in no change
to our stockholders relative ownership interests in us.
The industry and market data and other statistical information
used throughout this prospectus are based on independent
industry publications, government publications, reports by
market research firms or other published independent sources.
Some data is also based on good faith estimates, which are
derived from our review of internal surveys, as well as certain
independent sources. Independent industry publications and
surveys generally state that they have obtained information from
sources believed to be reliable, but do not guarantee the
accuracy and completeness of such information.
(i)
Prospectus
Summary
This summary highlights certain information contained
elsewhere in this prospectus and may not contain all of the
information you should consider before investing in our shares.
You should read this summary together with the entire
prospectus, including the information presented under the
heading Risk Factors, the consolidated financial
statements and related notes and the unaudited pro forma
condensed combined financial information and related notes
appearing elsewhere in this prospectus.
Except where the context otherwise requires, or where
otherwise indicated, references in this prospectus to
we, us, or our are to
CBaySystems Holdings Limited and its subsidiaries, references to
MedQuist Inc. are to MedQuist Inc. and its
subsidiaries and references to Spheris are to
Spheris Inc. and its subsidiaries for the period prior to
April 22, 2010 and to the business we acquired from Spheris
Inc. for the period after such date.
Overview
We are a leading provider of integrated clinical documentation
solutions for the U.S. healthcare system. Our
end-to-end
solutions convert physicians dictation of patient
interactions, or the physician narrative, into a high quality
and customized electronic record. These solutions integrate
technologies and services for voice capture and transmission,
automated speech recognition, or ASR, medical transcription and
editing, workflow automation, and document management and
distribution to deliver a complete managed service for our
customers. Our solutions enable hospitals, clinics, and
physician practices to improve the quality of clinical data as
well as accelerate and automate the documentation process, and
we believe our solutions improve physician productivity and
satisfaction, enhance revenue cycle performance, and facilitate
the adoption and meaningful use of electronic health records.
We are the largest provider by revenue of clinical documentation
solutions based on the physician narrative in the United States.
During the three months ended June 30, 2010, we processed,
on an annualized run rate basis, more than 2.9 billion
lines of clinical documentation on our platform. The significant
majority of lines we process are edited or transcribed by our
more than 14,000 MTs and MEs. Of this volume, for the three
months ended June 30, 2010, more than 60% was processed
using ASR technology and nearly 40% was produced offshore. Our
size allows us to handle the clinical documentation requirements
of many of the largest and most complex healthcare delivery
networks in the United States, provides us with economies of
scale, and enables us to devote significantly more resources to
enhancing our solutions through research and development than
most of our competitors.
We serve more than 2,400 hospitals, clinics, and physician
practices throughout the United States, including 40% of
hospitals with more than 500 licensed beds. As of June 30,
2010, the average tenure of our top 50 customers was over five
years, and approximately 95% of our revenue was from recurring
services. Insights gained from our broad, long-standing customer
relationships allow us to optimize our integrated solutions, and
we believe that this positions us for future growth as we target
new customers.
We have realized significant increases in both revenue and
profitability as the result of two large acquisitions, MedQuist
Inc., in which we acquired a majority interest in August 2008,
and Spheris, which we acquired in April 2010. From 2007 to 2009,
our net revenues increased from $57.7 million to
$371.8 million. Over this same period, our Adjusted EBITDA
increased from $2.4 million to $60.1 million, and our
Adjusted EBITDA margins expanded from 4.1% to 16.2%. For a
reconciliation of our net income (loss) attributable to
CBaySystems Holdings Limited to Adjusted EBITDA, see
Summary Historical and Unaudited Pro Forma Consolidated
Financial Data.
Our
Industry
Over the past several decades, our industry has evolved from
almost exclusively in-house production to outsourced services
and from labor-intensive services to technologically-enabled
solutions. The market opportunity for our solutions is driven by
overall healthcare utilization and cost containment efforts in
the United States. Numerous factors are driving increases in the
demand for healthcare services including population growth,
longer life expectancy, the increasing prevalence of chronic
illnesses, and expanded coverage from healthcare reform.
According to the U.S. Centers for Medicare and Medicaid
Services, spending on healthcare grew from $1.2 trillion
1
in 1998 to $2.3 trillion in 2008, representing a compound annual
growth rate of 7.0%. It also projects that healthcare spending
will grow to reach $4.2 trillion, or 19.3% of U.S. gross
domestic product, by 2018, representing a compound annual growth
rate of 6.3%. At the same time, U.S. healthcare providers
remain under substantial pressure to reduce costs while
maintaining or improving the quality of care.
Accurate and timely clinical documentation has become a critical
requirement of the growing U.S. healthcare system.
Medicare, Medicaid, and insurance companies demand extensive
patient care documentation. The 2009 Health Information
Technology for Economic and Clinical Health Act, or the HITECH
Act, includes numerous incentives to promote the adoption and
meaningful use of electronic health records, or EHRs, across the
healthcare industry. Consequently, healthcare providers are
increasingly using EHRs to input, store, and manage their
clinical data in a digital format. Healthcare providers that use
EHRs require accurate, easy-to-use, and cost-effective means to
input clinical data that are not disruptive to the physician
workflow.
The market for outsourced clinical documentation solutions based
on the physician narrative is substantial. Key components of
this market include voice capture and transmission technologies,
ASR software, medical transcription and editing services, and
document workflow and management software. ValueNotes Database
Pvt. Ltd., or ValueNotes, a market research firm, estimates that
the market for outsourced medical transcription services was
$5.4 billion in 2009 and is expected to grow 8.2% per annum
over the next five years to $8.0 billion in 2014.
Healthcare providers are increasingly choosing to outsource
their clinical documentation processes. The benefits of
outsourcing include reduced costs, access to leading
technologies, accelerated turn-around times, improved data
accuracy, greater physician productivity, and satisfaction of
security and compliance requirements. We believe that the
majority of clinical documentation is still produced in-house by
U.S. hospitals and physician practices today. ValueNotes
estimates that the in-house medical transcription market was 67%
of the overall market in 2009, and projects the percentage of
outsourced production of medical transcription will grow from
33% in 2009 to 38% in 2014.
While outsourcing provides many benefits, the landscape for
outsourced service providers is highly fragmented, with hundreds
of providers offering varying degrees of technological
automation and offshore capabilities. Technological automation
and a rise in offshore capabilities have substantially decreased
the cost of production and have further differentiated
outsourcing providers. We believe that participants in our
industry must expand their technology platform and offshore
production capabilities to remain competitive.
Our Competitive
Strengths
Our competitive strengths include:
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Leader in a large, fragmented market We are
the largest provider by revenue of clinical documentation
solutions based on the physician narrative in the United States.
Our size enables us to meet the needs of large, sophisticated
healthcare customers, provides economies of scale, and enables
us to devote significantly more resources to research and
development and quality assurance than many other providers.
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Integrated solutions delivered as a complete managed
service We offer fully-integrated
end-to-end
managed services that capture and convert the physician
narrative into a high quality customized electronic record. We
integrate technologies and services for voice capture and
transmission, ASR, medical transcription and editing, workflow
automation, and document management and distribution. The end
result is value-added clinical documentation with high accuracy
and quick turn-around times.
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Large and diversified customer base with long-term
relationships We serve more than 2,400
hospitals, clinics and physician practices throughout the United
States, including 40% of hospitals with more than 500 licensed
beds. We have a long-standing history with our customers and, as
of June 30, 2010, approximately 95% of our revenue was from
recurring services.
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Highly-efficient operating model We believe
we have a significantly lower cost structure than many of our
competitors. Over the past two years, we have driven down our
cost structure through the use of technology automation,
standardized processes, and offshore resources. Our use of ASR,
which has grown from 39% of our volume in the fourth quarter of
2008 to 62% in the second quarter of 2010, has
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increased our productivity. Additionally, our expanding
footprint in India has enabled us to increase our offshore
production from 28% of our volume to 39% over this same period.
The financial impact of these measures has been an improvement
in gross margins during this timeframe from 33.8% to 35.6%.
During this same time, we have grown volumes by 1.9% while
sharing cost savings with our customers in the form of lower
prices.
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Proven management team We have assembled an
outstanding senior leadership team with significant industry
experience and domain expertise in both domestic and offshore
operations. Our management team has delivered substantial
results and brings an entrepreneurial spirit with proven
experience in managing growth, driving operational improvements,
and successfully integrating acquisitions.
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Our
Strategy
Key elements of our strategy include:
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Expand our customer base and increase existing customer
penetration We intend to grow our customer base
by targeting three market segments: large healthcare providers
still using in-house services, large healthcare providers
currently using competing outsourced alternatives, and
small-to-medium medical practices. Given our market leadership,
strong solution offerings, and low cost structure, we believe we
are well positioned to both replace in-house solutions as well
as displace competing outsourced alternatives for large
healthcare providers. For small-to-medium sized physician
practices, we offer an easy-to-use web-based clinical
documentation platform, CBayScribe, to expand our market share
in this segment, which we believe to be underpenetrated. In
order to increase penetration within our existing customer base,
we intend to continue targeting additional healthcare clinical
areas and facilities of our current customers. Additionally, as
healthcare providers centralize their purchasing decisions, we
believe that our ability to deliver outstanding services for
large, complex requirements provides us with increasing access
to new sales opportunities within our existing customer base and
through existing customer relationships.
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Continue to develop and enhance our integrated
solutions We seek to differentiate our
integrated solutions through sophisticated technology and
process improvement. We have over 100 employees dedicated
to research and development. Over the last year, we launched
numerous enhancements, including a front end speech platform for
general medicine, additional EHR system integration, and
advanced performance monitoring.
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Enhance profitability through technical and operational
expertise We have made significant improvements
in productivity through business process and infrastructure
improvements. Notwithstanding reductions in customer pricing,
our gross margins have expanded from 33.8% in the fourth quarter
of 2008, our first fiscal quarter after we acquired MedQuist
Inc., to 35.6% in the second quarter of 2010, and our Adjusted
EBITDA margins have expanded from 10.8% to 17.6% for the same
periods. Our management team has proven its ability to implement
continuous process improvements and we intend to further
increase offshore production and our use of technological
automation, including ASR, to lower costs and enhance our
profitability.
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Facilitate the adoption and promote meaningful use of EHR
systems Our integrated solutions provide a
comprehensive, accurate and effective method to incorporate
physician narrative into an EHR system. We interface with
substantially all of the leading EHR vendors to integrate our
clinical documentation solutions and to help our customers
realize the full potential of their EHR systems through the use
of the physician narrative. In our experience, when EHR is
adopted, customers tend to consolidate their purchase decisions,
which benefits us as a leading provider of clinical
documentation solutions.
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Pursue strategic acquisitions We believe that
there are significant opportunities available to create value
through strategic acquisitions. We intend to seek appropriate
opportunities to grow our customer base, enhance our solutions,
consolidate costs, and expand our value proposition to our
customers.
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Our
History
We began operation in 1998 with the goal of providing
high-quality outsourced clinical documentation solutions to
U.S. healthcare providers at a low cost. We combined
U.S. sales, marketing, and customer service with offshore
operations, primarily in India, and have grown our scale through
strategic acquisitions.
Acquisitions
MedQuist
Inc.
In August 2008, an affiliate of S.A.C. Private Capital Group,
LLC, or SAC PCG, invested $124.0 million to acquire a
majority interest in us. Concurrent with this investment, we
acquired a 69.5% interest in MedQuist Inc., or the MedQuist Inc.
Acquisition. At the time of the acquisition, MedQuist Inc. was
the largest U.S. medical transcription service provider by
revenue, but had been adversely impacted by inefficient
operations, litigation and customer disputes. Net revenues for
MedQuist Inc. had fallen from $483.9 million for the year
ended December 31, 2002 to $340.3 million for the year
ended December 31, 2007.
We believed that MedQuist Inc., despite its operational
challenges and substantial overhead, had strong underlying
technology, deep healthcare domain expertise, and a long-tenured
customer base. Following our acquisition of MedQuist Inc., we
embarked upon a strategy to enhance the management team,
streamline operations, improve relationships with customers,
leverage our offshore resources, increase the utilization of ASR
technology, and resolve all outstanding litigation. This
strategy resulted in a stabilization of volume trends starting
in the second quarter of 2009. The following table shows the
percentage change in MedQuist Inc.s volume for the nine
quarters ended March 31, 2010, the last quarter prior to
our acquisition of Spheris, or the Spheris Acquisition.
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2008
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2009
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2010
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Prior to the MedQuist Inc.
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MedQuist Inc.
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Acquisition
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Q1
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Q2
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Q3
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Q4
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Q1
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Q2
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Q3
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Q4
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Q1
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Volume % Change over Previous Year
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(3.3
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)%
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(4.7
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(0.1
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)%
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(0.4
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(2.2
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0.8
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%
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2.5
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%
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2.8
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%
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4.0
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%
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Spheris
In April 2010, we acquired certain assets, principally customer
contracts, from Spheris in a transaction conducted under
Section 363 of the Bankruptcy Code. Spheris was the second
largest U.S. medical transcription service provider by
revenue at the time. Spheris had experienced declines in volumes
from customer attrition, which we believed was attributable to
quality issues and underinvestment in product development caused
by financial constraints leading up to its bankruptcy. Some
volume declines continued after the date of the Spheris
Acquisition as the result of notices of termination given prior
to that date. The following table shows the percentage change in
Spheris volume for the nine quarters ended March 31,
2010, the last quarter prior to the Spheris Acquisition.
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Spheris
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2008
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2009
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2010
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Q3
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Q4
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Q4
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Q1
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Volume % Change over Previous Year
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(4.8
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)%
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(4.7
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)%
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(5.9
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)%
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(11.6
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(13.3
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(10.9
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)%
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(7.9
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)%
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(6.5
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)%
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(5.5
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)%
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We considered the negative volume trend for Spheris in our
acquisition valuation. Net revenues for Spheris were
$156.6 million and $35.2 million for the year ended
December 31, 2009 and the three months ended March 31,
2010, respectively. Customers who submitted notices of
termination prior to the acquisition generated revenues of
$24.6 million and $1.7 million during the year ended
December 31, 2009 and the three months ended
March 31, 2010, respectively. Therefore, net revenues for
the year ended December 31, 2009 and the three months ended
March 31, 2010, less revenues attributable to customers who
submitted notices of termination prior to the Spheris
Acquisition, were $132.0 million and $33.5 million,
respectively.
4
Our Spheris integration efforts have focused on merging the new
customer base acquired, integrating systems and eliminating cost
redundancies. We expect the measures we have implemented since
the Spheris Acquisition to yield $7.0 million of cost
savings in the fourth quarter of 2010, representing an
annualized impact of $28.0 million. We expect that the
integration of Spheris will be fully completed by the first half
of 2011.
Pricing
We base our pricing on various factors, principally, market
forces, the extent to which we can utilize our offshore
production facilities, the extent to which customers utilize the
ASR technology available in our solutions, the scope of services
provided and turn-around times requested by a particular
customer. We work with our customers to evaluate how different
solutions affect pricing and to determine an optimal mix of
service level and price for that customer. Higher utilization of
offshore production and ASR leads to lower costs for us, which
permits us to offer better pricing to our customers while at the
same time contributing to margin growth. We have successfully
migrated a significant portion of MedQuist Inc.s volume
offshore and we will continue these efforts in relation to our
combined businesses.
Recent
Developments
Recapitalization
Transactions
On October 14, 2010, MedQuist Inc. incurred
$85.0 million of indebtedness through the issuance of
13% senior subordinated notes due 2016, or the Senior
Subordinated Notes, under a note purchase agreement, or the Note
Purchase Agreement, and incurred $200.0 million of
indebtedness under a term loan, or the Term Loan, under a
$225.0 million credit facility, or the Senior Secured
Credit Facility. We are a guarantor of both the Senior
Subordinated Notes and the Senior Secured Credit Facility.
MedQuist Inc. used the proceeds to repay $80.0 million of
indebtedness under its prior credit facility, or the Acquisition
Credit Facility, to repay $13.6 million of indebtedness
under a subordinated promissory note, or the Acquisition
Subordinated Promissory Notes, each issued in connection with
the Spheris Acquisition, and to pay a $176.5 million
special dividend to its stockholders. We received
$122.6 million of this special dividend and used
$104.1 million to extinguish our 6% Convertible Notes
issued to Royal Philips Electronics, in connection with the
MedQuist Inc. Acquisition and $4.1 million to extinguish
certain other lines of credit. We refer to these transactions as
the Recapitalization Transactions.
Exchange
Transactions
On September 30, 2010, certain of MedQuist Inc.s
noncontrolling stockholders entered into an exchange agreement
with us, or the Exchange Agreement, whereby we agreed to issue
approximately 20.3 million shares of our common stock in
exchange for their 4.8 million shares of MedQuist Inc.
common stock, subject to certain adjustments to the exchange
ratio based principally on the level of MedQuist Inc.s net
debt at closing. We refer to this as the MedQuist Exchange. The
MedQuist Exchange is contingent upon, among other conditions,
our completion of this offering, listing our shares on The
NASDAQ Global Market and our reincorporation in Delaware, and,
assuming the MedQuist Exchange is consummated without any
adjustments, would increase our ownership in MedQuist Inc. from
69.5% to 82.5%.
On October 18, 2010, we filed with the Securities and
Exchange Commission, or the SEC, a registration statement on
Form S-4
offering those noncontrolling MedQuist Inc. stockholders who did
not participate in the MedQuist Exchange shares of our common
stock in exchange for their MedQuist Inc. shares. Assuming the
MedQuist Exchange is consummated, a full exchange in the
Exchange Offer would increase our ownership in MedQuist Inc.
from 82.5% to 100.0%. We can give no assurance regarding the
level of participation in the Exchange Offer.
For a more detailed description of the Recapitalization
Transactions, the MedQuist Exchange and the Exchange Offer,
collectively, the Corporate Reorganization, see Corporate
Reorganization.
5
Risks Associated
With Our Business
Our business is subject to a number of risks which you should be
aware of before making an investment decision. Those risks are
discussed more fully in Risk Factors beginning on
page 16. For example:
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We compete with many others in the market for clinical
documentation solutions which may result in lower prices for our
services, reduced operating margins and an inability to maintain
or increase our market share.
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Our business is dependent on the continued demand for
transcription services, and, if electronic health records
companies produce solutions acceptable to large hospital systems
for the creation of electronic clinical documentation, the
overall demand for medical transcription services could be
reduced.
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Our ability to sustain and grow profitable operations is
dependent on the willingness of new customers to outsource and
adopt new technology platforms, as well as our ability to retain
customers.
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Our success will depend on our ability to support existing
technologies, as well as adopt and integrate new technology into
our workflow platforms.
|
Corporate
Information
Our principal executive offices are located at 9009 Carothers
Parkway, Franklin, TN 37067. The telephone number of our
principal executive offices is (866) 295-4600.
Immediately prior to the consummation of this offering, we
intend to convert from a British Virgin Islands company to a
Delaware corporation.
6
The
Offering
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Common stock offered |
|
shares |
|
Common stock to be outstanding immediately after this
offering(1)
|
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shares |
|
Over-allotment option |
|
The selling stockholders have granted the underwriters a
30-day option to purchase up
to additional
shares. |
Use of
proceeds
We estimate that our net proceeds from this offering, after
deducting the underwriting discounts and commissions and
estimated offering expenses, will be approximately
$ ,
assuming an initial public offering price of
$ per share, the midpoint of the
price range shown on the cover page of this prospectus. We
intend to use the net proceeds from this offering for working
capital and other general corporate purposes. We may also use a
portion of the net proceeds for the acquisition of complementary
companies or businesses, although we currently do not have any
acquisition or investment planned. We will not receive any
proceeds from the sale of shares by the selling stockholders.
Dividend
policy
We currently expect to retain future earnings, if any, for use
in the operation and expansion of our business and do not
anticipate paying any cash dividends in the foreseeable future.
Payments of future dividends, if any, will be at the sole
discretion of our board of directors after taking into account
various factors, including our business, operating results and
financial condition, current and anticipated cash needs, plans
for expansion and any legal or contractual limitations on our
ability to pay dividends. Our ability to pay dividends on our
common stock is limited by the covenants of the agreements
governing our indebtedness and may be further restricted by the
terms of any future debt or preferred securities.
The
NASDAQ Global Market listing
We intend to apply to list our common stock on The NASDAQ Global
Market under the symbol
.
Assumptions
in this Prospectus
Unless we indicate otherwise, all information in this prospectus:
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assumes consummation of the MedQuist Exchange based on an
exchange ratio of 4.2459 shares of our common stock for
each MedQuist Inc.
share;(2)
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assumes a full exchange in the Exchange Offer based on the ratio
applicable under the MedQuist
|
(1) The number of shares of
common stock to be outstanding after this offering includes (i)
approximately 20.3 million shares of common stock to
be issued in the MedQuist Exchange, (ii) approximately
28.4 million shares of our common stock to be issued in the
Exchange Offer, assuming a full exchange and (iii) approximately
4.5 million shares of our common stock issuable pursuant to
an agreement with an affiliate of SAC PCG, or the Consulting
Services Agreement, entered into at the time of the MedQuist
Inc. Acquisition, and excludes (i) approximately
11.5 million shares of common stock reserved for issuance
under our equity incentive plans, of which options to purchase
approximately 5.8 million shares with a weighted average
exercise price of $1.18 were outstanding as of June 30,
2010, (ii) 403,680 shares of common stock reserved for issuance
under the stand-alone grants made to certain present and former
executives under management stockholders agreements, of which
options to purchase 403,680 shares with a weighted average price
of $1.75 were outstanding as of June 30, 2010, and (iii)
366,695 shares of our common stock issuable pursuant to a
warrant agreement between us and Oosterveld International BV,
dated March 19, 2009. See Certain Relationships and
Related Party Transactions.
(2) The exchange ratio under
the MedQuist Exchange is subject to adjustment based principally
upon the level of MedQuist Inc.s net debt at the closing
of the MedQuist Exchange. Every $10.0 million decrease
below $304.0 million in MedQuist Inc.s net debt would
increase the exchange ratio by approximately 0.05 shares of
our common stock.
7
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assumes our redomiciliation under the laws of the state of
Delaware and the related conversion of our shares;
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assumes no exercise by the underwriters of their over-allotment
option to purchase shares from the selling stockholders; and
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|
assumes an initial public offering price of
$ per share, the midpoint of the
price range shown on the cover page of this prospectus.
|
(3) The ratio applicable under
the Exchange Offer has not yet been fixed, but we currently
expect it will be approximately the same as the exchange ratio
applicable to the MedQuist Exchange.
8
Summary
Historical and Unaudited Pro Forma Consolidated Financial
Data
The following table sets forth our summary historical
consolidated financial data for the years ended
December 31, 2007, 2008 and 2009 and as of June 30,
2010 and for the six months ended June 30, 2009 and 2010.
The summary historical consolidated financial data for the years
ended December 31, 2007, 2008 and 2009 have been derived
from our audited consolidated financial statements included
elsewhere in this prospectus. The summary historical
consolidated financial data as of June 30, 2010 and for the
six months ended June 30, 2009 and 2010 have been derived
from our unaudited consolidated financial statements included
elsewhere in this prospectus. We prepared the unaudited
historical information on a basis consistent with that used in
preparing our audited consolidated financial statements, which
reflect all adjustments, consisting of only normal recurring
adjustments, that we consider necessary to present fairly our
financial position and results of operations for the unaudited
periods.
Our summary historical consolidated statements of operations and
other operating data reflect the consolidation of the results of
operations of MedQuist Inc. since August 6, 2008 and
Spheris since April 22, 2010, the respective dates of their
acquisition.
The summary consolidated financial data also sets forth our
unaudited pro forma condensed combined statements of operations
for the year ended December 31, 2009 and the six months
ended June 30, 2010 and our unaudited pro forma condensed
consolidated balance sheet as of June 30, 2010. The
unaudited pro forma condensed combined statements of operations
and the unaudited pro forma condensed consolidated balance sheet
have been derived from the historical consolidated financial
information of us and Spheris, which are included elsewhere in
this prospectus.
The pro forma combined statements of operations and other
operating data for the year ended December 31, 2009 and the
six months ended June 30, 2010 give effect to the following
transactions as if they had occurred on January 1, 2009:
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the Spheris Acquisition and the incurrence by MedQuist Inc. of
$113.6 million of debt to finance the Spheris Acquisition;
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the incurrence by MedQuist Inc. of $285.0 million of
indebtedness under the Senior Secured Credit Facility and Senior
Subordinated Notes, the simultaneous repayment of
$90.0 million of indebtedness under the Acquisition Credit
Facility, the repayment of $13.6 million of indebtedness
under the Acquisition Subordinated Promissory Notes, the payment
of a $176.5 million special dividend to MedQuist
Inc.s stockholders, of which we received
$122.6 million and the noncontrolling stockholders of
MedQuist Inc. received $53.9 million, and the repayment by
us, using the proceeds of such dividend, of $104.1 million
to extinguish our 6% Convertible Notes including a
$7.7 million premium on early prepayment, and
$4.1 million under certain other lines of credit;
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the issuance of 20.3 million shares of our common
stock in exchange for 4.8 million shares of MedQuist
Inc. common stock pursuant to the terms of the Exchange
Agreement with certain noncontrolling stockholders of MedQuist
Inc., assuming the MedQuist Exchange is consummated without any
adjustments, which will increase our ownership in MedQuist Inc.
from 69.5% to 82.5%;
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the issuance of 4.5 million shares of our common stock
pursuant to the Consulting Services Agreement; and
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the issuance of 28.4 million shares of our common stock to
be issued in exchange for 6.7 million shares of MedQuist
Inc. common stock in the Exchange Offer, assuming an exchange
ratio equal to the exchange ratio applicable under the Exchange
Agreement and a full exchange. This would increase our ownership
in MedQuist Inc. from 82.5% to 100%.
|
The pro forma combined statements of operations and other
operating data for the year ended December 31, 2009 and the
six months ended June 30, 2010 do not give effect to the
following:
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the impact on net revenues from volume declines resulting from
Spheris customer terminations prior to the Spheris
Acquisition. The pro forma net revenues for the year ended
December 31, 2009 and for the six months ended
June 30, 2010 include $24.6 million and
$2.3 million, respectively, of net revenues associated with
such terminations; and
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9
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the full impact on Adjusted EBITDA of cost savings and synergies
resulting from the Spheris Acquisition, which we have
implemented since the Spheris Acquisition and expect to yield
$7.0 million of cost savings in the fourth quarter of 2010,
representing an annualized benefit of $28.0 million. Our
results for the six months ended June 30, 2010 reflect $0.9
million of such cost savings.
|
The pro forma balance sheet data as of June 30, 2010 gives
effect to the Corporate Reorganization and the shares of our
common stock issuable pursuant to the Consulting Services
Agreement, as if they occurred as of June 30, 2010.
The pro forma as adjusted balance sheet data as of June 30,
2010 also gives effect to the issuance
of shares of
common stock in this offering at an assumed initial public
offering price of $ per share, the
midpoint of the price range shown on the cover of this
prospectus, after deducting the underwriting discounts and
commissions and estimated offering expenses payable by us as if
such transaction occurred as of June 30, 2010.
Our historical consolidated financial information has been
adjusted in the unaudited pro forma condensed combined financial
information to give effect to pro forma events that are
(1) directly attributable to the Spheris Acquisition, the
Corporate Reorganization, the shares of our common stock
issuable pursuant to the Consulting Services Agreement
(2) factually supportable and (3) with respect to the
statements of operations, expected to have a continuing impact
on the combined results. The pro forma information does not
reflect revenue opportunities and cost savings that may be
realized after the Spheris Acquisition. The pro forma financial
information also does not reflect expenses related to
integration activity that may be incurred by us in connection
with the Spheris Acquisition.
The pro forma data is based upon available information and
certain assumptions that we believe are reasonable. The pro
forma data is for informational purposes only and does not
purport to represent what our results of operations or financial
position actually would have been if such events had occurred on
the dates specified above and does not purport to project the
results of operations or financial position for any future
period or date. The pro forma data should be read in conjunction
with our historical consolidated financial statements, and
related notes included elsewhere in this prospectus as adjusted
for the acquisition of Spheris using the acquisition method of
accounting.
You should read the following summary financial and other data
together with our consolidated financial statements and related
notes included elsewhere in this prospectus and the information
under the sections entitled Capitalization,
Unaudited Pro Forma Condensed Combined Financial
Information, Selected Consolidated Financial and
Other Data and Managements Discussion and
Analysis of Financial Condition and Results of Operations
appearing elsewhere in this prospectus.
10
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|
|
|
|
|
|
|
|
|
|
Historical
|
|
|
Pro Forma
|
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|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
Year
|
|
|
Six Months
|
|
|
|
Years Ended
|
|
|
Six Months Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December 31,
|
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|
June 30,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except for per share amounts)
|
|
|
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
57,694
|
|
|
$
|
193,673
|
|
|
$
|
371,768
|
|
|
$
|
188,539
|
|
|
$
|
200,592
|
|
|
$
|
528,364
|
|
|
$
|
243,963
|
|
Cost of revenues
|
|
|
30,209
|
|
|
|
125,074
|
|
|
|
239,549
|
|
|
|
121,755
|
|
|
|
128,641
|
|
|
|
348,608
|
|
|
|
159,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
27,485
|
|
|
|
68,599
|
|
|
|
132,219
|
|
|
|
66,784
|
|
|
|
71,951
|
|
|
|
179,756
|
|
|
|
83,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Selling, general and administrative
|
|
|
25,137
|
|
|
|
51,243
|
|
|
|
60,632
|
|
|
|
31,764
|
|
|
|
32,706
|
|
|
|
79,725
|
|
|
|
38,869
|
|
Research and development
|
|
|
|
|
|
|
6,099
|
|
|
|
9,604
|
|
|
|
4,796
|
|
|
|
5,593
|
|
|
|
9,604
|
|
|
|
5,785
|
|
Depreciation and amortization
|
|
|
2,915
|
|
|
|
14,906
|
|
|
|
26,977
|
|
|
|
13,610
|
|
|
|
15,068
|
|
|
|
40,737
|
|
|
|
18,910
|
|
Cost of legal proceedings and settlements
|
|
|
|
|
|
|
5,311
|
|
|
|
14,943
|
|
|
|
12,158
|
|
|
|
2,152
|
|
|
|
16,189
|
|
|
|
2,152
|
|
Acquisition related charges
|
|
|
|
|
|
|
|
|
|
|
1,246
|
|
|
|
|
|
|
|
6,045
|
|
|
|
|
|
|
|
|
|
Goodwill impairment charge
|
|
|
|
|
|
|
98,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
|
|
|
|
2,106
|
|
|
|
2,727
|
|
|
|
|
|
|
|
966
|
|
|
|
3,502
|
|
|
|
966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
28,052
|
|
|
|
178,637
|
|
|
|
116,129
|
|
|
|
62,328
|
|
|
|
62,530
|
|
|
|
149,757
|
|
|
|
66,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(567
|
)
|
|
|
(110,038
|
)
|
|
|
16,090
|
|
|
|
4,456
|
|
|
|
9,421
|
|
|
|
29,999
|
|
|
|
17,297
|
|
Interest expense, net
|
|
|
(2,108
|
)
|
|
|
(3,954
|
)
|
|
|
(9,132
|
)
|
|
|
(4,660
|
)
|
|
|
(7,351
|
)
|
|
|
(31,251
|
)
|
|
|
(16,316
|
)
|
Equity in income (loss) of affiliated companies
|
|
|
(105
|
)
|
|
|
66
|
|
|
|
1,933
|
|
|
|
408
|
|
|
|
546
|
|
|
|
1,933
|
|
|
|
546
|
|
Other income
|
|
|
14
|
|
|
|
9
|
|
|
|
11
|
|
|
|
|
|
|
|
108
|
|
|
|
2,136
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and noncontrolling
interests
|
|
|
(2,766
|
)
|
|
|
(113,917
|
)
|
|
|
8,902
|
|
|
|
204
|
|
|
|
2,724
|
|
|
|
2,817
|
|
|
|
1,587
|
|
Income tax provision (benefit)
|
|
|
(113
|
)
|
|
|
(5,398
|
)
|
|
|
1,082
|
|
|
|
639
|
|
|
|
(326
|
)
|
|
|
342
|
|
|
|
(190
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(2,653
|
)
|
|
|
(108,519
|
)
|
|
|
7,820
|
|
|
|
(435
|
)
|
|
|
3,050
|
|
|
|
2,475
|
|
|
|
1,777
|
|
Less: Net (income) loss attributable to noncontrolling interests
|
|
|
57
|
|
|
|
(5,154
|
)
|
|
|
(7,085
|
)
|
|
|
(2,335
|
)
|
|
|
(2,497
|
)
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to CBaySystems Holdings
Limited
|
|
$
|
(2,596
|
)
|
|
$
|
(113,673
|
)
|
|
$
|
735
|
|
|
$
|
(2,770
|
)
|
|
$
|
553
|
|
|
$
|
2,475
|
|
|
$
|
1,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share attributable to CBaySystems
Holdings Limited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.04
|
)
|
|
$
|
(1.13
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.00
|
|
|
$
|
0.01
|
|
Diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(1.13
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.00
|
|
|
$
|
0.01
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
57,929
|
|
|
|
101,669
|
|
|
|
156,116
|
|
|
|
154,991
|
|
|
|
157,705
|
|
|
|
209,326
|
|
|
|
210,915
|
|
Diluted
|
|
|
57,929
|
|
|
|
101,669
|
|
|
|
156,116
|
|
|
|
154,991
|
|
|
|
157,705
|
|
|
|
209,326
|
|
|
|
210,915
|
|
Adjusted EBITDA(1)(2)
|
|
$
|
2,362
|
|
|
$
|
18,886
|
|
|
$
|
60,130
|
|
|
$
|
27,970
|
|
|
$
|
33,760
|
|
|
$
|
91,517
|
|
|
$
|
39,385
|
|
|
|
|
(1)
|
|
See below for reconciliations of
net income (loss) attributable to CBaySystems Holdings Limited
to Adjusted EBITDA.
|
(2)
|
|
Pro forma amounts do not give
effect to (i) the impact on net revenues from volume declines,
resulting from pre-acquisition customer terminations at Spheris,
of $24.6 million and $2.3 million in net revenues for
the year ended December 31, 2009 and the six months ended
June 30, 2010, respectively, and (ii) the full impact of
cost savings and synergies resulting from the Spheris
Acquisition, which we have implemented since the Spheris
Acquisition and expect to yield $7.0 million of cost
savings in the fourth quarter of 2010, representing an
annualized benefit of $28.0 million. Our results for the
six months ended June 30, 2010 reflect $0.9 million of such
cost savings. See Unaudited Pro Forma Condensed Combined
Financial Information.
|
11
The following table sets forth certain historical financial and
operating data for us, MedQuist Inc. and Spheris.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
Six Months
|
|
|
|
Years Ended
|
|
|
Six Months Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except for per share amounts)
|
|
|
Other Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated(1)
|
|
$
|
57,694
|
|
|
$
|
193,673
|
|
|
$
|
371,768
|
|
|
$
|
188,539
|
|
|
$
|
200,592
|
|
|
$
|
528,364
|
|
|
$
|
243,963
|
|
MedQuist Inc.
|
|
|
340,342
|
|
|
|
326,853
|
|
|
|
307,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spheris
|
|
|
200,392
|
|
|
|
182,843
|
|
|
|
156,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated(1)
|
|
$
|
2,362
|
|
|
$
|
18,886
|
|
|
$
|
60,130
|
|
|
$
|
27,970
|
|
|
$
|
33,760
|
|
|
$
|
91,517
|
|
|
$
|
39,385
|
|
MedQuist Inc.
|
|
|
3,480
|
|
|
|
32,337
|
|
|
|
55,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spheris
|
|
|
28,227
|
|
|
|
26,317
|
|
|
|
30,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Pro forma amounts do not give
effect to (i) the impact on net revenues from volume declines,
resulting from pre-acquisition customer terminations at Spheris,
of $24.6 million and $2.3 million in net revenues for
the year ended December 31, 2009 and the six months ended
June 30, 2010, respectively, and (ii) the full impact of
cost savings and synergies resulting from the Spheris
Acquisition, which we have implemented since the Spheris
Acquisition and expect to yield $7.0 million of cost
savings in the fourth quarter of 2010, representing an
annualized benefit of $28.0 million. Our results for the
six months ended June 30, 2010 reflect $0.9 million of such
cost savings. See Unaudited Pro Forma Condensed Combined
Financial Information.
|
(2)
|
|
See below for reconciliations of
net income (loss) to Adjusted EBITDA.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
As Adjusted
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Balance Sheet Data
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Cash and cash equivalents(a)
|
|
$
|
22,457
|
|
|
$
|
25,889
|
|
|
|
|
|
Working capital(b)
|
|
|
6,753
|
|
|
|
7,357
|
|
|
|
|
|
Total assets
|
|
|
380,151
|
|
|
|
391,291
|
|
|
|
|
|
Long term debt, including current portion of debt
|
|
|
214,092
|
|
|
|
294,973
|
|
|
|
|
|
Total equity
|
|
|
74,934
|
|
|
|
7,355
|
|
|
|
|
|
|
|
|
(a)
|
|
Pro forma as adjusted amount gives
effect to a $5.0 million payment to SAC PCG in connection
with the Corporate Reorganization.
|
(b)
|
|
Working capital is defined as total
current assets, excluding cash and cash equivalents, minus total
current liabilities, excluding current portion of debt.
|
12
The following table presents a reconciliation of net income
(loss) attributable to CBaySystems Holdings Limited to Adjusted
EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
Six Months
|
|
|
|
Years Ended
|
|
|
Six Months Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Net income (loss) attributable to CBaySystems Holdings Limited
|
|
$
|
(2,596
|
)
|
|
$
|
(113,673
|
)
|
|
$
|
735
|
|
|
$
|
(2,770
|
)
|
|
$
|
553
|
|
|
$
|
2,475
|
|
|
$
|
1,788
|
|
Net income (loss) attributable to noncontrolling interests
|
|
|
(57
|
)
|
|
|
5,154
|
|
|
|
7,085
|
|
|
|
2,335
|
|
|
|
2,497
|
|
|
|
|
|
|
|
(11
|
)
|
Income tax provision (benefit)(a)
|
|
|
(113
|
)
|
|
|
(5,398
|
)
|
|
|
1,082
|
|
|
|
639
|
|
|
|
(326
|
)
|
|
|
342
|
|
|
|
(190
|
)
|
Interest expense, net
|
|
|
2,108
|
|
|
|
3,954
|
|
|
|
9,132
|
|
|
|
4,660
|
|
|
|
7,351
|
|
|
|
31,251
|
|
|
|
16,316
|
|
Depreciation and amortization
|
|
|
2,915
|
|
|
|
14,906
|
|
|
|
26,977
|
|
|
|
13,610
|
|
|
|
15,068
|
|
|
|
40,737
|
|
|
|
18,910
|
|
Cost of legal proceedings and settlements
|
|
|
|
|
|
|
5,311
|
|
|
|
14,943
|
|
|
|
12,158
|
|
|
|
2,152
|
|
|
|
16,189
|
|
|
|
2,152
|
|
Acquisition related charges
|
|
|
|
|
|
|
5,620
|
|
|
|
1,246
|
|
|
|
|
|
|
|
6,045
|
|
|
|
|
|
|
|
|
|
Goodwill impairment charge
|
|
|
|
|
|
|
98,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
|
|
|
|
2,106
|
|
|
|
2,727
|
|
|
|
|
|
|
|
966
|
|
|
|
3,502
|
|
|
|
966
|
|
Equity in (income) loss of affiliated companies
|
|
|
105
|
|
|
|
(66
|
)
|
|
|
(1,933
|
)
|
|
|
(408
|
)
|
|
|
(546
|
)
|
|
|
(1,933
|
)
|
|
|
(546
|
)
|
Receivable write-offs, asset impairment charges, severance
charges and accrual reversals(b)
|
|
|
|
|
|
|
2,000
|
|
|
|
(1,864
|
)
|
|
|
(2,254
|
)
|
|
|
|
|
|
|
(1,046
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(c)
|
|
$
|
2,362
|
|
|
$
|
18,886
|
|
|
$
|
60,130
|
|
|
$
|
27,970
|
|
|
$
|
33,760
|
|
|
$
|
91,517
|
|
|
$
|
39,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
We had $130.0 million of
federal net operating loss carry forwards as of
December 31, 2009 and will record approximately
$30.0 million of annual tax amortization related to
intangible assets, including goodwill, that will reduce future
taxable income. Due to the existence of federal net operating
loss carry forwards and the impact of tax amortization related
to intangible assets, including goodwill, cash taxes paid
(refunded) were $84,000, $160,000, $796,000 for the years ended
December 31, 2007, 2008 and 2009, respectively, and
$497,000 and $(478,000) for the six months ended June 30,
2009 and 2010, respectively.
|
|
(b)
|
|
Includes the write-off of amounts
due from an unconsolidated affiliate of Spheris, an impairment
charge to write-off the balance of an investment and the
reversal of certain accruals, related to litigation claims, as a
result of the expiration of the applicable statute of
limitations.
|
|
(c)
|
|
Pro forma amounts do not give
effect to (i) the impact on net revenue from volume declines,
resulting from pre-acquisition customer terminations at Spheris
prior to the Spheris Acquisition, of $24.6 million and
$2.3 million in net revenues for the year ended
December 31, 2009 and the six months ended June 30,
2010, respectively, and (ii) the full impact of cost savings and
synergies resulting from the Spheris Acquisition, which we have
implemented since the Spheris Acquisition and expect to yield
$7.0 million of cost savings in the fourth quarter of 2010,
representing an annualized benefit of $28.0 million. Our
results for the six months ended June 30, 2010 reflect $0.9
million of such cost savings.
|
13
The following table presents a reconciliation of net income
(loss) to Adjusted EBITDA for MedQuist Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Net income (loss)
|
|
$
|
(15,206
|
)
|
|
$
|
(68,795
|
)
|
|
$
|
23,291
|
|
Income tax provision (benefit)
|
|
|
2,339
|
|
|
|
(16,513
|
)
|
|
|
1,975
|
|
Interest (income) expense, net
|
|
|
(8,366
|
)
|
|
|
(2,438
|
)
|
|
|
134
|
|
Depreciation and amortization
|
|
|
16,499
|
|
|
|
17,504
|
|
|
|
15,672
|
|
Restructuring and acquisition-related charges
|
|
|
2,756
|
|
|
|
2,055
|
|
|
|
2,727
|
|
Acquisition related charges
|
|
|
|
|
|
|
|
|
|
|
1,263
|
|
Cost of legal proceedings and settlements, net
|
|
|
6,083
|
|
|
|
19,738
|
|
|
|
14,843
|
|
Goodwill impairment charge
|
|
|
|
|
|
|
82,233
|
|
|
|
|
|
Equity in income of affiliated companies(a)
|
|
|
(625
|
)
|
|
|
(236
|
)
|
|
|
(2,015
|
)
|
Other income and accrual reversals(b)
|
|
|
|
|
|
|
(1,211
|
)
|
|
|
(2,254
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
3,480
|
|
|
$
|
32,337
|
|
|
$
|
55,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Represents proportionate share of
earnings from our equity method investment in A-Life Medical,
Inc., which is expected to be sold in November 2010 pursuant to
an executed agreement.
|
|
(b)
|
|
Represents the reversal of certain
accruals relating to certain litigation claims as a result of
the expiration of the applicable statute of limitations.
|
The following table presents a reconciliation of net loss to
Adjusted EBITDA for Spheris:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Net loss
|
|
$
|
(11,361
|
)
|
|
$
|
(19,179
|
)
|
|
$
|
(187,383
|
)
|
Income tax provision (benefit)
|
|
|
(5,856
|
)
|
|
|
3,870
|
|
|
|
(14,571
|
)
|
Interest expense, net
|
|
|
21,171
|
|
|
|
19,104
|
|
|
|
17,439
|
|
Depreciation and amortization
|
|
|
24,273
|
|
|
|
21,613
|
|
|
|
7,230
|
|
Operational restructuring charges
|
|
|
|
|
|
|
484
|
|
|
|
775
|
|
Transaction charge
|
|
|
|
|
|
|
|
|
|
|
6,961
|
|
Cost of legal proceedings and settlements
|
|
|
|
|
|
|
425
|
|
|
|
1,246
|
|
Goodwill impairment charge
|
|
|
|
|
|
|
|
|
|
|
198,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
28,227
|
|
|
$
|
26,317
|
|
|
$
|
30,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
Adjusted EBITDA is a metric used by management to measure
operating performance. Adjusted EBITDA is defined as net income
(loss) attributable to CBaySystems Holdings Limited, MedQuist
Inc. or Spheris, as applicable, plus net income (loss)
attributable to noncontrolling interests, income taxes, interest
expense, depreciation and amortization, cost of legal
proceedings and settlements, acquisition related charges,
goodwill impairment charge, restructuring charges, equity in
income (loss) of affiliated company, asset impairment charges,
severance costs, and certain unusual or nonrecurring items. We
present Adjusted EBITDA as a supplemental performance measure
because we believe it facilitates operating performance
comparisons from period to period and company to company by
backing out the following:
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potential differences caused by variations in capital structures
(affecting interest expense, net), tax positions (such as the
impact on periods or companies for changes in effective tax
rates), the age and book depreciation of fixed assets (affecting
depreciation expense);
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the impact of non-cash charges, such as goodwill impairment
charges and asset impairment charges; and
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the impact of unusual expenses or events, such as acquisition
related charges, restructuring charges, severance costs and
certain unusual or nonrecurring items.
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Because Adjusted EBITDA facilitates internal comparisons of
operating performance on a more consistent basis, we also use
Adjusted EBITDA in measuring our performance relative to that of
our competitors. Adjusted EBITDA is not a measurement of our
financial performance under GAAP and should not be considered as
an alternative to net income, operating income or any other
performance measures derived in accordance with GAAP or as an
alternative to cash flow from operating activities as measures
of our profitability or liquidity. We understand that although
Adjusted EBITDA is frequently used by securities analysts,
lenders and others in their evaluation of companies, Adjusted
EBITDA has limitations as an analytical tool, and you should not
consider it in isolation, or as a substitute for analysis of our
results as reported under GAAP. Some of these limitations are:
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Adjusted EBITDA does not reflect our cash expenditures or future
requirements for capital expenditures or contractual commitments;
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Adjusted EBITDA does not reflect changes in, or cash
requirements for, our working capital needs;
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although depreciation is a non-cash charge, the assets being
depreciated will often have to be replaced in the future, and
Adjusted EBITDA does not reflect any cash requirements for such
replacements; and
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other companies in our industry may calculate Adjusted EBITDA
differently than we do, limiting its usefulness as a comparative
measure.
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15
Risk
Factors
Investing in our common stock involves a high degree of risk.
You should carefully consider the following risk factors, as
well as other information in this prospectus, before deciding
whether to invest in shares of our common stock. The occurrence
of any of the following risks, or other risks that are currently
unknown or unforeseen by us, could harm our business, financial
condition, results of operations or growth prospects. In that
case, the trading price of our common stock could decline, and
you may lose all or part of your investment.
Risks Related to
Our Business
We
compete with many others in the market for clinical
documentation solutions which may result in lower prices for our
services, reduced operating margins and an inability to maintain
or increase our market share.
We compete with other outsourced clinical documentation
solutions companies in a highly fragmented market that includes
national, regional and local service providers, as well as
service providers with global operations. These companies have
services that are similar to ours, and certain of these
companies have substantially larger or have significantly
greater financial resources than we do. We also compete with the
in-house medical transcription staffs of our customers and
potential customers. There can be no assurance that we will be
able to compete effectively against our competitors or timely
implement new products and services. Many of our competitors
attempt to differentiate themselves by offering lower priced
alternatives to our outsourced medical transcription services
and customers could elect to utilize less comprehensive
solutions than the ones we offer due to the lower costs of those
competitive products. Some competition may even be willing to
accept less profitable business in order to grow revenue.
Increased competition and cost pressures affecting the
healthcare markets in general may result in lower prices for our
services, reduced operating margins and the inability to
maintain or increase our market share.
Our
business is dependent upon the continued demand for
transcription services. If EHR companies produce alternatives to
medical transcription that reduce the need for transcription,
the demand for our solutions could be reduced.
EHR companies solutions for the collection of clinical
data typically require physicians to directly enter and organize
patient information through
point-and-click
templates which attempt to reduce or eliminate the need for
transcription. A second alternative to conventional
transcription involves a physician dictating a record of patient
encounters and receiving a speech-recognized draft of their
dictation, which the physician can self-edit. There is
significant uncertainty and risk as to the demand for, and
market acceptance of, these solutions for the creation of
electronic clinical documentation. In the event that these and
other solutions are successful and gain wide acceptance, the
demand for our solutions could be reduced and our business,
financial condition and results of operations could be adversely
affected.
Our
growth is dependent on the willingness of new customers to
outsource and adopt our technology platforms.
We plan to grow, in part, by capitalizing on perceived market
opportunities to provide our services to new customers. These
new customers must be willing to outsource functions which may
otherwise have been performed within their organizations, adopt
new technologies and incur the time and expense needed to
integrate those technologies into their existing systems. For
example, the up-front cost and time involved in changing medical
transcription providers or in converting from an in-house
medical transcription department to an outsourced provider may
be significant. Many customers may prefer to remain with their
current provider or keep their transcription in-house rather
than invest the time and resources required for the
implementation of a new system. Also, as the maintenance of
accurate medical records is a critical element of a healthcare
providers ability to deliver quality care to its patients
and to receive proper and timely reimbursement for the services
it renders, potential customers may be reluctant to outsource or
change providers of such an important function.
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Our
success will depend on our ability to support existing
technologies as well as to adopt and integrate new technology
into our workflow platforms.
Our ability to remain competitive in the clinical documentation
industry is based, in part, on our ability to develop, utilize
and support technology in the services and solutions that we
provide to our customers. As our customers advance
technologically, we must be able to effectively integrate our
solutions with their systems and provide advanced data
collection technology. We also may need to develop technologies
to provide service systems comparable to those of our
competitors as they develop new technology. If we are unable to
effectively develop and integrate new technologies, we may not
be able to compete effectively with our competitors. In
addition, if the cost of developing and integrating new
technologies is high, we may not realize our expected return on
investment.
Technology
innovations in the markets that we serve may create alternatives
to our products and result in reduced sales.
Technology innovations to which our current and potential
customers might have access could reduce or eliminate their need
for our products. A new or other disruptive technology that
reduces or eliminates the use of one or more of our products
could negatively impact the sale of these products. Our failure
to develop, introduce or enhance products able to compete with
new technologies in a timely manner could have an adverse effect
on our business, results of operation and financial condition.
Many of
our customer contracts are terminable at will by our customers,
and our ability to sustain and grow profitable operations is
dependent upon the ability to retain customers.
Many of our contracts can be terminated at will by our
customers. If a significant number of our customers were to
cancel or materially change their commitments with us, we could
have significantly decreased revenue, which would harm our
business, operating results and financial condition. We must,
therefore, engage in continual operational support and sales
efforts to maintain revenue stability and future growth with
these customers. If a significant number of our customers
terminate or fail to renew their contracts with us, our business
could be negatively impacted if additional business is not
obtained to replace the business which was lost.
Customer retention is largely dependent on providing quality
service at competitive prices. Customer retention may be
impacted by events outside of our control, such as changes in
customer ownership, management, financial condition and
competitors sales efforts. If we experience a higher than
expected rate of customer attrition the resulting loss of
business could adversely affect results of operations and
financial condition.
Our
indebtedness could adversely affect our ability to raise
additional capital to fund our operations and limit our ability
to pursue our growth strategy or to react to changes in the
economy or our industry, and our debt obligations include
restrictive covenants which may restrict our operations or
otherwise adversely affect us.
After the consummation of the Recapitalization Transactions, we
will have approximately $295.0 million of indebtedness
outstanding, consisting of $200.0 million of Term Loan debt
under our Senior Secured Credit Facility, $85.0 million of
Senior Subordinated Notes and other indebtedness consisting of
capital leases and borrowings under other credit facilities, and
we may incur additional indebtedness in the future. This
indebtedness could have important negative consequences to our
business, including:
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increasing the difficulty of our ability to make payments on our
outstanding debt;
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increasing our vulnerability to general economic and industry
conditions because our debt payment obligations may limit our
ability to use our cash to respond to or defend against changes
in the industry or the economy;
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requiring a substantial portion of our cash flow from operations
to be dedicated to the payment of principal and interest on our
indebtedness, therefore reducing our ability to use our cash
flow to fund our operations, capital expenditures and future
business opportunities;
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limiting our ability to obtain additional financing for working
capital, capital expenditures, debt service requirements,
acquisitions and general corporate or other purposes;
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limiting our ability to pursue our growth strategy; and
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placing us at a disadvantage compared to our competitors who are
less leveraged and may be better able to use their cash flow to
fund competitive responses to changing industry, market or
economic conditions.
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In addition, under our debt financing agreements, we must abide
by certain financial and other restrictive covenants that, among
other things, require us to maintain a minimum consolidated
interest coverage ratio, a maximum total leverage ratio and a
maximum consolidated senior leverage ratio. Upon a breach of any
of the covenants in our debt financing agreements, the lenders
could declare us to be in default and could further require any
outstanding borrowings to be immediately due and payable, and
terminate all commitments to extend further credit.
We are
dependent on third party speech recognition software
incorporated in certain of our technologies, and the inability
to maintain, support or enhance such third party software over
time could harm our business.
We license speech recognition software from third parties,
including from competitors, that we incorporate into several of
our key products and solutions. Our ability to continue to sell
and support these products and solutions depends on continued
support from these licensors. The loss of these licenses could
adversely impact our business until we identify, license and
integrate, or develop and integrate equivalent software. There
can be no assurance that such third party licensors will
continue to invest the appropriate levels of resources in the
software to maintain and enhance the capabilities of the
software and if such third party licensors do not continue to
develop their products, the development of our solutions to meet
the requirements of our customers and potential customers could
be adversely affected.
Our use
of open source and third-party software could impose
unanticipated conditions or restrictions on our ability to
commercialize our solutions.
We incorporate open source software into our workflow solutions
platforms and other software solutions. Open source software is
accessible, usable and modifiable by anyone, provided that users
and modifiers abide by certain licensing requirements. Under
certain conditions, the use of some open source code to create
derivative code may obligate us to make the resulting derivative
code available to others at no cost. The circumstances under
which our use of open source code would compel us to offer
derivative code at no cost are subject to varying judicial
interpretations, and we cannot guarantee that a court would not
require certain of our core technology be made available as open
source code. The use of such open source code may also
ultimately require us to take remedial action, such as replacing
certain code used in our products, paying a royalty to use some
open source code, making certain proprietary source code
available to others or discontinuing certain products, any of
which may divert resources away from our development efforts.
We may also find that we need to incorporate certain proprietary
third-party technologies, including software programs, into our
products in the future. Licenses to relevant third-party
technologies may not be available to us on commercially
reasonable terms, or at all. Therefore, we could face delays in
product releases until equivalent technology can be identified,
licensed or developed and integrated into our current products.
Such delays could materially adversely affect our business,
operating results and financial condition.
Our
ability to expand our business depends on our ability to
effectively manage our domestic and offshore production
capacity, which we may not be able to do.
Our success depends, in part, upon our ability to effectively
manage our domestic and offshore production capacity, including
our ability to attract and retain qualified MTs and MEs who can
provide accurate medical transcription. We must also effectively
manage our offshore transcription labor pool, which is currently
located in India. If the productivity of our Indian employees
does not outpace any increase in wages, our profits could
suffer. Because medical transcription is a skilled position in
which experience is valuable, we require that our MTs and MEs
have substantial experience or receive substantial training
before being hired. Competition may force us to increase the
compensation and benefits paid to our MTs and MEs, which could
reduce our operating margins and profitability.
18
If we
fail to comply with contractual obligations and applicable laws
and regulations governing the handling of patient identifiable
medical information, we could suffer material losses or be
adversely affected by exposure to material penalties and
liabilities.
As part of the operation of our business, our customers provide
us with certain patient identifiable medical information.
Although many regulatory and governmental requirements do not
directly apply to our operations, we and our hospital and other
healthcare provider customers must comply with a variety of
requirements related to the handling of patient information,
including laws and regulations protecting the privacy,
confidentiality and security of protected health information, or
PHI. Most of our customers are covered entities under the Health
Insurance Portability and Accountability Act of 1996, or HIPAA,
and, in many of our relationships, we function as a business
associate. The provisions of HIPAA, require our customers to
have business associate agreements with us under which we are
required to appropriately safeguard the PHI we create or receive
on their behalf. Further, we and our customers are required to
comply with HIPAA security regulations that require us and them
to implement certain administrative, physical and technical
safeguards to ensure the confidentiality, integrity and
availability of electronic PHI, or EPHI. We are required by
regulation and contract to protect the security of EPHI that we
create, receive, maintain or transmit for our customers
consistent with these regulations. To comply with our regulatory
and contractual obligations, we may have to reorganize processes
and invest in new technologies. We also are required to train
personnel regarding HIPAA requirements. If we, or any of our
MTs, MEs or subcontractors, are unable to maintain the privacy,
confidentiality and security of the PHI that is entrusted to us,
we and/or our customers could be subject to civil and criminal
fines and sanctions and we could be found to have breached our
contracts with our customers.
We are bound by business associate agreements with covered
entities that require us to use and disclose PHI in a manner
consistent with HIPAA in providing services to those covered
entities. The HITECH Act, which was enacted into law on
February 17, 2009 as part of the American Recovery and
Reinvestment Act of 2009, or ARRA, enhances and strengthens the
HIPAA privacy and security standards and makes certain
provisions applicable to business associates of
covered entities. As of February 17, 2010, some provisions
of HIPAA apply directly to us. In addition, the HITECH Act
creates new security breach notification requirements. The
direct applicability of the new HIPAA Privacy and Security
provisions will require us to incur additional costs and may
restrict our business operations. In addition, these new
provisions will result in additional regulations and guidance
issued by the United States Department of Health and Human
Services and will be subject to interpretation by various courts
and other governmental authorities, thus creating potentially
complex compliance issues for us and our customers.
As of February 17, 2010, we are directly subject to
HIPAAs criminal and civil penalties for breaches of our
privacy and security obligations.
Security
and privacy breaches in our systems may damage customer
relations and inhibit our growth.
The uninterrupted operation of our hosted solutions and the
confidentiality and security of third-party information is
critical to our business. Any failures or perceived failures in
our security and privacy measures could have a material adverse
effect on our financial position and results of operations. If
we are unable to protect, or our customers perceive that we are
unable to protect, the security and privacy of our electronic
information, our growth could be materially adversely affected.
A security or privacy breach may:
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cause our customers to lose confidence in our solutions;
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harm our reputation;
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expose us to liability; and
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increase our expenses from potential remediation costs.
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While we believe that we use proven applications designed for
data security and integrity to process electronic transactions,
there can be no assurance that our use of these applications
will be sufficient to address changing market conditions or the
security and privacy concerns of existing and potential
customers.
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Our
business depends on the reliable and secure operation of our
computer hardware, software, Internet applications and data
centers.
A substantial portion of our business involves the transfer of
large amounts of data to and from our workflow platforms. These
workflow platforms, and their underlying technologies, are
designed to operate and to be accessible by our customers
24 hours a day, seven days a week. Network and information
systems, the Internet and other technologies are critical to our
business activities. We have periodically experienced short term
outages with our workflow platforms that have not significantly
disrupted our business. However, a long term outage could
adversely affect our ability to provide service to our customers.
We also perform data center
and/or
hosting services for certain customers, including the storage of
critical patient and administrative data. Failure of public
power and backup generators, impairment of telecommunications
lines, a concerted denial of service cyber attack,
damage (environmental, accidental, intentional or pandemic) to
the buildings, the equipment inside the buildings housing our
data centers, the customer data contained therein
and/or the
personnel trained to operate such facilities could cause a
disruption in operations and negatively impact customers who
depend on us for data center and system support services. Any
interruption in operations at our data centers
and/or
customer support facilities could damage our reputation, cause
us to lose existing clients, hurt our ability to obtain new
customers, result in revenue loss, create potential liabilities
for our customers and us and increase insurance and other
operating costs.
Recent
and proposed legislation and possible negative publicity may
impede our ability to utilize offshore production
capabilities.
Certain state laws that have recently been enacted and bills
introduced in recent sessions of the U.S. Congress seek to
restrict the transmission of personally identifiable information
regarding a U.S. resident to any foreign affiliate,
subcontractor or unaffiliated third party without adequate
privacy protections or without providing notice of the
transmission and an opportunity to opt out. Some of the
proposals would require patient consent. If enacted, these
proposed laws would impose liability on healthcare businesses
arising from the improper sharing or other misuse of personally
identifiable information. Some proposals would create a private
civil cause of action that would allow an injured party to
recover damages sustained as a result of a violation of the new
law. A number of states have also considered, or are in the
process of considering, prohibitions or limitations on the
disclosure of medical or other information to individuals or
entities located outside of the U.S. Further, as a result
of concerns regarding the possible misuse of personally
identifiable information, some of our customers have
contractually limited our ability to use MTs and MEs located
outside of the U.S. The effect of these proposals would be
to limit our ability to utilize our lower-cost offshore
production facilities for affected customers, which could
adversely affect our operating margins.
Any
change in legislation, regulation or market practices in the
United States affecting healthcare or healthcare insurance may
materially adversely affect our business and results of
operations.
Over the past twenty years the U.S. healthcare industry has
experienced a variety of regulatory and market driven changes to
how it is operated and funded. Further changes, whether by
government policy shift, insurance company changes or otherwise,
may happen, and any such changes may adversely affect the
U.S. healthcare information and services market. As
business process outsourcing and off-shoring have
grown in recent years, concerns have also grown about the impact
of these phenomena on jobs in the United States. These concerns
could drive government policy in a way which is disadvantageous
to us. Further, if government regulation or market practices
leads to fewer individuals seeking medical treatment, we could
experience a decline in our processed volumes.
Our
business, financial condition and results of operations could be
adversely affected by the political and economic conditions in
India.
A significant portion of our operations is located in India.
Multiple factors relating to our Indian operations could have a
material adverse effect on our business, financial condition and
results of operations. These factors include:
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changes in political, regulatory, legal or economic conditions;
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governmental actions, such as restrictions on the transfer or
repatriation of funds and foreign investments;
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civil disturbances, including terrorism or war;
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political instability;
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public health emergencies;
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changes in employment practices and labor standards;
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local business and cultural factors that differ from our
customary standards and practices; and
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changes in tax laws.
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In addition, the Indian economy may differ favorably or
unfavorably from other economies in several respects, including
the growth rate of GDP, the rate of inflation, resource
self-sufficiency and balance of payments position. The Indian
government has traditionally exercised and continues to exercise
a significant influence over many aspects of the Indian economy.
Further actions or changes in policy, including taxation, of the
Indian central government or the respective Indian state
governments could have a significant effect on the Indian
economy, which could adversely affect private sector companies,
market conditions and the success of our operations.
U.S. and Indian transfer pricing regulations require that
any international transactions involving associated enterprises
are undertaken at an arms length price. Applicable income
tax authorities review our tax returns and if they determine
that the transfer prices we have applied are not appropriate, we
may incur increased tax liabilities, including accrued interest
and penalties, which would cause our tax expense to increase,
possibly materially, thereby materially reducing our
profitability and cash flows. Indian tax authorities reviewed
our transfer pricing practices at Spheris India Pvt. Ltd. for
tax years ended March 2004 and 2005, prior to our ownership of
Spheris, and concluded that the transfer price was not at
arms length. They assessed additional taxes for these
years, which we have paid or fully reserved. However, we
continue to dispute this assessment and the matter is currently
under appeal.
We are
exposed to fluctuations of the value of the Indian rupee against
the U.S. dollar, which could adversely affect our
operations.
Although our accounts are prepared in U.S. dollars, much of our
operations are carried out in India with payments to staff and
suppliers made in Indian Rupees. The exchange rate between the
Indian Rupee and the U.S. dollar has changed substantially and
could fluctuate in the future. Movements in the rate of exchange
between the Indian Rupee and the U.S. dollar could result in
increases or decreases in our costs and earnings, and may also
affect the book value of our assets located outside the United
States and the amount of our equity.
We are
highly dependent on certain key personnel, and the loss of any
or all of these key personnel may have an adverse impact upon
future performance.
Our operations and future success are dependent upon the
existence and expertise in this sector of certain key personnel.
The loss of services of any of these individuals for any reason
or our inability to attract suitable replacements would have a
material adverse effect on the financial condition of our
business and operations.
We have
grown, and may continue to grow, through acquisitions, which
could dilute existing stockholders and could involve substantial
integration risks.
As part of our business strategy, we have in the past acquired,
and expect to continue to acquire, other businesses and
technologies. We may issue equity securities for future
acquisitions, which would dilute existing stockholders, perhaps
significantly depending on the terms of the acquisition. We may
also incur additional debt in connection with future
acquisitions, which may place additional restrictions on the
ability to operate the business. Furthermore, prior acquisitions
have required substantial integration and management efforts.
Acquisitions involve a number of risks, including:
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difficulty in integrating the operations and personnel of the
acquired businesses, including different and complex accounting
and financial reporting systems;
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potential disruption of ongoing business and distraction of
management;
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potential difficulty in successfully implementing, upgrading and
deploying in a timely and effective manner new operational
information systems and upgrades of finance and accounting
systems;
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difficulty in incorporating acquired technology and rights into
products and technology;
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unanticipated expenses and delays in completing acquired
development projects and technology integration;
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management of geographically remote offices and operations;
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impairment of relationships with partners and customers;
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customers delaying purchases or seeking concessions pending
resolution of integration between existing and newly acquired
services or technology platforms;
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entering markets or types of businesses in which management has
limited experience; and
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potential loss of customers or key employees of the acquired
company.
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As a result of these and other risks, we may not realize
anticipated benefits from acquisitions. Any failure to achieve
these benefits or failure to successfully integrate acquired
businesses and technologies could materially and adversely
affect our business and results of operations.
We will
be subject to additional regulatory compliance requirements,
including section 404 of the Sarbanes-Oxley Act of 2002, as
a result of this offering. If we fail to maintain an effective
system of internal controls, our reputation and our business
could be harmed.
As a U.S. public company, our ongoing compliance with various
rules and regulations, including the Sarbanes-Oxley Act of 2002,
will increase our legal and finance compliance costs and will
make some activities more time-consuming and costly. These rules
and requirements may be modified, supplemented or amended from
time to time. Implementing these changes may take a significant
amount of time and may require specific compliance training of
our personnel. For example, Section 404 of the
Sarbanes-Oxley Act requires that our management report on, and
our independent auditors attest to, the effectiveness of our
internal control over financial reporting in our annual reports
filed with the SEC. Section 404 compliance may divert
internal resources and will take a significant amount of time
and effort to complete. We may not be able to successfully
complete the procedures and certification and attestation
requirements of Section 404 by the time we will be required
to do so. If we fail to do so, or if in the future our Chief
Executive Officer, Chief Financial Officer or independent
registered public accounting firm determines that our internal
controls over financial reporting are not effective as defined
under Section 404, we could be subject to sanctions or
investigations by The NASDAQ Global Market, the SEC, or other
regulatory authorities. As a result, investor perceptions of our
company may suffer, and this could cause a decline in the market
price of our stock. Irrespective of compliance with these rules
and regulations, including the requirements under the
Sarbanes-Oxley Act, any failure of our internal controls could
have a material adverse effect on our stated results of
operations and harm our business and reputation. If we are
unable to implement these changes effectively or efficiently, it
could harm our operations, financial reporting or financial
results and could result in an adverse opinion on internal
controls from our independent auditors.
The
historical and unaudited pro forma financial information
included elsewhere in this prospectus may not be representative
of our results as a combined company after the Spheris
Acquisition, and accordingly, you have limited financial
information on which to evaluate the combined company and your
investment decision.
We and Spheris operated as separate companies prior to the
Spheris Acquisition. We have had no prior history as a combined
company and our operations have not previously been managed on a
combined basis. The pro forma financial information included
elsewhere in this prospectus, which was prepared in accordance
with Article 11 of the SECs
Regulation S-X,
is presented for informational purposes only and is not
necessarily indicative of the financial position or results of
operations that would have actually occurred had the Spheris
Acquisition been completed at or as of the dates indicated, nor
is it indicative of the future operating results or financial
position of the combined company. The unaudited pro forma
condensed combined consolidated statement of operations does not
reflect future events that may occur after the Spheris
Acquisition, including the potential realization of operating
cost savings (synergies) or restructuring activities or other
costs related to the planned integration of Spheris, and do not
consider potential impacts of current market conditions on
revenues, expense efficiencies or asset dispositions. The pro
forma financial information presented in this prospectus is
based in part on certain
22
assumptions regarding the Spheris Acquisition that we believe
are reasonable under the circumstances. We cannot assure you
that our assumptions will prove to be accurate over time.
Our
ability to use our net operating loss carryforwards may be
limited.
As of December 31, 2009, we had approximately
$130.0 million of federal net operating loss, or NOL,
carryforwards to offset future taxable income, which will begin
to expire in 2026 if not utilized and approximately
$250.0 million of state NOLs. Under the relevant federal
and state tax provisions currently in effect, certain
substantial cumulative changes in our ownership may further
limit the amount of NOL carryforwards that can be utilized
annually in the future to offset taxable income.
Section 382 of the Internal Revenue Code of 1986, as
amended, or the Code, imposes limitations on a companys
ability to use NOL carryforwards if such company experiences a
more-than-50-percent ownership change, or an ownership change,
over a three-year testing period. We believe that, as a result
of this offering or as a result of future issuances of capital
stock, it is possible that such an ownership change may occur.
Although we do not currently anticipate a significant limitation
as a result of an ownership change in connection with this
offering, if we experience an ownership change in connection
with or subsequent to this offering, our ability to use our
United States federal NOL carryforwards in any future periods
may be restricted. If we are limited in our ability to use our
NOL carryforwards, we will pay more taxes than if we were able
to utilize such NOL carryforwards fully. As a result, any
inability to use our NOL carryforwards could adversely affect
our financial condition and results of operations.
We may
not own 100% of the stock of certain of our
subsidiaries.
Unless the MedQuist Exchange closes and the Exchange Offer is
completed at the highest acceptance level, we will not wholly
own MedQuist Inc., and our ability to gain 100% ownership of
MedQuist Inc. could be adversely affected by provisions of
New Jersey corporate law that limit certain business
combinations between corporations such as MedQuist Inc.
organized in New Jersey and their significant shareholders.
If we do not wholly own MedQuist Inc., our interests in MedQuist
Inc. could conflict with the interests of MedQuist Inc.s
remaining noncontrolling stockholders. Also, MedQuist Inc. may
need to seek the consent of its noncontrolling stockholders
and/or independent members of its board of directors in order to
take certain actions, and those consents may not be forthcoming.
Our costs could also be adversely affected by our inability to
fully integrate MedQuist Inc. into our consolidated operations
and management structure.
Risks Related to
Our Common Stock
Our stock
price may fluctuate significantly.
An active U.S. public market for our common stock may not
develop or be sustained after the completion of this offering
and while our stock is currently listed on the Alternative
Investment Market of the London Stock Exchange, or AIM, we
intend to delist from AIM upon the completion of this offering
or shortly thereafter. We will negotiate and determine the
offering price of the shares offered hereby with the
underwriters based on several factors. This price may vary from
the market price of our common stock after this offering. You
may be unable to sell your shares of common stock at or above
the initial offering price. The stock market, particularly in
recent years, has experienced significant volatility, and the
volatility of stocks often does not relate to the operating
performance of the companies represented by the stock. Factors
that could cause volatility in the market price of our common
stock include:
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market conditions affecting our customers businesses,
including the level of mergers and acquisitions activity;
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the loss of any major customers or the acquisition of new
customers for our services;
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announcements of new services or functions by us or our
competitors;
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actual and anticipated fluctuations in our quarterly operating
results;
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rumors relating to us or our competitors;
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actions of stockholders, including sales of shares by our
directors and executive officers;
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23
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additions or departures of key personnel; and
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developments concerning current or future strategic alliances or
acquisitions.
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These and other factors may cause the market price and demand
for our common stock to fluctuate substantially, which may limit
or prevent investors from readily selling their shares of common
stock and may otherwise negatively affect the liquidity of our
common stock. In addition, in the past, when the market price of
a stock has been volatile, holders of that stock have instituted
securities class action litigation against us that issued the
stock. If any of our stockholders brought a lawsuit against us,
we could incur substantial costs defending the lawsuit. Such a
lawsuit could also divert the time and attention of our
management.
Our
largest stockholder will exercise significant control over our
company.
After this offering, affiliates of SAC PCG will beneficially own
in the aggregate shares representing approximately %
of our outstanding capital stock. Furthermore, we have entered
into a Stockholders Agreement with affiliates of SAC PCG
pursuant to which they will have the right to nominate to our
board three, two or one directors for so long as they own at
least 20%, 10% or 5% of our voting power, respectively. This
concentration of ownership of our shares and the
Stockholders Agreement could delay or prevent proxy
contests, mergers, tender offers, open-market purchase programs
or other purchases of shares of our common stock that might
otherwise give you the opportunity to realize a premium over the
then-prevailing market price of our common stock. This
concentration of ownership may also adversely affect our stock
price.
Future
sales of shares by existing stockholders could cause our stock
price to decline.
If our existing stockholders sell, or indicate an intent to
sell, substantial amounts of our common stock in the public
market after the
180-day
contractual
lock-up (if
applicable) and other applicable legal restrictions on resale
discussed in this prospectus lapse, the trading price of our
common stock could decline significantly. Not all of our
existing stockholders are subject to a contractual lock-up. Upon
the completion of this offering, and, after giving effect to (i)
the MedQuist Exchange, assuming it is consummated without any
adjustments to the exchange ratio, (ii) the Exchange Offer,
assuming a full exchange and (iii) the issuance of
4.5 million shares of our common stock pursuant to the
Consulting Services Agreement, we will have
outstanding shares
of common stock, assuming no exercise of outstanding options. Of
these
shares, shares
of common stock, plus any shares sold pursuant to the
underwriters option to purchase additional shares, will be
immediately freely tradable, without restriction, in the public
market. Jefferies & Company, Inc. may, in its sole
discretion, permit our officers, directors, employees and
current stockholders to sell shares prior to the expiration of
the lock-up
agreements. We cannot predict the effect, if any, that public
sales of these shares or the availability of these shares for
sale will have on the market price of our common stock.
After the
lock-up
agreements pertaining to this offering expire, an
additional shares
will be eligible for sale in the public market. In addition, the
shares subject to outstanding options under our equity incentive
plans and the shares reserved for future issuance under our
equity incentive plans will become eligible for sale in the
public market in the future, subject to certain legal and
contractual limitations. Moreover, 180 days after the
completion of this offering, holders of
approximately shares of our
common stock will have the right to require us to register these
shares under the Securities Act of 1933, as amended, pursuant to
a registration rights agreement. If our existing stockholders
sell substantial amounts of our common stock in the public
market, or if the public perceives that such sales could occur,
this could have an adverse impact on the market price of our
common stock, even if there is no relationship between such
sales and the performance of our business.
Provisions
of Delaware law and our charter documents could delay or prevent
an acquisition of our company, even if the acquisition would be
beneficial to our stockholders, and could make it more difficult
for you to change management.
Provisions of Delaware law and our certificate of incorporation
and by-laws, which will be effective upon the completion of this
offering, may discourage, delay or prevent a merger, acquisition
or other change in control that stockholders may consider
favorable, including transactions in which stockholders might
otherwise receive a
24
premium for their shares. These provisions may also prevent or
delay attempts by stockholders to replace or remove our current
management or members of our board of directors. These
provisions include:
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a classified board of directors;
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limitations on the removal of directors;
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advance notice requirements for stockholder proposals and
nominations;
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the inability of stockholders to act by written consent or to
call special meetings;
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the ability of our board of directors to make, alter or repeal
our by-laws; and
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the authority of our board of directors to issue preferred stock
with such terms as our board of directors may determine.
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In addition, upon the closing of this offering, we will be
subject to provisions of our certificate of incorporation
similar to Section 203 of the Delaware General Corporation
Law, which, subject to certain exceptions for our largest
stockholder and its affiliates, limit business combination
transactions with stockholders of 15% or more of our outstanding
voting stock that our board of directors has not approved. These
provisions and other similar provisions make it more difficult
for stockholders or potential acquirers to acquire us without
negotiation. These provisions may apply even if some
stockholders may consider the transaction beneficial to them.
As a result, these provisions could limit the price that
investors are willing to pay in the future for shares of our
common stock. These provisions might also discourage a potential
acquisition proposal or tender offer, even if the acquisition
proposal or tender offer is at a premium over the then current
market price for our common stock.
If equity
research analysts do not publish research or reports about our
business or if they issue unfavorable commentary or downgrade
our common stock, the price of our common stock could
decline.
The trading market for our common stock will rely in part on the
research and reports, if any, that equity research analysts
publish about us and our business. The price of our stock could
decline if one or more securities analysts downgrade our stock
or if those analysts issue other unfavorable commentary or cease
publishing reports about us or our business.
We do not
currently intend to pay dividends on our common stock and,
consequently, your ability to achieve a return on your
investment will depend on appreciation in the price of our
common stock.
We do not intend to pay any cash dividends on our common stock
for the foreseeable future. We currently intend to invest our
future earnings, if any, to fund our growth, including growth
through acquisitions. The payment of any future dividends will
be determined by the board of directors in light of conditions
then existing, including our earnings, financial condition and
capital requirements, business conditions, corporate law
requirements and other factors. See Dividend Policy.
We may
apply the proceeds of this offering to uses that do not improve
our operating results or increase the value of your
investment.
We currently intend to use a substantial portion of the net
proceeds from this offering for general corporate purposes,
including working capital and other general corporate purposes.
We may also use a portion of the net proceeds for the execution
of our strategic plans, either through the acquisition of
companies or by other means that we believe will complement our
business. However, we do not have more specific plans for the
net proceeds from this offering. Our board of directors and
management will have broad discretion in how we use the net
proceeds of this offering and may spend the proceeds in a manner
that our stockholders do not deem desirable. These proceeds
could be applied in ways that do not improve our operating
results or increase the value of your investment.
25
Special
Note Regarding Forward-Looking Statements
This prospectus contains forward-looking statements
within the meaning of the federal securities laws. All
statements other than statements of historical facts included in
this prospectus, including statements regarding our future
financial position, economic performance and results of
operations, as well as our business strategy, and projected
costs and plans and objectives of management for future
operations, and the information referred to under
Managements Discussion and Analysis of Financial
Condition and Results of Operations, are forward-looking
statements. In addition, forward-looking statements generally
can be identified by the use of forward-looking terminology,
such as may, will, expect,
intend, estimate,
anticipate, believe or
continue or similar terminology.
Such forward-looking statements include but are not limited to
statements regarding:
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potential synergies from the acquisition of Spheris;
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our ability to adopt and integrate new technologies;
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our expectation as to the future growth of the healthcare
industry;
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increases in the productivity of MTs and MEs in order to outpace
the decline in prices for medical transcription;
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customer retention;
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potential benefits of our size and scale;
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our ability to develop and adopt new technologies;
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our ability to gain new customers;
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our ability to increase sales;
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our intended use of proceeds from this offering; and
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our ability to consummate the MedQuist Exchange and the Exchange
Offer.
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The preceding list is not intended to be an exhaustive list of
all of our forward-looking statements. Forward-looking
statements are not historical facts, and are based on current
expectations, estimates and projections about our industry,
managements beliefs and certain assumptions made by
management, many of which, by their nature, are inherently
uncertain and beyond our control. Accordingly, you are cautioned
that any forward-looking statements are not guarantees of future
performance and are subject to certain risks, uncertainties and
assumptions that are difficult to predict. Although we believe
that the expectations reflected in our forward-looking
statements are reasonable as of the date made, expectations may
prove to have been materially different from the results
expressed or implied by such forward-looking statements. Unless
otherwise required by law, we also disclaim any obligation to
update our view of any such risks or uncertainties or to
announce publicly the result of any revisions to the
forward-looking statements made in this prospectus.
All written and oral forward-looking statements attributable to
us, or persons acting on our behalf, are expressly qualified in
their entirety by these cautionary statements. You should
evaluate all forward-looking statements made in this prospectus
in the context of these risks and uncertainties.
26
Corporate
Reorganization
Recapitalization
Transactions
On October 1, 2010, MedQuist Inc., as borrower, and our
subsidiaries, MedQuist Transcriptions, Ltd. and CBay Inc., as
co-borrowers and guarantors, and we and certain of our other
subsidiaries, as guarantors, entered into the Senior Secured
Credit Facility with General Electric Capital Corporation, as
administrative agent, and the lenders party thereto, providing
for (i) a $200.0 million Term Loan and (ii) a
$25.0 million revolving credit facility. On
September 30, 2010, MedQuist Inc., as issuer, and our
subsidiaries, MedQuist Transcriptions, Ltd. and CBay Inc., as
co-issuers and guarantors, and we and certain of our other
subsidiaries, as guarantors, entered into a Note Purchase
Agreement with BlackRock Kelso Capital Corporation, PennantPark
Investment Corporation, Citibank, N.A., and THL Credit, Inc.
providing for the issuance of $85.0 million aggregate
principal amount of 13% Senior Subordinated Notes due 2016.
Interest on the Senior Subordinated Notes is payable in
quarterly installments at the issuers option at either
(i) 13% in cash or (ii) 12% in cash plus 2% in the
form of additional Senior Subordinated Notes. See
Description of Indebtedness for a more detailed
description of the Senior Secured Credit Facility and the Senior
Subordinated Notes.
The closing and funding of the Term Loan and the Senior
Subordinated Notes occurred on October 14, 2010. MedQuist
Inc. used the proceeds to repay $80.0 million of
indebtedness under its Acquisition Credit Facility, to repay
$13.6 million of indebtedness under the Acquisition
Subordinated Promissory Note it issued in connection with the
Spheris Acquisition and to pay a $176.5 million special
dividend to its stockholders. We received $122.6 million of
this special dividend and used $104.1 million to redeem our
6% Convertible Notes, and $4.1 million to extinguish
certain other lines of credit.
MedQuist
Exchange
On September 30, 2010, we entered into an Exchange
Agreement with certain of MedQuist Inc.s noncontrolling
stockholders that currently hold in the aggregate approximately
13% of MedQuist Inc.s outstanding shares. Pursuant to the
Exchange Agreement, those MedQuist Inc. stockholders will
receive 4.2459 shares of our common stock for each MedQuist
Inc. share, subject to certain adjustments, including
adjustments related to MedQuist Inc.s net debt at the
closing of the MedQuist Exchange, and will enter into a
stockholders agreement with us that, among other things,
provides them with registration rights and contains provisions
regarding their voting in the election of our directors. Every
$10.0 million decrease below $304.0 million in
MedQuist Inc.s net debt at the closing of the MedQuist
Exchange would increase the exchange ratio by approximately
0.05 shares of our common stock. The closing under the
Exchange Agreement is conditioned upon, among other conditions,
our completion of an initial public offering, the listing of our
shares on The NASDAQ Global Market and our reincorporation in
Delaware and would increase our ownership in MedQuist Inc.
from 69.5% to 82.5%.
Exchange
Offer
On October 18, 2010, we filed with the SEC a registration
statement on
Form S-4
offering those noncontrolling MedQuist Inc. stockholders that
did not participate in the MedQuist Exchange shares of our
common stock in exchange for their MedQuist Inc. shares.
Assuming the MedQuist Exchange is consummated, a full exchange
in the Exchange Offer would increase our ownership in MedQuist
Inc. from 82.5% to 100.0%. We can give no assurance regarding
the level of participation in the Exchange Offer.
Reincorporation
and Share Conversion
Immediately prior to the consummation of this offering, we
intend to convert from a British Virgin Islands company to a
Delaware corporation. In connection with that conversion, we may
adjust the number of our shares outstanding through a reverse
share split or similar action. The conversion and any such
reverse share split or similar action will result in no change
to our stockholders relative ownership interests in us.
We also intend to delist our common stock from AIM upon
completion of this offering or shortly thereafter and to apply
to list our shares on The NASDAQ Global Market.
27
Use of
Proceeds
We estimate that the net proceeds from this offering, after
deducting the underwriting discounts and commissions and
estimated offering expenses, will be approximately
$ million, assuming an
initial public offering price of $
per share, the midpoint of the estimated price range set forth
on the cover page of this prospectus. We intend to use the net
proceeds from this offering for working capital and other
general corporate purposes. We may also use a portion of the net
proceeds for the acquisition of complementary companies or
businesses, although we currently do not have any acquisition or
investment planned. We will not receive any proceeds from the
sale of shares of common stock by the selling stockholders if
the underwriters exercise the over-allotment option.
Dividend
Policy
We currently expect to retain future earnings, if any, for use
in the operation and expansion of our business and do not
anticipate paying any cash dividends in the foreseeable future.
Payments of future dividends, if any, will be at the sole
discretion of our board of directors after taking into account
various factors, including our business, operating results and
financial condition, current and anticipated cash needs, plans
for expansion and any legal or contractual limitations on our
ability to pay dividends. Our ability to pay dividends on our
common stock is limited by the covenants of the agreements
governing our indebtedness and may be further restricted by any
future debt or preferred securities. See Description of
Indebtedness.
28
Capitalization
The following table sets forth our capitalization as of
June 30, 2010:
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on an actual basis;
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on a pro forma basis to give effect to the Corporate
Reorganization and the issuance of stock pursuant to the
Consulting Services Agreement; and
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on a pro forma as adjusted basis to give effect to the
completion of this offering and the application of the net
proceeds as described under Use of Proceeds.
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You should read this table together with the information
contained in this prospectus, including Corporate
Reorganization, Use of Proceeds,
Unaudited Pro Forma Condensed Combined Financial
Information, Selected Consolidated Financial and
Other Data and Managements Discussion and
Analysis of Financial Condition and Results of Operations
and the consolidated financial statements and the related notes
thereto included elsewhere in this prospectus.
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As of June 30, 2010
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Pro Forma As
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($ in thousands)
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Actual
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Pro Forma(5)
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Adjusted
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Cash and cash equivalents(1)
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$
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22,457
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$
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25,889
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$
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Short-term debt(2)
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41,527
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23,112
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Long-term debt
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Term loans
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1,019
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Senior Secured Credit Facility
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60,000
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185,000
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Senior Subordinated Notes
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13,570
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85,000
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6% Convertible Notes
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96,419
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Other debt(3)
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1,557
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1,861
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Total debt
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214,092
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294,973
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Equity
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CBaySystems Holdings Limited stockholders equity
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Common stock; 1 billion shares authorized,
158.2 million shares issued and outstanding (actual);
1 billion shares authorized, 211.4 million shares
issued and outstanding (pro
forma); shares
authorized, shares
issued and outstanding (pro forma as adjusted)
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15,821
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21,142
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Additional paid in capital
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137,333
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115,195
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Accumulated deficit
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(115,133
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)
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(128,538
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Accumulated other comprehensive loss
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(849
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)
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(849
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Total CBaySystems Holdings Limited stockholders equity
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37,172
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6,950
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Noncontrolling interests
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37,762
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405
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Total equity
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74,934
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7,355
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Total capitalization(4)
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$
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289,026
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$
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302,328
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$
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(1) |
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Pro forma as adjusted gives effect to a $5.0 million
payment to SAC PCG in connection with the Corporate
Reorganization. |
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(2) |
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Short-term debt includes amount outstanding under our short-term
credit facilities, the current portion of long-term borrowings
and the current portion of capital lease obligations. |
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(3) |
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Other debt includes capital lease obligations and indebtedness
outstanding under our credit agreement with ICICI Bank and with
Induslnd Bank. |
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(4) |
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A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share
would increase (decrease) total stockholders capital and
total capitalization by
$ million, assuming the
number of shares offered by us, as set forth on the cover page
of this prospectus, remains the same and after deducting the
estimated underwriting discounts and estimated expenses payable
by us. |
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(5) |
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Pro forma basis reflects (i) the $200.0 million
borrowings under the Term Loan, (ii) the issuance of $85.0
million of Senior Subordinated Notes, (iii) our repayment
of the 6% Convertible Notes, (iv) the issuance of
approximately 20.3 million shares of our common stock
in the MedQuist Exchange, (v) the issuance of approximately
28.4 million shares of our common stock in the Exchange
Offer, and (vi) the issuance of approximately
4.5 million shares of our common stock pursuant to the
Consulting Services Agreement. |
29
Unaudited Pro
Forma Condensed Combined Financial Information
The following unaudited pro forma condensed consolidated
financial information includes our unaudited pro forma condensed
combined statements of operations for the year ended
December 31, 2009 and the six months ended June 30,
2010 and our unaudited pro forma condensed consolidated balance
sheet as of June 30, 2010. The unaudited pro forma
condensed combined statements of operations and the unaudited
pro forma condensed consolidated balance sheet have been derived
from the historical consolidated financial information of us and
Spheris, which are included elsewhere in this prospectus.
The pro forma combined statements of operations and other
operating data for the year ended December 31, 2009 and the
six months ended June 30, 2010 give effect to the following
transactions as if they had occurred on January 1, 2009:
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the Spheris Acquisition and the incurrence by MedQuist Inc. of
$113.6 million of debt to finance the Spheris Acquisition;
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the incurrence by MedQuist Inc. of $285.0 million of
indebtedness under the Senior Secured Credit Facility and Senior
Subordinated Notes, the simultaneous repayment of
$90.0 million of indebtedness under the Acquisition Credit
Facility, the repayment of $13.6 million of indebtedness
under the Acquisition Subordinated Promissory Notes, the payment
of a $176.5 million special dividend to MedQuist
Inc.s stockholders, of which we received
$122.6 million and the noncontrolling stockholders of
MedQuist Inc. received $53.9 million, and the repayment by
us, using the proceeds of such dividend, of $104.1 million
to extinguish our 6% Convertible Notes including a
$7.7 million premium on early prepayment and
$4.1 million under certain of our other lines of credit;
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the issuance of 20.3 million shares of our common
stock in exchange for 4.8 million shares of MedQuist
Inc. common stock pursuant to the terms of the Exchange
Agreement with certain noncontrolling stockholders of MedQuist
Inc., assuming the MedQuist Exchange is consummated without any
adjustments, which will increase our ownership in MedQuist Inc.
from 69.5% to 82.5%;
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the issuance of 4.5 million shares of our common stock
pursuant to the Consulting Services Agreement; and
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|
|
the issuance of 28.4 million shares of our common
stock in exchange for 6.7 million shares of MedQuist
Inc. common stock pursuant to the terms of the Exchange Offer,
assuming an exchange ratio equal to the exchange ratio
applicable under the Exchange Agreement and a full exchange.
This would increase our ownership in MedQuist Inc. from 82.5% to
100%.
|
The pro forma combined statements of operations and other
operating data for the year ended December 31, 2009 and the
six months ended June 30, 2010 do not give effect to the
following:
|
|
|
|
|
the impact on net revenues from volume declines resulting from
Spheris customer terminations prior to the Spheris
Acquisition. The pro forma net revenues for the year ended
December 31, 2009 and for the six months ended
June 30, 2010 include $24.6 million and
$2.3 million, respectively, of net revenues associated with
such terminations; and
|
|
|
|
the full impact on Adjusted EBITDA of cost savings and synergies
resulting from the Spheris Acquisition, which we have
implemented since the Spheris Acquisition and expect to yield
$7.0 million of cost savings in the fourth quarter of 2010,
representing an annualized benefit of $28.0 million. Our
results for the six months ended June 30, 2010 reflect $0.9
million of such cost savings.
|
The pro forma balance sheet data as of June 30, 2010 gives
effect to the Corporate Reorganization, and the shares of our
common stock issuable pursuant to the Consulting Services
Agreement, as if they occurred as of June 30, 2010.
The pro forma as adjusted balance sheet data as of June 30,
2010 also gives effect to the issuance
of shares of
common stock in this offering at an assumed initial public
offering price of $ per share, the
midpoint of the price range shown on the cover of this
prospectus, after deducting the underwriting discounts and
commissions and estimated offering expenses payable by us as if
such transaction occurred as of June 30, 2010.
Our historical consolidated financial information has been
adjusted in the unaudited pro forma condensed combined financial
information to give effect to pro forma events that are
(1) directly attributable to the Spheris Acquisition, the
Corporate Reorganization the shares of our common stock issuable
pursuant to the Consulting
30
Services Agreement, (2) factually supportable and
(3) with respect to the statements of operations, expected
to have a continuing impact on the combined results. The pro
forma information does not reflect revenue opportunities and
cost savings that may be realized after the Spheris Acquisition.
The pro forma financial information also does not reflect
expenses related to integration activity that may be incurred by
us in connection with the Spheris Acquisition.
The pro forma data is based upon available information and
certain assumptions that we believe are reasonable. The pro
forma data is for informational purposes only and does not
purport to represent what our results of operations or financial
position actually would have been if such events had occurred on
the dates specified above and does not purport to project the
results of operations or financial position for any future
period or date. The unaudited pro forma condensed combined
statements of operations and the unaudited pro forma condensed
consolidated balance sheet should be read in conjunction with
the accompanying notes, our historical consolidated financial
statements, and related notes included elsewhere in this
prospectus as adjusted for the acquisition of Spheris using the
acquisition method of accounting.
You should read the following unaudited pro forma condensed
consolidated financial information with our consolidated
financial statements and related notes included elsewhere in
this prospectus and the information under the section
Capitalization, Selected Consolidated
Financial and Other Data and Managements
Discussion and Analysis of Financial Condition and Results of
Operations appearing elsewhere in this prospectus.
31
CBaySystems
Holdings Limited and Subsidiaries
Unaudited Pro Forma Condensed Combined Statement
of Operations
For the year ended December 31, 2009
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recapitalization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
|
Spheris
|
|
|
Spheris
|
|
|
and MedQuist
|
|
|
Pro Forma
|
|
|
Exchange
|
|
|
|
|
|
|
CBaySystems
|
|
|
|
|
|
Acquisition
|
|
|
Acquisition
|
|
|
Exchange
|
|
|
Before
|
|
|
Offer
|
|
|
|
|
|
|
Holdings
|
|
|
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
Exchange
|
|
|
Pro Forma
|
|
|
|
|
|
|
Limited
|
|
|
Spheris
|
|
|
Adjustments
|
|
|
Combined
|
|
|
Adjustments
|
|
|
Offer
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
Net revenues
|
|
$
|
371,768
|
|
|
$
|
156,596
|
|
|
|
|
|
|
$
|
528,364
|
|
|
|
|
|
|
$
|
528,364
|
|
|
|
|
|
|
$
|
528,364
|
|
Cost of revenues
|
|
|
239,549
|
|
|
|
109,059
|
|
|
|
|
|
|
|
348,608
|
|
|
|
|
|
|
|
348,608
|
|
|
|
|
|
|
|
348,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
132,219
|
|
|
|
47,537
|
|
|
|
|
|
|
|
179,756
|
|
|
|
|
|
|
|
179,756
|
|
|
|
|
|
|
|
179,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
60,632
|
|
|
|
19,093
|
|
|
|
|
|
|
|
79,725
|
|
|
|
|
|
|
|
79,725
|
|
|
|
|
|
|
|
79,725
|
|
Research and development
|
|
|
9,604
|
|
|
|
|
|
|
|
|
|
|
|
9,604
|
|
|
|
|
|
|
|
9,604
|
|
|
|
|
|
|
|
9,604
|
|
Depreciation and amortization
|
|
|
26,977
|
|
|
|
7,230
|
|
|
|
6,530
|
(a)
|
|
|
40,737
|
|
|
|
|
|
|
|
40,737
|
|
|
|
|
|
|
|
40,737
|
|
Cost of legal proceedings and settlements
|
|
|
14,943
|
|
|
|
1,246
|
|
|
|
|
|
|
|
16,189
|
|
|
|
|
|
|
|
16,189
|
|
|
|
|
|
|
|
16,189
|
|
Acquisition and bankruptcy related charges
|
|
|
1,246
|
|
|
|
6,961
|
|
|
|
(8,207
|
)(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment charge
|
|
|
|
|
|
|
198,872
|
|
|
|
(198,872
|
)(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
2,727
|
|
|
|
775
|
|
|
|
|
|
|
|
3,502
|
|
|
|
|
|
|
|
3,502
|
|
|
|
|
|
|
|
3,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
116,129
|
|
|
|
234,177
|
|
|
|
(200,549
|
)
|
|
|
149,757
|
|
|
|
|
|
|
|
149,757
|
|
|
|
|
|
|
|
149,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
16,090
|
|
|
|
(186,640
|
)
|
|
|
200,549
|
|
|
|
29,999
|
|
|
|
|
|
|
|
29,999
|
|
|
|
|
|
|
|
29,999
|
|
Interest expense, net
|
|
|
(9,132
|
)
|
|
|
(17,439
|
)
|
|
|
6,611
|
(b)
|
|
|
(19,960
|
)
|
|
|
(11,291
|
)(g)
|
|
|
(31,251
|
)
|
|
|
|
|
|
|
(31,251
|
)
|
Equity in income of affiliated companies
|
|
|
1,933
|
|
|
|
|
|
|
|
|
|
|
|
1,933
|
|
|
|
|
|
|
|
1,933
|
|
|
|
|
|
|
|
1,933
|
|
Other income
|
|
|
11
|
|
|
|
2,125
|
|
|
|
|
|
|
|
2,136
|
|
|
|
|
|
|
|
2,136
|
|
|
|
|
|
|
|
2,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and noncontrolling
interests
|
|
|
8,902
|
|
|
|
(201,954
|
)
|
|
|
207,160
|
|
|
|
14,108
|
|
|
|
(11,291
|
)
|
|
|
2,817
|
|
|
|
|
|
|
|
2,817
|
|
Income tax provision (benefit)
|
|
|
1,082
|
|
|
|
(14,571
|
)
|
|
|
15,204
|
(e)
|
|
|
1,715
|
|
|
|
(1,373
|
)(i)
|
|
|
342
|
|
|
|
|
|
|
|
342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
7,820
|
|
|
|
(187,383
|
)
|
|
|
191,956
|
|
|
|
12,393
|
|
|
|
(9,918
|
)
|
|
|
2,475
|
|
|
|
|
|
|
|
2,475
|
|
Less: Net income attributable to noncontrolling interests
|
|
|
(7,085
|
)
|
|
|
|
|
|
|
(347
|
)(f)
|
|
|
(7,432
|
)
|
|
|
5,960
|
(h)
|
|
|
(1,472
|
)
|
|
|
1,472
|
(k)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to CBaySystems Holdings
Limited
|
|
$
|
735
|
|
|
$
|
(187,383
|
)
|
|
$
|
191,609
|
|
|
$
|
4,961
|
|
|
$
|
(3,958
|
)
|
|
$
|
1,003
|
|
|
$
|
1,472
|
|
|
$
|
2,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share attributable to CBaySystems
Holdings Limited:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
$
|
0.01
|
|
|
|
|
|
|
$
|
0.00
|
|
|
|
|
|
|
$
|
0.00
|
|
Diluted
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
$
|
0.01
|
|
|
|
|
|
|
$
|
0.00
|
|
|
|
|
|
|
$
|
0.00
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
156,116
|
|
|
|
|
|
|
|
|
|
|
|
156,116
|
|
|
|
24,789
|
(h,j)
|
|
|
180,905
|
|
|
|
28,421
|
(k)
|
|
|
209,326
|
|
Diluted
|
|
|
156,116
|
|
|
|
|
|
|
|
|
|
|
|
156,116
|
|
|
|
24,789
|
(h,j)
|
|
|
180,905
|
|
|
|
28,421
|
(k)
|
|
|
209,326
|
|
The accompanying notes are an integral part of the unaudited pro
forma condensed combined financial statements.
32
CBaySystems
Holdings Limited and Subsidiaries
Unaudited Pro Forma Condensed Combined Statement
of Operations
For the six months ended June 30, 2010
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recapitalization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
|
Spheris
|
|
|
Spheris
|
|
|
and MedQuist
|
|
|
Pro Forma
|
|
|
Exchange
|
|
|
|
|
|
|
CBaySystems
|
|
|
|
|
|
Acquisition
|
|
|
Acquisition
|
|
|
Exchange
|
|
|
Before
|
|
|
Offer
|
|
|
|
|
|
|
Holdings
|
|
|
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
Exchange
|
|
|
Pro Forma
|
|
|
|
|
|
|
Limited
|
|
|
Spheris
|
|
|
Adjustments
|
|
|
Combined
|
|
|
Adjustments
|
|
|
Offer
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
Net revenues
|
|
$
|
200,592
|
|
|
$
|
43,371
|
|
|
|
|
|
|
$
|
243,963
|
|
|
|
|
|
|
$
|
243,963
|
|
|
|
|
|
|
$
|
243,963
|
|
Cost of revenues
|
|
|
128,641
|
|
|
|
31,343
|
|
|
|
|
|
|
|
159,984
|
|
|
|
|
|
|
|
159,984
|
|
|
|
|
|
|
|
159,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
71,951
|
|
|
|
12,028
|
|
|
|
|
|
|
|
83,979
|
|
|
|
|
|
|
|
83,979
|
|
|
|
|
|
|
|
83,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
32,706
|
|
|
|
6,163
|
|
|
|
|
|
|
|
38,869
|
|
|
|
|
|
|
|
38,869
|
|
|
|
|
|
|
|
38,869
|
|
Research and development
|
|
|
5,593
|
|
|
|
192
|
|
|
|
|
|
|
|
5,785
|
|
|
|
|
|
|
|
5,785
|
|
|
|
|
|
|
|
5,785
|
|
Depreciation and amortization
|
|
|
15,068
|
|
|
|
1,850
|
|
|
|
1,992
|
(l)
|
|
|
18,910
|
|
|
|
|
|
|
|
18,910
|
|
|
|
|
|
|
|
18,910
|
|
Cost of legal proceedings and settlements
|
|
|
2,152
|
|
|
|
|
|
|
|
|
|
|
|
2,152
|
|
|
|
|
|
|
|
2,152
|
|
|
|
|
|
|
|
2,152
|
|
Acquisition and bankruptcy related charges
|
|
|
6,045
|
|
|
|
1,730
|
|
|
|
(7,775
|
)(n)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
966
|
|
|
|
|
|
|
|
|
|
|
|
966
|
|
|
|
|
|
|
|
966
|
|
|
|
|
|
|
|
966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
62,530
|
|
|
|
9,935
|
|
|
|
(5,783
|
)
|
|
|
66,682
|
|
|
|
|
|
|
|
66,682
|
|
|
|
|
|
|
|
66,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
9,421
|
|
|
|
2,093
|
|
|
|
5,783
|
|
|
|
17,297
|
|
|
|
|
|
|
|
17,297
|
|
|
|
|
|
|
|
17,297
|
|
Interest expense, net
|
|
|
(7,351
|
)
|
|
|
(3,459
|
)
|
|
|
139
|
(m)
|
|
|
(10,671
|
)
|
|
|
(5,645
|
)(q)
|
|
|
(16,316
|
)
|
|
|
|
|
|
|
(16,316
|
)
|
Equity in income of affiliated companies
|
|
|
546
|
|
|
|
|
|
|
|
|
|
|
|
546
|
|
|
|
|
|
|
|
546
|
|
|
|
|
|
|
|
546
|
|
Other income (expense)
|
|
|
108
|
|
|
|
(48
|
)
|
|
|
|
|
|
|
60
|
|
|
|
|
|
|
|
60
|
|
|
|
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before reorganization items and income taxes
|
|
|
2,724
|
|
|
|
(1,414
|
)
|
|
|
5,922
|
|
|
|
7,232
|
|
|
|
(5,645
|
)
|
|
|
1,587
|
|
|
|
|
|
|
|
1,587
|
|
Reorganization items
|
|
|
|
|
|
|
(5,762
|
)
|
|
|
5,762
|
(n)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and noncontrolling
interests
|
|
|
2,724
|
|
|
|
(7,176
|
)
|
|
|
11,684
|
|
|
|
7,232
|
|
|
|
(5,645
|
)
|
|
|
1,587
|
|
|
|
|
|
|
|
1,587
|
|
Income tax provision (benefit)
|
|
|
(326
|
)
|
|
|
(2,822
|
)
|
|
|
2,283
|
(o)
|
|
|
(865
|
)
|
|
|
675
|
(t)
|
|
|
(190
|
)
|
|
|
|
|
|
|
(190
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
3,050
|
|
|
|
(4,354
|
)
|
|
|
9,401
|
|
|
|
8,097
|
|
|
|
(6,320
|
)
|
|
|
1,777
|
|
|
|
|
|
|
|
1,777
|
|
Less: Net income attributable to noncontrolling interests
|
|
|
(2,497
|
)
|
|
|
|
|
|
|
(952
|
)(p)
|
|
|
(3,449
|
)
|
|
|
2,927
|
(r)
|
|
|
(522
|
)
|
|
|
533
|
(u)
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to CBaySystems Holdings
Limited
|
|
$
|
553
|
|
|
$
|
(4,354
|
)
|
|
$
|
8,449
|
|
|
$
|
4,648
|
|
|
$
|
(3,393
|
)
|
|
$
|
1,255
|
|
|
$
|
533
|
|
|
$
|
1,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share attributable to CBaySystems
Holdings Limited:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
$
|
0.02
|
|
|
|
|
|
|
$
|
0.01
|
|
|
|
|
|
|
$
|
0.01
|
|
Diluted
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
$
|
0.02
|
|
|
|
|
|
|
$
|
0.01
|
|
|
|
|
|
|
$
|
0.01
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
157,705
|
|
|
|
|
|
|
|
|
|
|
|
157,705
|
|
|
|
24,789
|
(r,s)
|
|
|
182,494
|
|
|
|
28,421
|
(u)
|
|
|
210,915
|
|
Diluted
|
|
|
157,705
|
|
|
|
|
|
|
|
|
|
|
|
157,705
|
|
|
|
24,789
|
(r,s)
|
|
|
182,494
|
|
|
|
28,421
|
(u)
|
|
|
210,915
|
|
The accompanying notes are an integral part of the unaudited pro
forma condensed combined financial statements.
33
CBaySystems
Holdings Limited and Subsidiaries
Unaudited Pro Forma Condensed Consolidated
Balance Sheet
As of June 30, 2010
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recapitalization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
|
and MedQuist
|
|
|
|
|
|
Exchange
|
|
|
|
|
|
|
CBaySystems
|
|
|
Exchange
|
|
|
Pro Forma
|
|
|
Offer
|
|
|
|
|
|
|
Holdings
|
|
|
Pro Forma
|
|
|
Before
|
|
|
Pro Forma
|
|
|
|
|
|
|
Limited
|
|
|
Adjustments
|
|
|
Exchange Offer
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
22,457
|
|
|
$
|
3,432
|
(v,w,x,y)
|
|
$
|
25,889
|
|
|
|
|
|
|
$
|
25,889
|
|
Accounts receivable, net
|
|
|
72,187
|
|
|
|
|
|
|
|
72,187
|
|
|
|
|
|
|
|
72,187
|
|
Other current assets
|
|
|
19,110
|
|
|
|
604
|
(v)
|
|
|
19,714
|
|
|
|
|
|
|
|
19,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
113,754
|
|
|
|
4,036
|
|
|
|
117,790
|
|
|
|
|
|
|
|
117,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
26,217
|
|
|
|
|
|
|
|
26,217
|
|
|
|
|
|
|
|
26,217
|
|
Goodwill
|
|
|
99,376
|
|
|
|
|
|
|
|
99,376
|
|
|
|
|
|
|
|
99,376
|
|
Other intangible assets, net
|
|
|
118,042
|
|
|
|
|
|
|
|
118,042
|
|
|
|
|
|
|
|
118,042
|
|
Deferred income taxes
|
|
|
2,880
|
|
|
|
|
|
|
|
2,880
|
|
|
|
|
|
|
|
2,880
|
|
Other assets
|
|
|
19,882
|
|
|
|
7,104
|
(v)
|
|
|
26,986
|
|
|
|
|
|
|
|
26,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
380,151
|
|
|
$
|
11,140
|
|
|
$
|
391,291
|
|
|
|
|
|
|
$
|
391,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of debt
|
|
$
|
41,527
|
|
|
$
|
(18,415
|
)(w)
|
|
$
|
23,112
|
|
|
|
|
|
|
$
|
23,112
|
|
Accounts payable
|
|
|
11,462
|
|
|
|
|
|
|
|
11,462
|
|
|
|
|
|
|
|
11,462
|
|
Accrued expenses and other current liabilities
|
|
|
40,195
|
|
|
|
|
|
|
|
40,195
|
|
|
|
|
|
|
|
40,195
|
|
Accrued compensation
|
|
|
23,906
|
|
|
|
|
|
|
|
23,906
|
|
|
|
|
|
|
|
23,906
|
|
Deferred revenue
|
|
|
8,981
|
|
|
|
|
|
|
|
8,981
|
|
|
|
|
|
|
|
8,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
126,071
|
|
|
|
(18,415
|
)
|
|
|
107,656
|
|
|
|
|
|
|
|
107,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to related parties
|
|
|
2,162
|
|
|
|
(2,162
|
)(z)
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term portion of debt
|
|
|
172,565
|
|
|
|
99,296
|
(w)
|
|
|
271,861
|
|
|
|
|
|
|
|
271,861
|
|
Deferred income taxes
|
|
|
2,667
|
|
|
|
|
|
|
|
2,667
|
|
|
|
|
|
|
|
2,667
|
|
Other non-current liabilities
|
|
|
1,752
|
|
|
|
|
|
|
|
1,752
|
|
|
|
|
|
|
|
1,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
305,217
|
|
|
|
78,719
|
|
|
|
383,936
|
|
|
|
|
|
|
|
383,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CBaySystems Holdings Limited stockholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
15,821
|
|
|
|
2,479
|
(y,z)
|
|
|
18,300
|
|
|
|
2,842
|
(aa)
|
|
|
21,142
|
|
Additional paid-in capital
|
|
|
137,333
|
|
|
|
(9,689
|
)(y,z)
|
|
|
127,644
|
|
|
|
(12,449
|
)(aa)
|
|
|
115,195
|
|
Accumulated deficit
|
|
|
(115,133
|
)
|
|
|
(13,405
|
)(v,w)
|
|
|
(128,538
|
)
|
|
|
|
|
|
|
(128,538
|
)
|
Accumulated other comprehensive loss
|
|
|
(849
|
)
|
|
|
|
|
|
|
(849
|
)
|
|
|
|
|
|
|
(849
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total CBaySystems Holdings Limited stockholders
equity
|
|
|
37,172
|
|
|
|
(20,615
|
)
|
|
|
16,557
|
|
|
|
(9,607
|
)
|
|
|
6,950
|
|
Noncontrolling interests
|
|
|
37,762
|
|
|
|
(46,964
|
)(x,y)
|
|
|
(9,202
|
)
|
|
|
9,607
|
(aa)
|
|
|
405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
74,934
|
|
|
|
(67,579
|
)
|
|
|
7,355
|
|
|
|
|
|
|
|
7,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
380,151
|
|
|
$
|
11,140
|
|
|
$
|
391,291
|
|
|
|
|
|
|
$
|
391,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the unaudited pro
forma condensed consolidated balance sheet.
34
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Unaudited Pro Forma Condensed Combined Financial
Information
The unaudited pro forma condensed combined financial information
is based on our and Spheris historical financial
information, and it is prepared and presented pursuant to the
regulations of the SEC regarding pro forma financial
information. The 2009 unaudited pro forma condensed combined
financial information includes our audited consolidated
statement of operations for the year ended December 31,
2009. Spheris historical financial information includes
its audited consolidated statement of operations for the year
ended December 31, 2009. The 2010 presentation includes our
unaudited historical consolidated statement of operations for
the six months ended June 30, 2010. Spheris
historical information includes its unaudited historical
consolidated statement of operations for the period
January 1, 2010 through April 21, 2010, the date prior
to the date of the Spheris Acquisition. The unaudited pro forma
condensed combined statements of operations for the year ended
December 31, 2009 and for the six months ended
June 30, 2010 also include the effects of the Corporate
Reorganization and the shares of our stock issuable under the
Consulting Services Agreement. The unaudited pro forma condensed
consolidated balance sheet as of June 30, 2010 is our
historical unaudited consolidated balance sheet as of
June 30, 2010 and is adjusted as if the Corporate
Reorganization and the shares of our stock issuable under the
Consulting Services Agreement had occurred as of June 30,
2010.
The unaudited pro forma condensed combined financial information
was prepared using the acquisition method of accounting under
Financial Accounting Standards Board Accounting Standards
Codification, or ASC, Topic 805, Business Combinations. ASC
Topic 805 requires, among other things, that identifiable assets
acquired and liabilities assumed be recognized at their fair
values as of the acquisition date, which is presumed to be the
closing date of the Spheris Acquisition. Accordingly, the pro
forma adjustments reflected in the accompanying unaudited pro
forma condensed combined financial information may be materially
different from the actual acquisition accounting adjustments
required as of the acquisition date.
Under ASC Topic 820, Fair Value Measurements and Disclosures,
fair value is defined as the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the
measurement date. ASC 820 specifies a hierarchy of
valuation techniques based on the nature of the inputs used to
develop the fair value measures. This is an exit price concept
for the valuation of the asset or liability. In addition, market
participants are assumed to be unrelated buyers and sellers in
the principal or the most advantageous market for the asset or
liability. Fair value measurements for an asset assume the
highest and best use by these market participants. Many of these
fair value measurements can be highly subjective, and it is also
possible that other professionals, applying reasonable judgment
to the same facts and circumstances, could develop and support a
range of alternative estimated amounts.
Total acquisition-related transaction costs incurred by us are
expensed in the periods in which the costs are incurred. Under
ASC Topic 805, acquisition-related transaction costs (such as
advisory, legal, valuation and other professional fees) are not
included as components of consideration transferred but are
accounted for as expenses in the periods in which the costs are
incurred.
Reorganization items for Spheris directly relate to the process
of reorganizing Spheris under voluntary Chapter 11
Bankruptcy petitions filed by Spheris and certain subsidiaries
on February 3, 2010.
The historical consolidated financial information has been
adjusted in the unaudited pro forma condensed combined financial
information to give effect to pro forma events that are
(1) directly attributable to the Corporate Reorganization
and the shares of our stock issuable under the Consulting
Services Agreement, (2) factually supportable, and
(3) with respect to the statement of operations, expected
to have a continuing impact on the combined results. The pro
forma financial information does not reflect revenue
opportunities and cost savings that we may realize after the
Spheris Acquisition. No assurance can be given with respect to
the estimated revenue opportunities and operating cost savings
that may be realized as a result of the Spheris Acquisition. The
pro forma financial information also does not reflect expenses
related to integration activity or exit costs that may be
incurred by us in connection with integrating the businesses.
35
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Unaudited Pro Forma Condensed Combined Financial
Information(Continued)
Certain Spheris amounts have been reclassified to conform to our
presentation. These reclassifications had no effect on
previously reported net income (loss). There were no material
transactions between us and Spheris during the periods presented
in the unaudited pro forma condensed combined financial
information that would need to be eliminated.
|
|
2.
|
Description of
the Spheris Acquisition
|
On April 22, 2010, we, together with our MedQuist Inc.
subsidiary, completed the acquisition of substantially all of
the domestic assets of Spheris and the stock of certain of its
foreign affiliates, pursuant to the terms of the Stock and Asset
Purchase Agreement entered into on April 15, 2010. The
purchase price consisted of approximately $98.8 million of
cash and MedQuist Inc.s issuance of a promissory note, net
of discount, totaling $13.6 million, or the Acquisition
Subordinated Promissory Note. We had no prior material
relationship with Spheris other than the agreements related to
the Spheris Acquisition described elsewhere in this prospectus.
In connection with the Spheris Acquisition, MedQuist
Transcriptions, Ltd., a subsidiary of MedQuist Inc., and certain
other subsidiaries of MedQuist Inc., or collectively, the Loan
Parties, entered into a credit agreement, or the Acquisition
Credit Facility, with General Electric Capital Corporation,
CapitalSource Bank, and Fifth Third Bank. The Acquisition Credit
Facility provided for up to $100.0 million in senior
secured credit facilities, consisting of a $50.0 million
term loan, and a revolving credit facility of up to
$50.0 million. The credit facilities were secured by a
first priority lien on substantially all of the property of the
Loan Parties. Borrowings under the revolving credit facility
were able to be made from time to time, subject to availability
under such facility, until the fourth anniversary of the closing
date. Amounts borrowed under the Acquisition Credit Facility
bore interest at a rate selected by MedQuist Transcriptions,
Ltd. equal to the Base Rate or the Eurodollar Rate (each as
defined in the Acquisition Credit Facility agreement) plus a
margin. At June 30, 2010, the revolving credit facility and
the term loan had interest rates of 6.25% and 6.75%,
respectively. The Acquisition Credit Facility was repaid in full
in October 2010 in connection with the Recapitalization
Transactions.
In connection with the Spheris Acquisition, MedQuist Inc. also
entered into the Acquisition Subordinated Promissory Note, with
Spheris Inc. The note was to mature in five years from the date
of the Spheris Acquisition. The face amount of the Acquisition
Subordinated Promissory Note was $17.5 million with
provisions for prepayment at discounted amounts, ranging from
77.5% of the principal if paid within six months, 87.5% from six
to nine months, 97.5% from nine to twelve months, 102.0% between
the first and second year, 101.0% between the second and third
year and 100.0% thereafter. For purposes of the purchase price
allocation, the note was discounted at 77.5% of the principal,
or $13.6 million. The Acquisition Subordinated Promissory
Note bore interest at 8.0% for the first six months. The
Acquisition Subordinated Promissory Note was repaid at 77.5% of
the face amount on October 14, 2010 in connection with the
Recapitalization Transactions.
On April 22, 2010, we transferred the following
consideration for the purchase of Spheris:
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Cash consideration paid
|
|
$
|
98,834
|
|
Fair value of unsecured Acquisition Subordinated Promissory Note
|
|
|
13,570
|
|
|
|
|
|
|
Total consideration transferred
|
|
$
|
112,404
|
|
|
|
|
|
|
|
The Acquisition Subordinated Promissory Note would have matured
in five years from the date of closing, and it had provisions
for prepayment at discounted amounts. We estimated the fair
value of the Acquisition Subordinated Promissory Note to be
$13.6 million. The fair value was determined using a Monte
Carlo simulation valuation model with the following key
assumptions: volatility of 3.9% and cost of debt of 10.5%. The
fair value of the Acquisition Subordinated Promissory Note is
included in the total purchase price.
36
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Unaudited Pro Forma Condensed Combined Financial
Information(Continued)
The following table summarizes the consideration the amounts of
identified assets acquired and liabilities assumed at the
acquisition date. The amounts recorded are subject to
finalization of assumed liabilities. The total amount assigned
to identified intangible assets and the related amortization
period is shown below:
|
|
|
|
|
|
|
Fair value of Spheris net assets acquired
|
|
(In thousands)
|
|
|
Cash
|
|
$
|
797
|
|
Trade receivables
|
|
|
22,407
|
|
Other current assets
|
|
|
4,142
|
|
Property, plant and equipment
|
|
|
9,133
|
|
Deposits
|
|
|
1,036
|
|
Developed technology (included in intangibles)
|
|
|
11,390
|
|
Customer relationships (included in intangibles)
|
|
|
37,210
|
|
Trademarks and trade name (included in intangibles)
|
|
|
1,640
|
|
Goodwill
|
|
|
45,344
|
|
Trade and other payables
|
|
|
(20,695
|
)
|
|
|
|
|
|
Identifiable assets acquired and liabilities assumed
|
|
$
|
112,404
|
|
|
|
|
|
|
|
The total assigned to identified intangible assets and the
related amortization period is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
Fair Value
|
|
|
Period
|
|
|
|
(In thousands)
|
|
|
|
|
|
Developed technology
|
|
$
|
11,390
|
|
|
|
9 years
|
|
Customer relationships
|
|
$
|
37,210
|
|
|
|
7-9 years
|
|
Trademarks and Tradenames
|
|
$
|
1,640
|
|
|
|
4 years
|
|
Goodwill
|
|
$
|
45,344
|
|
|
|
Indefinite
|
|
|
The amounts and lives of the identified intangibles other than
goodwill were valued at fair value. The analysis included a
combination of the cost approach and an income approach. We used
discount rates from 15% to 17%. The goodwill is attributable to
the workforce and synergies expected to occur after the Spheris
Acquisition. The goodwill and intangible assets are deductible
for tax purposes.
We have performed a review of Spheriss accounting policies
and procedures. As a result of that review, we did not identify
any differences between the accounting policies and procedures
of the two companies that, when conformed, would have a material
impact on the future operating results.
|
|
3.
|
The
Recapitalization Transactions
|
On September 30, 2010, MedQuist Inc., as issuer, and our
subsidiaries MedQuist Transcription Ltd., and CBay Inc., as
co-issuers
and guarantors, and we and certain of our other subsidiaries, as
guarantors, entered into the Note Purchase Agreement for the
issuance of $85.0 million aggregate principal amount of
13% Senior Subordinated Notes due 2016 to BlackRock Kelso
Capital Corporation, PennantPark Investment Corporation,
Citibank, N.A., and THL Credit, Inc. Interest on the notes is
payable in quarterly installments at the issuers option at
either (i) 13% in cash or (ii) 12% in cash plus 2% in
the form of additional Senior Subordinated Notes. Closing and
funding of the Senior Subordinated Notes occurred on
October 14, 2010.
On October 1, 2010, MedQuist Inc., as borrower, and our
subsidiaries MedQuist Transcriptions, Ltd., and CBay Inc., as
co-borrowers and guarantors, and we and certain of our other
subsidiaries, as guarantors, entered into the
37
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Unaudited Pro Forma Condensed Combined Financial
Information(Continued)
Senior Secured Credit Facility with General Electric Capital
Corporation, as administrative agent, and the parties thereto,
consisting of (i) a $200.0 million Term Loan and
(ii) a $25.0 million Revolving Credit Facility.
Closing and funding under the Term Loan occurred on
October 14, 2010. The Senior Secured Credit Facility bears
an interest rate of LIBOR plus 5.50% and a LIBOR floor of 1.75%.
In addition, the Revolving Credit Facility bears a fee of
50 basis points on undrawn amounts.
The proceeds from the borrowings from the Term Loan and the
Senior Subordinated Notes were used as follows:
|
|
|
|
|
Repayment of the then outstanding indebtedness under the
Acquisition Credit Facility of $90.0 million as of
June 30, 2010. With the repayment on October 14, 2010,
the Acquisition Credit Facility was terminated.
|
|
|
|
Repayment of the Acquisition Subordinated Promissory Note on
October 14, 2010. The amount paid to satisfy and extinguish
the principal amount of the Acquisition Subordinated Promissory
Note was $13.6 million.
|
|
|
|
Declaration and payment of a special dividend on
October 18, 2010 by MedQuist Inc. of $4.70 per share. The
total amount of the MedQuist Inc. dividend was
$176.5 million, of which $122.6 million was paid to us.
|
|
|
|
Repayment on October 14, 2010 of our 6% Convertible
Notes due to Philips. The 6% Convertible Notes were settled
at $104.1 million including $7.7 million as a
negotiated prepayment premium to the outstanding balance at the
time of the repayment.
|
|
|
|
Repayment of $4.1 million on certain of our other lines of
credit.
|
The sources and uses of funds related to the Recapitalization
Transactions are shown as if they had occurred as of
June 30, 2010 (in millions):
|
|
|
|
|
|
|
|
|
|
|
Sources
|
|
|
Uses
|
|
|
Term Loan
|
|
$
|
200.0
|
|
|
Extinguishment of Acquisition Credit Facility
|
|
$
|
90.0
|
|
Senior Subordinated Notes
|
|
|
85.0
|
|
|
Extinguishment of Acquisition Subordinated Promissory Note
|
|
|
13.6
|
|
|
|
|
|
|
|
Extinguishment of 6% Convertible Notes (includes premium on
early prepayment)
|
|
|
104.1
|
|
|
|
|
|
|
|
Extinguishment of other debt agreements
|
|
|
4.1
|
|
|
|
|
|
|
|
Dividend distribution to noncontrolling stockholders
|
|
|
53.9
|
|
|
|
|
|
|
|
Cash to working capital
|
|
|
3.4
|
|
|
|
|
|
|
|
Expenses (MedQuist Exchange)
|
|
|
2.5
|
|
|
|
|
|
|
|
Fees and expenses (Recapitalization Transactions)
|
|
|
13.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sources
|
|
$
|
285.0
|
|
|
Total Uses
|
|
$
|
285.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On September 30, 2010, we entered into the Exchange
Agreement with certain MedQuist Inc. stockholders that hold in
the aggregate approximately 13% of MedQuist Inc.s
outstanding shares. Assuming the MedQuist Exchange is
consummated without any adjustments, the MedQuist Exchange would
increase our ownership in
38
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Unaudited Pro Forma Condensed Combined Financial
Information(Continued)
MedQuist Inc. from 69.5% to 82.5%. Pursuant to the Exchange
Agreement, those MedQuist Inc. stockholders will receive
4.2459 shares of our common stock for each MedQuist Inc.
share, subject to certain adjustments, including adjustments
related to MedQuists net capital debt at the closing of
the MedQuist Exchange, and will enter into a stockholders
agreement with us that, among other things, provides them with
registration rights and contains provisions regarding their
voting in the election of our directors. The closing under the
Exchange Agreement is conditioned upon, among other conditions,
our completion of an initial public offering, listing our shares
on The NASDAQ Global Market and our reincorporation in Delaware.
On October 18, 2010, we filed with the SEC a registration
statement on
Form S-4
offering those noncontrolling MedQuist Inc. stockholders who did
not participate in the MedQuist Exchange shares of our common
stock in exchange for their MedQuist Inc. shares. The terms of
the registered exchange offer are described in such registration
statement. Assuming the MedQuist Exchange is consummated, a full
exchange in the Exchange Offer would increase our ownership in
MedQuist Inc. from 82.5% to 100.0%.
|
|
6.
|
Pro Forma
Adjustments Related to the Unaudited Pro Forma Condensed
Combined Statement of Operations for the year ended
December 31, 2009
|
Spheris
Acquisition Pro Forma Adjustments:
|
|
|
|
a.
|
Adjustment to reflect increased amortization of acquired
intangibles as shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual
|
|
|
|
Amount
|
|
|
Estimated Life
|
|
|
Amortization
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Trademarks and Tradenames
|
|
$
|
1,640
|
|
|
|
4 years
|
|
|
$
|
410
|
|
Developed technology
|
|
|
11,390
|
|
|
|
9 years
|
|
|
|
1,266
|
|
Customer relationships
|
|
|
37,210
|
|
|
|
7-9 years
|
|
|
|
4,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
50,240
|
|
|
|
|
|
|
$
|
6,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional depreciation of approximately $203,000 would be
incurred related to fair value adjustments for certain tangible
assets, primarily equipment and leasehold improvements.
|
|
|
|
b.
|
Adjustment to reflect interest expense related to the Spheris
Acquisition, as shown in the table below:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Acquisition Credit Facility interest
|
|
$
|
6,177
|
|
Interest on the Acquisition Subordinated Promissory Note
|
|
|
2,678
|
|
Amortization of deferred financing costs
|
|
|
1,973
|
|
|
|
|
|
|
|
|
|
10,828
|
|
Less: Spheris historical interest expense
|
|
|
17,439
|
|
|
|
|
|
|
Adjustment to interest expense
|
|
$
|
(6,611
|
)
|
|
|
|
|
|
|
The Acquisition Credit Facility and the Acquisition Subordinated
Promissory Note were repaid in connection with the
Recapitalization Transactions.
39
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Unaudited Pro Forma Condensed Combined Financial
Information(Continued)
|
|
|
|
c.
|
Adjustment to eliminate the 2009 Spheris goodwill impairment
charge.
|
|
|
|
|
d.
|
Adjustment to eliminate the direct incremental acquisition
related costs incurred by us and Spheris for bankruptcy related
and reorganization costs.
|
|
|
|
|
e.
|
Adjustment to eliminate the historical income tax benefit of
Spheris and to record the income tax provision of the combined
entities at our historical effective tax rate in effect for the
respective period. However, the effective tax rate of the
combined company could be different depending on
post-acquisition activities.
|
|
|
|
|
f.
|
Adjustment to recognize noncontrolling interest in MedQuist Inc.
|
Recapitalization
Transactions and the MedQuist Exchange Pro Forma
Adjustments:
|
|
|
|
g.
|
Adjustment to reflect interest expense as shown below:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Interest on Term Loan
|
|
$
|
14,500
|
|
Interest on Senior Subordinated Notes
|
|
|
11,050
|
|
Amortization of related deferred financing fees
|
|
|
2,692
|
|
|
|
|
|
|
Total
|
|
|
28,242
|
|
|
|
|
|
|
Less: Interest that would not have been incurred under the prior
debt agreements, as follows:
|
|
|
|
|
Acquisition Credit Facility
|
|
|
6,177
|
|
Acquisition Subordinated Promissory Note
|
|
|
2,678
|
|
6% Convertible Notes
|
|
|
5,447
|
|
Other debt agreements
|
|
|
676
|
|
Amortization of previous deferred financing fees
|
|
|
1,973
|
|
|
|
|
|
|
Adjustment to interest expense
|
|
$
|
11,291
|
|
|
|
|
|
|
|
The Term Loan bears a variable interest rate. Each
1/8%
increase in the base rate (prime or LIBOR) would result in a
$0.3 million increase in annual interest expense.
In connection with our repayment and termination of the
Acquisition Credit Facility, Acquisition Subordinated Promissory
Note and 6% Convertible Notes we wrote off approximately
$5.7 million of deferred financing fees and recorded a loss
of $7.7 million on the repayment of the 6% Convertible
Notes. As these amounts are non recurring and resulted directly
from the Recapitalization Transactions they have not been
reflected in the pro forma adjustments.
|
|
|
|
h.
|
In connection with the MedQuist Exchange, noncontrolling
stockholders holding 4.8 million shares of MedQuist Inc.
have agreed to exchange their MedQuist Inc. shares for shares of
our common stock whereby they will receive 4.2459 shares of
our common stock for each share of MedQuist Inc., which will
result in approximately 20.3 million additional shares
outstanding assuming the MedQuist Exchange is consummated
without any adjustments. After the MedQuist Exchange, we will
own approximately 82.5% of MedQuist Inc., and the noncontrolling
interest will decrease from approximately 30.5% to 17.5%. As we
hold a controlling interest in MedQuist Inc. before and after
the MedQuist Exchange, the exchange is recorded as an equity
transaction. Additionally, we agreed to pay up to
$2.5 million of expenses incurred by certain stockholders
who are party to the Exchange Agreement. We will account for
the payment as a capital transaction.
|
40
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Unaudited Pro Forma Condensed Combined Financial
Information(Continued)
Basic and diluted weighted average shares outstanding and net
income (loss) per share amounts have been adjusted to reflect
the issuance of 20.3 million shares of our common stock in
exchange for MedQuist Inc. shares as if the shares had been
outstanding from January 1, 2009.
|
|
|
|
i.
|
Adjustment to record the income tax provision of the
Recapitalization Transactions at our historical effective tax
rate in effect for the respective period. However, the effective
tax rate after the Recapitalization Transactions could be
different.
|
|
|
j.
|
Adjustment to satisfy our obligations under the Consulting
Services Agreement. Based upon the closing price for our shares
on October 14, 2010, the number of shares of our common
stock issuable would be approximately 4.5 million. Basic
and diluted weighted average shares outstanding and net income
(loss) per share amounts have been adjusted to reflect the
issuance of 4.5 million shares of our common stock.
|
Exchange Offer
Pro Forma Adjustments:
|
|
|
|
k.
|
Adjustments to eliminate the net income attributable to
noncontrolling interests assuming 100% of the MedQuist Inc.
stockholders participate in the Exchange Offer.
|
Basic and diluted weighted average shares outstanding and net
income (loss) per share amounts have been adjusted to reflect
the issuance of 28.4 million of our shares issued in
exchange for MedQuist Inc. shares as if the shares had been
outstanding from January 1, 2009.
|
|
7.
|
Pro forma
Adjustments Related to the Unaudited Pro forma Condensed
Combined Statement of Operations for the six months ended
June 30, 2010
|
Spheris
Acquisition Pro Forma Adjustments:
|
|
|
|
l.
|
Adjustment to reflect increased amortization of acquired
intangibles as shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual
|
|
|
|
Amount
|
|
|
Estimated Life
|
|
|
Amortization
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Trademarks and Tradenames
|
|
$
|
1,640
|
|
|
|
4 years
|
|
|
$
|
410
|
|
Developed technology
|
|
|
11,390
|
|
|
|
9 years
|
|
|
|
1,266
|
|
Customer relationships
|
|
|
37,210
|
|
|
|
7-9 years
|
|
|
|
4,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
50,240
|
|
|
|
|
|
|
$
|
6,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization for the period January 1, 2010 to
April 21, 2010
|
|
|
|
|
|
|
|
|
|
$
|
1,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional depreciation of $68,000 would be incurred related to
fair value adjustments for certain tangible assets, primarily
equipment and leasehold improvements.
|
|
41
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Unaudited Pro Forma Condensed Combined Financial
Information(Continued)
|
|
|
|
m.
|
Adjustment to reflect interest expense related to the Spheris
Acquisition, as shown in the table below:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Acquisition Credit Facility interest January 1, 2010 to
April 21, 2010
|
|
$
|
1,894
|
|
Interest on Acquisition Subordinated Promissory Note
January 1, 2010 to April 21, 2010
|
|
|
821
|
|
Amortization of deferred financing costs
|
|
|
605
|
|
|
|
|
|
|
|
|
|
3,320
|
|
Less: Spheris historical interest expense
|
|
|
3,459
|
|
|
|
|
|
|
Adjustment to interest expense
|
|
$
|
(139
|
)
|
|
|
|
|
|
|
|
|
|
|
n.
|
Adjustment to eliminate direct incremental acquisition related
costs incurred by us and Spheris for bankruptcy related and
reorganization costs.
|
|
|
|
|
o.
|
Adjustment to eliminate the historical income tax benefit of
Spheris and to record the income tax provision of the combined
entities at our historical effective tax rate in effect for the
respective period. However, the effective tax rate of the
combined company could be different depending on
post-acquisition activities.
|
|
|
|
|
p.
|
Adjustment to reflect the noncontrolling interest in MedQuist
Inc.
|
Recapitalization
Transactions and MedQuist Exchange Pro Forma
Adjustments
|
|
|
|
q.
|
Adjustment to reflect interest expense as shown below:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Interest on Term Loan for six months
|
|
$
|
7,250
|
|
Interest on Senior Subordinated Notes for six months
|
|
|
5,525
|
|
Amortization of related deferred financing fees
|
|
|
1,346
|
|
|
|
|
|
|
Total
|
|
|
14,121
|
|
|
|
|
|
|
Less: Interest that would not have been incurred under the prior
debt agreements as follows:
|
|
|
|
|
Acquisition Credit Facility
|
|
|
3,089
|
|
Acquisition Subordinated Promissory Note
|
|
|
1,339
|
|
6% Convertible Notes
|
|
|
2,723
|
|
Other debt agreements
|
|
|
338
|
|
Amortization of previous deferred financing fees
|
|
|
987
|
|
|
|
|
|
|
Adjustment to interest expense
|
|
$
|
5,645
|
|
|
|
|
|
|
|
The Term Loan bears a variable interest rate. Each
1/8%
increase in the base rate (prime or LIBOR) would result in a
$0.3 million increase in annual interest expense.
In connection with our repayment and termination of the
Acquisition Credit Facility, Acquisition Subordinated Promissory
Note and 6% Convertible Notes we wrote off
$5.7 million of deferred financing fees and recorded a loss
of $7.7 million on the repayment of the 6% Convertible
Notes. As these amounts are nonrecurring and resulted directly
from the Recapitalization Transactions, they have not been
reflected in the pro forma adjustment.
42
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Unaudited Pro Forma Condensed Combined Financial
Information(Continued)
|
|
|
|
r.
|
In connection with the MedQuist Exchange, noncontrolling
stockholders holding 4.8 million shares of MedQuist Inc.
have agreed to exchange their MedQuist Inc. shares for shares of
our common stock whereby they will receive 4.2459 shares of
our common stock for each share of MedQuist Inc., which will
result in approximately 20.3 million additional shares
outstanding. After the MedQuist Exchange, we will own
approximately 82.5% of MedQuist Inc., and the noncontrolling
interest will decrease from approximately 30.5% to 17.5%. As we
hold a controlling interest in MedQuist Inc. before and after
the MedQuist Exchange, the exchange is recorded as an equity
transaction. Additionally, we agreed to pay up to
$2.5 million of expenses incurred by certain stockholders
who are party to the Exchange Agreement. We will account for the
payment as a capital transaction.
|
Basic and diluted weighted average shares outstanding and net
income (loss) per share amounts have been adjusted to reflect
the issuance of 20.3 million shares of our common stock in
exchange for MedQuist Inc. shares as if the shares had been
outstanding from January 1, 2009.
|
|
|
|
s.
|
Adjustment to satisfy our obligations under the Consulting
Services Agreement. Based upon the closing price for our shares
on October 14, 2010, the number of shares of our common
stock issuable would be approximately 4.5 million. Basic
and diluted weighted average shares outstanding and net income
loss per share amounts have been adjusted to reflect the
issuance of 4.5 million shares of our common stock.
|
|
|
t.
|
Adjustment to record the tax provision of the Recapitalization
Transactions at our historical effective tax rate in effect for
the respective period. However, the effective tax rate after the
Recapitalization Transactions could be different.
|
Exchange Offer
Pro Forma Adjustments:
|
|
|
|
u.
|
Adjustment to eliminate the net income attributable to
noncontrolling interests assuming 100% of the MedQuist Inc.
noncontrolling stockholders participate in the Exchange Offer.
|
Basic and diluted weighted average shares outstanding and net
income (loss) per share amounts have been adjusted to reflect
the issuance of 28.4 million shares of our common stock in
exchange for MedQuist Inc. shares as if the shares had been
outstanding from January 1, 2009.
|
|
8.
|
Pro Forma
Adjustments Related to the Unaudited Pro Forma Condensed
Consolidated Balance Sheet as of June 30, 2010
|
Recapitalization
Transactions and MedQuist Exchange Pro Forma
Adjustments
|
|
|
|
v.
|
We incurred debt issuance costs of $13.4 million in
connection with the Term Loan and Senior Subordinated Notes.
These amounts will be capitalized as other assets. Since the
previous Acquisition Credit Facility and Acquisition
Subordinated Promissory Notes were extinguished, previously
incurred and capitalized fees of $5.7 million will be
written off. This adjustment reflects the incremental debt
issuance costs to be capitalized.
|
|
|
|
|
w.
|
The proceeds of the Term Loan and Senior Subordinated Notes were
used to repay debt consisting of the Acquisition Credit
Facility, the Acquisition Subordinated Promissory Note and other
term loans and credit facilities maintained by us at the parent
company level. We recorded a loss of $7.7 million on the
|
43
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Unaudited Pro Forma Condensed Combined Financial
Information(Continued)
|
|
|
|
|
extinguishment of our 6% Convertible Notes related to an
early redemption premium. The adjustment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification
|
|
|
|
Current
|
|
|
Non current
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
New Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loan
|
|
$
|
15,000
|
|
|
$
|
185,000
|
|
|
$
|
200,000
|
|
Senior Subordinated Notes
|
|
|
|
|
|
|
85,000
|
|
|
|
85,000
|
|
Debt Repayment
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition Credit Facility
|
|
|
30,000
|
|
|
|
60,000
|
|
|
|
90,000
|
|
Acquisition Subordinated Promissory Notes
|
|
|
|
|
|
|
13,570
|
|
|
|
13,570
|
|
6% Convertible Notes
|
|
|
|
|
|
|
96,419
|
|
|
|
96,419
|
|
Other debt repayment
|
|
|
3,415
|
|
|
|
715
|
|
|
|
4,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Adjustment
|
|
$
|
(18,415
|
)
|
|
$
|
99,296
|
|
|
$
|
80,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
x.
|
Adjustment reflects the dividend paid to noncontrolling
stockholders of MedQuist Inc. totaling $53.9 million which
reduces our noncontrolling interest.
|
|
|
|
|
y.
|
Reflects the issuance of 20.3 million shares of our common
stock in exchange for 4.8 million shares of MedQuist Inc.
common stock, assuming an exchange ratio of 4.2459 for 1. The
impact of the MedQuist Exchange is a reclassification of
$6.9 million between noncontrolling interest and additional
paid in capital. Additionally, we agreed to pay up to
$2.5 million of expenses incurred by certain stockholders
who are party to the Exchange Agreement. We will account for the
payment as a capital transaction.
|
|
|
z.
|
Reflects the issuance of 4.5 million shares of our common stock
issuable pursuant to the Consulting Services Agreement, assuming
a share conversion at $2.38 per share, based upon the closing
price for our shares on October 14, 2010.
|
Exchange Offer
Pro Forma Adjustments
|
|
|
|
aa.
|
Adjustment to reduce noncontrolling interest assuming 100%
of the MedQuist Inc. noncontrolling stockholders participate in
the Exchange Offer. Reflects the issuance of 28.4 million
shares of our common stock in exchange for 6.7 million
shares of MedQuist Inc. common stock. The impact of the Exchange
Offer is a reclassification of $9.6 million between
noncontrolling interest and additional paid in capital.
|
44
Selected
Consolidated Financial and Other Data
The following tables summarize our consolidated financial data
for the periods presented. You should read the following
selected consolidated financial data in conjunction with our
consolidated financial statements and the related notes included
elsewhere in this prospectus and the Managements
Discussion and Analysis of Financial Condition and Results of
Operations section of this prospectus.
We derived the statement of operations data for the years ended
December 31, 2007, 2008 and 2009 and the balance sheet data
as of December 31, 2008 and 2009 from our audited
consolidated financial statements, which are included elsewhere
in this prospectus. We derived the statement of operations data
for the years ended December 31, 2005 and 2006 and the
balance sheet data as of December 31, 2005, 2006 and 2007
from our audited consolidated financial statements, which are
not included in this prospectus. We derived the statement of
operations data for the six months ended June 30, 2009 and
2010 and the balance sheet data as of June 30, 2010 from
our unaudited consolidated financial statements, which are
included elsewhere in this prospectus. In the opinion of our
management, the unaudited consolidated financial statements have
been prepared on the same basis as our audited consolidated
financial statements and include all adjustments, consisting of
only normal recurring adjustments that we consider necessary to
present fairly the financial information set forth in those
statements. Our historical results for any prior period are not
necessarily indicative of results to be expected for a full year
or any future period.
Our summary historical consolidated statements of operations and
other operating data reflect the consolidation of the results of
operations of MedQuist Inc. since August 6, 2008 and
Spheris since April 22, 2010, the respective dates of their
acquisitions.
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Six Months Ended June 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
31,806
|
|
|
$
|
41,862
|
|
|
$
|
57,694
|
|
|
$
|
193,673
|
|
|
$
|
371,768
|
|
|
$
|
188,539
|
|
|
$
|
200,592
|
|
Cost of revenues
|
|
|
15,999
|
|
|
|
20,613
|
|
|
|
30,209
|
|
|
|
125,074
|
|
|
|
239,549
|
|
|
|
121,755
|
|
|
|
128,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
15,807
|
|
|
|
21,249
|
|
|
|
27,485
|
|
|
|
68,599
|
|
|
|
132,219
|
|
|
|
66,784
|
|
|
|
71,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
13,237
|
|
|
|
17,318
|
|
|
|
25,137
|
|
|
|
51,243
|
|
|
|
60,632
|
|
|
|
31,764
|
|
|
|
32,706
|
|
Research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,099
|
|
|
|
9,604
|
|
|
|
4,796
|
|
|
|
5,593
|
|
Depreciation and amortization
|
|
|
2,635
|
|
|
|
2,258
|
|
|
|
2,915
|
|
|
|
14,906
|
|
|
|
26,977
|
|
|
|
13,610
|
|
|
|
15,068
|
|
Cost of legal proceedings and settlements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,311
|
|
|
|
14,943
|
|
|
|
12,158
|
|
|
|
2,152
|
|
Acquisition related charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,246
|
|
|
|
|
|
|
|
6,045
|
|
Goodwill impairment charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,106
|
|
|
|
2,727
|
|
|
|
|
|
|
|
966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
15,872
|
|
|
|
19,576
|
|
|
|
28,052
|
|
|
|
178,637
|
|
|
|
116,129
|
|
|
|
62,328
|
|
|
|
62,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(65
|
)
|
|
|
1,673
|
|
|
|
(567
|
)
|
|
|
(110,038
|
)
|
|
|
16,090
|
|
|
|
4,456
|
|
|
|
9,421
|
|
Interest expense, net
|
|
|
(606
|
)
|
|
|
(1,628
|
)
|
|
|
(2,108
|
)
|
|
|
(3,954
|
)
|
|
|
(9,132
|
)
|
|
|
(4,660
|
)
|
|
|
(7,351
|
)
|
Equity in income (loss) of affiliated companies
|
|
|
|
|
|
|
|
|
|
|
(105
|
)
|
|
|
66
|
|
|
|
1,933
|
|
|
|
408
|
|
|
|
546
|
|
Other income
|
|
|
18
|
|
|
|
18
|
|
|
|
14
|
|
|
|
9
|
|
|
|
11
|
|
|
|
|
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and noncontrolling
interests
|
|
|
(653
|
)
|
|
|
63
|
|
|
|
(2,766
|
)
|
|
|
(113,917
|
)
|
|
|
8,902
|
|
|
|
204
|
|
|
|
2,724
|
|
Income tax provision (benefit)
|
|
|
45
|
|
|
|
(46
|
)
|
|
|
(113
|
)
|
|
|
(5,398
|
)
|
|
|
1,082
|
|
|
|
639
|
|
|
|
(326
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(698
|
)
|
|
|
109
|
|
|
|
(2,653
|
)
|
|
|
(108,519
|
)
|
|
|
7,820
|
|
|
|
(435
|
)
|
|
|
3,050
|
|
Less: Net (income) loss attributable to noncontrolling interest
|
|
|
(6
|
)
|
|
|
31
|
|
|
|
57
|
|
|
|
(5,154
|
)
|
|
|
(7,085
|
)
|
|
|
(2,335
|
)
|
|
|
(2,497
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to CBaySystems Holdings
Limited
|
|
$
|
(704
|
)
|
|
$
|
140
|
|
|
$
|
(2,596
|
)
|
|
$
|
(113,673
|
)
|
|
$
|
735
|
|
|
$
|
(2,770
|
)
|
|
$
|
553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share attributable to CBaySystems
Holdings Limited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(.06
|
)
|
|
$
|
0.00
|
|
|
$
|
(0.04
|
)
|
|
$
|
(1.13
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
Diluted
|
|
$
|
(.06
|
)
|
|
$
|
0.00
|
|
|
$
|
(0.04
|
)
|
|
$
|
(1.13
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,289
|
|
|
|
12,310
|
|
|
|
57,929
|
|
|
|
101,669
|
|
|
|
156,116
|
|
|
|
154,991
|
|
|
|
157,705
|
|
Diluted
|
|
|
12,289
|
|
|
|
12,310
|
|
|
|
57,929
|
|
|
|
101,669
|
|
|
|
156,116
|
|
|
|
154,991
|
|
|
|
157,705
|
|
Other Operating Data (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(1)
|
|
$
|
2,576
|
|
|
$
|
4,009
|
|
|
$
|
2,362
|
|
|
$
|
18,886
|
|
|
$
|
60,130
|
|
|
$
|
27,970
|
|
|
$
|
33,760
|
|
|
|
|
(1)
|
|
See below for reconciliations of
net income (loss) attributable to CBaySystems Holdings Limited
to Adjusted EBITDA.
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
As of December 31,
|
|
|
June 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
Cash and cash equivalents
|
|
$
|
2,344
|
|
|
$
|
515
|
|
|
$
|
2,667
|
|
|
$
|
42,868
|
|
|
$
|
29,633
|
|
|
$
|
22,457
|
|
Working capital (deficit)(a)
|
|
|
2,832
|
|
|
|
6,166
|
|
|
|
10,870
|
|
|
|
1,128
|
|
|
|
(5,114
|
)
|
|
|
6,753
|
|
Total assets
|
|
|
20,722
|
|
|
|
31,817
|
|
|
|
51,420
|
|
|
|
279,177
|
|
|
|
253,068
|
|
|
|
380,151
|
|
Long term debt, including current portion of debt
|
|
|
3,899
|
|
|
|
21,283
|
|
|
|
14,075
|
|
|
|
126,008
|
|
|
|
107,340
|
|
|
|
214,092
|
|
Total equity
|
|
|
13,708
|
|
|
|
5,326
|
|
|
|
29,854
|
|
|
|
79,350
|
|
|
|
72,301
|
|
|
|
74,934
|
|
|
|
|
(a)
|
|
Working capital is defined as total
current assets, excluding cash and cash equivalents, minus total
current liabilities, excluding current portion of debt.
|
47
The following table presents a reconciliation of net income
(loss) attributable to CBaySystems Holdings Limited:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
Years Ended December 31,
|
|
|
June 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Net income (loss) attributable to CBaySystems Holdings Limited
|
|
$
|
(705
|
)
|
|
$
|
138
|
|
|
$
|
(2,596
|
)
|
|
$
|
(113,673
|
)
|
|
$
|
735
|
|
|
$
|
(2,770
|
)
|
|
$
|
553
|
|
Net income (loss) attributable to noncontrolling interests
|
|
|
(6
|
)
|
|
|
31
|
|
|
|
(57
|
)
|
|
|
5,154
|
|
|
|
7,085
|
|
|
|
2,335
|
|
|
|
2,497
|
|
Income tax provision (benefit)(a)
|
|
|
45
|
|
|
|
(46
|
)
|
|
|
(113
|
)
|
|
|
(5,398
|
)
|
|
|
1,082
|
|
|
|
639
|
|
|
|
(326
|
)
|
Interest expense, net
|
|
|
607
|
|
|
|
1,628
|
|
|
|
2,108
|
|
|
|
3,954
|
|
|
|
9,132
|
|
|
|
4,660
|
|
|
|
7,351
|
|
Depreciation and amortization
|
|
|
2,635
|
|
|
|
2,258
|
|
|
|
2,915
|
|
|
|
14,906
|
|
|
|
26,977
|
|
|
|
13,610
|
|
|
|
15,068
|
|
Cost of legal proceedings and settlements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,311
|
|
|
|
14,943
|
|
|
|
12,158
|
|
|
|
2,152
|
|
Acquisition related charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,620
|
|
|
|
1,246
|
|
|
|
|
|
|
|
6,045
|
|
Goodwill impairment charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,106
|
|
|
|
2,727
|
|
|
|
|
|
|
|
966
|
|
Equity in (income) loss of affiliated companies
|
|
|
|
|
|
|
|
|
|
|
105
|
|
|
|
(66
|
)
|
|
|
(1,933
|
)
|
|
|
(408
|
)
|
|
|
(546
|
)
|
Asset impairment charge, severance charges and accrual
reversals(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,000
|
|
|
|
(1,864
|
)
|
|
|
(2,254
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
2,576
|
|
|
$
|
4,009
|
|
|
$
|
2,362
|
|
|
$
|
18,886
|
|
|
$
|
60,130
|
|
|
$
|
27,970
|
|
|
$
|
33,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
We have $130.0 million of
federal net operating loss carry forwards as of
December 31, 2009 and will record approximately
$30.0 million of annual tax amortization related to
intangible assets, including goodwill, that will reduce future
taxable income. Due to the existence of federal net operating
loss carry forwards and the impact of tax amortization related
to intangible assets, including goodwill, cash taxes paid
(refunded) were $84,000, $160,000, $796,000 for the years ended
December 31, 2007, 2008 and 2009, respectively, and
$497,000 and $(478,000) for the six months ended June 30,
2009 and 2010, respectively.
|
|
(b)
|
|
Includes an impairment charge to
write-off the amount paid related to severance of one of our
former executives and the reversal of certain accruals, related
to litigation claims, as a result of the expiration of the
applicable statute of limitations.
|
48
Adjusted EBITDA is a metric used by management to measure
operating performance. Adjusted EBITDA is defined as net income
(loss) attributable to CBaySystems Holdings Limited plus net
income (loss) attributable to noncontrolling interests, income
taxes, interest expense, depreciation and amortization, cost of
legal proceedings and settlements, acquisition related charges,
goodwill impairment charge, restructuring charges, equity in
income (loss) of affiliated company, asset impairment charge,
severance costs, and certain unusual or nonrecurring items. We
present Adjusted EBITDA as a supplemental performance measure
because we believe it facilitates operating performance
comparisons from period to period and company to company by
backing out the following:
|
|
|
|
|
potential differences caused by variations in capital structures
(affecting interest expense, net), tax positions (such as the
impact on periods or companies for changes in effective tax
rates), the age and book depreciation of fixed assets (affecting
depreciation expense);
|
|
|
|
the impact of non-cash charges, such as goodwill impairment
charges and asset impairment charges; and
|
|
|
|
the impact of unusual expenses or events, such as acquisition
related charges, restructuring charges, severance costs and
certain unusual or nonrecurring items.
|
Because Adjusted EBITDA facilitates internal comparisons of
operating performance on a more consistent basis, we also use
Adjusted EBITDA in measuring our performance relative to that of
our competitors. Adjusted EBITDA is not a measurement of our
financial performance under GAAP and should not be considered as
an alternative to net income, operating income or any other
performance measures derived in accordance with GAAP or as an
alternative to cash flow from operating activities as measures
of our profitability or liquidity. We understand that although
Adjusted EBITDA is frequently used by securities analysts,
lenders and others in their evaluation of companies, Adjusted
EBITDA has limitations as an analytical tool, and you should not
consider it in isolation, or as a substitute for analysis of our
results as reported under GAAP. Some of these limitations are:
|
|
|
|
|
Adjusted EBITDA does not reflect our cash expenditures or future
requirements for capital expenditures or contractual commitments;
|
|
|
|
Adjusted EBITDA does not reflect changes in, or cash
requirements for, our working capital needs;
|
|
|
|
although depreciation is a non-cash charge, the assets being
depreciated will often have to be replaced in the future, and
Adjusted EBITDA does not reflect any cash requirements for such
replacements; and
|
|
|
|
other companies in our industry may calculate Adjusted EBITDA
differently than we do, limiting its usefulness as a comparative
measure.
|
49
Market Price
Information for Our Shares
We expect our shares to be listed on The NASDAQ Global Market
upon consummation of this offering. They have not previously
been listed on The NASDAQ Global Market or any other U.S.
market. However, our shares are currently listed on AIM under
the symbol CBAY. Our shares began trading on AIM in
June 2007.
As of October 11, 2010, there were 158.2 million
shares outstanding and approximately 127 holders of record
of our shares. On a fully diluted basis, there would be
218 million shares outstanding, which includes (i)
5.8 million shares issuable upon exercise of all
outstanding options under our equity incentive plan, (ii)
0.4 million shares issuable upon the exercise of
outstanding options under certain individual option grants to
certain members of management, (iii) 20.3 million shares
issuable pursuant to the MedQuist Exchange, (iv)
28.4 million shares issuable pursuant to the Exchange
Offer, assuming a full exchange, (v) 4.5 million shares
issuable pursuant to the Consulting Services Agreement and (vi)
0.4 million shares issuable pursuant to a warrant agreement
between us and Oosterveld International B.V.
On October 15, 2010, the last reported sale price of our
shares listed on AIM was £1.50 per share.
The following table shows the high and low market prices for our
shares for each fiscal quarter for the two most recent fiscal
years. Market prices for our shares have fluctuated
significantly since they were listed on AIM and trading volume
on AIM have been very small in relation to the number of our
total outstanding shares. As a result, the market prices shown
in the following table may not be indicative of the market
prices at which our shares will trade after this offering.
|
|
|
|
|
|
|
|
|
|
|
Share Price
|
|
|
|
(pence)
|
|
|
|
High
|
|
|
Low
|
|
|
Year
|
|
|
|
|
|
|
|
|
2009
|
|
|
84.5
|
|
|
|
33.5
|
|
2008
|
|
|
84.5
|
|
|
|
40.5
|
|
2007
|
|
|
112.0
|
(1)
|
|
|
63.5
|
(1)
|
2006
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
|
|
|
|
|
|
|
Third Quarter 2010
|
|
|
136.0
|
|
|
|
112.5
|
|
Second Quarter 2010
|
|
|
155.0
|
|
|
|
86.5
|
|
First Quarter 2010
|
|
|
212.5
|
|
|
|
62.5
|
|
Fourth Quarter 2009
|
|
|
84.5
|
|
|
|
69.0
|
|
Third Quarter 2009
|
|
|
82.0
|
|
|
|
38.5
|
|
Second Quarter 2009
|
|
|
40.5
|
|
|
|
33.5
|
|
First Quarter 2009
|
|
|
46.0
|
|
|
|
36.5
|
|
Fourth Quarter 2008
|
|
|
74.0
|
|
|
|
40.5
|
|
Third Quarter 2008
|
|
|
79.5
|
(2)
|
|
|
62.5
|
(2)
|
Second Quarter 2008
|
|
|
74.5
|
(2)
|
|
|
71.0
|
(2)
|
First Quarter 2008
|
|
|
84.5
|
|
|
|
72.0
|
|
|
|
|
(1) |
|
We were admitted to AIM on June 18, 2007. Data for 2007
reflects closing prices from June 18, 2007 to
December 31, 2007. |
|
(2) |
|
As a result of the reverse takeover rules of AIM, our shares
were temporarily suspended from trading on AIM on May 22,
2008 in connection with the execution of the stock purchase
agreement by and among us, CBay Inc. and Philips for our
acquisition of 69.5% of the outstanding shares of MedQuist Inc.
common stock. The shares resumed trading on July 21, 2008
with the increased share capital and were admitted to trading on
August 6, 2008. |
50
Managements
Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis of our financial condition
and results of operation should be read in conjunction with the
consolidated financial statements and related notes of each of
us, MedQuist Inc. and Spheris Inc. and with the information
under Unaudited Pro Forma Condensed Consolidated Financial
Information and Selected Consolidated Financial and
Other Data appearing elsewhere in this prospectus. In
addition to historical information, this discussion and analysis
contains forward looking statements that involve risks,
uncertainties and assumptions. Our actual results may differ
materially from those anticipated in these forward looking
statements as a result of certain factors. We discuss factors
that we believe could cause or contribute to these differences
below and elsewhere in this prospectus, including those set
forth under Risk Factors.
Overview
We are a leading provider of integrated clinical documentation
solutions for the U.S. healthcare system. Our
end-to-end
solutions convert physicians dictation of patient
interactions, or the physician narrative, into a high quality
and customized electronic record. These solutions integrate
technologies and services for voice capture and transmission,
ASR, medical transcription and editing, workflow automation, and
document management and distribution to deliver a complete
managed service for our customers. Our solutions enable
hospitals, clinics, and physician practices to improve the
quality of clinical data as well as accelerate and automate the
documentation process, and we believe our solutions improve
physician productivity and satisfaction, enhance revenue cycle
performance, and facilitate the adoption and meaningful use of
electronic health records.
Key Factors
Affecting Our Performance
In 2008 and 2010, we completed two large acquisitions which have
materially impacted our financial results. Our results have also
been impacted by volume and pricing trends, operating
improvements and selling, general and administrative expense
savings. These key factors are described below for the years
ended December 31, 2007, 2008 and 2009 and the six months
ended June 30, 2009 and 2010.
MedQuist
Inc. Acquisition
In August 2008, an affiliate of SAC PCG invested
$124.0 million to acquire a majority interest in us.
Concurrent with this investment, we acquired a 69.5% interest in
MedQuist Inc., the largest medical transcription service
provider by revenue in the United States at the time. The
purchase price was $239.7 million of which
$118.3 million was allocated to goodwill. The transaction
was financed using a combination of the investment proceeds and
debt financing.
MedQuist Inc. was more than four times the size of us as
measured by lines processed in 2008. Additionally, MedQuist Inc.
offered a complete integrated solution for clinical
documentation, which was a strong complement to our low-cost
service offering. However, prior to the acquisition, MedQuist
Inc. was facing deteriorating financial performance from
declining volumes, customer attrition issues, ongoing litigation
and a lack of offshore capabilities.
We believed that MedQuist Inc., despite its operational
challenges and substantial overhead, had strong underlying
technology, deep healthcare domain expertise, and a long-tenured
customer base. Following our acquisition of MedQuist Inc., we
embarked upon a strategy to enhance the management team,
streamline operations, improve relationships with customers,
leverage our offshore resources, increase the utilization of ASR
technology, and resolve all outstanding litigation. This
strategy resulted in a stabilization of volume trends starting
in the second
51
quarter of 2009. The following table shows the percentage change
in MedQuist Inc.s volume for the nine quarters ended
March 31, 2010, the last quarter prior to the Spheris
Acquisition.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
Prior to the MedQuist Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MedQuist Inc.
|
|
Acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
|
Q4
|
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
|
Q1
|
|
Volume % Change over Previous Year
|
|
|
(3.3
|
)%
|
|
|
(4.7
|
)%
|
|
|
(0.1
|
)%
|
|
|
|
(0.4
|
)%
|
|
|
(2.2
|
)%
|
|
|
0.8
|
%
|
|
|
2.5
|
%
|
|
|
2.8
|
%
|
|
|
4.0
|
%
|
|
Our operational improvements and integration efforts have
resulted in tangible financial improvements to our
profitability. MedQuist Inc.s Adjusted EBITDA grew from
$3.5 million in 2007 to $55.6 million in 2009. See
Summary Historical and Unaudited Pro Forma Consolidated
Financial Data for a reconciliation of Adjusted EBITDA to
net income. Gross profit margin has increased from 23% in 2007
to 33% in 2009. Selling, general and administrative expense for
MedQuist Inc. has decreased from $62.3 million or 18% of
revenue in 2007 to $33.4 million or 11% of revenue in 2009.
Spheris
Acquisition
On April 22, 2010, we acquired certain assets, principally
customer contracts, from Spheris in a transaction conducted
under Section 363 of the Bankruptcy Code. The purchase
price was $112.4 million of which $45.3 million was
allocated to goodwill. Spheris was the second largest
U.S. medical transcription service provider by revenue at
the time. Spheris had experienced declines in volumes due
principally to customer attrition, which we believed was
attributable to quality issues and underinvestment in product
development caused by financial constraints leading up to its
bankruptcy Some volume declines continued after the date of our
acquisition as the result of notices of termination given prior
to that date. The following table shows the percentage change in
Spheris volume for the nine quarters ended March 31,
2010, the last quarter prior to the Spheris Acquisition.
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Spheris
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2008
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2009
|
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2010
|
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|
Q1
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Q2
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Q3
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Q4
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Q1
|
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Q2
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Q3
|
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Q4
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Q1
|
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|
Volume % Change over Previous Year
|
|
|
(4.8
|
)%
|
|
|
(4.7
|
)%
|
|
|
(5.9
|
)%
|
|
|
(11.6
|
)%
|
|
|
(13.3
|
)%
|
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|
(10.9
|
)%
|
|
|
(7.9
|
)%
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|
(6.5
|
)%
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(5.5
|
)%
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We considered the negative volume trend for Spheris in our
acquisition valuation. Net revenues for Spheris were
$156.6 million and $35.2 million for the year ended
December 31, 2009 and the three months ended March 31,
2010, respectively. Customers who submitted notices of
termination prior to the acquisition generated revenues of
$24.6 million and $1.7 million during the year ended
December 31, 2009 and the three months ended
March 31, 2010, respectively. Therefore, net revenues for
the year ended December 31, 2009 and for the three months
ended March 31, 2010, less revenue attributable to
customers who submitted notices of termination prior to the
Spheris Acquisition, were $132.0 million and
$33.5 million, respectively.
Our Spheris integration efforts have focused on merging the new
customer base acquired, integrating systems and eliminating cost
redundancies. We expect the measures we have implemented since
the Spheris Acquisition to yield $7.0 million of cost
savings in the fourth quarter of 2010, representing an
annualized impact of $28.0 million. We expect that the
integration of Spheris will be fully completed by the first half
of 2011.
Volume
and Pricing Trends
The vast majority of our revenue is generated by providing
clinical documentation services to our customers. Medical
transcription by our MTs and MEs accounted for 87.7% of our net
revenues for the six months ended June 30, 2010. Product
sales and related maintenance contracts, patient financial
services revenues and other made up the balance of our revenues.
Our customers are generally charged a rate per character
multiplied by the number of characters that we process. MedQuist
Inc. volume had been declining prior to the MedQuist Inc.
Acquisition, and we have been able to reverse this trend by
increasing our sales (through the acquisition of new accounts
and additional work types from existing customers) and
decreasing our losses of existing customers. We have reduced
losses of MedQuist Inc. customers primarily by improving our
quality and improving our account management efforts. MedQuist
Inc. volume increased 1% in 2009 compared to 2008, and increased
2.1% for the six months ended June 30, 2010 compared to the
52
comparable period in 2009.
We base our pricing on various factors, principally market
forces, the extent to which we can utilize our offshore
production facilities, the extent to which customers utilize the
ASR technology available in our solutions, the scope of services
provided, and turnaround times requested by a particular
customer. We work with our customers to evaluate how different
solutions affect pricing and to determine what for them is an
optimal mix of service level and price. Higher utilization of
offshore production and ASR leads to lower costs for us, which
permits us to offer better pricing to our customers while at the
same time contributing to margin growth. We have successfully
migrated a significant portion of MedQuist Inc.s volume
offshore and we will continue these efforts in relation to our
combined businesses.
As technological advances and increased use of offshore
resources have driven down industry costs, the average price per
character has also declined as healthcare providers have sought
to participate in the economic gains. We intend to monitor and
adjust our pricing accordingly to remain competitive as these
industry trends continue.
Operating
Improvements
We have executed significant operational improvements since the
MedQuist Inc. Acquisition. Cost of revenue on a per unit basis
has declined due to the increased utilization of ASR technology
and the increased percentage of volume produced offshore. Our
use of speech recognition technology has increased from 31% to
62% over the eight quarters ended June 30, 2010.
Additionally we have increased our offshore production as a
percentage of our volume from 33% to 39% for the same period. As
we continue to increase the use of ASR technology and move
volume offshore, we expect to continue to reduce costs.
Some of our contracts specify lower prices for work performed
offshore or using speech recognition technology. Therefore, our
operating income will not increase by the full amount of the
savings we realize. Additionally, management has been reducing
support staff headcount in order to further reduce operating
costs.
These improvements have resulted in gross margin percentages
which have improved from 30.4% to 35.6% over the eight quarters
ended June 30, 2010 despite lower average prices.
Selling,
General and Administrative Expense Savings
We have made significant reductions in selling, general and
administrative expenses since 2008. Such expenses were 26% of
revenue in 2008 compared to 16% of revenue for the six months
ended June 30, 2010. These savings were achieved primarily
through headcount reductions and aggressive efforts to reduce
other administrative expenses.
In connection with the Spheris Acquisition we have identified
potential specific savings in the sales and marketing and
general and administrative areas. We anticipate that these
savings will be implemented throughout the remainder of 2010 and
2011.
Basis of
Presentation
Revenue
We derive revenue primarily from providing clinical
documentation solutions to health systems, hospitals and large
group medical practices. Our customers are generally charged a
fixed rate multiplied by the volume of work that we transcribe
or edit. To a lesser extent we earn revenue by providing
maintenance contracts, digital dictation solutions, speech
recognition solutions and revenue cycle services. Approximately
95% of our revenue is from recurring services.
Cost of
Revenues
Cost of revenue includes compensation of our direct employees
and subcontractors involved in production, other production
costs primarily related to operational and production
management, quality assurance, quality control and customer and
field service personnel and telecommunication and facility
costs. Cost of revenue also includes
53
the direct cost of technology products sold to customers.
Compensation costs for personnel in the United States are
directly related to clinical documentation revenue and are
generally based on lines transcribed or edited multiplied by a
specific rate, while personnel at our offshore production
centers are generally paid fixed wages. Cost of revenues does
not include depreciation or amortization.
Selling,
General and Administrative Expense
Our selling, general and administrative expense consists
primarily of marketing and sales costs, accounting costs,
information technology costs, professional fees, corporate
facility costs and corporate payroll and benefits expense.
Research
and Development Expense
Our research and development expense consists primarily of
personnel and related costs, including salaries and employee
benefits for software engineers and consulting fees paid to
independent consultants who provide software engineering
services to us. To date, our research and development efforts
have been devoted to new products and service offerings and
increases in features and functionality of our existing products
and services.
Depreciation
and Amortization
Depreciation is calculated on a straight-line basis over the
estimated useful lives of the assets, which range from two to
seven years for furniture, equipment and software, and the
lesser of the lease term or estimated useful life for leasehold
improvements. Intangible assets are being amortized using the
straight-line method over their estimated useful lives which
range from three to twenty years.
Cost of
Legal Proceedings and Settlements
Cost of legal proceedings and settlements includes settlement of
claims, ongoing litigation, and associated legal and other
professional fees incurred.
Critical
Accounting Policies and Use of Estimates
We prepare our consolidated financial statements in accordance
with generally accepted accounting principles in the United
States, or GAAP. We believe there are several accounting
policies that are critical to understanding our historical and
future performance, as these policies affect the reported
amounts of revenue and other significant areas that involve
managements judgments and estimates. These critical
accounting policies and estimates have been discussed with our
audit committee.
The preparation of our consolidated financial statements
requires us to make estimates and judgments that affect our
reported amounts of assets, liabilities, expense and related
disclosure of contingent liabilities. On an ongoing basis, we
evaluate these estimates and judgments. We base these estimates
on historical experience and on various other assumptions that
are believed to be reasonable at such time, the results of which
form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other
independent sources. Actual results may ultimately differ from
these estimates. Critical accounting policies are those policies
that require managements subjective and complex judgments,
often as a result of the need to make estimates about the effect
of inherently uncertain matters that may change in subsequent
periods. While there are a number of accounting policies,
methods and estimates affecting our consolidated financial
statements as addressed in Note 2 to our consolidated
financial statements, our critical accounting policies include
the following:
Revenue
Recognition
We recognize medical transcription services revenue when
persuasive evidence of an arrangement exists, the price is fixed
or determinable, services have been rendered and collectability
is reasonably assured. These services are recorded using
contracted rates and are net of estimates for customer credits.
Historically, our estimates have been reasonably accurate. If
actual results are higher or lower than our estimates, we would
have to adjust our estimates and financial statements in future
periods.
54
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount and do
not bear interest. The carrying value of accounts receivable
approximates fair value. The allowance for doubtful accounts is
our best estimate of potential losses resulting from the
inability of our customers to make required payments due. This
allowance is used to state trade receivables at estimated net
realizable value.
We estimate uncollectible amounts based upon our historical
write-off experience, current customer receivable balances,
aging of customer receivable balances, the customers
financial condition and current economic conditions.
Historically, our estimates have been adequate to provide for
our accounts receivable exposure.
Additionally, we enter into medical transcription service
contracts that may contain provisions for performance penalties
in the event we do not meet certain required service levels,
primarily related to turnaround time on transcribed reports. We
reduce revenue for any such performance penalties and service
level credits incurred and have included an estimate of such
penalties and credits in our allowance for uncollectible
accounts.
Valuation
of Long-Lived and Other Intangible Assets and Goodwill
In connection with acquisitions, we allocate portions of the
purchase price to tangible and intangible assets, consisting
primarily of acquired technologies and customer relationships,
based on independent appraisals received after each acquisition,
with the remainder allocated to goodwill. As of June 30,
2010, we had $99.4 million of goodwill and
$118.0 million of intangible assets. We assess the
realizability of goodwill and intangible assets with indefinite
useful lives at least annually, or sooner if events or changes
in circumstances indicate that the carrying amount may not be
recoverable. We have determined that we have three reporting
units but a sole operating segment.
We review our long-lived assets, including amortizable
intangibles, for impairment when events indicate that their
carrying amount may not be recoverable. When we determine that
one or more impairment indicators are present for an asset, we
compare the carrying amount of the asset to net future
undiscounted cash flows that the asset is expected to generate.
If the carrying amount of the asset is greater than the net
future undiscounted cash flows that the asset is expected to
generate, we then compare the fair value to the book value of
the asset. If the fair value is less than the book value, we
recognize an impairment loss. The impairment loss is the excess
of the carrying amount of the asset over its fair value.
Some of the events that we consider as impairment indicators for
our long-lived assets, including goodwill, are:
|
|
|
|
|
our net book value is greater than the fair value;
|
|
|
|
significant adverse economic and industry trends;
|
|
|
|
significant decrease in the market value of the asset;
|
|
|
|
the extent that we use an asset or changes in the manner that we
use it;
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|
|
|
significant changes to the asset since we acquired it; and
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|
|
|
other changes in circumstances that potentially indicate all or
a portion of our business will be sold.
|
Deferred
Income Taxes
Deferred tax assets represent future tax benefits that we expect
to be able to apply against future taxable income. Our ability
to utilize the deferred tax assets is dependent upon our ability
to generate future taxable income. To the extent that we believe
it is more likely than not that all or a portion of the deferred
tax asset will not be utilized, we record a valuation allowance
against that asset. In making that determination we consider all
positive and negative evidence and give stronger consideration
to evidence that is objective in nature.
Commitments
and Contingencies
We routinely evaluate claims and other potential litigation to
determine if a liability should be recorded in the event it is
probable that we will incur a loss and can estimate the amount
of such loss.
55
Customer
Accommodation Program
In response to customers concerns regarding historical
billing matters, MedQuist Inc. established a plan to offer
financial accommodations to certain of its customers during 2005
and 2006 and recorded the related liability at such time. In
2008 MedQuist Inc. reached an agreement on customer litigation
resolving all claims by the named parties. Since then we have
not made additional offers. The liability balance was
$11.5 million as of June 30, 2010.
MedQuist Inc. is unable to predict how many customers, if any,
may accept the outstanding accommodation offers on the terms
proposed by it, nor it is able to predict the timing of the
acceptance (or rejection) of any outstanding accommodation
offers. Until any offers are accepted, MedQuist Inc. may
withdraw or modify the terms of the accommodation program or any
outstanding offers at any time. In addition, MedQuist Inc. is
unable to predict how many future offers, if made, will be
accepted on the terms proposed by it. We regularly evaluate
whether to proceed with, modify or withdraw the accommodation
program or any outstanding offers. To the extent the program
were withdrawn or modified, our financial statements would be
affected.
56
Consolidated
Results of Operations
Comparison
of Six Months Ended June 30, 2009 and 2010
The following tables set forth our unaudited consolidated
results of operations for the periods indicated below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amount
|
|
|
Revenues
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Net revenues
|
|
$
|
188,539
|
|
|
|
100
|
%
|
|
$
|
200,592
|
|
|
|
100
|
%
|
Cost of revenues
|
|
|
121,755
|
|
|
|
65
|
%
|
|
|
128,641
|
|
|
|
64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
66,784
|
|
|
|
35
|
%
|
|
|
71,951
|
|
|
|
36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
31,764
|
|
|
|
17
|
%
|
|
|
32,706
|
|
|
|
16
|
%
|
Research and development
|
|
|
4,796
|
|
|
|
3
|
%
|
|
|
5,593
|
|
|
|
3
|
%
|
Depreciation and amortization
|
|
|
13,610
|
|
|
|
7
|
%
|
|
|
15,068
|
|
|
|
8
|
%
|
Cost of legal proceedings and settlements
|
|
|
12,158
|
|
|
|
6
|
%
|
|
|
2,152
|
|
|
|
1
|
%
|
Acquisition related charges
|
|
|
|
|
|
|
|
|
|
|
6,045
|
|
|
|
3
|
%
|
Restructuring charges
|
|
|
|
|
|
|
|
|
|
|
966
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
62,328
|
|
|
|
33
|
%
|
|
|
62,530
|
|
|
|
31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
4,456
|
|
|
|
2
|
%
|
|
|
9,421
|
|
|
|
5
|
%
|
Interest expense, net
|
|
|
(4,660
|
)
|
|
|
(2
|
)%
|
|
|
(7,351
|
)
|
|
|
(4
|
)%
|
Equity in income (loss) of affiliated companies
|
|
|
408
|
|
|
|
0
|
%
|
|
|
546
|
|
|
|
0
|
%
|
Other income
|
|
|
|
|
|
|
|
|
|
|
108
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and noncontrolling interests
|
|
|
204
|
|
|
|
0
|
%
|
|
|
2,724
|
|
|
|
1
|
%
|
Income tax provision (benefit)
|
|
|
639
|
|
|
|
0
|
%
|
|
|
(326
|
)
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(435
|
)
|
|
|
0
|
%
|
|
|
3,050
|
|
|
|
2
|
%
|
Less: Net income attributable to noncontrolling interests
|
|
|
(2,335
|
)
|
|
|
(1
|
)%
|
|
|
(2,497
|
)
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to CBaySystems Holdings
Limited
|
|
$
|
(2,770
|
)
|
|
|
(1
|
)%
|
|
$
|
553
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(1)
|
|
$
|
27,970
|
|
|
|
15
|
%
|
|
$
|
33,760
|
|
|
|
17
|
%
|
|
|
|
|
(1) |
|
See Selected Consolidated Financial and Other Data
for a reconciliation of net income (loss) attributable to
CBaySystems Holdings Limited to Adjusted EBITDA. |
Net
Revenues
Net revenues increased by $12.1 million, or 6%, to
$200.6 million for the six months ended June 30, 2010
compared to $188.5 million for the six months ended
June 30, 2009. The Spheris Acquisition contributed
$26.4 million in incremental revenue for the six months
ended June 30, 2010 which was partially offset primarily by
a decrease of $9.0 million in revenues from clinical
documentation solutions due to lower prices, as well as lower
revenue cycle management, product and maintenance contract
revenue.
57
Cost of
Revenues
Cost of revenues increased $6.9 million, or 6%, to
$128.6 million for the six months ended June 30, 2010
compared to $121.8 million for the six months ended
June 30, 2009. This was attributable primarily to:
|
|
|
|
|
the Spheris Acquisition which added $18.8 million in costs;
|
|
|
|
the impact of cost savings of $10.4 million from the
increased use of offshore resources, increased use of speech
recognition and reduced staffing levels; and
|
|
|
|
reduction of other costs of $1.5 million.
|
Selling,
General and Administrative
Selling, general and administrative expense increased $942,000,
or 3%, to $32.7 million for the six months ended
June 30, 2010 compared to $31.8 million for the six
months ended June 30, 2009. The Spheris Acquisition added
$3.1 million in costs, offset by $1.9 million in cost
reductions in our revenue cycle management business and
$1.0 million in cost reductions for professional fees and
staffing.
Research
and Development
Research and development expense increased $797,000, or 17%, to
$5.6 million for the six months ended June 30, 2010
compared to $4.8 million for the six months ended
June 30, 2009. The increase was primarily due to the
Spheris Acquisition, which added $1.1 million in research
and development expense.
Depreciation
and Amortization
Depreciation and amortization increased $1.5 million, or
11%, to $15.1 million for the six months ended
June 30, 2010 compared to $13.6 million for the six
months ended June 30, 2009. The increase was primarily due
to the amortization of acquired intangible assets of
$1.2 million associated with the Spheris Acquisition.
Cost of
Legal Proceedings and Settlements
Cost of legal proceedings and settlements decreased
$10.0 million, or 82%, to $2.2 million for the six
months ended June 30, 2010 compared to $12.2 million
for the six months ended June 30, 2009. The decrease was
due to the costs incurred in 2009 related to the Anthurium
settlement of $5.9 million, related legal fees of
$3.8 million and other legal fees of $1.2 million
partially offset by the 2010 accrual of $900,000 related to the
Kaiser litigation which was settled.
Acquisition
Related Charges
We incurred acquisition related charges of $6.0 million
related to the Spheris Acquisition for the six months ended
June 30, 2010.
Restructuring
Charges
During the six months ended June 30, 2010, we recorded
restructuring charges of $1.0 million primarily related to
employee severance. We expect that restructuring activities and
related charges will continue into early 2011 as management
identifies opportunities for synergies resulting from the
Spheris Acquisition including the elimination of redundant
functions.
Interest
Expense, net
Interest expense, net increased $2.7 million, or 58%, to
$7.4 million for the six months ended June 30, 2010
compared to $4.7 million for the six months ended
June 30, 2009. The increase was due to $3.8 million,
which is related to the debt incurred in connection with the
Spheris Acquisition, partially offset by a decrease of
$1.2 million in interest expense as a result of the 2009
repayment of the bridge note incurred in connection with the
MedQuist Inc. Acquisition.
58
Income
Tax Provision
Our consolidated income tax expense consists principally of an
increase in deferred tax liabilities related to goodwill
amortization deductions for income tax purposes during the
applicable period as well as state and foreign income taxes,
offset by a tax benefit related to the reversal of reserves for
various state jurisdictions as agreements on the liabilities
were reached. The tax benefit for the six months ended
June 30, 2010 includes the reversal of approximately
$500,000 from our accrual for various state uncertain tax
positions as a result of filing voluntary disclosure agreements
with state jurisdictions. We recorded a valuation allowance to
reduce our net deferred tax assets to an amount that is more
likely than not to be realized in future years.
We expect that our consolidated income tax expense for the year
ended December 31, 2010, similar to the year ended
December 31, 2009, will consist principally of an increase
in deferred tax liabilities related to goodwill amortization
deductions for income tax purposes during the applicable year as
well as state and foreign income taxes. We regularly assess the
future realization of deferred taxes and whether the valuation
allowance against the majority of domestic deferred tax assets
is still warranted. To the extent sufficient positive evidence,
including past results and future projections, exists to benefit
all or part of these benefits, the valuation allowance will be
released accordingly.
Net
Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests for the six
months ended June 30, 2010 increased by $200,000 to
$2.5 million compared to $2.3 million for the six
months ended June 30, 2009. The increase in net income
attributable to noncontrolling interests was due to the increase
in the net income of MedQuist Inc.
59
Comparison of
Years Ended December 31, 2008 and 2009
The following table sets forth our consolidated results of
operations for the periods indicated below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amount
|
|
|
Revenues
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Net revenues
|
|
$
|
193,673
|
|
|
|
100
|
%
|
|
$
|
371,768
|
|
|
|
100
|
%
|
Cost of revenues
|
|
|
125,074
|
|
|
|
65
|
%
|
|
|
239,549
|
|
|
|
64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
68,599
|
|
|
|
35
|
%
|
|
|
132,219
|
|
|
|
36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
51,243
|
|
|
|
26
|
%
|
|
|
60,632
|
|
|
|
16
|
%
|
Research and development
|
|
|
6,099
|
|
|
|
3
|
%
|
|
|
9,604
|
|
|
|
3
|
%
|
Depreciation and amortization
|
|
|
14,906
|
|
|
|
8
|
%
|
|
|
26,977
|
|
|
|
7
|
%
|
Cost of legal proceedings and settlements
|
|
|
5,311
|
|
|
|
3
|
%
|
|
|
14,943
|
|
|
|
4
|
%
|
Acquisition related charges
|
|
|
|
|
|
|
|
|
|
|
1,246
|
|
|
|
0
|
%
|
Goodwill impairment charge
|
|
|
98,972
|
|
|
|
51
|
%
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
2,106
|
|
|
|
1
|
%
|
|
|
2,727
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
178,637
|
|
|
|
92
|
%
|
|
|
116,129
|
|
|
|
31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(110,038
|
)
|
|
|
(57
|
)%
|
|
|
16,090
|
|
|
|
4
|
%
|
Interest expense, net
|
|
|
(3,954
|
)
|
|
|
(2
|
)%
|
|
|
(9,132
|
)
|
|
|
(2
|
)%
|
Equity in income of affiliated companies
|
|
|
66
|
|
|
|
0
|
%
|
|
|
1,933
|
|
|
|
1
|
%
|
Other income
|
|
|
9
|
|
|
|
0
|
%
|
|
|
11
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and noncontrolling
interests
|
|
|
(113,917
|
)
|
|
|
(59
|
)%
|
|
|
8,902
|
|
|
|
2
|
%
|
Income tax (provision) benefit
|
|
|
5,398
|
|
|
|
3
|
%
|
|
|
(1,082
|
)
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(108,519
|
)
|
|
|
(56
|
)%
|
|
|
7,820
|
|
|
|
2
|
%
|
Less: Net income attributable to noncontrolling interest
|
|
|
(5,154
|
)
|
|
|
(3
|
)%
|
|
|
(7,085
|
)
|
|
|
(2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to CBaySystems Holdings
Limited
|
|
$
|
(113,673
|
)
|
|
|
(59
|
)%
|
|
$
|
735
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(1)
|
|
$
|
18,886
|
|
|
|
10
|
%
|
|
$
|
60,130
|
|
|
|
16
|
%
|
|
|
|
|
(1) |
|
See Selected Consolidated Financial and Other Data
for a reconciliation of net income (loss) attributable to
CBaySystems Holdings Limited to Adjusted EBITDA. |
Net
Revenues
Net revenues increased $178.1 million, or 92%, to
$371.8 million for the year ended December 31, 2009
compared to $193.7 million for the year ended
December 31, 2008. This increase was attributable primarily
to:
|
|
|
|
|
$171.5 million from the consolidation of MedQuist Inc. for
a full year resulting from our acquisition of MedQuist Inc. in
August 2008; and
|
|
|
|
an increase in clinical documentation revenue of
$11.0 million due to organic volume growth partially offset
by a decrease in our revenue cycle management revenue by
$4.4 million largely due to customer attrition.
|
60
Cost of
Revenues
Cost of revenues increased $114.5 million, or 92%, to
$239.5 million for the year ended December 31, 2009
compared to $125.1 million for the year ended
December 31, 2008. This increase was attributable primarily
to:
|
|
|
|
|
$110.8 million from the consolidation of MedQuist Inc. for
a full year; and
|
|
|
|
an increase of $5.7 million in clinical documentation cost
of revenue, primarily due to increased personnel cost to support
expansion of capacity, partially offset by a reduction on
$2.1 million in our revenue cycle management business costs
to better align costs with revenue.
|
Selling,
General and Administrative
Selling, general and administrative expense increased
$9.4 million, or 18%, to $60.6 million for the year
ended December 31, 2009 compared to $51.2 million for
the year ended December 31, 2008. This increase was
primarily attributable to:
|
|
|
|
|
consolidation of a full-year of MedQuist Inc. selling, general
and administrative expense of $13.9 million;
|
|
|
|
increase in share based compensation charge of $798,000;
|
|
|
|
full year impact of the cost of our new management team and
corporate costs in 2009 amounting to $2.6 million; offset by
|
|
|
|
charges in 2008 amounting to $7.6 million comprised of
$5.6 million of acquisition related costs incurred in
connection with the MedQuist Inc. Acquisition and
$2.1 million for the write-off of uncollectible accounts
receivable.
|
Research
and Development
Research and development expense increased $3.5 million, or
57%, to $9.6 million for the year ended December 31,
2009 compared to $6.1 million for the year ended
December 31, 2008. This increase was attributable primarily
to the consolidation of a full-year of MedQuist Inc.s
research and development expenses.
Depreciation
and Amortization
Depreciation and amortization expense increased
$12.1 million, or 81%, to $27.0 million for the year
ended December 31, 2009 compared to $14.9 million for
the year ended December 31, 2008. This increase was
attributable primarily to the consolidation of a full-year of
MedQuist Inc. depreciation and amortization expense including
the impact of amortization of acquired intangible assets
amounting to $12.5 million.
Cost of
Legal Proceedings and Settlement
Cost of legal proceedings and settlement increased
$9.6 million, or 181%, to $14.9 million for the year
ended December 31, 2009 compared with $5.3 million for
the year ended December 31, 2008. This increase was due
primarily to the consolidation of a full year of MedQuist
Inc.s cost of legal proceedings and settlements, which
includes legal fees incurred in connection with both the SEC
investigations and proceedings and as well as the defense of
certain civil litigation and proceedings. Included in 2009 are
costs incurred related to the Anthurium settlement of
$5.9 million and related legal fees of $3.8 million.
Acquisition
Related Charges
We incurred costs of $1.2 million during the year ended
December 31, 2009 related to the Spheris Acquisition.
Goodwill
Impairment Charge
We carried out our annual impairment test in the fourth quarter
of 2008, which included our annual testing date in December.
During our annual impairment testing, we determined the fair
value using a combination of market capitalization based on
market price per share for approximately the 60 days before
December 31, 2008 including a control premium and a
discounted cash flow analysis. Determining fair value requires
the exercise of significant
61
judgment, including judgment about appropriate discount rates,
perpetual growth rates, the amount and timing of expected future
cash flows, as well as relevant comparable company earnings
multiples for the market-based approach. The cash flows employed
in the discounted cash flow analyses were based on our internal
business model for 2009 and, for years beyond 2009 the growth
rates we used are an estimate of the future growth in the
industry in which we participate. The discount rates used in the
discounted cash flow analyses are intended to reflect the risks
inherent in the future cash flows of the reporting unit and are
based on an estimated cost of capital, which we determined based
on estimated cost of capital relative to the capital structure.
In addition, the market-based approach utilizes comparable
company public trading values, research analyst estimates and,
where available, values observed in private market transactions.
The analysis indicated that the reporting units fair value
was below the book value for the MedQuist Inc. and revenue cycle
management reporting units and accordingly, a goodwill
impairment charge of $99.0 million was recorded.
In 2009, the fair value of the MedQuist Inc. reporting unit
substantially exceeded its carrying value and the fair value of
the revenue cycle management reporting unit exceeded its
carrying value by 7%, and accordingly, no second step of the
goodwill impairment test was performed and no impairment charge
was recorded.
In estimating the fair value of our CBay transcription reporting
unit, the market approach and the income approach were used. The
fair value of the reporting unit substantially exceeded its
carrying value, and accordingly, no second step of the goodwill
impairment test was performed and no impairment charge was
recorded in 2009 or 2008.
Interest
Expense, Net
Interest expense, net primarily reflects interest paid on our
credit facilities and long term debt, net of interest earned on
deposits with banks. Interest expense, net increased
$5.2 million, or 131%, to $9.1 million for the year
ended December 31, 2009 compared with $4.0 million for
the year ended December 31, 2008. This increase was
attributable to the full year impact of interest expense on the
acquisition related debt related to the MedQuist Inc.
Acquisition amounting to $4.9 million and other increases
of $200,000.
Income
Tax Provision
The effective income tax rate for the year ended
December 31, 2009 was 12.2% compared with an effective
income tax benefit rate of 4.7% for the year ended
December 31, 2008. The 2009 tax expense includes an
increase in the deferred tax liabilities associated with
indefinite life intangible assets related to goodwill, an
increase in the deferred tax liability associated with an equity
method investment, the reduction of the foreign valuation
allowance and adjustments related to state tax exposures. After
consideration of all evidence, both positive and negative,
management concluded again in 2009, that it was more likely than
not that a significant portion of the domestic deferred income
tax assets would not be realized; therefore, we have a valuation
allowance to reduce our net deferred tax assets to an amount
that is more likely than not to be realized in future years. The
2008 tax benefit includes the reversal of approximately
$5.6 million of deferred tax liabilities associated with
indefinite life intangible assets related to goodwill which was
impaired in 2008.
Net
Income Attributable to Noncontrolling Interest
Net income attributable to noncontrolling interest increased
$1.9 million, or 37%, to $7.1 million for the year
ended December 31, 2009 compared to $5.2 million for
the year ended December 31, 2008. This increase was
attributable to the consolidation of MedQuist Inc. for the full
year of 2009.
62
Comparison of
Years Ended December 31, 2007 and 2008
The following table sets forth our consolidated results of
operations for the periods indicated below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amount
|
|
|
Revenues
|
|
|
|
(In thousands)
|
|
|
Net revenues
|
|
$
|
57,694
|
|
|
|
100
|
%
|
|
$
|
193,673
|
|
|
|
100
|
%
|
Cost of revenues
|
|
|
30,209
|
|
|
|
52
|
%
|
|
|
125,074
|
|
|
|
65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
27,485
|
|
|
|
48
|
%
|
|
|
68,599
|
|
|
|
35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
25,137
|
|
|
|
44
|
%
|
|
|
51,243
|
|
|
|
26
|
%
|
Research and development
|
|
|
|
|
|
|
|
|
|
|
6,099
|
|
|
|
3
|
%
|
Depreciation and amortization
|
|
|
2,915
|
|
|
|
5
|
%
|
|
|
14,906
|
|
|
|
8
|
%
|
Cost of legal proceedings and settlements
|
|
|
|
|
|
|
|
|
|
|
5,311
|
|
|
|
3
|
%
|
Goodwill impairment charge
|
|
|
|
|
|
|
|
|
|
|
98,972
|
|
|
|
51
|
%
|
Restructuring charges
|
|
|
|
|
|
|
|
|
|
|
2,106
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
28,052
|
|
|
|
49
|
%
|
|
|
178,637
|
|
|
|
92
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(567
|
)
|
|
|
(1
|
)%
|
|
|
(110,038
|
)
|
|
|
(57
|
)%
|
Interest expense, net
|
|
|
(2,108
|
)
|
|
|
(4
|
)%
|
|
|
(3,954
|
)
|
|
|
(2
|
)%
|
Equity in loss (income) of affiliated companies
|
|
|
(105
|
)
|
|
|
0
|
%
|
|
|
66
|
|
|
|
0
|
%
|
Other income
|
|
|
14
|
|
|
|
0
|
%
|
|
|
9
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and noncontrolling interests
|
|
|
(2,766
|
)
|
|
|
(5
|
)%
|
|
|
(113,917
|
)
|
|
|
(59
|
)%
|
Income tax benefit
|
|
|
113
|
|
|
|
0
|
%
|
|
|
5,398
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(2,653
|
)
|
|
|
(5
|
)%
|
|
|
(108,519
|
)
|
|
|
(56
|
)%
|
Less: Net (income) loss attributable to noncontrolling interest
|
|
|
57
|
|
|
|
0
|
%
|
|
|
(5,154
|
)
|
|
|
(3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to CBaySystems Holdings
Limited
|
|
|
(2,596
|
)
|
|
|
(4
|
)%
|
|
|
(113,673
|
)
|
|
|
(59
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(1)
|
|
$
|
2,362
|
|
|
|
4
|
%
|
|
$
|
18,886
|
|
|
|
10
|
%
|
|
|
|
|
(1) |
|
See Selected Consolidated Financial and Other Data
for a reconciliation of net income (loss) attributable to
CBaySystems Holdings Limited to Adjusted EBITDA. |
Net
Revenues
Net revenues increased $136.0 million to
$193.7 million for the year ended December 31, 2008
compared with $57.7 million for the year ended
December 31, 2007. This increase was attributable primarily
to:
|
|
|
|
|
$124.6 million from the consolidation of MedQuist Inc.
since the date of our acquisition of MedQuist Inc. in August
2008; and
|
|
|
|
an increase of $4.6 million in clinical documentation
revenue as a result of our organic volume growth and an increase
of $6.8 million in revenue cycle management revenue
primarily due to the full-year impact of revenue from AMS Plus,
Inc., a revenue cycle management business that we acquired in
August 2007.
|
63
Cost of
Revenues
Cost of revenues increased $94.9 million to
$125.1 million for the year ended December 31, 2008
compared with $30.2 million for the year ended
December 31, 2007. This increase was attributable primarily
to:
|
|
|
|
|
$88.8 million from the consolidation of MedQuist
Inc.s cost of revenue from the date of the MedQuist Inc.
Acquisition in August 2008; and
|
|
|
|
increase in clinical documentation and revenue cycle management
cost of revenue by $6.1 million, primarily due to both
increased personnel cost to support expansion of capacity as
well as the full-year impact of our acquisition of AMS Plus,
Inc., which contributed $5.2 million to the increase.
Revenue cycle management costs declined by $1.3 million due
to a reduction in the workforce as part of cost realignment with
the reduced revenue. The cost of revenue for our clinical
documentation business increased by $2.2 million.
|
Selling,
General and Administrative
Selling, general and administrative expense increased
$26.1 million, or 104%, to $51.2 million for the year
ended December 31, 2008 compared to $25.1 million for
the year ended December 31, 2007. This increase was
primarily attributable to:
|
|
|
|
|
consolidation of MedQuist Inc.s selling, general and
administrative expense from the date of the MedQuist Inc.
Acquisition in August 2008 of $17.5 million; and
|
|
|
|
an increase of $5.6 million for expenses related to the MedQuist
Inc. Acquisition, and
|
|
|
|
an increase of $2.8 million in clinical documentation and
revenue cycle management due to the full-year impact of AMS
Plus, Inc.; and offset by
|
|
|
|
a decline in share based compensation charge of
$1.2 million and other savings of $0.6 million.
|
Research
and Development
Research and development expense increased $6.1 million for
the year ended December 31, 2008 compared to $0 for the
year ended December 31, 2007. This increase was
attributable to the consolidation of MedQuist Inc.
Depreciation
and Amortization
Depreciation and amortization expense increased
$12.0 million, to $14.9 million for the year ended
December 31, 2008 compared with $2.9 million for the
year ended December 31, 2007. This increase was
attributable primarily to:
|
|
|
|
|
consolidation of a partial year of MedQuist Inc. depreciation
and amortization expense, including the impact of amortization
of acquired intangible assets associated with the acquisition of
MedQuist Inc. amounting to $10.0 million; and
|
|
|
|
an increase of $1.9 million in clinical documentation and
revenue cycle management.
|
Cost of
Legal Proceedings and Settlements
Cost of legal proceedings and settlements increased
$5.3 million for the year ended December 31, 2008
compared with no such costs for the year ended December 31,
2007. This increase was due to the consolidation of a partial
year of MedQuist Inc.s cost of legal proceedings and
settlement, which includes legal fees incurred in connection
with the SEC and U.S. Department of Justice investigations
and proceedings as well as the defense of certain civil
litigation and proceedings. See Note 14 to our audited
consolidated financial statements included elsewhere in this
prospectus.
Goodwill
Impairment Charge
We carried out our annual impairment test in the fourth quarter
of 2008, which included our annual testing date in December.
During our annual impairment testing, we determined the fair
value using a combination of market capitalization based on
market price per share for approximately the 60 days before
December 31, 2008 including a control premium, and a
discounted cash flow analysis. Determining fair value requires
the exercise of significant judgment, including judgment about
appropriate discount rates, perpetual growth rates, the amount
and timing of
64
expected future cash flows, as well as relevant comparable
company earnings multiples for the market-based approach. The
cash flows employed in the discounted cash flow analyses were
based on our internal business model for 2009 and, for years
beyond 2009 the growth rates we used are an estimate of the
future growth in the industry in which we participate. The
discount rates used in the discounted cash flow analyses are
intended to reflect the risks inherent in the future cash flows
of the reporting unit and are based on an estimated cost of
capital, which we determined based on estimated cost of capital
relative to the capital structure. In addition, the market-based
approach utilizes comparable company public trading values,
research analyst estimates and, where available, values observed
in private market transactions. The analysis indicated that the
reporting units fair value was below the book value for
the MedQuist Inc. and revenue cycle management reporting units
and accordingly, a goodwill impairment charge of
$99.0 million was recorded.
Restructuring
Charges
During 2008, we recorded a restructuring charge of
$2.1 million for severance obligations related to a
reduction in workforce of 189 employees in order to better
align costs with revenue.
Interest
Expense, Net
Interest expense, net primarily reflects interest paid on our
credit facilities and long term debt, net of interest earned on
deposits with banks. Interest expense, net increased
$1.8 million, or 88%, to $4.0 million for the year
ended December 31, 2008 compared to $2.1 million for
the year ended December 31, 2007. This increase was
attributable to interest expense on acquisition related debt
related to the MedQuist Inc. Acquisition amounting to
$2.5 million offset by a $654,000 reduction in interest
expense due to the repayment of other debt.
Income
Tax Provision
The effective income tax rate for the year ended
December 31, 2008 was an income tax benefit rate of 4.7%
compared with an effective income tax benefit rate of 4.1% for
the year ended December 31, 2007. The 2008 tax benefit
includes the reversal of approximately $5.6 million of
deferred tax liabilities associated with indefinite life
intangible assets related to goodwill which was impaired in
2008. After consideration of all evidence, both positive and
negative, management concluded again in 2008, that it was more
likely than not that a significant portion of the domestic
deferred income tax assets would not be realized; therefore, we
have a valuation allowance to reduce our net deferred tax assets
to an amount that is more likely than not to be realized in
future years.
Net
Income Attributable to Noncontrolling Interest
Net income attributable to noncontrolling interest increased
$5.2 million to $5.2 million for the year ended
December 31, 2008 compared with $57,000 for the year ended
December 31, 2007. This increase was attributable to the
consolidation of MedQuist Inc. from the date of the
MedQuist Inc. Acquisition.
65
Unaudited
Quarterly Results of Operations
The following table sets forth our unaudited consolidated
quarterly results of operations for each of the eight quarters
during the period from July 1, 2008 to June 30, 2010.
In our managements opinion, the unaudited results of
operations for each quarter have been prepared on the same basis
as the audited consolidated financial statements included in
this prospectus and reflect all necessary adjustments,
consisting only of normal recurring adjustments, necessary for a
fair presentation of our results of operations for the quarters
presented. You should read this information together with our
consolidated financial statements and the related notes
appearing elsewhere in this prospectus. Operating results for
any fiscal quarter are not necessarily indicative of results for
the full year. Historical results are not necessarily indicative
of the results to be expected in future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Net revenues
|
|
$
|
64,338
|
|
|
$
|
94,215
|
|
|
$
|
94,669
|
|
|
$
|
93,871
|
|
|
$
|
93,289
|
|
|
$
|
89,939
|
|
|
$
|
88,604
|
|
|
$
|
111,988
|
|
Cost of revenues
|
|
|
44,781
|
|
|
|
62,376
|
|
|
|
62,103
|
|
|
|
59,651
|
|
|
|
61,170
|
|
|
|
56,625
|
|
|
|
56,513
|
|
|
|
72,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
19,557
|
|
|
|
31,839
|
|
|
|
32,566
|
|
|
|
34,220
|
|
|
|
32,119
|
|
|
|
33,314
|
|
|
|
32,091
|
|
|
|
39,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
18,486
|
|
|
|
20,354
|
|
|
|
16,008
|
|
|
|
15,757
|
|
|
|
14,830
|
|
|
|
14,037
|
|
|
|
15,826
|
|
|
|
16,880
|
|
Research and development
|
|
|
2,753
|
|
|
|
3,346
|
|
|
|
2,416
|
|
|
|
2,380
|
|
|
|
2,439
|
|
|
|
2,369
|
|
|
|
2,281
|
|
|
|
3,312
|
|
Depreciation and amortization
|
|
|
4,741
|
|
|
|
8,597
|
|
|
|
6,603
|
|
|
|
7,007
|
|
|
|
6,719
|
|
|
|
6,648
|
|
|
|
6,363
|
|
|
|
8,705
|
|
Cost of legal proceedings and settlements
|
|
|
3,482
|
|
|
|
1,829
|
|
|
|
7,774
|
|
|
|
4,384
|
|
|
|
1,382
|
|
|
|
1,403
|
|
|
|
1,043
|
|
|
|
1,109
|
|
Acquisition related charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,246
|
|
|
|
924
|
|
|
|
5,121
|
|
Goodwill impairment charge
|
|
|
|
|
|
|
98,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
(30
|
)
|
|
|
2,136
|
|
|
|
|
|
|
|
|
|
|
|
481
|
|
|
|
2,246
|
|
|
|
60
|
|
|
|
906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
29,432
|
|
|
|
135,234
|
|
|
|
32,801
|
|
|
|
29,528
|
|
|
|
25,851
|
|
|
|
27,949
|
|
|
|
26,497
|
|
|
|
36,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(9,875
|
)
|
|
|
(103,395
|
)
|
|
|
(235
|
)
|
|
|
4,692
|
|
|
|
6,268
|
|
|
|
5,365
|
|
|
|
5,594
|
|
|
|
3,827
|
|
Interest expense, net
|
|
|
(659
|
)
|
|
|
(2,410
|
)
|
|
|
(2,342
|
)
|
|
|
(2,317
|
)
|
|
|
(2,286
|
)
|
|
|
(2,187
|
)
|
|
|
(1,891
|
)
|
|
|
(5,460
|
)
|
Equity in income (loss) of affiliated companies
|
|
|
69
|
|
|
|
18
|
|
|
|
72
|
|
|
|
336
|
|
|
|
2,127
|
|
|
|
(602
|
)
|
|
|
514
|
|
|
|
32
|
|
Other income
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and noncontrolling
interests
|
|
|
(10,465
|
)
|
|
|
(105,778
|
)
|
|
|
(2,505
|
)
|
|
|
2,711
|
|
|
|
6,109
|
|
|
|
2,587
|
|
|
|
4,325
|
|
|
|
(1,601
|
)
|
Income tax provision (benefit)
|
|
|
1,312
|
|
|
|
(7,573
|
)
|
|
|
355
|
|
|
|
286
|
|
|
|
613
|
|
|
|
(172
|
)
|
|
|
8
|
|
|
|
(334
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(11,777
|
)
|
|
|
(98,205
|
)
|
|
|
(2,860
|
)
|
|
|
2,425
|
|
|
|
5,496
|
|
|
|
2,759
|
|
|
|
4,317
|
|
|
|
(1,267
|
)
|
Less: net (income) loss attributable to noncontrolling interest
|
|
|
1,690
|
|
|
|
(6,852
|
)
|
|
|
(335
|
)
|
|
|
(2,000
|
)
|
|
|
(2,957
|
)
|
|
|
(1,793
|
)
|
|
|
(2,229
|
)
|
|
|
(268
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to CBaySystems Holdings
Limited
|
|
$
|
(10,087
|
)
|
|
$
|
(105,057
|
)
|
|
$
|
(3,195
|
)
|
|
$
|
425
|
|
|
$
|
2,539
|
|
|
$
|
966
|
|
|
$
|
2,088
|
|
|
$
|
(1,535
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
The following table presents a reconciliation of net income
(loss) attributable to CBaySystems Holdings Limited, which we
believe is the most comparable GAAP measure, to Adjusted EBITDA.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
September,
|
|
|
December,
|
|
|
2010
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
30,
|
|
|
31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Net income (loss) attributable to CBaySystems Holdings Limited
|
|
$
|
(10,087
|
)
|
|
$
|
(105,057
|
)
|
|
$
|
(3,195
|
)
|
|
$
|
425
|
|
|
$
|
2,539
|
|
|
$
|
966
|
|
|
$
|
2,088
|
|
|
$
|
(1,535
|
)
|
Net income (loss) attributable to noncontrolling interests
|
|
|
(1,690
|
)
|
|
|
6,852
|
|
|
|
335
|
|
|
|
2,000
|
|
|
|
2,957
|
|
|
|
1,793
|
|
|
|
2,229
|
|
|
|
268
|
|
Income tax provision (benefit)(a)
|
|
|
1,312
|
|
|
|
(7,573
|
)
|
|
|
355
|
|
|
|
286
|
|
|
|
613
|
|
|
|
(172
|
)
|
|
|
8
|
|
|
|
(334
|
)
|
Interest expense, net
|
|
|
659
|
|
|
|
2,410
|
|
|
|
2,342
|
|
|
|
2,317
|
|
|
|
2,286
|
|
|
|
2,187
|
|
|
|
1,891
|
|
|
|
5,460
|
|
Depreciation and amortization
|
|
|
4,741
|
|
|
|
8,597
|
|
|
|
6,603
|
|
|
|
7,007
|
|
|
|
6,719
|
|
|
|
6,648
|
|
|
|
6,363
|
|
|
|
8,705
|
|
Cost of legal proceedings and settlements
|
|
|
3,482
|
|
|
|
1,829
|
|
|
|
7,774
|
|
|
|
4,384
|
|
|
|
1,382
|
|
|
|
1,403
|
|
|
|
1,043
|
|
|
|
1,109
|
|
Acquisition related charges
|
|
|
5,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,246
|
|
|
|
924
|
|
|
|
5,121
|
|
Goodwill impairment charge
|
|
|
|
|
|
|
98,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
|
|
|
|
2,136
|
|
|
|
|
|
|
|
|
|
|
|
481
|
|
|
|
2,246
|
|
|
|
60
|
|
|
|
906
|
|
Equity in (income) loss of affiliated companies
|
|
|
(69
|
)
|
|
|
(18
|
)
|
|
|
(72
|
)
|
|
|
(336
|
)
|
|
|
(2,127
|
)
|
|
|
602
|
|
|
|
(514
|
)
|
|
|
(32
|
)
|
Asset impairment charges, severance charges and accrual
reversals(b)
|
|
|
|
|
|
|
2,000
|
|
|
|
(563
|
)
|
|
|
(1,301
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
3,898
|
|
|
$
|
10,148
|
|
|
$
|
13,579
|
|
|
$
|
14,782
|
|
|
$
|
14,850
|
|
|
$
|
16,919
|
|
|
$
|
14,092
|
|
|
$
|
19,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
We have $130.0 million of
federal net operating loss carry forwards as of
December 31, 2009 and will record approximately
$30.0 million of annual tax amortization related to
intangible assets, including goodwill, that will reduce future
taxable income. Due to the existence of federal net operating
loss carry forwards and the impact of tax amortization related
to intangible assets, including goodwill, cash taxes paid
(refunded) were $84,000, $160,000, $796,000 for the years ended
December 31, 2007, 2008 and 2009, respectively, and
$497,000 and $(478,000) for the six months ended June 30,
2009 and 2010, respectively.
|
|
(b)
|
|
Includes an impairment charge to
write off the amount paid related to severance of one of our
former executives and the reversal of certain accruals, related
to litigation claims, as a result of the expiration of the
applicable statute of limitations.
|
Our net revenues increased in the quarter ended
December 31, 2008 due to the consolidation of MedQuist Inc.
for the full quarter and then again in the quarter ended
June 30, 2010 with the consolidation of Spheris starting
April 22, 2010. We experience minor fluctuations in our
revenue as a result of variations in the number of business days
in certain months and the deferral by consumers of elective
medical procedures during certain holiday periods.
Our gross profit as a percentage of net revenues has increased
from 30% in the quarter ended September 30, 2008 to 36% for
the quarter ended June 30, 2010. This improvement was due
to the increased use of speech recognition technology, which
increased from 31% to 62% over the eight quarters ended
June 30, 2010 and the increase in our offshore production,
which, as percentage of our volume has increased from 33% to 39%
for the same period. Additionally we reduced our indirect
operating headcount to further reduce our costs.
Selling, general and administrative expense has decreased from
$18.5 million for the quarter ended September 30, 2008
to $16.9 million for the quarter ended June 30, 2010.
As a percentage of revenue selling, general and administrative
expense has decreased from 29% to 15% over the same period. This
was due to headcount reductions and reductions in other
administrative expenses.
Our Adjusted EBITDA has increased over the eight quarter period
from $3.9 million in the quarter ended September 30,
2008 to $19.7 million in the quarter ended June 30,
2010. This is the result of the MedQuist Inc. Acquisition and
Spheris Acquisition, the operating improvements and the expense
reductions made over the period.
67
Liquidity and
Capital Resources
Our principal sources of liquidity include cash generated from
operations, available cash on hand, and availability under our
Senior Secured Credit Facility, as described below.
Available cash at June 30, 2010 was $22.5 million
compared to $29.6 million at December 31, 2009. During
the six-month period ended June 30, 2010, we received
$100.0 million in cash inflow from our Acquisition Credit
Facility which was utilized to fund the Spheris Acquisition.
Additionally, several other items impacted cash flows for the
six month period ended June 30, 2010, resulting in a net
decrease of $7.1 million, including:
|
|
|
|
|
addition of cash flows provided by Spheris operations;
|
|
|
|
cash used to pay financing costs associated with the Acquisition
Credit Facility (as defined below);
|
|
|
|
$10.0 million in payments on the Acquisition Credit
Facility;
|
|
|
|
acquisition-related charges associated with the Spheris
Acquisition;
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|
|
restructuring payments; and
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|
|
|
other working capital changes.
|
We believe our existing cash, cash equivalents, cash to be
generated from operations and available borrowings under our
revolving credit facility will be sufficient to finance our
operations for the next twelve months. However, if we fail to
generate adequate cash flows from operations in the future, due
to an unexpected decline in our net revenues, or due to
increased cash expenditures in excess of the net revenues
generated, then our cash balances may not be sufficient to fund
our continuing operations without obtaining additional debt or
equity. There are no assurances that sufficient funding from
external sources will be available to us on acceptable terms, if
at all.
Prior to
the Corporate Reorganization
In connection with the Spheris Acquisition, MedQuist
Transcriptions, Ltd., a subsidiary of MedQuist Inc., and certain
other subsidiaries of MedQuist Inc., or collectively, the Loan
Parties, entered into a credit agreement, or the Acquisition
Credit Facility, with General Electric Capital Corporation,
CapitalSource Bank, and Fifth Third Bank. The Acquisition Credit
Facility provided for up to $100.0 million in senior
secured credit facilities, consisting of a $50.0 million
term loan, and a revolving credit facility of up to
$50.0 million. The credit facilities were secured by a
first priority lien on substantially all of the property of the
Loan Parties. Borrowings under the revolving credit facility
were able to be made from time to time, subject to availability
under such facility, until the fourth anniversary of the closing
date. Amounts borrowed under the Acquisition Credit Facility
bore interest at a rate selected by MedQuist Transcriptions,
Ltd. equal to the Base Rate or the Eurodollar Rate (each as
defined in the Acquisition Credit Facility agreement) plus a
margin. At June 30, 2010, the revolving credit facility and
the term loan had interest rates of 6.25% and 6.75%,
respectively. The Acquisition Credit Facility was repaid in full
on October 14, 2010 in connection with the Recapitalization
Transactions.
In connection with the Spheris Acquisition, MedQuist Inc. also
entered into the Acquisition Subordinated Promissory Note, with
Spheris Inc. The note was to mature in five years from the date
of the Spheris Acquisition. The face amount of the Acquisition
Subordinated Promissory Note was $17.5 million with
provisions for prepayment at discounted amounts, ranging from
77.5% of the principal if paid within six months, 87.5% from six
to nine months, 97.5% from nine to twelve months, 102.0% between
the first and second year, 101.0% between the second and third
year and 100.0% thereafter. For purposes of the purchase price
allocation, the note was discounted at 77.5% of the principal,
or $13.6 million. The Acquisition Subordinated Promissory
Note bore interest at 8.0% for the first six months. The
Acquisition Subordinated Promissory Note was repaid at 77.5% of
the face amount on October 14, 2010 in connection with the
Recapitalization Transactions.
In connection with the MedQuist Inc. Acquisition, we issued the
6% Convertible Notes to Philips. The 6% Convertible Notes were
extinguished on October 14, 2010 in connection with the
Recapitalization Transactions.
We are party to a credit agreement with ICICI Bank, Mumbai,
India in the amount of $2.8 million, at interest rates
ranging from LIBOR plus 2.5% and 15.5%, respectively, which is
secured by CBay Systems (India) Pvt. Ltd.s, or CBay India,
current assets and fixed assets. The amount outstanding as of
June 30, 2010, December 31,
68
2009 and 2008 was $194,000, $1.4 million and
$1.7 million, respectively. For the six months ended
June 30, 2010 and the years ended December 31, 2009,
2008 and 2007 we recorded $74,000, $205,000, $98,000 and
$36,000, respectively, of interest expense in our consolidated
statements of operations.
We had revolving lines of credit from K Bank. Subject to certain
terms and conditions of the agreement with K Bank, the agreement
provided a revolving line of credit of a maximum of
$5.7 million. These revolving lines of credit with
K Bank were repaid in full on October 14, 2010 in
connection with the Recapitalization Transactions.
We are party to a credit agreement with IndusInd Bank, Mumbai,
India of $3.2 million at interest rates of LIBOR plus 3%,
which is secured by current assets and fixed assets of CBay
India. The amount outstanding under this credit agreement as of
June 30, 2010 and December 31, 2009 was
$3.0 million and $0, respectively.
Subsequent
to the Corporate Reorganization
In connection with the Corporate Reorganization, on
October 1, 2010, MedQuist Inc., as borrower, and our
subsidiaries, MedQuist Transcriptions, Ltd. and CBay Inc.,
as co-borrowers and guarantors, and we and certain of our other
subsidiaries, as guarantors, entered into the Senior Secured
Credit Facility with General Electric Capital Corporation, as
administrative agent, and the parties thereto, consisting of
(i) a $200.0 million Term Loan and (ii) a
$25.0 million Revolving Credit Facility. The Senior Secured
Credit Facility is secured by a first priority lien on
substantially all existing and after-acquired property of the
borrowers and the guarantors. The Term Loan is repayable in
equal quarterly installments of $5.0 million commencing on
the first fiscal quarter after the closing date, with the
balance payable 5 years from the closing date. The term
loan interest rate is LIBOR plus 5.50% with a LIBOR floor of
1.75% and is payable monthly. We may also structure borrowings
as Eurodollar loans with an interest rate based on LIBOR rates.
Currently, the LIBOR floor is in effect. We may prepay the term
loan with certain prepayment penalties. Mandatory prepayments
are required when we generate excess cash flows as defined under
the Senior Secured Credit Facility. Under the Senior Secured
Credit Facility, we are required to maintain (i) a minimum
consolidated interest coverage ratio, initially, of 2.75x and
increasing over the term of the facility to 4.00x, (ii) a
maximum total leverage ratio, initially of 4.00x and declining
over the term of the facility to 1.50x and (iii) a maximum
consolidated senior leverage ratio, initially of 3.00x and
declining over the term of the facility to 1.00x.
In addition to the Senior Secured Credit Agreement, in
connection with the Corporate Reorganization, on
September 30, 2010, MedQuist Inc., as issuer, MedQuist
Transcriptions, Ltd. and CBay Inc. as co-issuers and
guarantors, and we and certain of our other subsidiaries, as
guarantors, entered into the Note Purchase Agreement for the
issuance of $85.0 million aggregate principal amount of
13% Senior Subordinated Notes due 2016 to BlackRock Kelso
Capital Corporation, PennantPark Investment Corporation,
Citibank, N.A., and THL Credit, Inc. Interest on the notes is
payable in quarterly installments at the issuers option at
either (i) 13% in cash or (ii) 12% in cash plus 2% in
the form of additional senior subordinated notes. Closing and
funding of the Senior Secured Credit Facility and the Senior
Subordinated Notes occurred on October 14, 2010. See
Description of Indebtedness for a more detailed
description of the Senior Secured Credit Facility and the Senior
Subordinated Notes.
Proceeds from the Senior Secured Credit Facility and the Senior
Subordinated Notes were used by MedQuist Inc. to repay
$80.0 million of indebtedness under the Acquisition Credit
Facility, to repay $13.6 million indebtedness under the
Acquisition Subordinated Promissory Note and to pay a
$176.5 million special dividend to its stockholders. We
received $122.6 million of this special dividend and used
$104.1 million to extinguish our 6% Convertible Notes
issued in connection with the MedQuist Inc. Acquisition and
$4.1 million to extinguish other lines of credit.
Operating
Activities
Cash flow provided by operating activities was
$19.6 million for the six months ended June 30, 2009
compared to $13.8 million for the six months ended
June 30, 2010. Receivables from customers decreased by
$4.7 million for the six months ended June 30, 2009
and by $1.7 million for the six months ended June 30,
2010 due primarily to the timing of customer payments. Other
current assets increased by $4.1 million for the six months
ended June 30, 2010 as a result of prepaid software
maintenance and deferred fees associated with the acquisition
financing related to the Spheris Acquisition. Cash flow provided
by operating activities was $42.7 million for the
69
year ended December 31, 2009 compared to cash used by
operating activities of $2.6 million for the year ended
December 31, 2008, and cash provided by operating
activities of $3.3 million for the year ended
December 31, 2007. The 2009 cash flow includes a full year
of results from MedQuist Inc.
As of December 31, 2009, we have approximately
$130.0 million of federal net operating losses which will
begin to expire in 2026, and approximately $250.0 million
of state net operating losses which will expire from 2010 to
2029. To the extent these net operating losses are not subject
to federal or state limitation, we can utilize these net
operating losses to offset future taxable income that we may
generate which would reduce future cash tax payments. We have
evaluated our ability to utilize these net operating losses and
currently we have a valuation allowance against a majority of
the deferred tax assets related to these net operating losses.
Investing
Activities
Cash used in investing activities was $6.5 million for the
six months ended June 30, 2009 which reflects the purchase
of property and equipment and additions to intangible assets
(primarily capitalized software). Cash used by investing
activities was $105.0 million for the six months ended
June 30, 2010. The Spheris Acquisition accounted for
$98.3 million and purchases of property and equipment and
intangible assets accounted for $6.7 million of the 2010
cash used by investing activities. Cash used by investing
activities was $18.5 million, $76.5 million and
$12.2 million for the year ended December 31, 2007, 2008
and 2009 respectively. Payments for acquisitions and interests
in affiliates were $10.2 million, $69.3 million and
$2.7 million for 2007, 2008 and 2009, respectively, and the
remaining cash used in investing activities primarily related to
the purchase of property and equipment.
Financing
Activities
Cash provided by financing activities was insignificant for the
six months ended June 30, 2009. For the six months ended
June 30, 2010 cash provided by financing activities was
$84.6 million primarily related to the Spheris Acquisition.
Financing activities used $44.4 million for the year ended
December 31, 2009 representing dividends of
$15.3 million to noncontrolling interests and
$28.6 million related to repayments of loans. For the year
ended December 31, 2008 cash provided by financing
activities was $121.4 million which was primarily the
result of the $124.0 million investment by our majority
stockholder. For the year ended December 31, 2007, the cash
provided by financing activities was $16.1 million of which
the primary components were the proceeds from the sale of stock
offset by repayments of indebtedness.
Contractual
Obligations
The following table summarizes our obligations to make future
payments under current contracts as of December 31, 2009
(in thousands):
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|
|
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|
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|
|
|
|
|
|
|
|
|
|
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Payment Due By Period
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|
|
Less than
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|
|
|
|
|
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|
|
Total
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1 Year
|
|
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1-3 Years
|
|
|
3-5 Years
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|
|
After
|
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|
(In thousands)
|
|
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Operating Lease Obligations
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|
$
|
20,770
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|
|
$
|
5,561
|
|
|
$
|
13,152
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|
|
$
|
2,057
|
|
|
|
|
|
Purchase Obligations(1)
|
|
|
10,869
|
|
|
|
8,666
|
|
|
|
2,203
|
|
|
|
|
|
|
|
|
|
Long-term debt, including current maturities
|
|
|
107,340
|
|
|
|
6,207
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|
|
|
3,040
|
|
|
|
98,093
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|
|
|
|
|
|
|
|
|
|
|
|
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|
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Total Contractual Obligations
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$
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138,979
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|
|
$
|
20,434
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|
|
$
|
18,395
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|
|
$
|
100,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
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|
(1) |
|
Purchase obligations are for telecommunication contracts
($9.6 million), software development cost
($1.0 million) and other recurring purchase obligations
($250,000). |
70
Our debt obligations changed materially as of June 30, 2010
because of the incurrence of the debt associated with the
Spheris Acquisition. The following table summarizes our
obligations to make future payments of principal (excluding
interest) under debt obligations as of June 30, 2010 (in
thousands):
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|
|
|
|
2010
|
|
$
|
13,878
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|
2011
|
|
|
23,304
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|
2012
|
|
|
122,028
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|
2013
|
|
|
1,044
|
|
2014
|
|
|
40,247
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2015 and thereafter
|
|
|
13,591
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|
|
|
|
|
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Total
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$
|
214,091
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|
|
|
|
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|
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Our debt obligations changed materially subsequent to
June 30, 2010 because of the incurrence and refinancing of
debt obligations then outstanding. The following table
summarizes our obligations to make future payments of principal
(excluding interest) under debt obligations as of June 30,
2010 on a pro forma basis after giving effect to the
Recapitalization Transactions (in thousands):
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|
|
|
2010
|
|
$
|
10,364
|
|
2011
|
|
|
23,138
|
|
2012
|
|
|
20,568
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|
2013
|
|
|
20,365
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|
2014
|
|
|
20,247
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|
2015 and thereafter
|
|
|
200,291
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|
|
|
|
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Total
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|
$
|
294,973
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|
|
|
|
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Off-Balance Sheet
Arrangements
We are not involved in any off-balance sheet arrangements that
have or are reasonably likely to have a material current or
future impact on our financial condition, changes in financial
condition, revenue or expense, results of operations, liquidity,
capital expenditures, or capital resources.
Quantitative and
Qualitative Disclosures about Market Risk
Market risk represents the risk of loss that may impact our
financial position due to adverse changes in financial market
prices and rates. Our market risk exposure is primarily a result
of fluctuations in interest rates. We do not hold or issue
financial instruments for trading purposes. Our offshore
production costs are subject to foreign exchange fluctuation as
these costs are primarily paid in Indian Rupees. We have entered
in to foreign exchange contracts to offset such fluctuation. As
of June 30, 2010, we had forward Indian rupee purchase
contracts totaling $7.0 million at an average contract
price of 46.80 Indian rupees. Such contracts have various
maturities through March 31, 2011.
Interest Rate
Sensitivity
We earn interest income from our balances of cash and cash
equivalents. This interest income is subject to market risk
related to changes in interest rates, which affects primarily
our investment portfolio. We invest in instruments that meet
high credit quality standards, as specified in our investment
policy.
The Term Loan of our Senior Secured Credit Facility bears
interest at LIBOR plus 5.50% with a LIBOR floor of 1.75%. Our
interest expense associated with this loan will increase if
LIBOR increases. Because the LIBOR floor is
71
currently in effect an increase in LIBOR of approximately 1.25%
will not increase our effective interest rate. A 1% increase in
LIBOR above this floor would result in an approximate
$2.0 million annual increase in our interest expense.
Recent Accounting
Pronouncements
In June 2009, the Financial Accounting Standards Board, or FASB,
issued, The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles.
This establishes the codification as the source of authoritative
GAAP recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the SEC under
federal securities laws are also sources of authoritative GAAP
for SEC registrants. All guidance contained in the Codification
carries an equal level of authority.
In September 2009, the FASB ratified two consensuses affecting
revenue recognition:
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The first consensus, Revenue Recognition
Multiple-Element Arrangements, sets forth requirements that must
be met for an entity to recognize revenue from the sale of a
delivered item that is part of a multiple-element arrangement
when other items have not yet been delivered. One of those
current requirements is that there be objective and reliable
evidence of the standalone selling price of the undelivered
items, which must be supported by either vendor-specific
objective evidence, or VSOE, or third-party evidence, or TPE.
This consensus eliminates the requirement that all undelivered
elements have VSOE or TPE before an entity can recognize the
portion of an overall arrangement fee that is attributable to
items that already have been delivered. In the absence of VSOE
or TPE of the standalone selling price for one or more delivered
or undelivered elements in a multiple-element arrangement,
entities will be required to estimate the selling prices of
those elements. The overall arrangement fee will be allocated to
each element (both delivered and undelivered items) based on
their relative selling prices, regardless of whether those
selling prices are evidenced by VSOE or TPE or are based on the
entitys estimated selling price. Application of the
residual method of allocating an overall arrangement
fee between delivered and undelivered elements will no longer be
permitted.
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The second consensus, Software-Revenue Recognition, addresses
the accounting for a transaction involving software to exclude
from its scope tangible products that contain both software and
non-software components that function together to deliver a
products functionality.
|
The consensuses are effective prospectively for revenue
arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010. We are evaluating the
potential impact of these requirements on our financial
statements.
72
Business
Overview
We are a leading provider of integrated clinical documentation
solutions for the U.S. healthcare system. Our
end-to-end
solutions convert physicians dictation of patient
interactions, or the physician narrative, into a high quality
and customized electronic record. These solutions integrate
technologies and services for voice capture and transmission,
ASR, medical transcription and editing, workflow automation, and
document management and distribution to deliver a complete
managed service for our customers. Our solutions enable
hospitals, clinics, and physician practices to improve the
quality of clinical data as well as accelerate and automate the
documentation process, and we believe our solutions improve
physician productivity and satisfaction, enhance revenue cycle
performance, and facilitate the adoption and meaningful use of
electronic health records.
We are the largest provider by revenue, of clinical
documentation solutions based on the physician narrative in the
United States. During the three months ended June 30, 2010,
we processed, on an annualized run rate basis, more than
2.9 billion lines of clinical documentation on our
platform. The significant majority of lines we process are
edited or transcribed by our more than 14,000 MTs and MEs. Of
this volume, for the three months ended June 30, 2010, more
than 60% was processed using ASR technology and nearly 40% was
produced offshore. Our size allows us to handle the clinical
documentation requirements of many of the largest and most
complex healthcare delivery networks in the United States,
provides us with economies of scale, and enables us to devote
significantly more resources to enhancing our solutions through
research and development than most of our competitors.
We serve more than 2,400 hospitals, clinics, and physician
practices throughout the United States, including 40% of
hospitals with more than 500 licensed beds. As of June 30,
2010, the average tenure of our top 50 customers was over five
years, and approximately 95% of our revenue was from recurring
services. Insights gained from our broad, long-standing customer
relationships allow us to optimize our integrated solutions, and
we believe that this positions us for future growth as we target
new customers.
We have realized significant increases in both revenue and
profitability as the result of two large acquisitions, MedQuist
Inc., in which we acquired a majority interest in August 2008,
and Spheris, which we acquired in April 2010. From 2007 to 2009,
our net revenue increased from $57.7 million to
$371.8 million. Over this same period, our Adjusted EBITDA
increased from $2.4 million to $60.1 million, and our
Adjusted EBITDA margins expanded from 4.1% to 16.2%. For a
reconciliation of our net income (loss) attributable to
CBaySystems Holdings Limited to Adjusted EBITDA, see
Selected Consolidated Financial and Other Data.
Our
Industry
Growth of
Clinical Documentation in the United States
Over the past several decades, our industry has evolved from
almost exclusively in-house production to outsourced services
and from labor-intensive services to technologically-enabled
solutions. The market opportunity for our solutions is driven by
overall healthcare utilization and cost containment efforts in
the United States. Numerous factors are driving increases in the
demand for healthcare services including population growth,
longer life expectancy, the increasing prevalence of chronic
illnesses, and expanded coverage from healthcare reform.
According to the U.S. Centers for Medicare and Medicaid
Services, spending on healthcare grew from $1.2 trillion in 1998
to $2.3 trillion in 2008, representing a compound annual growth
rate of 7.0%. It also projects that healthcare spending will
grow to reach $4.2 trillion or 19.3% of U.S. gross domestic
product, by 2018, representing a compound annual growth rate of
6.3%. At the same time, U.S. healthcare providers remain
under substantial pressure to reduce costs while maintaining or
improving the quality of care.
Accurate and timely clinical documentation has become a critical
requirement of the growing U.S. healthcare system.
Medicare, Medicaid, and insurance companies demand extensive
patient care documentation. The HITECH Act includes numerous
incentives to promote the adoption and meaningful use of
electronic health records, or EHRs, across the healthcare
industry. Consequently, healthcare providers are increasingly
using EHRs to input, store, and manage their clinical data in a
digital format. Healthcare providers that use EHRs require
accurate, easy-to-use, and cost-effective means to input
clinical data that are not disruptive to the physician
73
workflow.
Importance
of the Physician Narrative
Physicians generally use one of two methods to capture clinical
data in a digital format: dictation and on-screen data entry.
Dictation allows a physician to use his or her voice to document
patient interactions, which is then converted into a text format
or EHR record. On-screen data entry enables a physician to
populate templates or drop-down menus in an EHR system,
typically with a handheld or other hardware device.
In many hospital settings, dictation is the most popular method
for capturing clinical data because of the many advantages it
provides over on-screen data entry. From an efficiency
standpoint, a physicians time is typically the most
expensive labor component of a clinical documentation process,
and reducing the time required for data capture lowers costs. It
is generally faster to dictate than enter data on-screen, and
dictation frees up the physician to do other tasks in parallel.
From a documentation standpoint, dictation allows for a flexible
narration of patient interactions. Templates and drop-down menus
typically restrict input to a structured format. While dictation
can be converted into structured format later, it provides a
more flexible method for data capture. According to a 2003
article published in the Archives of Pathology and Laboratory
Medicine, dictated reports produced by medical language
specialists achieve accuracy rates higher than 99%.
Market
Opportunity
The need to convert and manage the physician narrative
represents a substantial market opportunity. Historically,
in-house hospital labor was used to transcribe clinical reports
using analog recordings from physicians. Later, healthcare
providers began to outsource production to domestic providers
and use digital formats. Today, advanced automation
technologies, such as ASR and workflow platforms, and low-cost
offshore resources are available to drive substantial
improvements in productivity and cost.
Outsourcing enables healthcare providers to reduce costs, gain
access to leading technologies, accelerate turnaround times,
improve accuracy, and fulfill security and compliance
requirements. In a March 2010 report, ValueNotes estimated that
spending on outsourced transcription services by hospitals,
clinics, and physician practices in the United States reached
$5.4 billion in 2009. ValueNotes further projected that the
market for outsourced transcription would grow 8.2% per annum to
$8.0 billion by 2014. As this market expands, ValueNotes
projects that outsourcing will grow relative to in-house
alternatives from 33% of production in 2009 to 38% by 2014.
74
Market
Segmentation and Trends
While outsourcing provides many benefits, the landscape for
outsourced service providers is highly fragmented with varying
degrees of technological automation and offshore capabilities
amongst providers. Thousands of local and regional providers
offer limited services without technology offerings. A small set
of national providers offer a combination of technology and
services, but have varying degrees of technological
sophistication and production capacity. Some vendors also focus
more on pure technology, offering ASR software, with
partnerships for third-party services, though most of these
vendors lack production scale.
Over the last five years, technological automation and a rise in
offshore capabilities have substantially decreased the cost of
production and have further differentiated outsourcing
providers. ASR has been a key technological driver of
productivity gains. ASR converts the physician narrative into a
text format which is available for editing. The effective use of
this technology lowers the cost of production relative to
conventional transcription services by replacing transcription
labor with editing, which, while still required, is much less
time consuming. Another key driver for cost reductions has been
the increased use of offshore infrastructure and resources.
Historically, most U.S. healthcare providers that
outsourced their production did so to domestic service
providers. With the advent of internet-based technologies and
improvements in the quality and training of offshore personnel,
the clinical documentation industry has seen a shift towards
offshore resources to reduce costs. India is by far the most
popular destination for outsourcing given relatively low wages
and a highly educated English-speaking workforce.
As the industrys cost of production has declined through
increases in technological automation and offshore capabilities,
the average market price for medical transcription services has
also declined. This has allowed healthcare providers to
participate in these economic gains. However, we believe that
participants in our industry must expand their technology
platforms and offshore capabilities to remain competitive.
Our Competitive
Strengths
Our competitive strengths include:
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Leader in a large, fragmented market We are
the largest provider by revenue of clinical documentation
solutions based on the physician narrative in the United States.
Our size enables us to meet the needs of large, sophisticated
healthcare customers, provides economies of scale, and enables
us to devote significantly more resources to research and
development and quality assurance than many other providers.
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Integrated solutions delivered as a complete managed
service We offer fully-integrated
end-to-end
managed services that capture and convert the physician
narrative into a high quality customized electronic record. We
integrate technologies and services for voice capture and
transmission, ASR, medical transcription and editing, workflow
automation, and document management and distribution. The end
result is value-added clinical documentation with high accuracy
and quick
turn-around
times.
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Large and diversified customer base with long-term
relationships We serve more than 2,400
hospitals, clinics and physician practices throughout the United
States, including 40% of hospitals with more than 500 licensed
beds. We have a long-standing history with our customers, and as
of June 30, 2010, approximately 95% of our revenue was from
recurring services.
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Highly-efficient operating model We believe
we have a significantly lower cost structure than many of our
competitors. Over the past two years, we have driven down our
cost structure through the use of technology automation,
standardized processes, and offshore resources. Our use of ASR,
which has grown from 39% of our volume in the fourth quarter of
2008 to 62% in the second quarter of 2010, has increased our
productivity. Additionally, our expanding footprint in India has
enabled us to increase our offshore production from 28% of our
volume to 39% over this same period. The financial impact of
these measures has been an improvement in gross margins during
this timeframe from 33.8% to 35.6%. During this same time, we
have grown volumes by 1.9% while sharing cost savings with our
customers in the form of lower prices.
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Proven management team We have assembled an
outstanding senior leadership team with significant industry
experience and domain expertise in both domestic and offshore
operations. Our management team
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has delivered substantial results and brings an entrepreneurial
spirit with proven experience in managing growth, driving
operational improvements, and successfully integrating
acquisitions.
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Our
Strategy
Key elements of our strategy include:
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Expand our customer base and increase existing customer
penetration We intend to grow our customer base
by targeting three market segments: large healthcare providers
still using in-house services, large healthcare providers
currently using competing outsourced alternatives, and
small-to-medium medical practices. Given our market leadership,
strong solution offerings, and low cost structure, we believe we
are well positioned to both replace in-house solutions as well
as displace competing outsourced alternatives for large
healthcare providers. For small-to-medium sized physician
practices, we offer an easy-to-use web-based clinical
documentation platform, CBayScribe, to expand our market share
in this segment, which we believe to be underpenetrated. In
order to increase penetration within our existing customer base,
we intend to continue targeting additional healthcare clinical
areas and facilities of our current customers. Additionally, as
healthcare providers centralize their purchasing decisions, we
believe that our ability to deliver outstanding services for
large, complex requirements provides us with increasing access
to new sales opportunities within our existing customer base and
through existing customer relationships.
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Continue to develop and enhance our integrated
solutions We seek to differentiate our
integrated solutions through sophisticated technology and
process improvement. We have over 100 employees dedicated
to research and development. Over the last year, we launched
numerous enhancements, including a front end speech platform for
general medicine, additional EHR system integration, and
advanced performance monitoring.
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Enhance profitability through technical and operational
expertise We have made significant improvements
in productivity through business process and infrastructure
improvements. Notwithstanding reductions in customer pricing,
our gross margins have expanded from 33.8% in the fourth quarter
of 2008, our first fiscal quarter after we acquired MedQuist
Inc., to 35.6% in the second quarter of 2010, and our Adjusted
EBITDA margins have expanded from 10.8% to 17.6% for the same
periods. Our management team has proven its ability to implement
continuous process improvements and we intend to further
increase offshore production and our use of technological
automation, including ASR, to lower costs and enhance our
profitability.
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Facilitate the adoption and promote meaningful use of EHR
systems Our integrated solutions provide a
comprehensive, accurate and effective method to incorporate
physician narrative into an EHR system. We interface with
substantially all of the leading EHR vendors to integrate our
clinical documentation solutions and to help our customers
realize the full potential of their EHR systems through the use
of the physician narrative. In our experience, when EHR is
adopted, customers tend to consolidate their purchase decisions,
which benefits us as a leading provider of clinical
documentation solutions.
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Pursue strategic acquisitions We believe that
there are significant opportunities available to create value
through strategic acquisitions. We intend to seek appropriate
opportunities to grow our customer base, enhance our solutions,
consolidate costs, and expand our value proposition to our
customers.
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Our
Solutions
Clinical
Documentation Solutions for Healthcare Providers
We provide enterprise-class solutions for healthcare providers
ranging from fully-integrated
end-to-end
managed services to stand-alone offerings. These solutions
represent the large majority of our revenues. Our solutions
enable our customers to easily access advanced technologies with
confidence that their clinical documentation requirements will
be completed accurately and quickly. Our industry-leading
solutions integrate voice capture and transmission, automated
speech recognition, transcription services, workflow management,
and document management and distribution capabilities.
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With proprietary and licensed technologies, we enable our
customers to efficiently manage their narrative-based
documentation through customizable workflows. A typical workflow
includes the following steps:
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Capture As the first step in a workflow
process, users can dictate into one of several input devices,
including a variety of handheld dictation devices, smartphone
applications, or standard telephones. PC-based dictation
stations can also be used for users who prefer to edit their own
files from speech recognition. By supporting a wide array of
capture methods, we provide flexibility to our customers to
decide which approach works best with their workflow.
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Manage Captured voice files are merged with
patient information from our customers information systems
and loaded into our enterprise platform for processing. Our
platform balances production resources across both in-house and
outsourced personnel, and its web-based management capabilities
allow administrators to easily manage workflows from anywhere at
any time. We generate draft reports using ASR technology which
are reviewed by our MEs. We can also use conventional
transcription services from our MTs. To maintain high quality
and efficiency, our platform automatically matches voice files
from various specialties and acuity levels to the MTs or MEs
with the appropriate skill sets. It also includes random quality
checks to give timely feedback to our personnel. Turnaround time
is an important metric for our customers, and so the system
optimizes processing to ensure we fulfill our contracted service
level agreements, which typically range from one hour to
48 hours.
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Analyze Completed reports are routed back to
physicians or other healthcare professionals for review, final
editing (as required), and authentication. These reports are
then available to drive additional value added services, such as
coding, data abstraction, and billing services. We provide
customers with sophisticated reporting capabilities and
integrated electronic signature solutions to simplify and
accelerate the review of their clinical reports. We use
Quantifytm,
our patent-pending natural language processing technology, to
convert final reports into structured documentation formats.
These structured formats allow data to be loaded into an EHR
system, easily analyzed for clinical documentation improvement
initiatives, or used for quality measures for reporting to
government agencies. In addition, reports can drive revenue
cycle management processes through our web-based CodeRunnerCAC
platform, which provides a complete coding workflow and
workforce management solution.
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Distribute After being approved by the
physician, electronic records are distributed. We provide a
fully featured distribution solution for printing, faxing and
electronic distribution to referring physicians. We have
developed thousands of interfaces with major, mid-level and
proprietary hospital information systems, radiology information
systems, health information repositories and electronic health
record systems. Our solution supports HL7 and XML-based formats
which further allows us to meet the needs of each individual
customer. Throughout the entire workflow, our managed service
platform maintains security measures and audit trails in full
compliance with HIPAA privacy and security standards and
regulations and the protection of the confidentiality of patient
information.
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In delivering these customized workflows, we offer a variety of
software products. These can work either as stand-alone
solutions or as integrated solutions with our other managed
services. These solutions include:
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Enterprise platform Our core platform
provides a powerful and flexible transcription solution that
integrates the process of dictation, transcription, speech
recognition, and document delivery into a unified clinical
information management workflow. We offer the platform typically
as a managed service. For those customers that prefer to use
their own services, we also offer it on a license basis. Our
platform provides a high performance and highly customizable
clinical documentation workflow. It integrates with every major
hospital system vendor, such as Epic, Cerner, and Meditech, and
we developed thousands of interfaces with customer systems.
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SpeechQ Our front end speech recognition
solution enables physicians to dictate, edit, and sign their
reports in real-time. With workflows customized for numerous
medical practices, such as radiology and general medicine,
SpeechQ offers
end-to-end
workflows that combine voice commands and dictation. SpeechQ
integrates with our enterprise platform in scenarios where a
physician prefers to send text to our editors for review.
Additionally, it interfaces with EHR and other healthcare
systems to allow patient demographic information to be
automatically populated, updated, and distributed.
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DocQVoice Our web-based enterprise digital
voice capture and transport solution is deployed at the
customers location and integrates with both our enterprise
platform and legacy dictation systems.
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Clinical
Documentation Solutions for Physician Group Practices, Clinics
and Small Hospitals
Small healthcare providers, such as physician group practices,
clinics, and small hospitals, have many of the same requirements
as larger providers, but they frequently lack in-house expertise
in IT systems. For these providers, we offer fully-integrated
end-to-end
managed services that have been tailored for their requirements.
We market these offerings under CBayScribe. Through this
service, we provide online access to advanced technologies
through a web-based platform. This gives small healthcare
providers access to functionality that was previously only
available to larger hospitals. With much of the same
functionality as our enterprise platform, CBayScribe gives
smaller healthcare providers the same confidence and
capabilities to manage their clinical documentation in an
accurate and timely fashion.
Our proprietary and licensed technologies enable small
healthcare providers to efficiently manage their narrative-based
documentation through numerous workflows. Like our solutions for
large healthcare providers, CBayScribe utilizes and maintains
security measures and audit trails that establish our compliance
with and assist our customers in their compliance with privacy
and security standards and HIPAA regulations.
Revenue
Cycle Management
We offer coding and other revenue cycle management solutions to
improve customers reimbursement, compliance and other
revenue cycle processes. CodeRunner, our internet-based coding
workflow, offers coding services which are used by certain of
the largest healthcare institutions in the industry. We recently
added computer assisted coding to CodeRunner which, like speech
recognition, provides the customer with improved productivity,
increased accuracy and more consistent coding. In addition, in
2013 there is a mandate to change to the ICD-10 coding system
which will increase the number of code possibilities five-fold.
The only way healthcare organizations can effectively deal with
this change is to adopt technology. We provide total
departmental outsourcing of coding,
on-site
temporary assistance and remote-coding services through both
VPN-enabled access to customer systems and CodeRunner. We also
offer complete recovery audit and consulting services, as well
as traditional coding audit
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services. These solutions enable our customers to utilize an
end-to-end
solution from dictation to billing. Revenue cycle management is
a small part of our business.
Selling and
Marketing
As of June 30, 2010, we employed more than
100 personnel in our sales force and account management
organization. Our sales force is focused on new customer sales
opportunities including both the conversion of customers that
are using in-house solutions as well as the displacement of
competitive offerings. This sales organization employs
consultative sales techniques to deliver customized programs and
solutions that respond to the customers unique
requirements. Our account management organization is responsible
for continuity of our current customer relationships and the
expansion of those relationships to include additional services,
facilities, or work types.
We complement our sales efforts with numerous marketing
initiatives, including:
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telemarketing and direct mail programs;
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attending and sponsoring industry trade shows of national
organizations, such as the American Health Information
Management Association, Healthcare Information and Management
Systems Society, Association for Healthcare Documentation
Integrity, Radiological Society of North America, Society for
Imaging Informatics in Medicine, and Medical Transcription
Industry Alliance;
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participating in work groups and leadership committees of the
industry associations; and
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advertising in trade journals related to our industry.
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We market our integrated clinical documentation solutions using
multiple brands. For health systems, hospitals and large group
medical practices, we primarily market our offerings through the
MedQuist Inc. brand. For
small-to-medium
sized physician practices, we primarily use the CBayScribe brand.
Operations
We serve our customers 24 hours a day, seven days a week
with our integrated clinical documentation solutions. We use ASR
in most of our production, which we complement with skilled,
English-speaking MTs and MEs.
Over 14,000 of our MTs and MEs are located in the United States
and India. We believe this is the largest workforce of any
company providing clinical documentation services. The size of
our global pool of resources allow us to quickly and efficiently
provide customers with the capacity needed to implement
comprehensive, scalable solutions.
Technology
Technology
Development
We devote substantial resources to research and development to
ensure that our solutions meet both current and future customer
requirements. As of June 30, 2010, we employed a
development staff of over 90 employees. Our development staff
has expertise in multiple disciplines, including service
oriented architectures, web-based clients, high volume
transactional databases, data warehouses, web services and
integration with third-party systems. We also outsource
development for specific technologies, such as ASR,
capture-assisted codes, encoders, databases, portal technologies
and reporting. Much of the technology in our integrated
solutions is proprietary. Our development personnel follow a
rigorous development methodology that ensures repeatable, high
quality and timely delivery of solutions.
ASR is a key component of our narrative-based solutions, and we
license software for a portion of our ASR capabilities. We dual
source ASR software licenses.
Technology
Operations
Together with our subsidiaries, we currently operate data
centers in the United States and in India. These data centers
have internal and external redundancy to protect data and
maintain service levels. Our three production
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data centers are owned and maintained, by third parties. The
services provided by these third party vendors are generally
available commercially at comparable rates from other vendors.
Our six non-production data centers are located in existing
office locations at reduced rates. Our data centers are scalable
to service additional customers without significant capital
investment.
Our clinical documentation solutions are hosted by us and
accessed using high-speed internet connections or private
network connections. We have devoted significant resources to
producing software applications and managed services to meet the
functionality and performance expectations of our customers. We
use commercially available hardware and a combination of
proprietary and commercially-available licensed software to
provide our clinical documentation solutions.
Competition
Because we integrate technologies and services, we compete with
companies in a number of different sectors. These competitors
include:
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in-house service departments of healthcare providers, which we
believe produce the majority of clinical documentation today
based on the physician narrative;
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national medical transcription service providers, such as Focus
Informatics, Inc. (a subsidiary of Nuance), Heartland
Information Services, Transcend Services, Inc., and Webmedex,
Inc.;
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local or regional medical transcription service organizations;
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ASR software vendors, such as Nuance and MultiModal, which
market ASR as a means to reduce clinical documentation labor; and
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EHR software vendors which promote their systems as a
replacement to narrative-based input by using on-screen
templates and drop-down boxes for data entry.
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Competition for our integrated clinical documentation solutions
is based primarily on the following factors:
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accuracy and timeliness of documentation produced;
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pricing;
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ability to provide fully-integrated
end-to-end
solutions;
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ease of upgrades and ability to add complementary offerings;
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capacity to handle large volumes and complex workflows;
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physician acceptance and productivity;
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analytics provided to customers;
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domestic or offshore production capabilities;
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time to implement for new customers; and
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financial stability.
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We believe we compete effectively on all of the above criteria.
We provide fully integrated
end-to-end
managed services that translate the physician narrative into a
customized electronic record with high accuracy and low
turnaround time. We believe that our production cost structure
is among the lowest in the industry, which allows us to offer
competitive prices while continuing to invest in the development
of new technologies and services. We have the largest production
capacity, and we believe that our operational capabilities and
implementation time for new accounts are unsurpassed.
Government
Regulation
The provision of clinical documentation solutions is heavily
regulated by federal and state statutes and regulations. We and
our healthcare customers must comply with a variety of
requirements, including HIPAA and other restrictions regarding
privacy, confidentiality, and security of health information.
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We have structured our operations to comply with HIPAA and other
regulatory and contractual requirements. We have implemented
appropriate safeguards related to the access, use, or disclosure
of PHI, to address the privacy and security of PHI consistent
with our regulatory and contractual requirements. We also train
our personnel regarding HIPAA and other requirements. We have
made and continue to make investments in systems to support
customer operations that are regulated by HIPAA and other
regulations. Because these standards are subject to
interpretation and change, we cannot predict the future impact
of HIPAA or other regulations on our business and operations.
HIPAA and
HITECH Act
HIPAA establishes a set of national privacy and security
standards for protecting the privacy, confidentiality and
security of PHI. Under HIPAA, health plans, healthcare
clearinghouses, and healthcare providers, together referred to
as covered entities for purposes of HIPAA, and their business
associates must meet certain standards in order to protect
individually identifiable health information. The HITECH Act
which was enacted into law on February 17, 2009 as part of
the ARRA, enhances and strengthens the HIPAA privacy and
security standards and makes certain provisions of HIPAA
applicable to business associates of covered entities.
As part of the operation of our business, our customers provide
us with certain PHI, and we are considered to be a business
associate of most of our customers for purposes of HIPAA. The
provisions of HIPAA require our customers to have agreements in
place with us whereby we are required to appropriately safeguard
the PHI we create or receive on their behalf. As a business
associate, we also have statutory and regulatory obligations
under HIPAA. We are bound by our business associate agreements
to use and disclose PHI in a manner consistent with HIPAA in
providing services to those covered entities.
We and our customers are also subject to HIPAA security
regulations that require the implementation of certain
administrative, physical and technical safeguards to ensure the
confidentiality, integrity and availability of EPHI. We are
required by regulation and contract to protect the security of
EPHI that we create, receive, maintain or transmit for our
customers consistent with these regulations. These requirements
include implementing administrative, physical and technical
safeguards that reasonably and appropriately protect the
confidentiality, integrity and availability of such EPHI. To
comply with our regulatory and contractual obligations, we may
have to reorganize processes and invest in new technologies. On
February 17, 2010, we became directly subject to
HIPAAs criminal and civil penalties for any breaches of
our privacy and security obligations.
Other
Restrictions Regarding Privacy, Confidentiality, and Security of
Health Information
In addition to HIPAA, numerous other state and federal laws
govern the collection, dissemination, use, access to,
confidentiality and security of PHI. In addition, Congress and
some states are considering new laws and regulations that
further protect the privacy and security of medical records or
medical information. In many cases, these state laws are not
preempted by the HIPAA privacy and security standards.
Intellectual
Property
We rely on a combination of copyright, patent, trademark, trade
secret and other intellectual property laws, nondisclosure
agreements, license agreements, contractual provisions and other
measures to protect our proprietary rights. We have a number of
registered trademarks in the United States and abroad, including
CBay®,
MedQuist®
and
SpeechQ®.
We have common law rights over a number of unregistered
trademarks. We also own a limited number of United States and
foreign patents and patent applications that relate to our
products, processes and technologies.
We dual source license ASR software that we incorporate into our
DEP, SpeechQ for Radiology and SpeechQ for General Medicine
proprietary products. Some of our intellectual property is
licensed from competitors.
Employees
As of June 30, 2010, we had approximately
7,000 employees in the United States and approximately
6,000 in India. Most of our employees are MTs and MEs involved
in the production and quality assurance of clinical
documentation. We have approximately 6,000 such specialists in
the United States, virtually all of whom work
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from home, and approximately 5,000 in India, who primarily work
at company-operated facilities. In addition, we engage
approximately 3,000 MTs and MEs who are not our employees.
Our large production capacity allows us to service the needs of
large, complex healthcare organizations, and we estimate it is
nearly three times as high as our next largest competitor.
We believe we have good relationships with our employees. Our
employees are not subject to collective bargaining agreements or
union representation.
Legal
Proceedings
When we acquired MedQuist Inc. in August 2008, MedQuist Inc. was
involved in a number of legal matters, including customer and
stockholder issues and regulatory investigations. Substantially
all of these legal matters have been resolved. As of
June 30, 2010, one legal matter remains open related to
MedQuist Inc.s billing practices prior to the MedQuist
Inc. Acquisition. The SEC is pursuing civil litigation against
MedQuist Inc.s former chief financial officer, whose
employment ended with MedQuist Inc. in July 2004. Pursuant to
its by-laws, MedQuist Inc. has been providing indemnification
for the legal fees of this individual.
From time to time, we are involved in legal proceedings or
regulatory investigations arising in the ordinary course of our
business. We are not currently a party to any material legal
proceedings that we believe would likely have a material adverse
effect on our financial condition, results of operations or cash
flows. See Note 14 to our audited consolidated financial
statements included elsewhere in this prospectus.
Properties
We lease 34 facilities in the U.S and India representing
approximately 677,550 square feet including our
administrative headquarters for our United States operations,
which is located in an approximately 48,000 square foot
facility in Franklin, Tennessee.
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Management
Set forth below are the names and ages as of October 15,
2010 and positions with our company of the persons who will
serve as our directors and executive officers upon the
consummation of this offering.
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Name
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Age
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Position
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Robert M. Aquilina
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Chairman and Chief Executive Officer
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V. Raman Kumar
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Vice Chairman and Director of CBaySystems Holdings Limited and
Chief Executive Officer of CBay India
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Michael Seedman
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Chief Technology Officer and Director
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Clyde Swoger
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Chief Financial Officer
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Peter Masanotti
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President and Chief Executive Officer of MedQuist Inc.
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Michael F. Clark
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Co-Chief
Operating Officer of MedQuist Inc.
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Anthony James
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Co-Chief
Operating Officer of MedQuist Inc.
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Frank Baker
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Director
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Peter Berger
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Director
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Merle Gilmore
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Director
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Jeffrey Hendren
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Director
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Kenneth John McLachlan
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Director
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James Patrick Nolan
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Director
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Robert M.
Aquilina, Chairman and Chief Executive Officer
Mr. Aquilina has served as the Chairman of our board of
directors since August 2008 and as Chief Executive Officer since
October 2010. He also serves as chairman of the MedQuist Inc.
board of directors and its compensation committee. He has also
served as an Executive Partner, a senior operating consulting
role, to SAC PCG since 2007. Prior to this, he served as an
Industrial Partner at Ripplewood Holdings LLC, or Ripplewood, a
private equity firm based in New York, from 2002 to 2004 and
held the role of Co-Chairman of Flag Telecom Group Ltd. from
2002 to 2004. Mr. Aquilina was a board member of Japan
Telecom Inc. from 2003 to 2004. Prior to these positions,
Mr. Aquilina was a senior operating executive of AT&T,
Inc. with a
21-year
career. His last post at AT&T, ending in 2001 was as
Co-President of AT&T Consumer Services and a member of the
Chairmans Operating Group. Within AT&T,
Mr. Aquilina held a variety of senior positions including
President of Europe, Middle East & Africa, Vice
Chairman of AT&T Unisource, Vice Chairman of WorldPartners,
Chairman of AT&T-UK, and General Manager of Global Data
Services. Mr. Aquilina holds an M.B.A. from The University
of Chicago and a B.Sc. in Engineering degree from The Cooper
Union for the Advancement of Science & Art in New York
(Cooper Union). Mr. Aquilina has been a Member of Cooper
Unions Board of Trustees since 2000.
V. Raman
Kumar, Vice Chairman and Director of CBaySystems Holdings
Limited and Chief Executive Officer of CBay India
Mr. Kumar is our co-founder, a director and has served as
our Vice Chairman since August 2008 and as a director since
February 2007. He has also served as the President of CBay Inc.
since December 24, 2008, as Chairman & President
of CBay Systems & Services Inc. since April 1,
2010 and as Executive Chairman & Chief Executive of
CBay Systems (India) Private Limited since July 1, 2010.
Prior to his position at CBay Systems (India) Private Limited,
Mr. Kumar served as its Chairman & Managing
Director from October 1, 2005 to July 1, 2010. Prior
to our founding in 1998, he worked as a Senior Vice President
(International Trade Finance and Marketing) at the Essar Group,
a multinational conglomerate. Mr. Kumar also currently
serves on the board of directors of CBay Inc. , CBay
Systems & Services Inc., Mirrus Systems Inc., CBay
Systems Limited, AMSPlus Inc., CBay Systems (India) Private
Limited, ZTec Ventures Limited, ZNan Holdings Limited, Novo GTC
FZE UAE, Spheris (India) Private Limited and CBay Infotech
Ventures Private Limited. Mr. Kumar has a BA (Honors) and
Masters Degree in History from St. Stephenss College, New
Delhi, India.
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Michael Seedman,
Chief Technology Officer and Director
Mr. Seedman has served as our Chief Technology Officer and
as a director since August 2008. Mr. Seedman also serves on
the MedQuist Inc. board of directors. He has more than
35 years of senior executive management, leadership and
technological innovation expertise and experience. He founded
Seedman and Associates in January 2000 and oversees his personal
investment portfolio and has actively served on both public and
private boards continuously from before its founding to the
present. Mr. Seedman was the President and founder of
Chrysalis Technology from 2002 through 2005, an Industrial
Partner at Ripplewood from September 1997 to June 2003, where he
served on the D&M Holdings Inc. board of directors from
1999 until 2003 and the Chairman of the board for Digital
Networks North America from 2000 to 2003. He began his active
affiliation with Ripplewood in 1999 as an Industrial Partner
with Western Multiplex Corp. (acquired by Proxim Corporation),
where he served on its board of directors and was their General
Manager from 2001 until 2002. Prior to this, Mr. Seedman
founded and was the Chairman of Entrega Technologies (acquired
by Xircom), a computer peripheral design and manufacturer in
1997. Mr. Seedman was the Senior Vice President and General
Manager of U.S. Robotics Personal Communications
Division (acquired by 3Com Corporation). Prior to
U.S. Robotics, from August 1993 to September 1997.
Mr. Seedman served as President and Chief Executive Officer
of Practical Peripherals, which he founded in 1981, sold to
Hayes Microcomputer, Inc. in 1989, and operated as the CEO and
President until August 1993. Mr. Seedman currently serves
on the board of directors of Airvana, Revenew Systems, Inc.,
Cleversafe Inc. and LS Research, LLC. Mr. Seedman has
served as an Executive Partner, a senior operating consultant
role, to SAC PCG since 2007. Mr. Seedman attended the
University of Southern California from 1974 to 1979 and received
a degree in Business and Accounting.
Clyde Swoger,
Chief Financial Officer
Mr. Swoger has served as our Chief Financial Officer since
August 2008. Mr. Swoger has also served as a senior
operating consultant to SAC PCG since August 2007, assisting
with the identification and evaluation of acquisition
opportunities. Mr. Swoger founded Creative Business
Solutions LLC, a
start-up
management consulting firm, in September 2006 and where he
currently serves as President. Between 2004 and July 2006
Mr. Swoger provided consulting and management services to
several
start-up
companies. Prior to that time, Mr. Swoger served as Senior
Vice President and General Manager of DeVilbiss Air Power
Company (Pentair) from 2001 to 2003. He also held the position
of Vice President of Business Development of Pentair Tools Group
in 2001. Prior to this, Mr. Swoger held various executive
positions in Sanford Corporation and Kohler International Ltd
including Vice President Business Development and Group
Controller. Mr. Swoger holds a B. Sc. in Materials
Engineering and a Masters of Business Development from the
University of Michigan.
Peter L.
Masanotti, President and Chief Executive Officer of MedQuist
Inc.
Mr. Masanotti has served as MedQuist Inc.s Chief
Executive Officer since September 2008 and as MedQuist
Inc.s President since November 2008. Prior to this,
Mr. Masanotti was Managing Director and Global Head of
Business Process Sourcing at Deutsche Bank, an international
bank, since May 2007, where he was responsible for offshore and
onshore labor productivity and efficiency for the investment
banking platform. From July 2005 through May 2007,
Mr. Masanotti was the Chief Operating Officer and Executive
Vice President of Office Tiger LLC, a business outsourcing firm
which services major investment banks and Fortune
500 companies. From December 2001 to May 2005,
Mr. Masanotti served as Chief Operating Officer of
Geller & Company, a privately held finance and
accounting outsourcing firm. He also held executive positions at
Baltimore Technologies Inc., a Dublin, Ireland-based
e-security
solutions provider, and at International Telecommunication Data
Systems Inc., a leading billing and customer care solutions
provider to the wireless telecommunication industry.
Mr. Masanotti received his B.A. in economics from the
University of Connecticut-Storrs. He is also a graduate of the
Temple University School of Law.
Michael F. Clark,
Co-Chief Operating Officer of MedQuist Inc.
Mr. Clark has served as MedQuist Inc.s Co-Chief
Operating Officer since June 2009. Mr. Clark previously
served as MedQuist Inc.s Senior Vice President of
Operations from February 2005 to June 2009. From November 2003
until February 2005, Mr. Clark served as MedQuist
Inc.s Senior Vice President of Operations for its Western
Division. From May 2002 until November 2003, Mr. Clark
served as MedQuist Inc.s Vice President of
84
Operations for its Southwest Division and from January 1998
until July 2000, he served as Region Vice President for the
Southeast. Mr. Clark joined MedQuist Inc. in 1998 through
MedQuist Inc.s acquisition of MRC Group. While at MRC,
Mr. Clark served as Vice President, Marketing and Corporate
Services. From May 2001 until May 2002, Mr. Clark served as
Chief Operating Officer for eScribe, a firm that outsources the
HIM function in hospitals. While at MRC, Mr. Clark served
as Vice President, Marketing and Corporate Services.
Mr. Clark received his B.S. in Marketing and International
Business from Miami University in Oxford, Ohio and an MBA from
the University of Miami in Coral Gables, Florida.
Anthony James,
Co-Chief Operating Officer of MedQuist Inc.
Mr. James has served as MedQuist Inc.s Co-Chief
Operating Officer since June 2010, following MedQuist
Inc.s acquisition of Spheris. Prior to becoming the
Co-Chief Operating Officer of MedQuist Inc., Mr. James was
the Chief Operating Officer for Spheris from 2006 to April 2010.
Prior to becoming the Chief Operating Officer of Spheris,
Mr. James served as Spheris Chief Financial Officer
from 2001 to 2006 and Corporate Controller from 1999 to 2001.
Prior to that time, Mr. James worked in a variety of
financial roles over a seven-year tenure with Mariner Post-Acute
Network, a long-term healthcare company. Mr. James is a
certified public accountant and received his B.A. in Accounting
from the University of Northern Iowa.
Frank Baker,
Director
Mr. Baker has served as a director since August
2008. He also serves as a non-executive director of
MedQuist Inc. Mr. Baker is a co-founder of SAC PCG and has
been a Managing Director since 2007. Prior to establishing SAC
PCG, Mr. Baker was a Managing Director at Ripplewood and
RHJ International from 2004 to 2006 where he was responsible for
making various private equity investments and taking RHJ
International public on the Brussels Stock Exchange. He joined
Ripplewoods New York office in 1999 and transferred to
Ripplewood Japan, Inc. in 2002. Prior to joining Ripplewood,
Mr. Baker spent over three years in investment banking as
an Associate at J.P. Morgan Securities Inc. in its Capital
Markets Group and as an Analyst at Goldman Sachs & Co.
in its Mergers and Acquisitions Group. Mr. Baker also
currently serves as director of Cosmos Bank, Taiwan.
Mr. Baker has a B.A. in Economics from the University of
Chicago and an M.B.A. from Harvard Business School.
Peter Berger,
Director
Mr. Berger has served as a director since August
2008. He also serves as a non-executive director of
MedQuist Inc. Mr. Berger is a co-founder of SAC PCG and has
been a Managing Director since 2007. Mr. Berger was a
founding member of Ripplewood. From 1995 to 1998 and from 2000
to 2006, Mr. Berger served as both a Managing Director of
Ripplewood and as a Special Senior Advisor to the Board of RHJ
International. Prior to joining Ripplewood, Mr. Berger
served as Managing Director and Chief Executive Officer of
Mediacom Venture LLC, a boutique investment advisory firm from
1999 to 2000. From 1989 to 1991, he served as a Managing
Director in investment banking at Bear Stearns Companies. Prior
to this, Mr. Berger was a senior partner and global head of
the Corporate Finance Group at Arthur Andersen & Co.,
where he began his career in 1974. Mr. Berger also served
as Non-Executive Chairman of the Board of Kepner-Tregoe, Inc., a
management consulting company and currently serves as director
of Cosmos Bank, Taiwan. Mr. Berger has a B.Sc. from Boston
University and an M.B.A. from Columbia University Graduate
School of Business.
Merle L. Gilmore,
Director
Mr. Gilmore has served as a director since August 2008. He
has been President of LKR Technology Partners, LLC since 2001.
Mr. Gilmore served as an Industrial Partner of Ripplewood
from 2001 to 2008 and has been an Executive Partner of SAC PCG
since 2009. Mr. Gilmore was a senior executive of Motorola,
Inc., holding numerous senior management positions including
Executive Vice President and President of the Land Mobile
Products Sector from 1993 to 1997, Executive Vice President and
President for Europe, Middle East and Africa from 1997 to 1998
and Executive Vice President and President of the Communications
Enterprise from 1998 to 2000. Mr. Gilmore has been a
director of Revenew Systems LLC, a marketing company, since
2006. In April, 2010 he was named Chairman of the Board of
Airvana Network Solutions, Inc. He was previously a member of
85
the Proxim Corp., Japan Telecom, Inc. and Mediabolic, Inc.
boards of directors and the Chairman of the Board and a
representative officer of D&M Holdings Inc. from 2001 to
2006. Mr. Gilmore received his B.S. in Electrical
Engineering from the University of Illinois and his M.S. in
Electrical Engineering from Florida Atlantic University.
Jeffrey Hendren,
Director
Mr. Hendren has served as a director since August 2008. He
is a co-founder of SAC PCG and has been a Managing Director
since 2007. He currently also serves as a director on our board
and on the board of Cosmos Bank, Taiwan. Prior to establishing
SAC PCG in 2007, Mr. Hendren was a Managing Director at
Ripplewood and RHJ International from 1997 to 2007 where he was
responsible for making various private equity investments and
taking RHJ International public on the Brussels Stock Exchange.
Before joining Ripplewood and RHJ International,
Mr. Hendren was a member of Goldman, Sachs &
Co.s merger department from 1989 to 1997 and, from 1981 to
1988, Mr. Hendren held various positions at Georgia Pacific
Corp. Mr. Hendren has a B.Sc. from Indiana University and
an M.B.A. from Harvard Business School.
Kenneth John
McLachlan, Director
Mr. McLachlan has served as a director since May 2007.
He is the founder and has been the chairman of the consulting
firm McLachlan & Associates since January 1992.
Prior to that, he held leadership roles at companies such as
PricewaterhouseCoopers from January 1970 to
December 1987, Boehringer Mannheim from January 1988
to December 1993, Mackie Plc from January 1995 to
December 1997. Mr. McLachlan during the past five
years has held directorships at various UK international private
companies, including Vitaflo International Ltd. He is a
qualified Chartered Accountant in Scotland as well as being a
Registered Accountant in The Netherlands. He is also a Fellow of
the Institute of Taxation in the UK.
James Patrick
Nolan, Director
Mr. Nolan has been a director since August 2008. He is
an Executive Vice President at Royal Philips Electronics and is
Head of Mergers & Acquisitions, a position he has held
since June 2005. Mr. Nolan joined Philips, at its
headquarters in Amsterdam, Netherlands, in 2000 as an executive
in the Mergers & Acquisitions department. Prior to
joining Philips, Mr. Nolan held merger and acquisition
roles at companies including Credit Commercial de France,
Coopers & Lybrand Management Consultants and Rabobank
Internations. He has held several board positions including
being a board member of Navteq Inc., the worlds leading
digital navigation software company, and SHL Telemedicine Ltd.,
an IT-based healthcare company. Mr. Nolan qualified as a
barrister after having graduated in Law from the University of
Oxford in the United Kingdom and he subsequently gained an MBA
from INSEAD, France.
There are no family relationships among any of our executive
officers and directors.
Board of
Directors
Our board of directors, or board, currently consists of nine
directors. Within twelve months after our common stock is listed
on The NASDAQ Global Market, we expect that a majority of our
board members will be independent as such term is defined in
Rule 10A-3(b)(i) under the Exchange Act and in The NASDAQ
Listing Rule 5605(a)(2).
Committees of the
Board
Our board currently includes an audit committee, a remuneration
committee and a nomination committee. After the Corporate
Reorganization and the completion of this offering, the
committees of our board will consist of an audit committee, a
remuneration committee and a nomination and corporate governance
committee.
Audit
Committee
Our audit committee currently consists of Messrs. McLachlan and
Berger. We expect to have an independent director under the
corporate governance standards of The NASDAQ Global Market and
the independence
86
requirements of
Rule 10A-3
of the Exchange Act at the completion of this offering, a second
independent member within 90 days of the completion of this
offering and a third independent member within one year of the
completion of this offering so that all of our audit committee
members will be independent as such term is defined in
Rule 10A-3(b)(i)
under the Exchange Act and in NASDAQ Listing
Rule 5605(a)(2). The independent member of our audit
committee, upon the completion of this offering, will qualify as
an audit committee financial expert as such term is
defined in Item 407(d)(5) of
Regulation S-K.
The purpose of the audit committee will be to assist our board
in overseeing and monitoring (1) the quality and integrity
of our financial statements, (2) our compliance with legal
and regulatory requirements, (3) our independent registered
public accounting firms qualifications and independence,
(4) the performance of our internal audit function and
(5) the performance of our independent registered public
accounting firm.
Our board will adopt a written charter for the audit committee,
which will be available on our website upon the completion of
this offering.
Remuneration
Committee
Our remuneration committee currently consists of Messrs. Baker,
Hendren, Aquilina and Gilmore. We expect to have an independent
director under the corporate governance standards of The NASDAQ
Global Market and the independence requirements of
Rule 10A-3
of the Exchange Act at the completion of this offering, a second
independent member within 90 days of the completion of this
offering and the remaining members as independent within one
year of the completion of this offering so that all of our
remuneration committee members will be independent as such term
is defined in
Rule 10A-3(b)(i)
under the Exchange Act and in the NASDAQ Listing
Rule 5605(a)(2). The purpose of the remuneration committee
is to assist our board in discharging its responsibilities
relating to (1) setting our compensation program and
compensation of our executive officers and directors and
(2) monitoring our incentive and equity-based compensation
plans. Following the completion of this offering, the
remuneration committee will also assist our board in preparing
the compensation committee report required to be included in our
proxy statement under the rules and regulations of the SEC.
Our board will adopt a written charter for the remuneration
committee, which will be available on our website upon the
completion of this offering.
Nomination
Committee
Our nomination committee currently consists of Messrs. Berger,
Baker, Hendren and McLachlan. We expect to have an independent
director under the corporate governance standards of The NASDAQ
Global Market and the independence requirements of
Rule 10A-3
of the Exchange Act at the completion of this offering, a second
independent member within 90 days of the completion of this
offering and the remaining members as independent within one
year of the completion of this offering so that all of our
nomination and corporate governance committee members will be
independent as such term is defined in
Rule 10A-3(b)(i)
under the Exchange Act and in NASDAQ Listing
Rule 5605(a)(2). The purpose of our nomination committee is
to assist our board in discharging its responsibilities relating
to (1) developing and recommending criteria for selecting
new directors and (2) screening and recommending to the
board individuals qualified to become executive officers.
Our board will adopt a written charter for the nominating
committee, which will be available on our website upon
completion of this offering.
Duties of
Directors
Under Delaware law, our directors will have a duty of loyalty to
act honestly and in good faith with a view to our best
interests. Our directors will also have a duty to exercise the
skill they actually possess and such care and diligence that a
reasonably prudent person would exercise in comparable
circumstances. In fulfilling their duty of care to us, our
directors must ensure compliance with our certificate of
incorporation and by-laws. A stockholder has the right to seek
damages if a duty owed by our directors is breached. You should
refer to Description of Capital Stock for additional
information on our standard corporate governance under Delaware
law.
87
Remuneration
Committee Interlocks and Insider Participation
We do not anticipate any interlocking relationships between any
member of our remuneration committee and any of our executive
officers that would require disclosure under the applicable
rules promulgated under the federal securities laws.
Code of Business
Conduct and Ethics
We expect that, prior to the completion of the offering, our
board will adopt a code of business conduct and ethics
applicable to our directors, officers and employees, in
accordance with applicable rules and regulations of the SEC and
The NASDAQ Global Market.
Compensation
Discussion and Analysis
Named Executive
Officers
For the fiscal year ended December 31, 2009, the following
individuals constitute our named executive officers, or NEOs:
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Robert Aquilina, our Chairman and Chief Executive Officer;
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V. Raman Kumar, our Vice Chairman;
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Clyde Swoger, our Chief Financial Officer;
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Michael Seedman, our Chief Technology Officer; and
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Peter Masanotti, President and Chief Executive Officer of
MedQuist Inc.
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Remuneration
Committee
Our remuneration committee currently consists of
Messrs. Baker, Aquilina and Gilmore. The key
responsibilities of the remuneration committee are to consider
and recommend to our board the framework for the remuneration of
our executive officers. The remuneration committee is also
required to consider and recommend to our board the total
individual remuneration package of each employee director and
executive officer, including bonuses, incentive payments and
stock options or other equity and equity-based awards. The
remuneration committee is also empowered to review the design of
all equity and equity-based incentive plans and recommend the
approval of such plans to our board. None of the directors votes
on decisions concerning his or her own remuneration.
MedQuist Inc.
Compensation Committee
MedQuist Inc., our majority-owned subsidiary, has a separately
constituted compensation committee composed of
Messrs. Aquilina, Baker, Berger and Pinckert.
Mr. Pinckert is an independent director of MedQuist Inc.
and also serves as the Chairman of the MedQuist Inc. audit
committee. The key responsibilities of the compensation
committee are to make recommendations to the MedQuist Inc. board
of directors regarding the following:
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the corporate and individual goals and objectives relevant to
the compensation of MedQuist Inc.s executive officers;
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the evaluation of MedQuist Inc.s corporate performance and
the performance of its executive officers in light of such goals
and objectives; and
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the compensation of MedQuist Inc.s executive officers
based on such evaluations.
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Compensation
Philosophy
We provide our NEOs with incentives tied to the achievement of
our corporate objectives or, in the case of Mr. Masanotti,
objectives that are tied solely to the performance of MedQuist
Inc.
88
The remuneration and compensation committees have each
separately established a total compensation philosophy and
structure designed to accomplish the following objectives:
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attract, retain and motivate executives who can thrive in a
competitive environment of continuous change and who can achieve
positive business results in light of challenging circumstances;
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provide executives with a total compensation package that
recognizes individual contributions, as well as overall business
results; and
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promote and reward the achievement of objectives that our board
or the MedQuist Inc. board, as applicable, and management
believes will lead to long-term growth in shareholder value.
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To achieve these objectives, we intend to maintain compensation
arrangements that tie a substantial portion of our NEOs
overall compensation to the achievement of our key strategic,
operational and financial goals or to our individual business
divisions, as applicable.
Role of Named
Executive Officers in Setting Compensation
Our NEOs do not play a role in their own compensation
determinations, other than discussing individual performance
objectives with members of the remuneration or compensation
committee, as applicable.
Elements of
Compensation
Our and MedQuist Inc.s executive compensation programs
utilize four primary elements to accomplish the objectives
described above:
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base salary;
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annual cash incentives linked to corporate and individual
performance;
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long-term incentives in the form of equity-based awards;
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severance
and/or
change in control benefits; and
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perquisites.
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We believe that we can meet the objectives of our executive
compensation program by achieving a balance among these elements
that is competitive with our industry peers and creates
appropriate incentives for our NEOs. Actual compensation levels
are a function of both corporate and individual performance as
described under each compensation element set forth below. In
making compensation determinations, the remuneration and
compensation committees consider the competitiveness of
compensation both in terms of individual pay elements and the
aggregate compensation package provided to our NEOs.
Base
Salary
We provide our NEOs with base salary in the form of fixed cash
compensation to compensate them for services rendered during the
fiscal year. The current salaries for our NEOs were negotiated
at the time that they were hired and are set forth in their
employment agreements, which were negotiated individually with
each executive. The remuneration and compensation committees
believe that the initial salaries of our NEOs were set at levels
competitive with individuals with similar responsibilities in
similarly-sized public companies in the healthcare IT sector.
The base salary of each of our NEOs is reviewed annually by the
remuneration or compensation committee, as applicable, to
determine if any salary adjustments are appropriate. Generally,
in making a determination of whether to make base salary
adjustments, the remuneration and compensation committees
consider the following factors:
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success in meeting our (or, in the case of Mr. Masanotti,
MedQuist Inc.s) strategic operational and financial goals;
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an assessment of such executive officers individual
performance; and
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changes in scope of responsibilities of such executive officer.
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In addition, the remuneration and compensation committees
consider internal equity within our organization and the
aggregate levels of compensation earned by our NEOs.
89
None of our NEOs received base salary increases during 2009
since each of them had commenced employment in the second half
of 2008 in accordance with newly negotiated employment
arrangements. In addition, no base salary adjustments for our
NEOs were made for 2010 in light of the difficult economic
climate and because it was determined that the salaries were
sufficient to retain and incentivize our executives. The current
base salaries of our NEOs are as follows:
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2010 Annual Base
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Name
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Salary Rate ($)
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Robert Aquilina
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$
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500,000
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V. Raman Kumar
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$
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500,000
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Clyde Swoger
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$
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300,000
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Michael Seedman
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$
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120,000
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Peter Masanotti
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$
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500,000
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Annual Cash
CompensationPerformance-Based Incentive Bonus
Program
We believe that performance-based cash incentives play an
essential role to motivate our NEOs to achieve defined annual
goals. The objectives of our and MedQuist Inc.s annual
management incentive plans are to:
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align the interests of executives and senior management with our
strategic plan and critical performance goals;
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motivate and reward achievement of specific, measurable annual
individual and corporate performance objectives;
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provide payouts commensurate with corporate performance;
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provide competitive total compensation opportunities; and
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enable us to attract, motivate and retain talented executive
management.
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Our incentive bonus plans are designed to reward our executives
for the achievement of pre-established annual financial targets
and management objectives or personal performance, as
applicable. These objectives are established for each individual
NEO based upon the scope of his responsibility. Specifically,
Messrs. Aquilina, Swoger and Seedmans bonuses were
based upon our consolidated performance (including MedQuist
Inc.), Mr. Kumars bonus was based upon the
performance of our operations (excluding MedQuist Inc.), and
Mr. Masanottis bonus was based on the performance of
MedQuist Inc. alone.
2009 Incentive
Plans
Each of our NEOs was eligible to earn an annual bonus up to
either a predetermined dollar amount or a percentage of such
executives base salary, as set forth in each NEOs
employment agreement. Our NEOs are eligible to earn their annual
bonus based upon the achievement of target performance
objectives under our 2009 Incentive Plan and, for
Mr. Masanotti, under the MedQuist Inc. 2009 Incentive Plan
(together with our 2009 Incentive Plan, the 2009 Plans),
as follows:
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Executive
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Maximum Bonus for 2009
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Robert Aquilina
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$
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750,000
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V. Raman Kumar
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$
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750,000
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Clyde Swoger
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$
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400,000
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Michael Seedman
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$
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180,000
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Peter Masanotti
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$
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700,000
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(1)
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Represents 140% of base salary. |
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Performance
Measures
Payments of incentive awards were based on the achievement of a
combination of corporate performance objectives which were
established for each NEO and an assessment of individual
performance toward achievement of such corporate objectives as a
way to communicate and measure our performance expectations and
to maintain and unify our executives focus on our key
strategic objectives. The actual bonus payable for a particular
year is bifurcated into a corporate performance-based element
and a discretionary element based on the remuneration and
compensation committees subjective assessment of the
applicable NEOs individual performance in relation to the
achievement of pre-established net revenues and Adjusted EBITDA
goals established exclusively for the 2009 Plans. As noted
below, the individual incentive pool was funded at 30% of the
total of all participants aggregate maximum incentives and
was allocated to eligible participants at the discretion of our
board in respect of the 2009 Incentive Plan and the MedQuist
Inc. board in respect of the MedQuist Inc. 2009 Incentive Plan.
For 2009, each NEOs cash bonus was based upon the
achievement of the following criteria, with the percentage
weightings as set forth below:
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Objective
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Weighting
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Net revenues
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35
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%
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Adjusted EBITDA
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35
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%
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Personal performance
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30
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%
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Adjusted EBITDA was calculated as defined in the 2009 Plans.
The corporate performance-based element of the annual bonus
incentive was calculated on the basis of achieving net revenues
and Adjusted EBITDA targets under the 2009 Plans, based on
internal financial goals set in connection with the remuneration
and compensation committees consideration and approval of
the annual operating plans for 2009 for us and for MedQuist
Inc., respectively. The range of potential payouts under the
2009 Plans reflected the level of achievement of the applicable
financial goals for 2009. No payout was available for
performance below 80% of the Adjusted EBITDA target
and/or below
90% of the net revenues target. The maximum payout for each
performance metric was capped at 170% of the pro-rated maximum
bonus amount bonus amount (and, with respect to the corporate
performance targets, which maximum applied) for performance in
excess of 115% of the Adjusted EBITDA target
and/or for
performance in excess of 110% of the net revenues target).
Actual corporate performance was measured against the targeted
levels for each of the two financial objectives under the 2009
Plans and weighted in accordance with the weightings set forth
above. In addition, the remuneration and compensation committees
assessed each NEOs personal performance, with the
potential payout percentage ranging from 0% to 170% for the
individual performance portion of the annual bonus incentive.
Notwithstanding the foregoing, in no event could the total
payout, based on an assessment of both corporate and personal
performance, exceed the maximum bonus amount for each NEO set
forth in his employment agreement.
For fiscal 2009, as established exclusively for our 2009
Incentive Plan, our consolidated net revenues goal was
$389.4 million and the Adjusted EBITDA goal was
$69.1 million, which targets were achieved at 46% and 110%,
respectively for the 2009 fiscal year. For fiscal 2009, the net
revenues goal for our operations excluding MedQuist Inc. was
$85.8 million and the Adjusted EBITDA goal for our
operations excluding MedQuist Inc. was $17.3 million,
neither of which targets was achieved. For fiscal 2009, as
established exclusively for the MedQuist Inc. 2009 Incentive
Plan, the net revenues goal was $315.6 million and the
Adjusted EBITDA goal was $52.8 million, which targets were
achieved at 97% and 110%, respectively.
The actual bonus payment made to each of the NEOs was based upon
the actual performance for the quantifiable financial
performance objectives as well as a subjective assessment of the
individuals performance. In addition to determining the
applicable payout percentages based on the achievement of the
applicable corporate financial goals for our NEOs, set forth
above, the remuneration and compensation committees determined
the level of achievement of each NEOs personal performance, and
then approved the overall bonus payment for 2009. Based on
actual performance measured against plan objectives, as well as
the committees subjective assessment of each
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NEOs personal performance, the remuneration and
compensation committees, as applicable, approved the following
cash incentive payments for 2009:
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Total 2009 Incentive
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Net
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Adjusted
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Bonus Payout ($)
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Executive
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Revenues
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EBITDA
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Personal
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(% of maximum)
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Robert Aquilina
|
|
$
|
120,750
|
(46%)
|
|
$
|
289,013
|
(110%)
|
|
$
|
175,500
|
(78%)
|
|
$
|
585,263
|
(78%)
|
V. Raman Kumar
|
|
$
|
0
|
(0%)
|
|
$
|
0
|
(0%)
|
|
$
|
382,500
|
(170%)
|
|
$
|
382,500
|
(51%)
|
Clyde Swoger
|
|
$
|
64,400
|
(46%)
|
|
$
|
154,140
|
(110%)
|
|
$
|
0
|
(0%)
|
|
$
|
218,500
|
(55%)
|
Michael Seedman
|
|
$
|
28,980
|
(46%)
|
|
$
|
69,363
|
(110%)
|
|
$
|
42,120
|
(78%)
|
|
$
|
140,463
|
(78%)
|
Peter Masanotti
|
|
$
|
238,385
|
(97%)
|
|
$
|
269,500
|
(110%)
|
|
$
|
192,115
|
(92%)
|
|
$
|
700,000
|
(100%)
|
The foregoing table also shows the payment as a percentage of
the maximum bonus for each NEO.
The bonus payments are normally paid by the end of the first
quarter of the year following the year in which the bonus is
earned. If for any reason the bonus payment is delayed, it
generally accrues interest between March 31st and the
actual date of payment, which shall not be later than
December 31, 2010, at the rate of 7% per year.
2010 Management
Incentive Plans
The target bonus opportunities under the 2010 management
incentive plans for us and MedQuist Inc., or the 2010 Plans,
remain unchanged from 2009 levels for each of our NEOs. However,
the corporate objectives and the percentage weightings for
objectives under the 2010 Plans were changed to a 50% weighting
for Adjusted EBITDA, and a 25% weighting for each of (i)
annualized net sales volume and (ii) personal performance in
relation to achievement of corporate objectives, in each case
established exclusively for the 2010 Plans.
Equity-Based
Incentive Plans
Equity
Incentive Awards
Our equity award program is the primary vehicle for offering
long-term incentives to our NEOs. Historically, all of our
equity awards have been in the form of stock options. We believe
that equity-based compensation provides our NEOs with a direct
interest in our long-term performance, creates an ownership
culture and aligns the interests of our NEOs and our
stockholders. Grants of stock options, including those to our
NEOs, are approved by our board and are granted at an exercise
price at our above the fair market value of our common stock on
the date of grant. Options are generally subject to a time-based
vesting schedule, which furthers our objective of employee
retention, as it provides an incentive to our executives to
remain in our employ during the vesting period. Similarly,
MedQuist Inc. has implemented its own equity award program to
offer long-term incentives to its executives, including
Mr. Masanotti who holds options granted under a MedQuist
Inc. equity incentive plan, as described in greater detail below.
Options Granted
to Named Executive Officers under the 2007 Plan
Messrs. Aquilina, Kumar, Swoger and Seedman were awarded
stock options under our 2007 Equity Incentive Plan, or the 2007
Plan, pursuant to the provisions of their employment agreements
executed in August 2008 in connection with the completion of the
MedQuist Inc. Acquisition. Such stock options were granted by
our board on August 6, 2008 with an exercise price of
£0.70 per share. The options are subject to the following
vesting schedule: one-third of the shares vested on
August 6, 2009, and one-sixth of the shares vest every six
months thereafter, such that the options will be fully vested on
August 6, 2011. Any unvested options will automatically
vest if the executives employment is terminated without
cause or the executive quits for good
reason (as each such term is defined in the
executives employment agreement). As noted above, subject
to the NEOs continued service, all unvested options will
accelerate automatically upon a change in control
(as such term is defined in the executives option
agreement). Generally, an executive can exercise vested options
following a termination of
92
employment without cause or a resignation with or without good
reason for a period of 90 days following such termination;
however, this period will be extended to 12 months in the
event of death or disability. Pursuant to the terms of the
management stockholders agreement, each executive is subject to
a customary
lock-up for
a period of 180 days following this offering.
Stand-Alone
Executive Option Award
On June 12, 2007, our board approved a grant of options
over 1,400,080 shares of our common stock to Mr. Kumar
outside of the 2007 Plan. The options were granted in three
tranches, of which only options over 253,680 shares remain
outstanding and exercisable. The options were granted with an
exercise price of $1.75 per share, which was equal to the price
at which our common stock was issued in our initial public
offering on AIM. The options vested on June 18, 2007, the
date on which our shares were admitted for trading on AIM. The
options will remain exercisable for a period of six months from
the date of termination of Mr. Kumars employment
(except a termination for cause, unless otherwise determined by
the remuneration committee). If not exercised, the options will
expire on June 12, 2017.
MedQuist Inc.
Option Grant
On September 30, 2008, pursuant to the terms of
Mr. Masanottis employment agreement, MedQuist Inc.
granted Mr. Masanotti an option to purchase up to
295,749 shares of MedQuist Inc. common stock at $4.85 per
share, which was the fair market value of MedQuist Inc. common
stock on the date of grant. On March 2, 2009, MedQuist Inc.
entered into an amended and restated stock option agreement with
Mr. Masanotti to (i) amend the exercise price of the
original stock option grant and (ii) to provide that if
Mr. Masanottis employment by MedQuist Inc. is
terminated for cause (as defined in
Mr. Masanottis employment agreement), the option will
terminate immediately in full. The amended option agreement:
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|
|
|
increased the exercise price to $8.25;
|
|
|
|
provides that the option vests as to one-third of the shares
subject to the option on the first anniversary of the grant date
and one-sixth of the shares subject to the option vest every six
month anniversary thereafter, such that the option will be fully
vested the third anniversary of the grant date; and
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|
provides that upon the occurrence of a change in
control (as such term is defined in the amended and
restated option agreement) or termination of
Mr. Masanottis employment without cause
or by him for good reason (each as defined in
Mr. Masanottis employment agreement), the options
shall become immediately exercisable, to the extent not already
vested.
|
Severance and
Change in Control Benefits
We and MedQuist Inc., as applicable, have entered into severance
arrangements with each of Messrs. Aquilina, Kumar, Swoger,
Seedman and Masanotti, as set forth in their respective
employment agreements, and as discussed in detail under the
heading Potential Payments Upon Termination or Change in
Control, below. These arrangements were determined on the
basis of arms length negotiations at the time we entered
into the respective employment agreements with each of our NEOs.
In general, the severance benefits are designed to provide
economic protection to our key executives in order that they can
remain focused on our business without undue personal concern in
the event that an executives position is eliminated or
significantly altered, including in connection with a change in
control. We recognize that circumstances may arise in which we
may consider eliminating certain key positions that are no
longer necessary, including in connection with a change in
control transaction. These benefits are intended to provide the
security needed for the executives to remain focused and reduce
the distraction regarding personal concerns during a transition.
In addition, under the terms of the option awards granted to our
NEOs, all options that are unvested at the time of an
executives termination without cause or resignation for
good reason will automatically vest in full upon such
termination. Additionally, all unvested options will
automatically accelerate in the event of a change of control of
us or MedQuist Inc., as the case may be.
93
Benefits and
Perquisites
We and MedQuist Inc. each maintain broad-based benefits for all
of our respective full-time employees, including health, dental,
life and disability insurance, as well as our 401(k) plan. These
benefits are offered to our NEOs on the same basis as all other
employees, except that we provide, and pay the premiums for,
additional long-term disability and life insurance coverage for
Mr. Masanotti.
Tax and
Accounting Considerations
We structure our compensation program in a manner that is
consistent with our compensation philosophy and objectives.
Internal Revenue Code Section 162(m) (as interpreted by IRS
Notice
2007-49)
denies a federal income tax deduction for certain compensation
in excess of $1 million per year paid to the chief
executive officer and the three other most highly-paid executive
officers (other than the companys chief executive officer
and chief financial officer) of a publicly-traded corporation.
Certain types of compensation, including compensation based on
performance criteria that are approved in advance by
stockholders, are excluded from the deduction limit. In
addition, grandfather provisions may apply to
certain compensation arrangements that were entered into by a
corporation before it was publicly held. Our policy will be to
qualify compensation paid to our executive officers for
deductibility for federal income tax purposes to the extent
feasible. However, to retain highly skilled executives and
remain competitive with other employers, the Remuneration and
Compensation Committees will have the right to authorize
compensation that would not otherwise be deductible under
Section 162(m) or otherwise.
We endeavor to design our equity incentive awards in a manner
that will result in equity accounting treatment under applicable
accounting standards.
Summary
Compensation Table
The following table sets forth, for the year ended
December 31, 2009, summary information concerning the
compensation of our NEOs.
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Non-Equity
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|
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|
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|
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Options
|
|
Incentive Plan
|
|
All Other
|
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|
Name and Principal Position
|
|
Year
|
|
Salary
|
|
Bonus
|
|
Awards(2)
|
|
Compensation
|
|
Compensation
|
|
Total
|
|
Robert Aquilina,
Chairman and
Chief Executive Officer
|
|
|
2009
|
|
|
$
|
500,000
|
|
|
$
|
175,579(1
|
)
|
|
|
|
|
|
$
|
409,684(3
|
)
|
|
|
|
|
|
$
|
1,085,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
V. Raman Kumar,
Vice Chairman and Director of CBaySystems Holdings Limited and
Chief Executive Officer of CBayIndia
|
|
|
2009
|
|
|
$
|
500,000
|
|
|
$
|
382,500(1
|
)
|
|
|
|
|
|
$
|
0(3
|
)
|
|
|
|
|
|
$
|
882,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clyde Swoger,
Chief Financial
Officer
|
|
|
2009
|
|
|
$
|
300,000
|
|
|
$
|
(1
|
)
|
|
|
|
|
|
$
|
218,500(3
|
)
|
|
|
|
|
|
$
|
518,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Seedman,
Chief Technology
Officer
|
|
|
2009
|
|
|
$
|
120,000
|
|
|
$
|
42,139(1
|
)
|
|
|
|
|
|
$
|
98,324(3
|
)
|
|
|
|
|
|
$
|
260,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peter Masanotti,
President and Chief
Executive Officer of
MedQuist Inc.
|
|
|
2009
|
|
|
$
|
500,000
|
|
|
$
|
192,115(1
|
)
|
|
|
|
|
|
$
|
507,885
|
|
|
|
|
|
|
$
|
1,200,000
|
|
|
|
|
(1) |
|
The amounts in this column represent payments made pursuant to
the discretionary element of the 2009 Incentive Plans. |
|
(2) |
|
As discussed under the heading Equity-Based Incentive
PlansMedQuist 2002 Stock Option PlanMedQuist Option
Grant above, on September 30, 2008, MedQuist Inc.
made a stock option grant to Mr. Masanotti to |
94
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|
|
|
|
purchase up to 295,749 shares of MedQuist Inc. common
stock, which agreement was subsequently amended on March 2,
2009. The amendment increasing the exercise price of the stock
option grant from $4.85 to $8.25 per share did not result in any
incremental fair value over the amount calculated for the 2008
fiscal year. |
|
(3) |
|
The amounts in this column represent payments made pursuant to
the corporate performance-based element of the 2009 Plans. |
Grants of
Plan-Based Awards in Fiscal Year 2009
The following table sets forth each grant of an award made to
each NEO for the year ended December 31, 2009.
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|
|
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|
|
|
|
|
|
|
Estimated Possible Payouts Under Non-Equity Incentive Plan
Awards(1)
|
|
|
Threshold
|
|
Target
|
|
Maximum
|
Name
|
|
($)
|
|
($)
|
|
($)
|
|
Robert Aquilina
|
|
$
|
187,500
|
|
|
$
|
441,176
|
|
|
$
|
750,000
|
|
V. Raman Kumar
|
|
$
|
187,500
|
|
|
$
|
441,176
|
|
|
$
|
750,000
|
|
Clyde Swoger
|
|
$
|
100,000
|
|
|
$
|
235,294
|
|
|
$
|
400,000
|
|
Michael Seedman
|
|
$
|
45,000
|
|
|
$
|
105,882
|
|
|
$
|
180,000
|
|
Peter Masanotti
|
|
$
|
175,000
|
|
|
$
|
411,765
|
|
|
$
|
700,000
|
|
|
|
|
(1) |
|
Represents the performance-based element of the awards granted
under the 2009 Plans. The material terms of these annual cash
incentive awards are discussed above (see Compensation
Discussion and AnalysisAnnual Cash
CompensationPerformance-Based Incentive Bonus
Program). |
Narrative
Disclosure to Summary Compensation Table and Grants of
Plan-Based Awards Table
We have entered into written employment agreements with each of
our NEOs that provide for the payment of base salary and for
each NEOs participation in our bonus programs and employee
benefit plans. See Executive Employment Agreements,
below. In addition, each agreement specifies payments and
benefits that would be due to such named executive officer upon
the termination of his employment with us. See Potential
Payments Upon Termination or Change in Control below,
for additional information regarding amounts payable upon
termination to each of our NEOs.
Outstanding
Equity Awards at Fiscal Year-End
The following table sets forth all outstanding equity awards
held by each of our NEOs as of December 31, 2009.
|
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|
|
|
|
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|
|
|
|
|
|
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|
Number of Securities Underlying Unexercised Options (#)
|
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|
|
|
Name
|
|
Exercisable
|
|
Unexercisable
|
|
Option Exercise Price
|
|
Option Expiration Date
|
|
CBaySystems Holdings Limited(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert Aquilina
|
|
|
726,167
|
|
|
|
1,452,333
|
|
|
|
£0
|
.70(3
|
)
|
|
|
August 6, 2018
|
|
V. Raman Kumar
|
|
|
1,860,067
|
|
|
|
3,720,133
|
|
|
|
£0
|
.70(3
|
)
|
|
|
August 6, 2018
|
|
|
|
|
253,680
|
(2)
|
|
|
|
|
|
|
$1
|
.75
|
|
|
|
June 12, 2017
|
|
Clyde Swoger
|
|
|
259,333
|
|
|
|
518,667
|
|
|
|
£0
|
.70(3
|
)
|
|
|
August 6, 2018
|
|
Michael Seedman
|
|
|
363,067
|
|
|
|
726,133
|
|
|
|
£0
|
.70(3
|
)
|
|
|
August 6, 2018
|
|
MedQuist Inc.(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peter Masanotti
|
|
|
98,583
|
|
|
|
197,166
|
|
|
|
$8
|
.25
|
|
|
|
September 30, 2018
|
|
|
|
|
(1) |
|
All options over our common shares granted to each of our NEOs
except Mr. Masanotti (with the exception of outstanding
vested options over 253,680 of our shares issued to
Mr. Kumar as a stand-alone grant) were issued under the
2007 Plan on August 6, 2008. One-third of these options
vested on August 6, 2009, with the remaining options
vesting in one-sixth increments on each six month
anniversary thereafter. All outstanding |
95
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|
|
|
|
unvested options will accelerate in full upon a change in
control; the options will also accelerate following a
termination of employment by us without cause or by
the executive for good reason (see
Compensation Discussion and AnalysisEquity-Based
Incentive Plans2007 Equity Incentive PlanOptions
Granted to Named Executive Officers under the 2007 Plan,
above). |
|
(2) |
|
Represents options granted outside of the 2007 Plan which vested
on June 18, 2007. |
|
(3) |
|
When our shares are delisted from AIM and listed on The NASDAQ
Global Market, the exercise price will be adjusted and converted
into U.S. dollars. |
|
(4) |
|
As discussed under Compensation Discussion and
AnalysisEquity-Based Incentive PlansMedQuist Inc.
2002 Stock Option PlanMedQuist Option Grant above,
on September 30, 2008, MedQuist Inc. made an option grant
to Mr. Masanotti over 295,749 shares of its common stock at the
then applicable fair market value of $4.85 per share. On
March 2, 2009, MedQuist Inc. entered into an amended option
agreement with Mr. Masanotti to, among other things, increase
the exercise price of the option to $8.25 per share. One third
of the option vested on September 30, 2009 (the first
anniversary of the grant date) and one-sixth of the option vests
on each six month anniversary thereafter. |
Option Exercises
and Stock Vested During Last Fiscal Year
There were no option exercises by any of our NEOs during the
year ended December 31, 2009.
Pension Benefits
and Non-Qualified Deferred Compensation
None of our NEOs participates in any qualified or non-qualified
defined benefit plan or any non-qualified deferred compensation
plan that provides for payments or other benefits at or in
connection with retirement sponsored by us or by MedQuist Inc.
Executive
Employment Agreements
Robert
Aquilina
We entered into an employment agreement with Robert Aquilina in
August 2008 pursuant to which Mr. Aquilina serves as
our Executive Chairman. The term of the agreement expires on
December 31, 2011, but will be automatically extended for
additional one year periods unless notice is provided by either
party that the term will not be extended.
Mr. Aquilina is entitled to an annual base salary of
$500,000, subject to increase as may be determined from time to
time in the sole discretion of our board. Mr. Aquilina is
eligible to earn an annual bonus award of up to $750,000 based
upon achievement of performance objectives established by our
board. Mr. Aquilina also received a signing bonus in the
amount of $1 million, one-half of which was paid within
10 days following the commencement date, and the remaining
half of which was paid on December 22, 2009. Additionally,
Mr. Aquilina was granted stock options over 2,178,500 of
our ordinary shares, subject to the terms and conditions of the
2007 Plan.
The employment agreement provides that in the case of
termination without cause (including our election
not to extend the employment term) or resignation with
good reason (as such terms are defined below),
Mr. Aquilina is entitled to a payment of a pro-rata bonus
for the year of termination and, subject to his execution of a
release, continued payment of his base salary for a period of
12 months following the date of such termination.
Mr. Aquilina is also subject to certain restrictive
covenants regarding non-competition, non-interference and
non-solicitation of employees and consultants for a period of
one year following termination of employment and certain
restrictive covenants regarding non-disclosure of confidential
information and intellectual property.
V. Raman
Kumar
We entered into an employment agreement with Mr. Kumar on
August 2, 2008 pursuant to which Mr. Kumar serves as
our Vice-Chairman and previously served as our Chief Executive
Officer. The term of the agreement
96
expires December 31, 2011, and unless otherwise agreed in
writing, continuation of Mr. Kumars employment thereafter
will be deemed at will and will not extend any of
the provisions of his employment agreement.
Mr. Kumar is entitled to an annual base salary of $500,000,
subject to increase as may be determined from time to time in
the sole discretion of our board. Mr. Kumar is eligible to
earn an annual bonus award of up to $750,000 based upon
achievement of performance objectives established by our board.
Additionally, Mr. Kumar received a signing bonus of
$1 million, one-half of which was paid on or within
10 days following the commencement date and the remaining
half of which was paid on December 22, 2009. Additionally,
Mr. Kumar was granted options over 5,580,200 of our common
shares, subject to the terms and conditions of the 2007 Plan.
Upon a termination without cause or resignation for
good reason (as such terms are defined below),
Mr. Kumar is entitled to, subject to his execution of a
release, continued payment of his base salary until the earlier
of six months following the date of such termination and
December 31, 2011.
Clyde
Swoger
We entered into an employment agreement with Clyde Swoger on
August 7, 2008 pursuant to which Mr. Swoger serves as
our Chief Financial Officer. The term of the agreement expires
on December 31, 2011, but will be automatically extended
for additional one-year periods unless notice is provided by
either party that the term will not be extended.
Mr. Swoger is entitled to an annual base salary of
$300,000, subject to increase as may be determined from time to
time in the sole discretion of our board. Mr. Swoger is
eligible to earn an annual bonus award of up to $400,000, based
upon achievement of performance objectives established by our
board. Mr. Swoger also received a signing bonus in the
amount of $500,000, one-half of which was paid within
10 days following the commencement date, the remaining half
of which was paid on December 22, 2009. Additionally,
Mr. Swoger was granted stock options over
778,000 shares of our ordinary shares, subject to the terms
and conditions of the 2007 Plan.
Mr. Swoger is entitled to the same severance benefits and
is subject to the same restrictive covenants as
Mr. Aquilina, as set forth above.
Michael
Seedman
We entered into an employment agreement with Michael Seedman on
August 8, 2008 pursuant to which Mr. Seedman serves as
our Chief Technology Officer. The term of the agreement expires
on December 31, 2011, but will be automatically extended
for additional one-year periods unless notice is provided by
either party that the term will not be extended.
Mr. Seedman is entitled to an annual base salary of
$120,000, subject to increase as may be determined from time to
time in the sole discretion of our board. Mr. Seedman is
eligible to earn an annual bonus award of up to $180,000 based
upon achievement of performance objectives established by our
board. Mr. Seedman also received a signing bonus in the
amount of $750,000, one-half of which was paid within
10 days following the commencement date, and the remaining
half of which was paid on December 22, 2009. Additionally,
Mr. Seedman was granted stock options over 1,089,200 of our
ordinary shares, subject to the terms and conditions of the 2007
Plan.
Mr. Seedman is entitled to the same severance benefits and
is subject to the same restrictive covenants as
Mr. Aquilina, as set forth above.
Peter
Masanotti
In connection with his appointment as MedQuist Inc.s Chief
Executive Officer, MedQuist Inc. entered into an employment
agreement with Mr. Masanotti, dated as of September 3,
2008, pursuant to which he agreed to serve through
December 31, 2011. The agreement renews automatically for
successive one-year periods thereafter unless either party
provides written notice that the term will not be extended.
In structuring Mr. Masanottis compensation, the
MedQuist Inc. board of directors considered the importance of
motivating a new Chief Executive Officer to make a long-term
commitment to MedQuist Inc. and to consistently grow its
business. Pursuant to the terms of his employment agreement,
Mr. Masanotti was entitled to receive up to
97
$800,000 on or prior to February 1, 2009 as a signing bonus
based upon certain conditions which did not transpire;
consequently, MedQuist Inc.s obligation to pay this amount
was extinguished. Mr. Masanotti is entitled to receive an
annual base salary of $500,000 and an annual bonus award based
upon the achievement of performance objectives established by
the MedQuist Inc. board of up to 140% of his base salary.
Pursuant to the terms of his employment agreement,
Mr. Masanotti received a stock option grant to purchase up
to 295,749 shares of MedQuist Inc. common stock. See
Compensation Discussion and Analysis
Equity-Based Incentive Plans MedQuist Inc. 2002
Stock Option Plan MedQuist Option Grant above,
for additional information regarding the stock option grant to
Mr. Masanotti.
Mr. Masanotti is entitled to the same severance benefits as
Mr. Aquilina, as set forth above. Mr. Masanotti is
also subject to certain restrictive covenants regarding
non-competition, non-interference and non-solicitation of
employees and consultants for a period of one year following
termination of employment, and certain restrictive covenants
regarding non-disclosure of confidential information and
intellectual property.
Potential
Payments Upon Termination or Change in Control
The following is a description of payments and benefits that
would be due to each of our NEOs upon the termination of his
employment with us or MedQuist Inc., as applicable, and upon a
change in control of us or MedQuist, Inc., as the case may be.
The amounts in the table below assume that each termination was
effective as of December 31, 2009 and are merely
illustrative of the impact of a hypothetical termination of each
executives employment or the consummation of a change in
control on December 31, 2009 of us or MedQuist Inc., as
applicable. The amounts that would be payable upon an actual
termination of employment or an actual change in control can
only be determined at the time of such termination based on the
facts and circumstances then prevailing.
The following table provides the total dollar value of the
compensation that would be paid to each of our NEOs assuming a
change in control of us or MedQuist Inc., as applicable, or the
termination of his employment in certain defined circumstances,
on December 31, 2009, pursuant to the arrangements
described above:
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Termination
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Termination
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without Cause
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on Death or
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or for
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Change in
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Named Executive Officer
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Compensation
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Disability
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Good Reason
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Control
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Robert Aquilina
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Salary Continuation
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$
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500,000
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|
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|
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Pro-Rata Bonus
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$
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585,263
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$
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585,263
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Option Acceleration
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$
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52,037
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(1)
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$
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52,037
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(1)
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Total
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$
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585,263
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$
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1,137,300
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$
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52,037
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V. Raman Kumar
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Salary Continuation
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$
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250,000
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Pro-Rata Bonus
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$
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382,500
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$
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Option Acceleration
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$
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133,289
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(1)
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$
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133,289
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(1)
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Total
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$
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382,500
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$
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383,289
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$
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133,289
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Clyde Swoger
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Salary Continuation
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$
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300,000
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Pro-Rata Bonus
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$
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218,500
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$
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218,500
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Option Acceleration
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$
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18,585
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(1)
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$
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18,585
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(1)
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Total
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$
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218,500
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$
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537,085
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$
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18,585
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Michael Seedman
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Salary Continuation
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$
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120,000
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Pro-Rata Bonus
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$
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140,463
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$
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140,463
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Option Acceleration
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$
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26,017
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(1)
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$
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26,017
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(1)
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Total
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$
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140,463
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$
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286,480
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$
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26,017
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Peter Masanotti
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Salary Continuation
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$
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500,000
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Pro-Rata Bonus
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$
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700,000
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$
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700,000
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Option Acceleration
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$
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0
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(2)
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$
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0
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(2)
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Total
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$
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700,000
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$
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1,200,000
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$
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0
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98
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(1) |
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Value represents the gain the NEO would receive in the event all
unvested options were accelerated on December 31, 2009,
calculated as the positive difference, or spread, between our
share price on December 31, 2009 of £0.725 per share
and the exercise price of the option, converted into U.S.
dollars using an exchange rate of $1.433/£1, which is the
interbank exchange rate reported on Oanda on such date. |
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(2) |
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Because the closing price of MedQuist Inc.s common stock
on December 31, 2009 was lower than the exercise price of the
options held by Mr. Masanotti, the acceleration of the options
would have had no reportable value as of December 31, 2009 (i.e.
there would be no spread if the options were
exercised on such date). |
Severance
Payments Upon Termination of Employment
Under the terms of their employment agreement with us, each of
our NEOs except Mr. Kumar is entitled to payments of a
pro-rata bonus for the year of termination and continuation of
his then current base salary for 12 months in the event
that:
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his employment is terminated by us or MedQuist Inc., as the case
may be, without cause (as defined below), or
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he resigns for good reason (as defined below).
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Each of our NEOs, except for Mr. Kumar, is also entitled to
the continuation of his then current base salary for 12 months
in the event that we or MedQuist Inc., as the case may be, elect
not to renew the executives employment term beyond
December 31, 2011.
In order to receive continued payments of base salary, the
executive would be required to execute and deliver a general
release of claims against us.
Additionally, each of our NEOs is entitled to receive a pro-rata
bonus for the year in which his employment terminates on account
of death or disability, calculated on the basis of our actual
performance for the year and payable when such bonus would
otherwise have been payable had the NEOs employment not
terminated.
As used in the employment agreements with us and MedQuist Inc.,
(1) Cause means the occurrence of any of the
following: (a) executives failure to substantially
perform his duties (other than as a result of total or partial
incapacity due to physical or mental illness)
(b) dishonesty (willful dishonesty, in the cases of Messrs.
Aquilina, Swoger and Seedman) in the performance of
executives duties, (c) executives conviction
of, or plea of nolo contendere to a crime constituting
(x) a felony under the laws of the United States or any
state thereof or (y) a misdemeanor involving moral
turpitude, (d) executives willful malfeasance or
willful misconduct in connection with his duties or any
intentional (willfull for Mr. Masanotti) act or omission
which is demonstrably injurious to our financial condition or
business reputation or that of our subsidiaries or affiliates,
or (e) executives breach of the employment agreement
provisions relating to non-competition, non-interference,
non-solicitation, confidentiality and our intellectual property.
(2) For each of our NEOs except Messrs. Masanotti and
Kumar, good reason means (a) breach by us of
any material term of employment agreement, (b) any material
diminution in executives authority or responsibilities, or
(c) relocation of the executives primary place of
employment to a location more than 30 miles from the
location specified in his employment agreement; provided that
any of the foregoing events shall constitute good reason only if
we fail to cure such event within 30 days after receipt
from the executive of written notice of the event which
constitutes good reason; provided, further, that good
reason shall cease to exist for an event on the 60th day
following the later of its occurrence or the executives
knowledge thereof, unless he has given us written notice thereof
prior to such date.
(3) As used in Mr. Masanottis employment
agreement with MedQuist Inc., the term good reason
means (a) the failure to pay or cause to be paid his base
salary or annual bonus when due, (b) any reduction in his base
salary or annual bonus opportunity set forth in the employment
agreement, (c) any substantial and sustained diminution in
his authority, title, reporting relationship or responsibilities
from those described in the employment agreement, or
(d) MedQuist Inc.s material breach of the employment
agreement; provided that any of the foregoing events shall
constitute good reason only if MedQuist Inc. fails to cure such
event within 30 days after receipt from Mr. Masanotti
of written notice of the event which constitutes good reason;
provided, further, that good reason
99
shall cease to exist for an event on the 60th day following the
later of its occurrence or Mr. Masanottis knowledge
thereof, unless he has given us written notice thereof prior to
such date. Further, good reason will not be deemed
to have occurred by reason of Mr. Masanottis
reassignment to serve as the President or in another capacity as
the most senior executive of a division if MedQuist Inc.
materially expands its business.
(4) As used in Mr. Kumars employment agreement,
Good Reason means (a) our failure to pay
Mr. Kumars base salary or annual bonus, or
(b) any substantial and sustained diminution of his
authority or responsibilities; provided that either of the
events will constitute good reason only if we fail to cure such
event within 30 days after receipt from Mr. Kumar of
written notice; provided further that good reason will not exist
for an event on the 60th day following the later of its
occurrence or Mr. Kumars knowledge thereof, unless he
has given us written notice prior to such date.
As noted above, our NEOs are bound by certain non-competition,
non-interference and non-solicitation covenants which extend for
a period of 12 months following termination of employment
for any reason.
Change in Control
Benefits
Pursuant to the terms of the option agreements under the 2007
Plan with each of our NEOs except Mr. Masanotti, all
unvested options will accelerate in full upon a change in
control (see Equity-Based Incentive Plans2007 Equity
Incentive PlanChange in Control, above).
Pursuant to the terms of Mr. Masanottis amended and
restated option agreement, all unvested options will accelerate
in full upon a change in control of MedQuist Inc.
For purposes of the amended and restated option agreement,
change in control is defined as: (i) the sale
or disposition of all or substantially all of
MedQuist Inc.s assets other than to certain permitted
holders, (ii) any person or group (other than to certain
permitted holders) becoming the beneficial owner of more than
50% of the total voting power of MedQuist Inc. common stock,
(iii) a recapitalization or other corporate transaction in
which the majority of the beneficial stock ownership of MedQuist
Inc. before the transaction is not retained by the then current
holders in substantially the same proportions, (iv) the
incumbent directors ceasing to constitute a majority of the
MedQuist Inc. board during any 12 month period, (v) we
cease to own a majority interest in MedQuist Inc., or
(vi) SAC PEI CB Investment, L.P., or SAC CBI, ceases to
remain obligated to file a Schedule 13D under the Exchange
Act in respect of its beneficial ownership in MedQuist Inc.
Equity
Incentive Plans
2007 Equity
Incentive Plan
We maintain our 2007 Equity Incentive Plan which was adopted on
June 12, 2007 and subsequently amended on September 4,
2008. The 2007 Plan provides a framework for the grant of equity
and other-equity related incentives to our employees, directors,
officers and consultants (excluding those who provide services
exclusively to MedQuist Inc.). The aggregate number of shares of
our common stock which may be issued
and/or
transferred pursuant to awards made under the 2007 Plan may not
exceed, when aggregated with the number of shares issued or
remaining issuable or transferred or remaining transferable in
respect of awards made under the 2007 Plan, 10% of the number of
shares then outstanding. No additional awards will be granted
under the 2007 Plan following the closing of this offering, but
the 2007 Plan will continue to govern the terms and conditions
of all options granted under the 2007 Plan which remain
outstanding.
Awards Available
for Grant
Benefits under the 2007 Plan consist of stock options, stock
appreciation rights, restricted stock, restricted stock units
and other share, share-based or cash awards. Awards granted
under the 2007 Plan cannot be assigned, transferred, charged or
otherwise disposed of or encumbered.
Stock
Options
Stock options, or Options, consist of a right to purchase shares
which may be granted to participants at any time as determined
by our board. Our board has the authority to determine the terms
of any option award granted
100
under the 2007 Plan. All options have been granted with an
exercise price that equals or exceeds the fair market value for
our common stock on the date of grant. Only options are
currently outstanding under the 2007 Plan.
Change in
Control
Pursuant to the terms of the options granted to our NEOs, in the
event of a change in control (as defined below), all
outstanding options will accelerate in full and the board will
give executives reasonable notice and an opportunity to exercise
any vested options in advance of the consummation of such
change in control. Change in control
means: (i) the sale or disposition of all or substantially
all of our assets, (ii) any person or group becoming the
beneficial owner of more than 50% of the total voting power of
our common stock, (iii) a recapitalization or other
corporate transaction in which the majority of our beneficial
stock ownership before the transaction is not retained by the
then current holders in substantially the same proportions,
(iv) the incumbent directors ceasing to constitute a
majority of our board during any 12 month period, or
(v) SAC CBI ceasing to be a beneficial owner of at least 5%
of the total voting power of our voting stock.
Termination of
Employment or Service
In the case of a qualifying termination of employment or service
by reason of death, disability, redundancy or retirement, or
upon the transfer of an employing company or business, the award
agreement will specify what portion of the award will lapse and,
for vested options, the applicable period during which such
awards may be exercised following termination of employment.
Adjustments
Our board may make or provide for such adjustments in the number
and kind of shares
and/or the
exercise price of shares subject to outstanding awards granted
under the 2007 Plan as it may determine as equitably required to
prevent dilution or enlargement of the rights of participants
that would otherwise result from any change in our capital
structure including, but without limitation, from (a) any
stock dividend, stock split, combination of shares,
recapitalization or other change in our capital structure,
(b) any merger, consolidation, spin off, reorganization,
partial or complete liquidation or other distribution of assets,
issuance of rights or warrants to purchase securities, or
(c) any other corporate transaction or event having an
effect similar to any of the foregoing (other than a change in
control).
Amendments
Our board may at any time amend the 2007 Plan, in whole or in
part, provided that any amendment which may require approval by
our shareholders in order to comply with applicable law and the
rules of any relevant stock exchange will not be effective until
such approval has been obtained. The board may amend the terms
of any award granted under the 2007 Plan provided that no
amendment to the material advantage of participants may be made
without the prior approval of our shareholders, and no amendment
may impair the rights of any participant without his or her
consent.
MedQuist
Inc. 2002 Stock Option Plan
Set forth below is a summary of certain significant portions of
the MedQuist Inc. 2002 Stock Option Plan, or the MedQuist Inc.
Option Plan, pursuant to which the MedQuist Inc. board granted
certain stock option awards to Mr. Masanotti.
Eligibility and
Administration
All officers, key employees and consultants of MedQuist Inc.,
including all non-employee directors, are eligible to receive
options under the MedQuist Inc. Option Plan.
101
Amendment and
Termination
Options may not be granted pursuant to the MedQuist Inc. Option
Plan after the tenth anniversary of the approval of the plan by
shareholders of MedQuist Inc.. The board of MedQuist Inc.
reserves the right to modify, amend, suspend or terminate the
MedQuist Inc. Option Plan; provided, however, that such action
shall not affect options granted under the MedQuist Inc. Option
Plan prior to the actual date on which such action occurred. The
MedQuist Inc. board will also seek shareholder approval for any
amendment where such approval is required by law.
Number of Shares
and Adjustment
As of October 1, 2010, the number of MedQuist Inc. shares
of common stock which may be issued upon the exercise of options
granted under the MedQuist Inc. Option Plan is
1,500,000 shares. The aggregate number and kind of shares
issuable under the MedQuist Inc. Option Plan is subject to
appropriate adjustment to reflect changes in the capitalization
of MedQuist Inc., such as by stock dividend, stock split or
other similar circumstances. Any shares of MedQuist Inc. common
stock subject to options that terminate unexercised will be
available for future options granted under the MedQuist Inc.
Option Plan.
Exercise Price
and Terms
The exercise price for options granted under the MedQuist Inc.
Option Plan shall be equal to at least the fair market value of
the MedQuist Inc. common stock as of the date of the grant of
the option. Unless terminated earlier by the options
terms, options granted under the MedQuist Inc. Option Plan will
generally expire ten years after the date they are granted.
Termination of
Service; Death; Non-Transferability
Except in the case of an optionholders death or
disability, all unexercised options will terminate 90 days
after the date either (i) the optionee ceases to perform
services for MedQuist Inc., or (ii) MedQuist Inc. delivers
or receives notice of an intention to terminate the employment
relationship. An optionee who ceases to be an employee because
of a disability must exercise the option within one year after
he ceases to be an employee (but in no event later than the
expiration date). The heirs or personal representative of a
deceased employee who could have exercised an option while alive
may exercise such option within one year following the
employees death (but in no event later than the expiration
date). Unless the compensation committee provides otherwise,
options granted under the MedQuist Inc. Option Plan are not
transferable except in the event of death by will or the laws of
descent and distribution.
Compensation
of Directors
We currently do not pay Frank Baker, Peter Berger, Jeffery
Hendren or our employee directors any compensation for their
service on our board. Our other non-employee directors are paid
an annual retainer of $50,000, except for Mr. McLachlan who
receives $60,000 annually which reflects an additional $10,000
retainer for his role as chair of our audit committee. All
directors are reimbursed for all reasonable expenses incurred by
them in connection with their service on our board.
During 2009, our non-employee directors (other than Messrs.
Berger, Baker and Hendren) received the following compensation
from us:
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Fees Earned or
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Director
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Paid in Cash
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Total ($)
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Charles Siegfried Habermacher (former director)
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$
|
50,000
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$
|
50,000
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Atim Kabra (former director)
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$
|
50,000
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$
|
50,000
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Kenneth John McLachlan
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$
|
60,000
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$
|
60,000
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Merle Gilmore(1)
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$
|
32,432
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$
|
32,432
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James Patrick Nolan(2)
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$
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25,000
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$
|
25,000
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102
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(1) |
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Merle Gilmore was entitled to an annual retainer of £10,000
for the first half of 2009; the retainer arrangement was amended
effective as of our 2009 annual general meeting to conform to
the rate of $50,000 per year which is payable to our other
non-employee directors who receive retainers for service on our
board (except for Mr. McLachlan who receives an additional
$10,000 per year for his role as chair of our audit committee). |
(2) |
|
Reflects pro-rated amount of annual cash retainer paid or earned
during 2009 based on partial year service on our board. |
103
Principal and
Selling Stockholders
The following table and accompanying footnotes set forth
information regarding the beneficial ownership of our shares as
of October 11, 2010 based on the shares outstanding as of
October 11, 2010, of (i) each person known by us to
own beneficially more than 5% of our common stock,
(ii) each selling stockholder, (iii) each of the named
executive officers, (iv) each of our current directors,
(v) all current members of the board and the executive
officers as a group.
The amounts and percentages of shares beneficially owned are
reported on the basis of SEC regulations governing the
determination of beneficial ownership of securities. Under SEC
rules, a person is deemed to be a beneficial owner
of a security if that person has or shares voting power or
investment power, which includes the power to dispose of or to
direct the disposition of such security. A person is also deemed
to be a beneficial owner of any securities of which that person
has a right to acquire beneficial ownership within 60 days.
Securities that can be so acquired are deemed to be outstanding
for purposes of computing such persons ownership
percentage, but not for purposes of computing any other
persons percentage. Under these rules, more than one
person may be deemed to be a beneficial owner of the same
securities and a person may be deemed to be a beneficial owner
of securities as to which such person has no economic interest.
The number of shares and percentages of beneficial ownership
prior to this offering set forth below are based on the number
of shares to be issued and outstanding immediately prior to the
consummation of this offering. The number of shares and
percentages of beneficial ownership after this offering set
forth below are based on the number of shares to be issued and
outstanding immediately after the consummation of this offering.
Except as otherwise indicated in the footnotes below, each of
the beneficial owners has, to our knowledge, sole voting and
investment power with respect to the indicated shares of common
stock. Unless otherwise noted, the address of each director and
executive officer is
c/o CBaySystems
Holdings Limited, 9009 Carothers Parkway, Franklin, TN 37067.
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After this Offering
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Number
|
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Assuming the
|
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Assuming the
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of Shares
|
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Underwriters
|
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Underwriters
|
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Number
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Subject
|
|
Option is
|
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Option is
|
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Prior to this Offering
|
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of Shares
|
|
to the
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Not Exercised
|
|
Exercised in Full
|
Name and Address of beneficial
|
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Number
|
|
Percent
|
|
Being
|
|
Underwriters
|
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Number
|
|
Percent
|
|
Number
|
|
Percent
|
owner
|
|
of Shares
|
|
of Shares
|
|
Offered
|
|
Option
|
|
of Shares
|
|
of Shares
|
|
of Shares
|
|
of Shares
|
|
Principal Stockholders
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|
|
|
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|
|
|
|
|
|
S.A.C. PEI CB Investment, L.P.(1)
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|
89,988,851
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56.9
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%
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|
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|
|
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89,988,851
|
|
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|
|
|
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89,988,851
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|
|
|
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GMO Emerging Markets Fund, a series of GMO Trust
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11,896,352
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7.5
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11,896,352
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11,896,352
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Godrej Group(2)
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9,624,540
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6.1
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9,624,540
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|
|
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|
|
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|
9,624,540
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|
|
|
|
|
Directors and Named
Executive Officers
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Robert Aquilina(3)
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1,451,970
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*
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1,451,970
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1,451,970
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V. Raman Kumar(4)
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7,051,802
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4.5
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7,051,802
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7,051,802
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|
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Michael Seedman(5)
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725,952
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*
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725,952
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725,952
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Clyde Swoger(6)
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518,537
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*
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518,537
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518,537
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|
Peter Masanotti
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Frank Baker
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Peter Berger
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Merle Gilmore
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Jeffrey Hendren
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Kenneth John McLachlan
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James Patrick Nolan
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104
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After this Offering
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Number
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Assuming the
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Assuming the
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of Shares
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|
Underwriters
|
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Underwriters
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Number
|
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Subject
|
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Option is
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|
Option is
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|
Prior to this Offering
|
|
of Shares
|
|
to the
|
|
Not Exercised
|
|
Exercised in Full
|
Name and Address of beneficial
|
|
Number
|
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Percent
|
|
Being
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Underwriters
|
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Number
|
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Percent
|
|
Number
|
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Percent
|
owner
|
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of Shares
|
|
of Shares
|
|
Offered
|
|
Option
|
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of Shares
|
|
of Shares
|
|
of Shares
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of Shares
|
|
All directors and executive
officers as a group (13 persons)
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121,258,004
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76.6
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Selling Stockholders
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* |
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Less than 1%. |
|
(1) |
|
S.A.C. PEI CB Investment, L.P., or SAC CBI, is a Cayman Islands
limited partnership. Its general partner is S.A.C. PEI CB
Investment GP, Limited, or SAC CBI GP, a Cayman Islands company.
The directors of SAC CBI GP are Peter Berger and Peter Nussbaum,
each a U.S. citizen. The address of SAC CBI and SAC CBI GP is
c/o Walkers
Corporate Services Limited, Walker House, 87 Mary Street, George
Town, Grand Cayman KY1-9002, Cayman Islands. |
|
(2) |
|
These shares include 8,182,148 shares held by Godrej
Industries Limited and 1,442,392 shares by Godrej
International Limited. |
|
(3) |
|
Mr. Aquilina is our Chairman and our Chief Executive
Officer. Of the shares shown as beneficially owned, all
represent shares issuable pursuant to options that are currently
vested and exercisable. |
|
(4) |
|
Mr. Kumar is our Vice Chairman and a director. Of the
shares shown as beneficially owned, all represent shares
issuable pursuant to options that are currently vested and
exercisable. |
|
(5) |
|
Mr. Seedman is our Chief Technology Officer and a director
on our board. Of the shares shown as beneficially owned, all
represent shares issuable pursuant to options that are currently
vested and exercisable. |
|
(6) |
|
Mr. Swoger is our Chief Financial Officer. Of the shares
shown as beneficially owned, all represent shares issuable
pursuant to options that are currently vested and exercisable. |
105
Certain
Relationships and Related Party Transactions
Agreements with
SAC PCG and Affiliates and Related Transactions
Subscription
Agreement
On May 21, 2008, we entered into a subscription agreement, or
the Subscription Agreement, with SAC CBI, and SAC PCG. Under the
Subscription Agreement, we issued 89,988,851 shares of our
common stock for an aggregate purchase price of
$124.0 million and SAC CBI thereby acquired a majority
interest in us. We used the proceeds received under the
Subscription Agreement to fund a portion of the costs of the
MedQuist Inc. Acquisition.
Stock
Purchase Agreement
On May 21, 2008, we and our wholly-owned subsidiary, CBay
Inc., entered into a stock purchase agreement with Royal Philips
Electronics N.V., or Philips, pursuant to which CBay Inc.
purchased 26,085,086 shares of common stock, or
approximately 69.5% of the outstanding common stock of MedQuist
Inc. for (i) $98.1 million in cash, (ii) our 6%
Convertible Notes and (iii) a $26.2 million promissory
note. The 6% Convertible Notes and the $26.2 million
promissory note have been repaid.
Management
Stockholders Agreements
In connection with the MedQuist Inc. Acquisition, certain
members of our senior management team, including
Robert Aquilina, Raman Kumar, Michael Seedman and Clyde
Swoager, collectively, the Management Stockholders, we and SAC
CBI entered into stockholders agreements, each a
Management Stockholders Agreement. Each Management
Stockholders Agreement imposes significant restrictions on
transfer of shares of our common stock held by the relevant
Management Stockholder. Generally, shares will be
nontransferable by any means at any time prior to the third
anniversary of the closing date of the subscription or the
occurrence of a change in control, as defined in the
Management Stockholders Agreement, except pursuant to the
exercise of drag-along rights and tag-along
rights (as described below) and (i) sales to us,
(ii) sales to certain permitted transferees, or
(iii) with our prior written consent, in the case of common
stock, or the prior written consent of SAC CBI, in the case of
common stock issuable or issued upon exercise of options. Under
each Management Stockholders Agreement, if SAC CBI
proposes to transfer shares of common stock to a third party
purchaser, then SAC CBI will have drag-along rights
to require the relevant Management Stockholder to sell to the
third party purchaser, on the same terms and conditions as apply
to SAC CBI, shares of such common stock and vested options.
Under each Management Stockholders Agreement, if SAC CBI
proposes to transfer shares of common stock to a third party
purchaser (other than SAC CBI) in a or constituting a
change in control, then the relevant Management
Stockholder shall have tag-along rights to sell on
the same terms and conditions as apply to SAC CBI.
Consulting
Services Agreement
On August 19, 2008, we entered into an agreement, or the
Consulting Services Agreement, with S.A.C. PEI CB Investment II,
LLC, or SAC CBI II, an affiliate of SAC CBI, and Lehman
Brothers Commercial Corporation Asia, or LBCCA, and collectively
with SAC CBI II, the Consultants. The Consulting Services
Agreement was entered into to, among other thing, effect the
economic understanding regarding the terms upon which SAC CBI
acquired its ownership interest in us and to address
restrictions on our ability to sell shares at a discount at the
time of SAC CBIs investment in us. It provides for annual
payments, to be made in quarterly installments, of approximately
$1.9 million to SAC CBI II and $0.9 million to LBCCA,
which may at our option be paid in shares of our common stock at
fair market value in lieu of cash. We account for payments of
the annual consulting fee as a capital transaction. In addition,
we agreed to indemnify and reimburse the Consultants and their
affiliates for their
out-of-pocket
expenses in connection with the services rendered under this
agreement. Our payment obligations extend for five years from
the date of the agreement, unless a change of
control as defined in the agreement occurs, in which case
the present value of all amounts not previously paid become due
upon the change of control. Fees in the amount of
$1.1 million and $2.8 million were recorded for the
years ended December 31, 2008 and 2009, respectively. As of
December 31, 2008 and 2009 and June 30, 2009, we have
accrued and recorded in due to related parties
$1.1 million, $2.2 million and $2.2 million,
respectively. In July 2009, we issued
106
2,566,195 shares of our common stock and in May 2010 we
issued 651,881 shares of our common stock to satisfy a
portion of the amounts due. The closing of this offering and of
the MedQuist Exchange will result in a change of
control under the Consulting Services Agreement and we
intend to issue additional shares to satisfy our remaining
obligations under the agreement based upon the initial public
offering price for our shares in this offering. Based upon the
current price for our shares, the number of shares issuable
would be approximately 4.5 million.
Transaction
Fees
In connection with the MedQuist Inc. Acquisition, we paid a
transaction fee of $8.0 million in the aggregate to two
affiliates of SAC PCG and to LBCCA.
On May 4, 2010, the audit committee of MedQuist Inc.s
board of directors approved the payment of a $1.5 million
success-based fee to SAC PCG in connection with the Spheris
Acquisition.
We have approved a $5.0 million payment to SAC PCG in
connection with the Corporate Reorganization.
Voting
Agreement
In connection with the MedQuist Exchange, we entered into a
voting agreement, dated September 30, 2010, with SAC CBI,
SAC CB II, and International Equities (S.A.C. Asia) Limited, the
SAC Stockholders. Under this agreement, the SAC Stockholders
agreed to vote the shares held by them in favor of any matter
subject to a vote of our stockholders that is reasonably
necessary for consummation of the transactions contemplated by
the Exchange Agreement.
Registration
Rights Agreement
In connection with this offering, we will enter into a
Registration Rights Agreement with the SAC Stockholders to
provide registration rights with respect to shares of our common
stock outstanding held by the SAC Stockholders and their
affiliates. The Registration Rights Agreement will provide them
with an unlimited number of demand registrations and
piggyback registration rights. In addition, the
Registration Rights Agreement will provide that the SAC
Stockholders and their affiliates may request that we file a
shelf registration statement beginning on the 181st day
after this offering. The Registration Rights Agreement will also
provide that we will pay certain expenses relating to such
registrations and indemnify against certain liabilities, which
may arise under the Securities Act.
Stockholders
Agreements
In connection with this offering, we will enter into a
stockholders agreement with the SAC Stockholders, or the
IPO Stockholders Agreement. The IPO Stockholders
Agreement will grant the SAC Stockholders and their affiliates
the right to nominate to our board a number of designees, or SAC
Directors, equal to: (i) three directors so long as they
hold at least 20% of our voting power; (ii) two directors
so long as they hold at least 10% of our voting power; and
(iii) one director so long as they hold at least 5% of our
voting power. They have the right to remove and replace their
director-designees at any time and for any reason and to
nominate any individual(s) to fill any such vacancies.
In connection with the MedQuist Exchange, we will enter into a
stockholders agreement, or the MedQuist Exchange Stockholders
Agreement, with the SAC Stockholders and the investors party to
the MedQuist Exchange. For so long as the SAC Stockholders have
the right to nominate the SAC Directors, each Investor (as
defined in the MedQuist Exchange Stockholders Agreement) agrees,
among other things (i) that for a period of one year from
the closing under the MedQuist Exchange and thereafter for so
long as it owns at least three percent of our outstanding
shares, it will vote all of its voting shares, or (as
applicable) provide its written consent in respect thereof, in
favor of the election of the SAC Directors to our board and
(ii) not to take any action that would cause the number of
directors constituting the entire board to be greater than
eleven without the prior written consent of SAC CBI.
Under the MedQuist Exchange Stockholders Agreement, the
Investors will have piggyback registration rights
with respect to their shares of common stock in the event that
we sell shares of our common stock. With respect
107
to any underwritten public offering, each Investor also agrees
to a lock-up
period of 180 days beginning on the effective date of the
initial public offering or 90 days beginning on the
effective date of any other public offering.
Other Related
Party Transactions
Effective February 10, 2009 the former CEO and President of
Mirrus Systems Inc., or Mirrus, Nanda Krishnaiah, who also
served as a former executive director on our board, resigned
from services with us. Under the terms of his settlement, we
paid him $390,000 in severance and purchased his 13% stake in
Mirrus for $690,000. Mirrus is now our wholly owned
100% subsidiary.
During 2007, we repaid a loan made to us from V. Raman
Kumar, our Vice Chairman and a director, in the amount of
$226,706 plus interest. For the years ended December 31,
2007 and 2008, we received certain consulting services from
Mr. Kumar for an aggregate amount of $396,000.
We sold software solution services to CBay Systems Limited,
owned by our predecessor parent and in which Mr. Kumar was
a director, in the amount of $920,000 and $471,000 for the years
ended December 31, 2007 and 2008, respectively. During the
year ended December 31, 2008, CBay Systems Limited
transferred certain assets to us at an aggregate value of
$704,000 together with the related underlying liabilities
against certain assets amounting to $184,000 to be adjusted
against receivables from CBay Systems Limited. During the year
ended December 31, 2008, CBay Systems Limited settled
amounts recoverable by transferring to us certain fixed assets
of an aggregate value of $614,000. The balance receivable from
CBay Systems Limited of $760,000 was not considered recoverable
and accordingly it was written off. For the years ended
December 31, 2007 and 2008, we provided transcription
services of $7.3 million and $574,000 respectively, and for
the year ended December 31, 2007, software and management
services of $1.2 million to CBay Systems Limited. For the
years ended December 31, 2007 and 2008, we also provided
customer relationship and front end services to CBay Systems
Limited of $683,000 and $59,000, respectively. For the years
ended December 31, 2007 and 2008, we received reimbursement
of expenses of $233,000 and $120,000, respectively, and made
reimbursements of expenses to CBay Systems Limited for an
aggregate value of $398,000 and $107,000, respectively. Further,
we have provided short term advances to CBay Systems Limited for
an aggregate value of $5.3 million for the year ended
December 31, 2007. For the years ended December 31,
2007 and 2008, the net balance receivable from CBay Systems
Limited in respect of the above transactions aggregated
$2.8 million and $860,000, respectively.
For the years ended December 31, 2007 and 2008, we sold
software solution services of $920,000 and $471,000,
respectively, to Ztec Ventures Limited, a company in which
Mr. Kumar is a director.
We occupied property owned by Godrej Group, a principal
stockholder, and paid rent and service charges totaling $557,000
and $429,000 for the years ended December 31, 2007 and 2008
and 2009, respectively.
Related Person
Transaction Approval Policy
Prior to the completion of this offering, our board intends to
consider adoption of a written statement of policy for the
review, approval and monitoring of transactions involving us and
related persons.
108
Description of
Indebtedness
Senior Secured
Credit Facility
On October 1, 2010, MedQuist Inc., as borrower, and our
subsidiaries MedQuist Transcriptions, Ltd. and CBay Inc., as
co-borrowers and guarantors, and we and certain of our other
subsidiaries as guarantors, entered into the Senior Secured
Credit Facility with certain lenders and General Electric
Capital Corporation, as administrative agent.
The Senior Secured Credit Facility consists of:
|
|
|
|
|
a $200 million term loan, advanced in one drawing on
October 14, 2010, or the Closing Date, with a term of
five years, repayable in equal quarterly installments of
$5 million, commencing on the first day of the first fiscal
quarter beginning after the Closing Date, with the balance
payable at maturity.
|
|
|
|
a $25 million revolving credit facility under which
borrowings may be made from time to time during the period from
the Closing Date until the fifth anniversary of the Closing
Date. The revolving facility includes a $5 million
letter-of-credit
sub-facility
and a $5 million swing line loan
sub-facility.
|
Interest
Rate and Fees
The borrowings under the Senior Secured Credit Facility bear
interest at a rate equal to an applicable margin plus, at
the co-borrowers option, either (a) a base rate
determined by reference to the highest of (1) the rate last
quoted by the Wall Street Journal as the Prime Rate
in the United States, (2) the federal funds rate plus
1/2
of 1% and (3) the LIBOR rate for a one-month interest
period plus 1.00% or (b) the higher of (i) a LIBOR
rate determined by reference to the costs of funds for deposits
in the currency of such borrowing for the interest period
relevant to such borrowing adjusted for certain additional costs
and (ii) 1.75%. The applicable margin is 4.50% with respect
to base rate borrowings and 5.50% with respect to LIBOR
borrowings.
In addition to paying interest on outstanding principal under
the Senior Secured Credit Facility, the borrowers are required
to pay a commitment fee to the lenders under the revolving
credit facility in respect of the unutilized commitments
thereunder at a rate per annum equal to 0.50%. The borrowers are
also required to pay a fee on the average daily issued but
undrawn face amount of all outstanding letters of credit at a
rate per annum equal to the applicable margin then in effect
with respect to LIBOR loans under the revolving credit facility,
as well as a customary fronting fee of 0.125% and other
customary letter of credit fees.
Prepayments
Subject to certain exceptions, the Senior Secured Credit
Facility requires the co-borrowers to prepay outstanding term
loans with:
|
|
|
|
|
prior to the earlier of December 31, 2013 or the date upon
which we own 100% of the stock of MedQuist Inc., a percentage of
excess cash flow of MedQuist Inc. ranging from 25% to 65%
depending upon certain leverage tests;
|
|
|
|
following the earlier of December 31, 2013 or the date upon
which we own 100% of the stock of MedQuist Inc., a percentage of
our excess cash flow ranging from 60% to 65% depending upon
certain leverage tests;
|
|
|
|
50% of the net cash proceeds arising from the issuance or
sale by us or any of our subsidiaries of its own stock, subject
to certain exceptions, including exceptions for up to
$100 million of proceeds arising from one or more sales by
us of its own stock pursuant to one or more underwritten public
offerings; and
|
|
|
|
100% of the net cash proceeds received by us or any of our
subsidiaries from any loss, damage, destruction or condemnation
of, or any sale, transfer or other disposition of, any asset,
subject to certain thresholds and certain exceptions and
reinvestment rights.
|
The borrowers may voluntarily repay outstanding loans under the
Senior Secured Credit Facility or voluntarily reduce unutilized
portions of the revolving credit facility at any time,
generally, without premium or penalty.
109
Guaranty
and Security
The obligations of the borrowers under the Senior Secured Credit
Facility are unconditionally guaranteed by us and substantially
all of our existing and future domestic subsidiaries. All
obligations and related guarantees are secured by a first
priority perfected security interest in substantially all
existing and after-acquired real and personal property of the
borrowers and the guarantors.
Certain
Covenants and Events of Default
The Senior Secured Credit Facility contains a number of
significant covenants. We believe that these covenants are
material terms of the credit agreement and that information
about the covenants is material to an investors
understanding of our financial condition and liquidity. Covenant
compliance EBITDA is used to determine our compliance with
certain of these covenants. Any breach of covenants in the
Senior Secured Credit Facility (including those that are tied to
financial ratios based on covenant compliance EBITDA) could
result in a default under our credit agreement and the lenders
could elect to declare all amounts borrowed to be immediately
due and payable.
Subject to certain exceptions and threshold amounts, the
covenants under the credit agreement, among other things,
restrict the ability of us and our subsidiaries to:
|
|
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|
|
incur, create, assume or permit to exist any additional
indebtedness;
|
|
|
|
incur, create, assume or permit to exist any lien on any
property or assets (including stock or other securities of any
person, including any of our subsidiaries);
|
|
|
|
enter into sale and lease-back transactions;
|
|
|
|
make investments, loans, or advances;
|
|
|
|
engage in mergers or consolidations;
|
|
|
|
make certain acquisitions;
|
|
|
|
pay dividends and distributions or repurchase our capital stock;
|
|
|
|
engage in certain transactions with affiliates;
|
|
|
|
change the business conducted by our company and our
subsidiaries;
|
|
|
|
amend or modify certain material agreements governing our
indebtedness (including the Senior Subordinated Notes); or
|
|
|
|
make capital expenditures in excess of certain amounts.
|
Under the Senior Secured Credit Facility, we are required to
maintain (i) a minimum consolidated interest coverage
ratio, initially, of 2.75x and increasing over the term of the
facility to 4.00x, (ii) a maximum consolidated total
leverage ratio, initially of 4.00x and declining over the term
of the facility to 1.50x and (iii) a maximum consolidated
senior leverage ratio, initially of 3.00x, and declining over
the term of the facility to 1.00x.
The Senior Secured Credit Facility also contains certain
affirmative covenants and events of default, including financial
and other reporting requirements, as well as an event of default
pursuant to a change of control as defined therein.
As of October 14, 2010 we were in compliance in all
material respects with all covenants and provisions in the
Senior Secured Credit Facility.
The Senior
Subordinated Notes
In addition to the Senior Secured Credit Facility, in connection
with the Corporate Reorganization, MedQuist Inc., as issuer, and
MedQuist Transcriptions, Ltd. and CBay Inc., as
co-issuers
and guarantors, and we and certain of our other subsidiaries, as
guarantors, issued $85.0 million aggregate principal amount
of 13% Senior Subordinated Notes due 2016 pursuant to a
Note Purchase Agreement with BlackRock Kelso Capital
Corporation, PennantPark Investment Corporation, Citibank, N.A.,
and THL Credit, Inc. The Senior Subordinated Notes are
guaranteed on a joint and several, absolute, unconditional and
irrevocable basis, by us and certain of our subsidiaries.
Interest on the notes is payable in quarterly installments at
the issuers option at either (i) 13% in cash or
(ii) 12% in cash plus 2% in the form of additional Senior
Subordinated Notes. Closing and funding of the
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Senior Secured Credit Facility and the Senior Subordinated Notes
occurred on October 14, 2010. The Senior Subordinated Notes
are non-callable for two years after the closing date after
which they are redeemable at 105.0% declining ratably until four
years after the closing date. The Senior Subordinated Notes
contain a number of significant covenants that, among other
things, restrict our ability to dispose of assets, repay other
indebtedness, incur additional indebtedness, pay dividends,
prepay subordinated indebtedness, incur liens, make capital
expenditures, investments or acquisitions, engage in mergers of
consolidations, engage in certain types of transactions with
affiliates and otherwise restrict our activities. Under the
Senior Subordinated Notes, we are required to satisfy and remain
in compliance with specified financial ratios. Under the Senior
Subordinated Notes, we are required to maintain (i) a minimum
consolidated interest coverage ratio, initially of 2.50x and
increasing over the term of the facility 3.60x, (ii) a maximum
consolidated total leverage ratio, initially of 4.40x and
declining over the term of the facility to 1.70x and (iii) a
maximum consolidated senior leverage ratio, initially of 3.30x
and declining over the term of the facility to 1.10x.
Other
Indebtedness
CBay Systems and Services, Inc., Mirrus Systems, Inc., CBay Inc.
and CBay Systems (India) Pvt. Ltd. have entered into certain
working capital facilities, term loans and revolving lines of
credit for purposes of operating their respective businesses. In
total, there are eight such financing arrangements currently in
place. As of June 30, 2010, the amounts outstanding under
these arrangements ranged from approximately $750,000 to
approximately $2.9 million with interest rates from 6.00%
to 12.00%. We anticipate entering into similar credit facilities
from time to time in the future to satisfy working capital and
other needs.
We are party to a credit agreement with ICICI Bank, Mumbai,
India in the amount of $2.8 million, at interest rates
ranging from LIBOR plus 2.5% and 15.5%, respectively, which is
secured by CBay Indias current assets and fixed assets.
The amount outstanding as of June 30, 2010,
December 31, 2009 and 2008 was $194,000, $1.4 million
and $1.7 million, respectively. For the six months ended
June 30, 2010 and the years ended December 31, 2009,
2008 and 2007 we recorded $74,000, $205,000, $98,000 and
$36,000, respectively, of interest expense in our consolidated
statements of operations.
We are party to a credit agreement with IndusInd Bank, Mumbai,
India of $3.2 million at interest rates of LIBOR plus 3%,
which is secured by current assets and fixed assets of CBay
India. The amount outstanding under this credit agreement as of
June 30, 2010 and December 31, 2009 was
$3.0 million and $0, respectively. For the six months ended
June 30, 2010 and 2009 interest expense of $18,000 and $0,
respectively, was recorded in interest expense in our
consolidated statements of operations.
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Description of
Capital Stock
The following discussion summarizes the material terms of the
common stock to be issued in connection with the public offering
contemplated by this prospectus. This discussion does not
purport to be complete and is qualified in its entirety by
reference to our certificate of incorporation and by-laws to be
filed as exhibits to the registration statement of which this
prospectus forms a part. You can obtain copies of those
documents by following the instructions under Where You
Can Find More Information.
Our purpose is to engage in any lawful act or activity for which
corporations may now or hereafter be organized under the
Delaware General Corporation Law, or DGCL. Our certificate of
incorporation will authorize us to issue up
to shares
of common stock
and shares
of preferred stock, par value $0.10 per share. No shares of
preferred stock will be issued or outstanding immediately after
the public offering contemplated by this prospectus.
Common
Stock
Our certificate of incorporation will, among other things,
increase the number of shares of our authorized capital stock
to shares
of common stock and effect
a -for-one
stock split for our shares of common stock prior to the
offering. Each share of our common stock outstanding will
become shares
of common stock pursuant to the stock split. See Corporate
Reorganization.
The common stock has the voting rights described below under
Voting, and the dividend rights
described below under Dividends. Holders
of common stock do not have conversion or redemption rights or
any preemptive rights to subscribe for any of our unissued
securities. The rights, preferences and privileges of holders of
common stock are subject to the rights of the holders of any
preferred shares which may be authorized and issued in the
future.
Preferred
Stock
Our certificate of incorporation will authorize our board to
establish one or more series of preferred stock and to
determine, with respect to any series of preferred stock, the
terms and rights of that series, including:
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the designation of the series;
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the number of shares of the series, which our board of directors
may, except where otherwise provided in the preferred stock
designation, increase (but not above the total number of
authorized shares of the class) or decrease (but not below the
number of shares then outstanding);
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whether dividends, if any, will be cumulative or non-cumulative
and the dividend rate of the series;
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the dates at which dividends, if any, will be payable;
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the redemption rights and price or prices, if any, for shares of
the series;
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the terms and amounts of any sinking fund provided for the
purchase or redemption of shares of the series;
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the amounts payable on shares of the series in the event of any
voluntary or involuntary liquidation, dissolution or
winding-up
of the affairs of our company;
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whether the shares of the series will be convertible into shares
of any other class or series, or any other security, of our
company or any other company, and, if so, the specification of
the other class or series or other security, the conversion
price or prices or rate or rates, any rate adjustments, the date
or dates as of which the shares will be convertible and all
other terms and conditions upon which the conversion may be made;
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restrictions on the issuance of shares of the same series or of
any other class or series; and
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the voting rights, if any, of the holders of the series.
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Voting
Holders of our common stock are entitled to one vote per share
on all matters to be voted on by holders of our common stock.
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Dividends
The DGCL permits a corporation to declare and pay dividends out
of surplus or, if there is no surplus,
out of its net profits for the fiscal year in which the dividend
is declared
and/or the
preceding fiscal year. Surplus is defined as the
excess of the net assets of the corporation over the amount
determined to be the capital of the corporation by the board.
The capital of the corporation is typically calculated to be
(and cannot be less than) the aggregate par value of all issued
shares of capital stock. Net assets equals the fair value of the
total assets minus total liabilities. The DGCL also provides
that dividends may not be paid out of net profits if, after the
payment of the dividend, capital is less than the capital
represented by the outstanding stock of all classes having a
preference upon the distribution of assets.
Declaration and payment of any dividend will be subject to the
discretion of our board of directors. The time and amount of
dividends will be dependent upon our financial condition,
operations, cash requirements and availability, debt repayment
obligations, capital expenditure needs and restrictions in our
debt instruments, industry trends, the provisions of Delaware
law affecting the payment of distributions to stockholders and
other factors.
Stockholder
Meetings
Our by-laws will provide that annual stockholder meetings will
be held at a time and place selected by our board.
Anti-Takeover
Effects of Certain Provisions of Our Certificate of
Incorporation and By-laws
Several provisions in our certificate of incorporation and
by-laws may have anti-takeover effects. These provisions are
intended to avoid costly takeover battles, reduce our
vulnerability to a hostile change of control and enhance the
ability of our board to maximize stockholder value in connection
with any unsolicited offer to acquire us. However, these
anti-takeover provisions, which are summarized below, could also
discourage, delay or prevent (1) the merger or acquisition
of our company by means of a tender offer, a proxy contest or
otherwise, that a stockholder may consider in its best interest,
and (2) the replacement and/or removal of incumbent
officers and directors.
Authorized
Preferred Stock and Common Stock
Our board may issue preferred shares on terms calculated to
discourage, delay or prevent a change of control of our company
or the removal of our management. Moreover, our authorized but
unissued shares of preferred stock will be available for future
issuances without stockholder approval and could be utilized for
a variety of corporate purposes, including future offerings to
raise additional capital, acquisitions and employee benefit
plans. The existence of authorized but unissued and unreserved
shares of preferred stock could render more difficult or
discourage an attempt to obtain control of our company by means
of a proxy contest, tender offer, merger or otherwise.
Classified
Board of Directors
Our certificate of incorporation will provide that our board
will be divided into three classes of directors, with the
classes to be as nearly equal in number as possible. We will
have a classified board,
with
directors in Class I (expected to be
Messrs. ),
directors in Class II (expected to be
Messrs.
and )
and
directors in Class III (expected to be
Messrs. , ).
The members of each class will serve for a term expiring at the
third succeeding annual meeting of stockholders. As a result,
approximately one-third of our board of directors will be
elected each year. A replacement director shall serve in the
same class as the former director he or she is replacing. The
classification of our board will have the effect of making it
more difficult for stockholders to change the composition of our
board. Our certificate of incorporation and by-laws will provide
that the number of directors will be fixed from time to time
pursuant to a resolution adopted by the board, but must consist
of not less than seven or more than 15 directors.
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Removal
of Directors; Vacancies
Our certificate of incorporation will provide that directors may
be removed only for cause and only upon the affirmative vote of
holders of at least 75% of the voting power of all then
outstanding shares of stock entitled to vote generally in the
election of directors, voting together as a single class. In
addition, our by-laws provide that, except as set forth in the
stockholders agreements or any preferred certificate of
designations, any vacancies on our board will be filled only by
the affirmative vote of a majority of the remaining directors,
although less than a quorum, or by a sole remaining director.
No
Cumulative Voting
The DGCL provides that stockholders are not entitled to the
right to cumulate votes in the election of directors unless an
entitys certificate of incorporation provides otherwise.
Our certificate of incorporation does not provide for cumulative
voting.
Calling
of Special Meetings of Stockholders
Our certificate of incorporation will provide that special
meetings of our stockholders may be called at any time only by
or at the direction of the chairman of the board, the board or a
committee of the board which has been designated by the board.
Stockholder
Action by Written Consent
The DGCL permits stockholder action by written consent unless
otherwise provided by a corporations certificate of
incorporation. Our certificate of incorporation will preclude
stockholder action by written consent.
Advance
Notice Requirements for Stockholder Proposals and Director
Nominations
Our by-laws will provide that stockholders seeking to nominate
candidates for election as directors or to bring business before
an annual meeting of stockholders must provide timely notice of
their proposal in writing to the corporate secretary.
Generally, to be timely, a stockholders notice must be
received at our principal executive offices not less than
90 days nor more than 120 days prior to the first
anniversary date of the immediately preceding annual meeting of
stockholders. Our by-laws also specify requirements as to the
form and content of a stockholders notice. These
provisions, which do not apply to certain stockholders, may
impede stockholders ability to bring matters before a
meeting of stockholders or make nominations for directors at a
meeting of stockholders.
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Business
Combinations
We have opted out of Section 203 of the DGCL; however, our
certificate of incorporation contains similar provisions
providing that we may not engage in certain business
combinations with any interested stockholder
for a three-year period following the time that the stockholder
became an interested stockholder, unless:
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prior to such time, our board approved either the business
combination or the transaction which resulted in the stockholder
becoming an interested stockholder;
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upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of our voting stock outstanding
at the time the transaction commenced, excluding certain shares;
or
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at or subsequent to that time, the business combination is
approved by our board and by the affirmative vote of holders of
at least
662/3%
of the outstanding voting stock that is not owned by the
interested stockholder.
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Generally, a business combination includes a merger,
asset or stock sale or other transaction resulting in a
financial benefit to the interested stockholder. Subject to
certain exceptions, an interested stockholder is a
person who, together with that persons affiliates and
associates, owns, or within the previous three years owned, 15%
or more of our voting stock.
Under certain circumstances, this provision will make it more
difficult for a person who would be an interested
stockholder to effect various business combinations with a
company for a three-year period. This provision may encourage
companies interested in acquiring our company to negotiate in
advance with our board because the stockholder approval
requirement would be avoided if our board approves either the
business combination or the transaction which results in the
stockholder becoming an interested stockholder. These provisions
also may have the effect of preventing changes in our board and
may make it more difficult to accomplish transactions which
stockholders may otherwise deem to be in their best interests.
Our certificate of incorporation provides that the SAC
Stockholders and any of their respective direct or indirect
transferees and any group as to which such persons are a party
do not constitute interested stockholders for
purposes of this provision.
Corporate
Opportunity
Our certificate of incorporation will provide that we renounce
any interest or expectancy in, or in being offered an
opportunity to participate in, any business opportunity which
may be a corporate opportunity for SAC Stockholders or the
members of our board who are not our employees (including any
directors who also serve as officers). We do not renounce our
interest in any corporate opportunity offered to any such
director or officer if such opportunity is expressly offered to
such person solely in his or her capacity as our director or
officer.
Dissenters
Rights of Appraisal and Payment
Under the DGCL, with certain exceptions, our stockholders will
have appraisal rights in connection with a merger or
consolidation of the company pursuant to which they will have
the right to receive payment of the fair value of their shares
as determined by the Delaware Court of Chancery.
Stockholders
Derivative Actions
Under the DGCL, under certain circumstances, our stockholders
may bring an action in our name to procure a judgment in our
favor, also known as a derivative action, provided that the
stockholder bringing the action is a holder of common shares at
the time of the transaction to which the action relates or such
stockholders stock thereafter devolved by operation of law.
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Supermajority
Provisions
The DGCL provides generally that the affirmative vote of a
majority of the outstanding shares of stock entitled to vote is
required to amend a corporations certificate of
incorporation, unless the certificate of incorporation requires
a greater percentage. Our certificate of incorporation will
provide that the following provisions in our certificate of
incorporation and by-laws may be amended only by the affirmative
vote of holders of at least 75% of the voting power entitled to
vote generally in the election of directors, voting as a single
class:
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the provisions regarding classified board (the election and term
of our directors);
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the provisions regarding the resignation and removal of
directors;
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the provisions regarding competition and corporate opportunities;
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the provisions regarding entering into business combinations
with interested stockholders;
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the provisions regarding stockholder action by written consent;
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the provisions regarding calling meetings of stockholders;
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the provisions regarding filling vacancies on our board and
newly created directorships;
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the advance notice requirements for stockholder proposals and
director nominations;
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the indemnification provisions; and
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the amendment provision requiring that the above provisions be
amended only with a 75% supermajority vote.
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In addition, our certificate of incorporation will grant our
board the authority to amend and repeal our by-laws without a
stockholder vote in any manner not inconsistent with the laws of
the State of Delaware or our certificate of incorporation.
Limitations on
Liability and Indemnification of Officers and
Directors
The DGCL authorizes corporations to limit or eliminate the
personal liability of directors to corporations and their
stockholders for monetary damages for breaches of
directors fiduciary duties. Our certificate of
incorporation will include a provision that eliminates the
personal liability of directors for monetary damages for breach
of fiduciary duty as a director to the fullest extent permitted
by Delaware law.
Section 102(b)(7) of the DGCL provides that a corporation
may eliminate or limit the personal liability of a director to
the corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director, provided that such
provision shall not eliminate or limit the liability of a
director (i) for any breach of the directors duty of
loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL (regarding, among other things, the
payment of unlawful dividends) or (iv) for any transaction
from which the director derived an improper personal benefit.
In addition, Section 145 of the DGCL provides that a
Delaware corporation has the power to indemnify its officers and
directors in certain circumstances. Our by-laws also provide
that we must indemnify our directors and officers to the fullest
extent authorized by law. We are also expressly required to
advance certain expenses to our directors and officers and carry
directors and officers insurance providing
indemnification for our directors and officers for some
liabilities. We believe that these indemnification provisions
and the directors and officers insurance are useful
to attract and retain qualified directors and executive officers.
Section 145(a) of the DGCL empowers a corporation to
indemnify any director, officer, employee or agent, or former
director, officer, employee or agent, who was or is a party or
is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in
the right of the corporation) by reason of his service as a
director, officer, employee or agent of the corporation, or his
service, at the corporations request, as a director,
officer, employee or agent of another corporation or enterprise,
against expenses (including attorneys fees), judgments,
fines and amounts paid
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in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding provided that
such director or officer acted in good faith and in a manner
reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal
action or proceeding, provided that such director or officer had
no reasonable cause to believe his conduct was unlawful.
Section 145(b) of the DGCL empowers a corporation to
indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action
or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that such person is
or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
enterprise, against expenses (including attorneys fees)
actually and reasonably incurred in connection with the defense
or settlement of such action or suit provided that such director
or officer acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the
corporation, except that no indemnification may be made in
respect of any claim, issue or matter as to which such director
or officer shall have been adjudged to be liable to the
corporation unless and only to the extent that the Delaware
Court of Chancery or the court in which such action or suit was
brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances
of the case, such director or officer is fairly and reasonably
entitled to indemnity for such expenses which the court shall
deem proper.
The limitation of liability and indemnification provisions in
our certificate of incorporation and by-laws may discourage
stockholders from bringing a lawsuit against its directors for
breach of their fiduciary duty. These provisions may also have
the effect of reducing the likelihood of derivative litigation
against directors and officers, even though such an action, if
successful, might otherwise benefit our company and our
stockholders. In addition, an investment in our common stock may
be adversely affected to the extent we pay the costs of
settlement and damage awards against directors and officers
pursuant to these indemnification provisions.
There is currently no pending material litigation or proceeding
involving any of our directors, officers or employees for which
indemnification is sought.
Transfer Agent
and Registrar
The transfer agent and registrar for our shares
is .
Listing
We intend to delist our common stock from AIM and apply to list
our common stock on The NASDAQ Global Market under the symbol
.
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Shares Eligible
For Future Sale
Prior to this offering, there has not been a public market for
our common stock in the U.S., and we cannot predict what effect,
if any, market sales of shares of common stock or the
availability of shares of common stock for sale will have on the
market price of our common stock prevailing from time to time.
Nevertheless, sales of substantial amounts of common stock,
including shares issued upon the exercise of outstanding
options, in the public market, or the perception that such sales
could occur, could materially and adversely affect the market
price of our common stock and could impair our future ability to
raise capital through the sale of our equity or equity-related
securities at a time and price that we deem appropriate.
Upon the closing of this offering, after giving effect to the
MedQuist Exchange, the Exchange Offer and the shares issued
pursuant to the Consulting Services Agreement, we will have
outstanding an aggregate of
approximately shares
of common stock
( shares
of common stock if the underwriters exercise their option to
purchase additional shares). In addition, options to purchase
approximately shares
of our common stock will be outstanding as of the closing of
this offering. Of these
options, will
have vested at or prior to the closing of this offering and
approximately
will vest over the
next
to years. Of the
outstanding shares, (i) the shares sold in this offering and
(ii)
the shares
listed on AIM that are not held by our affiliates will be freely
tradable without restriction or further registration under the
Securities Act, except that any shares held by our affiliates,
as that term is defined under Rule 144 of the Securities
Act, or Rule 144, may be sold only in compliance with the
limitations described below. The remaining outstanding shares of
common stock will be deemed restricted securities, as defined
under Rule 144. Restricted securities may be sold in the
public market only if registered or if they qualify for an
exemption from registration under Rule 144, which we
summarize below.
The restricted shares and the shares held by our affiliates will
be available for sale in the public market as follows:
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shares will be eligible for sale at various times after the date
of this prospectus pursuant to Rule 144; and
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shares subject to the
lock-up
agreements will be eligible for sale at various times beginning
180 days after the date of this prospectus pursuant to
Rule 144.
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Rule 144
In general, under Rule 144 as in effect on the date of this
prospectus, a person who is not one of our affiliates at any
time during the three months preceding a sale, and who has
beneficially owned shares of our common stock for at least six
months, would be entitled to sell an unlimited number of shares
of our common stock provided current public information about us
is available and, after owning such shares for at least one
year, would be entitled to sell an unlimited number of shares of
our common stock without restriction. Our affiliates who have
beneficially owned shares of our common stock for at least six
months are entitled to sell within any three-month period a
number of shares that does not exceed the greater of:
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1% of the number of shares of our common stock then outstanding,
which was equal to
approximately shares
as of June 30, 2010; or
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the average weekly trading volume of our common stock on The
NASDAQ Global Market during the four calendar weeks preceding
the filing of a notice on Form 144 with respect to the sale.
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Sales under Rule 144 by our affiliates are also subject to
manner of sale provisions and notice requirements and to the
availability of current public information about us.
Lock-Up
Agreements
In connection with this offering, we, our executive officers and
directors, SAC CBI and certain of our other stockholders, all of
which parties in the aggregate
hold %
of our outstanding common stock immediately before this
offering, have agreed with the underwriters, subject to certain
exceptions, not to sell, offer, contract or grant any option to
sell, pledge, transfer or otherwise dispose of any shares,
options or warrants to acquire, dispose of or hedge any of our
common stock or securities convertible into or exchangeable for
shares of common stock,
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during the period ending 180 days after the date of this
prospectus, except with the prior written consent of
Jefferies & Company, Inc. See Underwriting.
Registration
Rights
Pursuant to certain agreements with our stockholders, we have
granted certain stockholders the right to cause us, in certain
instances, at our expense, to file registration statements under
the Securities Act covering resales of our common stock held by
them. These shares will represent
approximately % of our outstanding
common stock after this offering. These shares also may be sold
under Rule 144 under the Securities Act, depending on their
holding period and subject to restrictions in the case of shares
held by persons deemed to be our affiliates.
For a description of rights some holders of common stock have to
require us to register the shares of common stock they own, see
Certain Relationships and Related Party
Transactions Agreements with SAC PCG and Affiliates
and Related Transactions Stockholders
Agreements.
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Material United
States Federal Income And Estate Tax
Consequences To
Non-U.S.
Holders
The following is a summary of material United States federal
income and estate tax consequences relating to the purchase,
ownership and disposition of our common stock that is purchased
pursuant to this offering. Except where noted, this summary
deals only with common stock that is held as a capital asset by
a
non-U.S. holder.
A
non-U.S. holder
means a person (other than a partnership) that is not for United
States federal income tax purposes any of the following:
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an individual citizen or resident of the United States;
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a corporation (or any other entity treated as a corporation for
United States federal income tax purposes) created or organized
in or under the laws of the United States, any state thereof or
the District of Columbia;
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an estate the income of which is subject to United States
federal income taxation regardless of its source; or
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a trust if it (1) is subject to the primary supervision of
a court within the United States and one or more United States
persons have the authority to control all substantial decisions
of the trust or (2) has a valid election in effect under
applicable United States Treasury regulations to be treated as a
United States person.
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This summary is based upon provisions of the Internal Revenue
Code of 1986, as amended or the Code, and regulations, rulings
and judicial decisions, each as of the date hereof. Those
authorities may be changed, perhaps retroactively, so as to
result in United States federal income and estate tax
consequences different from those summarized below. This summary
does not address all aspects of United States federal income and
estate taxes and does not deal with foreign, state, local,
alternative minimum or other tax considerations that may be
relevant to
non-U.S. holders
in light of their personal circumstances. In addition, it does
not represent a detailed description of the United States
federal income tax consequences applicable to you if you are
subject to special treatment under the United States federal
income tax laws (including if you are a United States expatriate
or former long-term resident of the United States, financial
institution, insurance company, tax-exempt organization, dealer
in securities, broker, controlled foreign
corporation, passive foreign investment
company, a partnership or other pass-through entity for
United States federal income tax purposes, or a person who
acquired our common stock as compensation or otherwise in
connection with the performance of services). We cannot assure
you that a change in law will not alter significantly the tax
considerations that we describe in this summary.
If a partnership holds our common stock, the tax treatment of a
partner will generally depend upon the status of the partner and
the activities of the partnership. If you are a partner of a
partnership holding our common stock, you should consult your
tax advisors.
If you are considering the purchase of our common stock, you
should consult your own tax advisors concerning the particular
United States federal income and estate tax consequences to you
of the purchase, ownership and disposition of the common stock,
as well as the consequences to you arising under the laws of any
other taxing jurisdiction.
Dividends
The gross amount of any distribution by us of cash or property,
other than certain distributions, if any, of common stock
distributed pro rata to all of our shareholders, with respect to
common stock will constitute dividends to the extent such
distributions are paid out of our current or accumulated
earnings and profits as determined under United States federal
income tax principles. To the extent, if any, that the amount of
any distribution exceeds our current and accumulated earnings
and profits, it generally will be treated first as a tax-free
return of capital, on a share-by-share basis, to the extent of
the non-U.S. holders adjusted tax basis in our common
stock, and thereafter as capital gain.
Dividends paid to a
non-U.S. holder
of our common stock generally will be subject to withholding of
United States federal income tax at a 30% rate or such lower
rate as may be specified by an applicable income tax treaty.
However, dividends that are effectively connected with the
conduct of a trade or business by the
non-U.S. holder
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within the United States (and, if required by an applicable
income tax treaty, are attributable to a United States permanent
establishment) are not subject to the withholding tax, provided
certain certification and disclosure requirements are satisfied.
Instead, such dividends are subject to United States federal
income tax on a net income basis in the same manner as if the
non-U.S. holder
were a United States person as defined under the Code. Any such
effectively connected dividends received by a foreign
corporation may be subject to an additional branch profits
tax at a 30% rate or such lower rate as may be specified
by an applicable income tax treaty.
A
non-U.S. holder
of our common stock who wishes to claim the benefit of an
applicable treaty rate and avoid backup withholding, as
discussed below, for dividends will be required (a) to
complete Internal Revenue Service
Form W-8BEN
(or other applicable form) and certify under penalty of perjury
that such holder is not a United States person as defined under
the Code and is eligible for treaty benefits or (b) if our
common stock is held through certain foreign intermediaries, to
satisfy the relevant certification requirements of applicable
United States Treasury regulations. Special certification and
other requirements apply to certain
non-U.S. holders
that are pass-through entities rather than corporations or
individuals.
A
non-U.S. holder
of our common stock eligible for a reduced rate of United States
withholding tax pursuant to an income tax treaty may obtain a
refund of any excess amounts withheld by filing an appropriate
claim for refund with the Internal Revenue Service.
Gain on
Disposition of Common Stock
Any gain realized on the disposition of our common stock
generally will not be subject to United States federal income
tax unless:
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the gain is effectively connected with a trade or business of
the
non-U.S. holder
in the United States (and, if required by an applicable income
tax treaty, is attributable to a United States permanent
establishment of the
non-U.S. holder);
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the
non-U.S. holder
is an individual who is present in the United States for
183 days or more in the taxable year of that disposition,
and certain other conditions are met; or
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we are or have been a United States real property holding
corporation for United States federal income tax purposes.
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An individual
non-U.S. holder
described in the first bullet point immediately above will be
subject to tax on the net gain derived from the sale under
regular graduated United States federal income tax rates. An
individual
non-U.S. holder
described in the second bullet point immediately above will be
subject to a flat 30% tax on the gain derived from the sale,
which may be offset by United States source capital losses, even
though the individual is not considered a resident of the United
States. If a
non-U.S. holder
that is a foreign corporation falls under the first bullet point
immediately above, it will be subject to tax on its net gain in
the same manner as if it were a United States person as defined
under the Code and, in addition, may be subject to the branch
profits tax equal to 30% of its effectively connected earnings
and profits or at such lower rate as may be specified by an
applicable income tax treaty.
We believe we are not and do not anticipate becoming a
United States real property holding corporation for
United States federal income tax purposes.
Federal Estate
Tax
As of the date of this offering, as a result of prior amendments
to the Code, there is no United States federal estate tax for
2010, but such estate tax is scheduled to be fully reinstated in
2011. Under United States federal estate tax as in effect prior
to 2010, common stock held by an individual
non-U.S. holder
at the time of death will be included in such holders
gross estate for United States federal estate tax purposes,
unless an applicable estate tax treaty provides otherwise.
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Information
Reporting and Backup Withholding
We must report annually to the Internal Revenue Service and to
each
non-U.S. holder
the amount of dividends paid to such holder and the tax withheld
with respect to such dividends, regardless of whether
withholding was required. Copies of the information returns
reporting such dividends and withholding may also be made
available to the tax authorities in the country in which the
non-U.S. holder
resides under the provisions of an applicable income tax treaty.
A
non-U.S. holder
will be subject to backup withholding for dividends paid to such
holder unless such holder certifies under penalty of perjury
that it is a
non-U.S. holder
(and the payor does not have actual knowledge or reason to know
that such holder is a United States person as defined under the
Code), or such holder otherwise establishes an exemption.
Information reporting and, depending on the circumstances,
backup withholding will apply to the proceeds of a sale of our
common stock within the United States or conducted through
certain United States-related financial intermediaries, unless
the beneficial owner certifies under penalty of perjury that it
is a
non-U.S. holder
(and the payor does not have actual knowledge or reason to know
that the beneficial owner is a United States person as defined
under the Code), or such owner otherwise establishes an
exemption.
Any amounts withheld under the backup withholding rules may be
allowed as a refund or a credit against a
non-U.S. holders
United States federal income tax liability provided the required
information is furnished to the Internal Revenue Service.
Additional
Withholding Requirements
Under recently enacted legislation, the relevant withholding
agent may be required to withhold 30% of any dividends and the
proceeds of a sale of our common stock paid after
December 31, 2012 to (i) a foreign financial
institution unless such foreign financial institution agrees to
verify, report and disclose its U.S. accountholders and
meets certain other specified requirements or (ii) a
non-financial foreign entity that is the beneficial owner of the
payment unless such entity certifies that it does not have any
substantial United States owners or provides the name, address
and taxpayer identification number of each substantial United
States owner and such entity meets certain other specified
requirements. Non-U.S. holders are urged to consult their tax
advisors regarding the effect, if any, of the recent United
States federal income tax legislation on their investment in our
common stock.
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Underwriting
Jefferies & Company, Inc. and Lazard Capital Markets
LLC are acting as the representatives of the underwriters for
this offering. Under the terms and subject to the conditions
contained in an underwriting agreement to be entered into prior
to the completion of this offering and to be filed as an exhibit
to the registration statement of which this prospectus is a
part, the underwriters named below have severally agreed to
purchase, and we have agreed to sell to them, severally, the
number of shares indicated below:
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Name
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Number of Shares
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Jefferies & Company, Inc.
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Lazard Capital Markets LLC
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Macquarie Capital (USA) Inc.
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RBC Capital Markets Corporation
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Total
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The underwriting agreement will provide that the underwriters
are obligated to purchase all of the shares in this offering if
any are purchased, other than those shares covered by the
over-allotment option described below. The underwriting
agreement will provide that the obligations of the several
underwriters to pay for and accept delivery of the shares
offered by this prospectus are subject to certain conditions.
Over-Allotment
Option
The selling stockholders have granted to the underwriters an
option, exercisable for 30 days from the date of this
prospectus, to purchase up to an aggregate
of
additional shares at the initial public offering price set forth
on the cover page of this prospectus, less underwriting
discounts and commissions. The underwriters may exercise this
option solely for the purpose of covering over-allotments, if
any, made in connection with the offering of the additional
shares offered by this prospectus. If the underwriters exercise
this option, each underwriter will be obligated, subject to
certain conditions, to purchase a number of additional shares
proportionate to that underwriters initial purchase
commitment as indicated in the table above.
Commission and
Expenses
The underwriters have advised us that they propose to offer the
shares to the public at the initial public offering price set
forth on the cover page of this prospectus and to certain
dealers at that price less a concession not in excess of
$ per share. The underwriters may
allow, and certain dealers may reallow, a discount from the
concession not in excess of $ per
share to certain brokers and dealers. After this offering, the
initial public offering price, concession and reallowance to
dealers may be reduced by the representative. No such reduction
shall change the amount of proceeds to be received by us as set
forth on the cover page of this prospectus. The shares are
offered by the underwriters as stated herein, subject to receipt
and acceptance by them and subject to their right to reject any
order in whole or in part. The underwriters do not intend to
confirm sales to any accounts over which they exercise
discretionary authority.
The following table shows the initial public offering price, the
underwriting discounts and commissions payable to the
underwriters by us and the selling stockholders, and the
proceeds, before expenses, to us and the selling
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stockholders. Such amounts are shown assuming both no exercise
and full exercise of the underwriters over-allotment
option to purchase additional shares.
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Per Share
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Total
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With Full
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With Full
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Without Over-
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Exercise of
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Without Over-
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Exercise of
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allotment
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Over-allotment
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allotment
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Over-allotment
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Public offering price
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$
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$
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$
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$
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Underwriting discount and commissions paid by us
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Underwriting discount and commissions paid by the selling
stockholders
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Proceeds, before expenses, to us
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Proceeds, before expenses, to the selling stockholders
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We estimate expenses payable by us in connection with the
offering of shares, other than the underwriting discount and
commissions referred to above, will be approximately
$ million.
Indemnification
We and the selling stockholders have agreed to indemnify the
underwriters against certain liabilities, including liabilities
under the Securities Act and liabilities arising from breaches
of representations and warranties contained in the underwriting
agreement, or to contribute to payments that the underwriters
may be required to make in respect of those liabilities.
Lock-up
Agreements
We, our executive officers and directors, SAC CBI, and certain
of our other stockholders, all of which parties in the aggregate
hold % of our outstanding common
stock immediately prior to this offering have agreed, subject to
specified exceptions, not to directly or indirectly, for a
period of 180 days after the date of this prospectus,
without the prior written consent of Jefferies &
Company, Inc.:
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sell, offer, contract or grant any option to sell (including any
short sale), pledge, transfer, establish an open put
equivalent position within the meaning of
Rule 16a-1(h)
under the Securities Exchange Act of 1934, or the Exchange Act;
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otherwise dispose of any shares, options or warrants to acquire
shares, or securities exchangeable or exercisable for or
convertible into shares currently or hereafter owned either of
record or beneficially; or
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publicly announce an intention to do any of the foregoing.
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This restriction terminates after the close of trading of our
shares on and including the date 180 days after the date of
this prospectus. However, subject to certain exceptions, in the
event that either (i) during the last 17 days of the
180-day
restricted period, we issue an earnings release or material news
or a material event relating to us occurs or (ii) prior to
the expiration of the
180-day
restricted period, we announce that we will release earnings
results during the
16-day
period beginning on the last day of the
180-day
restricted period, then in either case the expiration of the
180-day
restricted period will be extended until the expiration of the
18-day
period beginning on the date of the issuance of the earnings
release or the occurrence of the material news or event, as
applicable, unless Jefferies & Company, Inc. waives,
in writing, such an extension.
Jefferies & Company, Inc. may, in its sole discretion
and at any time or from time to time before the termination of
the 180-day
period, without notice, release all or any portion of the
securities subject to these
lock-up
agreements. There are no existing agreements between the
underwriters and any of the persons who will execute a
lock-up
agreement providing consent to the sale of shares prior to the
expiration of the
lock-up
period.
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Listing
We intend to apply to list our common stock on The NASDAQ Global
Market under the trading symbol
.
Electronic
Distribution
A prospectus in electronic format may be made available on
websites or through other online services maintained by one or
more of the underwriters of this offering, or by their
affiliates. Other than the prospectus in electronic format, the
information on an underwriters website and any information
contained in any other website maintained by that underwriter is
not part of the prospectus or the registration statement of
which this prospectus forms a part, has not been approved
and/or
endorsed by us or any underwriter in its capacity as underwriter
and should not be relied upon by investors.
Price
Stabilization, Short Positions and Penalty Bids
Until the distribution of the shares is completed, SEC rules may
limit underwriters from bidding for and purchasing shares.
However, the representative may engage in transactions that
stabilize the market price of the shares, such as bids or
purchases to peg, fix or maintain that price so long as
stabilizing transactions do not exceed a specified maximum.
In connection with this offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise make short
sales of our shares and may purchase our shares on the open
market 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 this offering.
Covered short sales are sales made in an amount not
greater than the underwriters over-allotment option to
purchase additional shares in this offering. The underwriters
may close out any covered short position by either exercising
their over-allotment option or purchasing shares in the open
market. In determining the source of shares to close out the
covered short position, the underwriters will consider, among
other things, the price of shares available for purchase in the
open market as compared to the price at which they may purchase
shares through the over-allotment option. Naked
short sales are sales in excess of the over-allotment option.
The underwriters must close out any naked short position by
purchasing shares in the open market. A naked short position is
more likely to be created if the underwriters are concerned that
there may be downward pressure on the price of the shares in the
open market after pricing that could adversely affect investors
who purchase in this offering. A stabilizing bid is
a bid for or the purchase of shares on behalf of the underwriter
in the open market prior to the completion of this offering for
the purpose of fixing or maintaining the price of the shares. A
syndicate covering transaction is the bid for or
purchase of shares on behalf of the underwriters to reduce a
short position incurred by the underwriters in connection with
the offering.
Similar to other purchase transactions, the underwriters
purchases to cover the syndicate short sales may have the effect
of raising or maintaining the market price of our shares or
preventing or retarding a decline in the market price of our
shares. As a result, the price of our shares may be higher than
the price that might otherwise exist in the open market.
The representative may also impose a penalty bid on
underwriters. A penalty bid is an arrangement
permitting the representative to reclaim the selling concession
otherwise accruing to the underwriters in connection with this
offering if the shares originally sold by the underwriters are
purchased by the underwriters in a syndicate covering
transaction and have therefore not been effectively placed by
the underwriters. The imposition of a penalty bid may also
affect the price of the shares in that it discourages resales of
those shares.
Neither we nor any of the underwriters makes any representation
or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of
our shares. In addition, neither we nor any of the underwriters
makes any representation that the representative will engage in
these transactions or that any transaction, if commenced, will
not be discontinued without notice.
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Passive Market
Making
In connection with the offering, the underwriters may engage in
passive market-making transactions in the shares on The NASDAQ
Global Market in accordance with Rule 103 of
Regulation M under the Exchange Act during the period
before the commencement of offers or sales of shares and
extending through the completion and distribution. A passive
market-maker must display its bids at a price not in excess of
the highest independent bid of the security. However, if all
independent bids are lowered below the passive
market-makers bid that bid must be lowered when specified
purchase limits are exceeded.
Determination of
Offering Price
Prior to this offering, there has been no public market in the
United States for our shares. The initial public offering price
will be determined through negotiations between us and
Jefferies & Company, Inc. and Lazard Capital Markets
LLC, as representatives of the underwriters. The factors to be
considered in determining the public offering price may include
our future prospects and those of our industry in general,
sales, earnings and certain of our other financial operating
information in recent periods, and the market prices of
securities and certain financial and operating information of
companies engaged in activities similar to those we engage in.
The price of our shares on AIM during recent periods will also
be considered in determining the public offering price. It
should be noted, however, that historically there has been a
limited volume of trading in our shares on AIM. Therefore, the
price of our shares on AIM will only be one factor in
determining the public offering price. The estimated public
offering price range set forth on the cover page of this
preliminary prospectus is subject to change as a result of
market conditions and other factors.
We offer no assurances that the initial public offering price
will correspond to the price at which the shares will trade in
the public market subsequent to the offering or that an active
trading market for the shares will develop in the United States
and continue after the offering.
Affiliations
Certain of the underwriters or their respective affiliates have
in the past performed investment banking, brokerage and other
financial services for us or our affiliates for which they
received advisory or transaction fees, as applicable, plus
out-of-pocket
expenses, of the nature and in amounts customary in the industry
for these financial services. Each of the underwriters may
perform such services for us or our affiliates in the future.
Jefferies & Company, Inc. served as financial advisor to us
and certain of our affiliates in connection with the MedQuist
Inc. Acquisition in 2008. Jefferies & Company, Inc. also
served as financial advisor to Spheris in connection with
Spheriss bankruptcy and the Spheris Acquisition in April
2010.
Lazard Frères & Co. LLC has acted as a financial
advisor in connection with certain aspects of the
Recapitalization Transactions described herein. The relationship
between Lazard Frères & Co. LLC and Lazard Capital
Markets LLC is governed by a business alliance agreement between
their respective parent companies. Pursuant to such agreement,
Lazard Frères & Co. LLC referred this offering to
Lazard Capital Markets LLC and will receive a referral fee from
Lazard Capital Markets LLC in connection therewith.
Affiliates of Macquarie Capital (USA) Inc. and RBC Capital
Markets Corporation are lenders under our $225.0 million Senior
Secured Credit Facility.
Notice to
Investors
European
Economic Area
In relation to each Member State of the European Economic Area
which has implemented the European Union Prospectus Directive
(Directive 2003/71/EC), each of which we refer to as a
Relevant Member State, an offer to the public of any
shares which are the subject of the offering contemplated by
this prospectus may not be made in that Relevant Member State
prior to the publication of a prospectus in relation to our
shares which has been approved by the competent authority in
that Relevant Member State or, where appropriate, approved in
another
126
Relevant Member State and notified to the competent authority in
that Relevant Member State, all in accordance with the
Prospectus Directive except that an offer to the public in that
Relevant Member State of any of our shares may be made at any
time under the following exemptions under the Prospectus
Directive, if they have been implemented in that Relevant Member
State:
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to legal entities which are authorized or regulated to operate
in the financial markets or, if not so authorized or regulated,
whose corporate purpose is solely to invest in securities;
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to any legal entity which has two or more of: an average of at
least 250 employees during the last financial year; a total
balance sheet of more than 43,000,000 euros; and an annual net
turnover of more than 50,000,000 euros, as shown in its last
annual or consolidated accounts;
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by the managing underwriters to fewer than 100 natural or legal
persons (other than qualified investors as defined in the
Prospectus Directive) subject to obtaining the prior consent of
Jefferies & Company, Inc. for any such offer; or
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in any other circumstances falling within Article 3(2) of
the Prospectus Directive,
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provided that no such offer of our shares shall result in a
requirement for the publication by us or any underwriter of a
prospectus pursuant to Article 3 of the Prospectus
Directive.
For the purposes of this provision, the expression an
offer to the public in relation to any shares in any
Relevant Member State means the communication in any form and by
any means of sufficient information on the terms of the offer
and our shares to be offered so as to enable an investor to
decide to purchase or subscribe our shares, as the same may be
varied in that Relevant Member State by any measure implementing
the Prospectus Directive in that Relevant Member State and the
expression Prospectus Directive means European Union
Directive 2003/71/EC and includes any relevant implementing
measure in each Relevant Member State.
India
This document has not been and will not be registered as a
prospectus or a statement in lieu of prospectus with any
registrar of companies in India. This document has not been and
will not be reviewed or approved by any regulatory authority in
India, including the Securities and Exchange Board of India, any
registrar of companies in India or any stock exchange in India.
This document and this offering of our shares are not and should
not be construed as an invitation, offer or sale of any
securities to the public in India. Other than in compliance with
the private placement exemptions under applicable laws and
regulations in India, including the Companies Act, 1956, as
amended, our shares have not been, and will not be, offered or
sold to the public or any member of the public in India. This
document is strictly personal to the recipient and neither this
document nor the offering of our shares is calculated to result,
directly or indirectly, in our shares becoming available for
subscription or purchase by persons other than those receiving
the invitation or offer.
Selling
Restrictions Addressing Additional United Kingdom Securities
Laws
With respect to the United Kingdom, this prospectus is only
being distributed to, and is only directed at, persons in the
United Kingdom that are qualified investors within the meaning
of Article 2(1)(e) of the Prospectus Directive that are
also (i) investment professionals falling within
Article 19(5) of the Financial Services and Markets Act
2000 (Financial Promotion) Order 2005, or the Order, or
(ii) high net worth entities, and other persons to whom it
may lawfully be communicated, falling within
Article 49(2)(a) to (d) of the Order, with all such
persons together being referred to as relevant persons. This
prospectus and its contents are confidential and should not be
distributed, published or reproduced (in whole or in part) or
disclosed by recipients to any persons other than relevant
persons in the United Kingdom. Any person in the United Kingdom
that is not a relevant person should not act or rely on this
document or any of its contents.
127
Legal
Matters
The validity of the shares is being passed upon for us by
Simpson Thacher & Bartlett LLP. White & Case
LLP, counsel to the underwriters, will pass upon on certain
legal matters for the underwriters.
Experts
The audited consolidated financial statements of CBaySystems
Holdings Limited and its subsidiaries as of December 31,
2008 and 2009 and for each of the years then ended have been
included herein and in this prospectus in reliance upon the
report of KPMG LLP, independent registered public accounting
firm, appearing elsewhere in this prospectus, and upon the
authority of said firm as experts in accounting and auditing.
The audited consolidated financial statements of CBaySystems
Holdings Limited and its subsidiaries as of December 31,
2007 and for the year ended December 31, 2007 appearing in
this registration statement and prospectus have been audited by
Grant Thornton India, independent registered public accounting
firm, as stated in their report appearing elsewhere in this
prospectus, and are included, and made part of, this
registration statement in reliance upon the report of such firm
given upon the authority of such firm as experts in auditing and
accounting.
The audited consolidated financial statements of MedQuist Inc.
and its subsidiaries as of December 2006 and 2007 and for each
of the years in the three-year period ended December 31,
2007 have been included herein and in this prospectus in
reliance upon the report of KPMG LLP, independent registered
public accounting firm, appearing elsewhere in this prospectus,
and upon the authority of said firm as experts in accounting and
auditing. KPMG LLPs report on the consolidated financial
statements contains explanatory paragraphs that state MedQuist
Inc. and subsidiaries adopted Statement of Financial Accounting
Standards No. 123 (R), Share-Based Payment,
effective January 1, 2006 and adopted Financial Accounting
Standards Boards Interpretation No. 48, Accounting for
Uncertainty in Income Taxes an Interpretation of
SFAS No. 109, effective January 1, 2007.
The consolidated financial statements of Spheris Inc. at
December 2008 and 2009 and for each of the three years in the
period ended December 31, 2009, appearing in this
prospectus and registration statement have been audited by
Ernst & Young LLP, independent auditors, as set forth
in their report thereon (which contains an explanatory paragraph
describing conditions that raise substantial debt about Spheris
Inc.s ability to continue as a going concern as described
in Notes 2 and 22 to the consolidated financial statements)
appearing elsewhere herein, and are included in reliance upon
such report given on the authority of such firm as experts in
accounting and auditing.
Where You Can
Find More Information
We have filed with the SEC a registration statement on
Form S-1
under the Securities Act to register the shares offered hereby.
The term registration statement means the initial registration
statement and any and all amendments thereto, including the
exhibits and schedules, if any, to the initial registration
statement and any amendments thereto. This prospectus, which
constitutes a part of the registration statement, does not
contain all of the information set forth in the registration
statement or the exhibits and schedules filed therewith. For
further information with respect to us and the shares offered
hereby, reference is made to the registration statement and the
exhibits and schedules filed therewith. Statements contained in
this prospectus regarding the contents of any contract or any
other document that is filed as an exhibit to the registration
statement are not necessarily complete, and each such statement
is qualified in all respects by reference to the full text of
such contract or other document filed as an exhibit to the
registration statement. A copy of the registration statement,
along with the exhibits and schedules filed therewith, may be
inspected without charge at the Public Reference Room maintained
by the SEC, located at 100 F Street, N.E., Washington,
DC 20549, and copies of all or any part of the registration
statement may be obtained from such offices upon the payment of
the fees prescribed by the SEC. Please call the SEC at
1-800-SEC-0330
for further information about the Public Reference Room. The SEC
also maintains an Internet website that contains reports, proxy
and information statements and other information regarding
registrants that file electronically with the SEC. The address
of the website is www.sec.gov.
128
As a result of this offering, we will become subject to the
information and periodic reporting requirements of the
Securities Exchange Act of 1934, as amended, and, in accordance
therewith, we will file periodic reports, proxy statements and
other information with the SEC. Such periodic reports, proxy
statements and other information will be available for
inspection and copying at the public reference room and website
of the SEC referred to above. You may access our annual report
on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act with the SEC
free of charge at our website as soon as reasonably practicable
after such material is electronically filed with, or furnished
to, the SEC. The reference to our web address does not
constitute incorporation by reference of the information
contained at or accessible through this site.
We intend to furnish our stockholders with annual reports
containing combined financial statements audited by our
independent auditors and to make available to our stockholders
quarterly reports for the first three quarters of each fiscal
year containing unaudited interim condensed consolidated
financial statements.
129
Index to
Consolidated Financial Statements
|
|
|
|
|
CBaySystems Holdings Limited and Subsidiaries
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-9
|
|
MedQuist Inc. and Subsidiaries
|
|
|
|
|
|
|
|
F-52
|
|
|
|
|
F-53
|
|
|
|
|
F-54
|
|
|
|
|
F-55
|
|
|
|
|
F-56
|
|
|
|
|
F-57
|
|
|
|
|
|
|
|
|
|
F-90
|
|
|
|
|
F-91
|
|
|
|
|
F-92
|
|
|
|
|
F-93
|
|
Spheris Inc. and Subsidiaries
|
|
|
|
|
|
|
|
F-112
|
|
|
|
|
F-113
|
|
|
|
|
F-114
|
|
|
|
|
F-115
|
|
|
|
|
F-116
|
|
|
|
|
F-117
|
|
Spheris Inc. and Subsidiaries
(Debtor-In-Possession)
|
|
|
|
|
|
|
|
F-140
|
|
|
|
|
F-141
|
|
|
|
|
F-142
|
|
|
|
|
F-143
|
|
F-1
Report of
Independent Registered Public Accounting Firm
The Board of Directors
CBaySystems Holdings Limited and subsidiaries:
We have audited the accompanying consolidated balance sheets of
CBaySystems Holdings Limited and subsidiaries (the Company) as
of December 31, 2008 and 2009, and the related consolidated
statements of operations, equity and other comprehensive income
(loss), and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). 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 CBaySystems Holdings Limited and subsidiaries as of
December 31, 2008 and 2009, and the results of their
operations and their cash flows for the years then ended in
conformity with U.S. generally accepted accounting
principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
April 13, 2010
F-2
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
CBaySystems Holdings Limited
We have audited the accompanying consolidated statements of
operations, stockholders equity and comprehensive loss,
and cash flows of CBaySystems Holdings Limited (a British Virgin
Islands Company) and subsidiaries for the year ended
December 31, 2007. These consolidated financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. Our audit included consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the results
of operations and cash flows of CBaySystems Holdings Limited and
subsidiaries for the year ended December 31, 2007, in
conformity with accounting principles generally accepted in the
United States of America.
/s/ GRANT THORNTON, INDIA
Mumbai
October 15, 2010
F-3
CBaySystems
Holdings Limited and Subsidiaries
(In thousands, except per share
amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year End December 31,
|
|
|
Six Months Ended June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Net revenues
|
|
$
|
57,694
|
|
|
$
|
193,673
|
|
|
$
|
371,768
|
|
|
$
|
188,539
|
|
|
$
|
200,592
|
|
Cost of revenues
|
|
|
30,209
|
|
|
|
125,074
|
|
|
|
239,549
|
|
|
|
121,755
|
|
|
|
128,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
27,485
|
|
|
|
68,599
|
|
|
|
132,219
|
|
|
|
66,784
|
|
|
|
71,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
25,137
|
|
|
|
51,243
|
|
|
|
60,632
|
|
|
|
31,764
|
|
|
|
32,706
|
|
Research and development
|
|
|
|
|
|
|
6,099
|
|
|
|
9,604
|
|
|
|
4,796
|
|
|
|
5,593
|
|
Depreciation and amortization
|
|
|
2,915
|
|
|
|
14,906
|
|
|
|
26,977
|
|
|
|
13,610
|
|
|
|
15,068
|
|
Cost of legal proceedings and settlements
|
|
|
|
|
|
|
5,311
|
|
|
|
14,943
|
|
|
|
12,158
|
|
|
|
2,152
|
|
Acquisition related charges
|
|
|
|
|
|
|
|
|
|
|
1,246
|
|
|
|
|
|
|
|
6,045
|
|
Goodwill impairment charge
|
|
|
|
|
|
|
98,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
|
|
|
|
2,106
|
|
|
|
2,727
|
|
|
|
|
|
|
|
966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
28,052
|
|
|
|
178,637
|
|
|
|
116,129
|
|
|
|
62,328
|
|
|
|
62,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(567
|
)
|
|
|
(110,038
|
)
|
|
|
16,090
|
|
|
|
4,456
|
|
|
|
9,421
|
|
Equity in income (loss) of affiliated companies
|
|
|
(105
|
)
|
|
|
66
|
|
|
|
1,933
|
|
|
|
408
|
|
|
|
546
|
|
Other income
|
|
|
14
|
|
|
|
9
|
|
|
|
11
|
|
|
|
|
|
|
|
108
|
|
Interest expense, net
|
|
|
(2,108
|
)
|
|
|
(3,954
|
)
|
|
|
(9,132
|
)
|
|
|
(4,660
|
)
|
|
|
(7,351
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and noncontrolling
interests
|
|
|
(2,766
|
)
|
|
|
(113,917
|
)
|
|
|
8,902
|
|
|
|
204
|
|
|
|
2,724
|
|
Income tax provision (benefit)
|
|
|
(113
|
)
|
|
|
(5,398
|
)
|
|
|
1,082
|
|
|
|
639
|
|
|
|
(326
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(2,653
|
)
|
|
|
(108,519
|
)
|
|
|
7,820
|
|
|
|
(435
|
)
|
|
|
3,050
|
|
Less: Net (income) loss attributable to noncontrolling interests
|
|
|
57
|
|
|
|
(5,154
|
)
|
|
|
(7,085
|
)
|
|
|
(2,335
|
)
|
|
|
(2,497
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to CBaySystems Holdings
Limited
|
|
$
|
(2,596
|
)
|
|
$
|
(113,673
|
)
|
|
$
|
735
|
|
|
$
|
(2,770
|
)
|
|
$
|
553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share attributable to CBaySystems Holdings
Limited:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.04
|
)
|
|
$
|
(1.13
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
Diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(1.13
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
57,929
|
|
|
|
101,669
|
|
|
|
156,116
|
|
|
|
154,991
|
|
|
|
157,705
|
|
Diluted
|
|
|
57,929
|
|
|
|
101,669
|
|
|
|
156,116
|
|
|
|
154,991
|
|
|
|
157,705
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
CBaySystems
Holdings Limited and Subsidiaries
(In thousands, except par value)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
42,868
|
|
|
$
|
29,633
|
|
|
$
|
22,457
|
|
Accounts receivable, net
|
|
|
59,111
|
|
|
|
53,099
|
|
|
|
72,187
|
|
Other current assets
|
|
|
10,566
|
|
|
|
8,739
|
|
|
|
19,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
112,545
|
|
|
|
91,471
|
|
|
|
113,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
21,306
|
|
|
|
19,511
|
|
|
|
26,217
|
|
Goodwill
|
|
|
49,943
|
|
|
|
53,187
|
|
|
|
99,376
|
|
Other intangible assets, net
|
|
|
84,174
|
|
|
|
72,838
|
|
|
|
118,042
|
|
Deferred income taxes
|
|
|
1,756
|
|
|
|
2,495
|
|
|
|
2,880
|
|
Other assets
|
|
|
9,453
|
|
|
|
13,566
|
|
|
|
19,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
279,177
|
|
|
$
|
253,068
|
|
|
$
|
380,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of debt
|
|
$
|
33,497
|
|
|
$
|
6,207
|
|
|
$
|
41,527
|
|
Accounts payable
|
|
|
10,199
|
|
|
|
11,191
|
|
|
|
11,462
|
|
Accrued expenses and other current liabilities
|
|
|
31,702
|
|
|
|
29,803
|
|
|
|
40,195
|
|
Accrued compensation
|
|
|
13,585
|
|
|
|
16,034
|
|
|
|
23,906
|
|
Deferred revenue
|
|
|
11,889
|
|
|
|
9,924
|
|
|
|
8,981
|
|
Due to related parties
|
|
|
1,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
102,046
|
|
|
|
73,159
|
|
|
|
126,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to related parties
|
|
|
|
|
|
|
2,185
|
|
|
|
2,162
|
|
Long term debt
|
|
|
92,511
|
|
|
|
101,133
|
|
|
|
172,565
|
|
Deferred income taxes
|
|
|
550
|
|
|
|
2,166
|
|
|
|
2,667
|
|
Other non-current liabilities
|
|
|
4,720
|
|
|
|
2,124
|
|
|
|
1,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
199,827
|
|
|
|
180,767
|
|
|
|
305,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 14)
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
CBaySystems Holdings Limited stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock- $0.10 par value; authorized
1,000,000 shares;
|
|
|
|
|
|
|
|
|
|
|
|
|
154,991, 157,557 and 158,209 shares issued and outstanding,
respectively
|
|
|
15,499
|
|
|
|
15,756
|
|
|
|
15,821
|
|
Additional paid in capital
|
|
|
138,420
|
|
|
|
137,084
|
|
|
|
137,333
|
|
Accumulated deficit
|
|
|
(116,421
|
)
|
|
|
(115,686
|
)
|
|
|
(115,133
|
)
|
Accumulated other comprehensive loss
|
|
|
(1,191
|
)
|
|
|
(174
|
)
|
|
|
(849
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total CBaySystems Holdings Limited stockholders
equity
|
|
|
36,307
|
|
|
|
36,980
|
|
|
|
37,172
|
|
Noncontrolling interests
|
|
|
43,043
|
|
|
|
35,321
|
|
|
|
37,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
79,350
|
|
|
|
72,301
|
|
|
|
74,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
279,177
|
|
|
$
|
253,068
|
|
|
$
|
380,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
CBaySystems
Holdings Limited and Subsidiaries
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Six Months Ended June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(2,653
|
)
|
|
$
|
(108,519
|
)
|
|
$
|
7,820
|
|
|
$
|
(435
|
)
|
|
$
|
3,050
|
|
Adjustment to reconcile net income (loss) to net cash
provided by (used in) operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,915
|
|
|
|
14,906
|
|
|
|
26,977
|
|
|
|
13,610
|
|
|
|
15,068
|
|
Deferred income taxes
|
|
|
(304
|
)
|
|
|
(6,431
|
)
|
|
|
679
|
|
|
|
(283
|
)
|
|
|
205
|
|
Share based compensation
|
|
|
1,308
|
|
|
|
124
|
|
|
|
856
|
|
|
|
394
|
|
|
|
322
|
|
Provision for doubtful accounts
|
|
|
|
|
|
|
2,424
|
|
|
|
2,306
|
|
|
|
89
|
|
|
|
1,085
|
|
Non-cash interest expense
|
|
|
|
|
|
|
2,580
|
|
|
|
3,272
|
|
|
|
|
|
|
|
|
|
Equity in income of affiliated companies
|
|
|
105
|
|
|
|
(66
|
)
|
|
|
(1,933
|
)
|
|
|
(408
|
)
|
|
|
(546
|
)
|
Goodwill impairment charge
|
|
|
|
|
|
|
98,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
48
|
|
|
|
1,230
|
|
|
|
200
|
|
|
|
339
|
|
|
|
(555
|
)
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(5,024
|
)
|
|
|
(483
|
)
|
|
|
3,816
|
|
|
|
4,728
|
|
|
|
1,741
|
|
Other current assets
|
|
|
6,209
|
|
|
|
(96
|
)
|
|
|
2,185
|
|
|
|
393
|
|
|
|
(4,064
|
)
|
Other assets
|
|
|
546
|
|
|
|
819
|
|
|
|
(615
|
)
|
|
|
(505
|
)
|
|
|
918
|
|
Accounts payable
|
|
|
445
|
|
|
|
2,011
|
|
|
|
871
|
|
|
|
22
|
|
|
|
(5,379
|
)
|
Deferred revenue
|
|
|
|
|
|
|
3,398
|
|
|
|
(2,128
|
)
|
|
|
1,692
|
|
|
|
(994
|
)
|
Accrued expenses and other current liabilities
|
|
|
(1,005
|
)
|
|
|
(10,850
|
)
|
|
|
(3,634
|
)
|
|
|
(3,731
|
)
|
|
|
(382
|
)
|
Accrued compensation
|
|
|
690
|
|
|
|
2,150
|
|
|
|
1,904
|
|
|
|
3,461
|
|
|
|
(151
|
)
|
Other non-current liabilities
|
|
|
38
|
|
|
|
(4,811
|
)
|
|
|
94
|
|
|
|
276
|
|
|
|
3,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
3,318
|
|
|
|
(2,642
|
)
|
|
|
42,670
|
|
|
|
19,642
|
|
|
|
13,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(2,849
|
)
|
|
|
(4,420
|
)
|
|
|
(6,475
|
)
|
|
|
(3,052
|
)
|
|
|
(3,129
|
)
|
Purchases of and capitalized intangible assets
|
|
|
(265
|
)
|
|
|
(2,738
|
)
|
|
|
(2,995
|
)
|
|
|
(2,490
|
)
|
|
|
(3,584
|
)
|
Payment to related parties
|
|
|
(5,162
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments for acquisitions and interests in affiliates, net of
cash acquired
|
|
|
(10,202
|
)
|
|
|
(69,319
|
)
|
|
|
(2,690
|
)
|
|
|
(967
|
)
|
|
|
(98,310
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(18,478
|
)
|
|
|
(76,477
|
)
|
|
|
(12,160
|
)
|
|
|
(6,509
|
)
|
|
|
(105,023
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of stock
|
|
|
28,210
|
|
|
|
124,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
(15,256
|
)
|
|
|
|
|
|
|
|
|
Debt issuance cost
|
|
|
|
|
|
|
|
|
|
|
(1,201
|
)
|
|
|
|
|
|
|
(6,070
|
)
|
Borrowings from term loans, credit facilities, notes payable and
capital leases
|
|
|
1,959
|
|
|
|
866
|
|
|
|
659
|
|
|
|
595
|
|
|
|
107,216
|
|
Repayments for term loans, credit facilities, notes payable and
capital leases
|
|
|
(10,649
|
)
|
|
|
(3,439
|
)
|
|
|
(28,613
|
)
|
|
|
(859
|
)
|
|
|
(16,519
|
)
|
Share issue expenses
|
|
|
(4,136
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issue of shares to noncontrolling interest
|
|
|
1,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other receivables
|
|
|
(367
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
16,074
|
|
|
|
121,427
|
|
|
|
(44,411
|
)
|
|
|
(264
|
)
|
|
|
84,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate on cash
|
|
|
1,238
|
|
|
|
(2,107
|
)
|
|
|
666
|
|
|
|
369
|
|
|
|
(536
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
|
2,152
|
|
|
|
40,201
|
|
|
|
(13,235
|
)
|
|
|
13,238
|
|
|
|
(7,176
|
)
|
Cash and cash equivalentsbeginning of period
|
|
|
515
|
|
|
|
2,667
|
|
|
|
42,868
|
|
|
|
42,868
|
|
|
|
29,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalentsend of period
|
|
$
|
2,667
|
|
|
$
|
42,868
|
|
|
$
|
29,633
|
|
|
$
|
56,106
|
|
|
$
|
22,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
CBaySystems
Holdings Limited and Subsidiaries
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Component of
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Compound
|
|
|
Capital
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Paid in
|
|
|
Financial
|
|
|
Redemption
|
|
|
Income
|
|
|
Income
|
|
|
Income
|
|
|
Noncontrolling
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Instrument
|
|
|
Reserve
|
|
|
(Deficit)
|
|
|
(Loss)
|
|
|
(Loss)
|
|
|
Interests
|
|
|
Equity
|
|
|
Balance as of January 1, 2007
|
|
|
12,310
|
|
|
$
|
2,747
|
|
|
$
|
1,785
|
|
|
$
|
|
|
|
$
|
155
|
|
|
$
|
790
|
|
|
|
|
|
|
$
|
(147
|
)
|
|
$
|
(3
|
)
|
|
$
|
5,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common shares
|
|
|
17
|
|
|
|
4
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
Equity component of related party convertible debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
|
|
Investment on CBay Infotech Ventures Private Limited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,037
|
|
|
|
1,037
|
|
Gain in investment in CBay Infotech Ventures Private Limited
|
|
|
|
|
|
|
|
|
|
|
628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(628
|
)
|
|
|
|
|
Issue of shares on restructuring of CBay Group
|
|
|
49,308
|
|
|
|
4,931
|
|
|
|
916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,847
|
|
Cancellation of CBay India equity on restructuring of CBay Group
|
|
|
(12,327
|
)
|
|
|
(2,751
|
)
|
|
|
(2,205
|
)
|
|
|
(55
|
)
|
|
|
(155
|
)
|
|
|
(942
|
)
|
|
|
|
|
|
|
261
|
|
|
|
|
|
|
|
(5,847
|
)
|
Shares issued pursuant to share swap agreement
|
|
|
1,369
|
|
|
|
137
|
|
|
|
2,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,000
|
|
Shares issued on initial public offering
|
|
|
14,325
|
|
|
|
1,432
|
|
|
|
23,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,150
|
|
Share issue expenses
|
|
|
|
|
|
|
|
|
|
|
(4,136
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,136
|
)
|
Share based compensation
|
|
|
|
|
|
|
|
|
|
|
1,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,308
|
|
Components of comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,596
|
)
|
|
|
(2,596
|
)
|
|
|
|
|
|
|
(57
|
)
|
|
|
(2,653
|
)
|
Foreign currency translation adjustment gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
734
|
|
|
|
734
|
|
|
|
26
|
|
|
|
760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,862
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
65,002
|
|
|
|
6,500
|
|
|
|
24,878
|
|
|
|
|
|
|
|
|
|
|
|
(2,748
|
)
|
|
|
|
|
|
|
848
|
|
|
|
375
|
|
|
|
29,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
89,989
|
|
|
|
8,999
|
|
|
|
115,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124,000
|
|
Share based compensation
|
|
|
|
|
|
|
|
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
124
|
|
Share of noncontrolling interest in MedQuist Inc
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63,740
|
|
|
|
63,740
|
|
Share of noncontrolling interest in goodwill impairment charge
in MedQuist Inc
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,081
|
)
|
|
|
(25,081
|
)
|
Accrued payments to principal shareholders
|
|
|
|
|
|
|
|
|
|
|
(1,113
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,113
|
)
|
Receivable related to IPO proceeds
|
|
|
|
|
|
|
|
|
|
|
(450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(450
|
)
|
Components of comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(113,673
|
)
|
|
|
(113,673
|
)
|
|
|
|
|
|
|
5,154
|
|
|
|
(108,519
|
)
|
Foreign currency translation adjustment loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,039
|
)
|
|
|
(2,039
|
)
|
|
|
(1,165
|
)
|
|
|
(3,204
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(115,712
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
154,991
|
|
|
|
15,499
|
|
|
|
138,420
|
|
|
|
|
|
|
|
|
|
|
|
(116,421
|
)
|
|
|
|
|
|
|
(1,191
|
)
|
|
|
43,043
|
|
|
|
79,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock to principal shareholder
|
|
|
2,566
|
|
|
|
257
|
|
|
|
1,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,678
|
|
Accrued payments to principal shareholders
|
|
|
|
|
|
|
|
|
|
|
(2,750
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,750
|
)
|
Share based compensation
|
|
|
|
|
|
|
|
|
|
|
797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
|
|
|
|
856
|
|
Issuance of stock warrants
|
|
|
|
|
|
|
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
|
|
Dividend paid to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,256
|
)
|
|
|
(15,256
|
)
|
Acquisition of noncontrolling interest in subsidiary
|
|
|
|
|
|
|
|
|
|
|
(690
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(690
|
)
|
Dilution of affiliated company
|
|
|
|
|
|
|
|
|
|
|
(175
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(77
|
)
|
|
|
(252
|
)
|
Components of comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
735
|
|
|
|
735
|
|
|
|
|
|
|
|
7,085
|
|
|
|
7,820
|
|
Foreign currency translation adjustment gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,017
|
|
|
|
1,017
|
|
|
|
467
|
|
|
|
1,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
|
157,557
|
|
|
$
|
15,756
|
|
|
$
|
137,084
|
|
|
|
|
|
|
|
|
|
|
$
|
(115,686
|
)
|
|
|
|
|
|
$
|
(174
|
)
|
|
$
|
35,321
|
|
|
$
|
72,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-7
CBaySystems
Holdings Limited and Subsidiaries
Consolidated
Statements of Equity and Comprehensive Income (Loss)
(Continued)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Component of
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Compound
|
|
|
Capital
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Paid in
|
|
|
Financial
|
|
|
Redemption
|
|
|
Income
|
|
|
Income
|
|
|
Income
|
|
|
Noncontrolling
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Instrument
|
|
|
Reserve
|
|
|
(Deficit)
|
|
|
(Loss)
|
|
|
(Loss)
|
|
|
Interests
|
|
|
Equity
|
|
|
Balance as of December 31, 2009
|
|
|
157,557
|
|
|
$
|
15,756
|
|
|
$
|
137,084
|
|
|
|
|
|
|
|
|
|
|
$
|
(115,686
|
)
|
|
|
|
|
|
$
|
(174
|
)
|
|
$
|
35,321
|
|
|
$
|
72,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock to principal shareholder
|
|
|
652
|
|
|
|
65
|
|
|
|
1,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,397
|
|
Accrued payments to principal shareholders
|
|
|
|
|
|
|
|
|
|
|
(1,375
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,375
|
)
|
Share based compensation
|
|
|
|
|
|
|
|
|
|
|
292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
|
|
321
|
|
Acquisition of noncontrolling interest in subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
65
|
|
Components of comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
553
|
|
|
|
553
|
|
|
|
|
|
|
|
2,497
|
|
|
|
3,050
|
|
Foreign currency translation adjustment loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(675
|
)
|
|
|
(675
|
)
|
|
|
(150
|
)
|
|
|
(825
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(122
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2010 (unaudited)
|
|
|
158,209
|
|
|
$
|
15,821
|
|
|
$
|
137,333
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(115,133
|
)
|
|
|
|
|
|
$
|
(849
|
)
|
|
$
|
37,762
|
|
|
$
|
74,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
CBaySystems
Holdings Limited and Subsidiaries
(In thousands,
except per share amounts)
(Information as
of June 30, 2010 and for the six months ended June 30,
2009 and 2010 is unaudited)
|
|
1.
|
Description of
Business
|
CBaySystems Holdings Limited and subsidiaries (the
Company or CBaySystems Holdings Limited)
provides technology-enabled clinical documentation services and
related revenue cycle solutions for the healthcare industry with
operations in the United States of America and India. The
Company provides transcription and information management
services to integrated healthcare facility networks, hospitals,
academic institutions, clinics and physician practices. The
Companys solutions leverage internet technologies and
trained transcriptionists to provide medical transcription
services under a global service model. The Company also provides
patient financial services including billing and coding services
to hospitals and healthcare providers in the United States of
America. The Companys service and enterprise technology
solutions (including mobile voice capture devices, speech
recognition technologies, web-based workflow platforms), and a
global network of medical transcriptionists (MTs) and editors
(MEs) enable healthcare facilities to improve the quality and
timeliness of clinical data and information, reduce operational
costs, increase physician satisfaction, enhance revenue cycle
performance and facilitate the adoption and utilization of
Electronic Health Record (EHR) systems.
On August 6, 2008, an affiliate of S.A.C. Private Capital
Group, LLC and invested $124,000 in the Company in exchange for
89,989 common shares in the Company at a price of approximately
$1.38 per share which was equivalent to approximately 58.1% of
the Company. The proceeds from the issuance and certain
borrowings were used by the Company to finance the purchase of
an approximately 69.5% shareholding in MedQuist Inc. from
Koninklijke Philips Electronics N.V. (Philips), see note 10
Acquisitions. No purchase accounting adjustments related to the
investment have been pushed down to the Company. The Company is
listed on the Alternative Investment Market (AIM).
In August 2009, the board of MedQuist Inc., a consolidated
subsidiary of the Company, authorized a special cash dividend of
$1.33 per share or $49,949. The dividend was paid on
September 15, 2009 of which $15,256 was paid to the
noncontrolling interest which has reduced the carrying amount of
the noncontrolling interest in these consolidated financial
statements.
Recent
Developments
On April 22, 2010, the Company through its subsidiaries,
MedQuist Inc. and CBay Inc. (Purchasers), completed
the acquisition (the Acquisition) of substantially
all of the assets of Spheris, Inc. (Spheris) and certain of its
affiliates, including the acquisition of the stock of Spheris
India Private Limited, (SIPL) (collectively with
Spheris and SIPL, the Sellers), pursuant to the
terms of the Stock and Asset Purchase Agreement (the
Purchase Agreement) entered into between the
Purchasers and Sellers on April 15, 2010. See Note 10
for a description of the Acquisition. Costs incurred for the
Acquisition and direct integration costs are included in the
line item Acquisition related charges on the accompanying
statements of operations. See Note 21 for subsequent events.
|
|
2.
|
Significant
Accounting Policies
|
Principles of
Consolidation
The Companys consolidated financial statements include the
accounts of CBaySystems Holdings Limited and its subsidiary
companies. All intercompany balances and transactions have been
eliminated in consolidation.
F-9
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
Unaudited
Interim Financial Information
The accompanying interim consolidated financial statements of
the Company as of June 30, 2010 and for the six months
ended June 30, 2009 and 2010 have been prepared by the
Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission (SEC). Certain
information and footnote disclosures normally included in
financial statements prepared in conformity with accounting
principles generally accepted in the United States of America
have been condensed or omitted pursuant to such rules and
regulations relating to interim financial statements. In the
opinion of the Companys management, the accompanying
unaudited interim consolidated financial statements have been
prepared on the same basis as the audited consolidated financial
statements and reflect all adjustments, which include only
normal recurring adjustments, necessary to present fairly the
financial position of the Company as of June 30, 2010, and
the results of their operations and their cash flows for the six
months ended June 30, 2009 and 2010. The accompanying
unaudited interim consolidated financial statements are not
necessarily indicative of full year results.
Use of
Estimates and Assumptions in the Preparation of Consolidated
Financial Statements
The preparation of the Companys consolidated financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect amounts reported in
the Companys consolidated financial statements.
Significant items subject to such estimates and assumptions
include the carrying amount of property and equipment, valuation
of long-lived and intangible assets and goodwill, valuation
allowances for receivables and deferred income taxes, revenue
recognition, stock-based compensation and commitments and
contingencies. Actual results could differ from those estimates.
Revenue
Recognition
Revenues for medical transcription services are recognized when
the services are rendered. These services are based on
contracted rates. The Company also derives revenues from the
sale of voice-capture and document management products including
software, hardware and implementation, training and maintenance
service related to these products.
The Company recognizes software-related revenues using the
residual method when vendor-specific objective evidence (VSOE)
of fair value exists for all of the undelivered elements in the
arrangement, but does not exist for one or more delivered
elements. The Company allocates revenues to each undelivered
element based on its respective fair value determined by the
price charged when that element is sold separately or, for
elements not yet sold separately, the price established by
management if it is probable that the price will not change
before the element is sold separately. The Company defers
revenues for the undelivered elements.
Provided that the arrangement does not involve significant
production, modification, or customization of the software,
revenues are recognized when all of the following four criteria
have been met: persuasive evidence of an arrangement exists,
delivery has occurred, the fee is fixed or determinable and
collectability is probable.
If at the outset of an arrangement, the Company had determined
that the arrangement fee is not fixed or determinable, revenues
are deferred until the arrangement fee becomes due and payable
by the customer. If at the outset of an arrangement the Company
had determined that collectability is not probable, revenues are
deferred until payment is received. The Companys license
agreements typically do not provide for a right of return other
than during the standard warranty period. If an arrangement
allows for customer acceptance of the software or services, the
Company defers revenues until the earlier of customer acceptance
or when the acceptance rights lapse.
The Company separately markets and sells hardware and software
post contract customer support (PCS). PCS covers phone support,
hardware parts and labor, software bug fixes and limited
upgrades, if and when available. The Company does not commit to
specific future software upgrades or releases. The contract
period for PCS is generally one year. The Company recognizes
both hardware and software PCS on a straight line basis over the
life
F-10
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
of the underlying PCS contract. In some of the Companys
PCS contracts, the Company bills the customer prior to
performing the services. As of December 31, 2008 and 2009,
deferred PCS revenues of $11,052 and $7,643, respectively, are
included in deferred revenues and $340 and $177, respectively,
are included in other non-current liabilities in the
accompanying consolidated balance sheets.
Certain arrangements include multiple elements involving
software, hardware and implementation, training, or other
services that are not essential to the functionality of the
software. VSOE for services does not exist. Since the
undelivered elements are typically services, the Company
recognizes the entire arrangement fee ratably over the period
during which the services are expected to be performed or the
PCS period, whichever is longer, beginning with delivery of the
software, provided that all other revenue recognition criteria
are met. The services are typically completed before the PCS
term expires. As such, upon completion of the services, the
difference between the VSOE of fair value for the remaining PCS
period and the remaining unrecognized portion of the arrangement
fee is recognized as revenue (i.e. the residual method), and the
remaining deferred revenue is recognized ratably over the
remaining PCS period.
Fees for patient financial services related to accounts
receivable management services are generally contracted as a
percentage of amounts collected out of the allocated accounts.
Revenue from such arrangements is recognized based on actual
collections by the hospitals.
Fees for patient financial services related to reimbursement
analytics are contracted either on a fixed fee or a contingent
fee basis. Under the fixed fee, a fee is contractually fixed for
each reimbursement package delivered. Revenue from such
arrangements is recognized on the delivery of the reimbursement
package. Under the contingent fee, the fee is contracted as a
percentage of the amounts that would ultimately be reimbursed to
the hospitals by the relevant authorities and is contingent upon
receipt of the reimbursement by the hospital. Revenue from such
arrangements is recognized when the contingency is resolved on
receipt of the approval of the reimbursement package by the
financial intermediaries. As of December 31, 2008 and 2009,
$231 and $224, respectively, of revenue recognized in excess of
billings is recorded as unbilled revenues and are included in
accounts receivable in the consolidated balance sheets.
Sales
Taxes
The Company presents taxes assessed by a governmental authority
including sales, use, value added and excise taxes on a net
basis and therefore the presentation of these taxes is excluded
from the Companys revenues and is included in accrued
expenses in the accompanying consolidated balance sheets until
such amounts are remitted to the taxing authorities.
Litigation and
Settlement Costs
From time to time, the Company is involved in litigation,
claims, contingencies and other legal matters. The Company
records a charge equal to at least the minimum estimated
liability for a loss contingency when both of the following
conditions are met: (i) information available prior to
issuance of the financial statements indicates that it is
probable that an asset had been impaired or a liability had been
incurred at the date of the financial statements and
(ii) the range of the loss can be reasonably estimated. The
Company expenses legal costs as incurred.
Restructuring
Costs
A liability for restructuring costs associated with an exit or
disposal activity is recognized and measured initially at fair
value when the liability is incurred. The Company records a
liability for severance costs when the obligation is
attributable to employee service already rendered, the
employees rights to those benefits accumulate or vest,
F-11
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
payment of the compensation is probable and the amount can be
reasonably estimated. The Company records a liability for
future, non-cancellable operating lease costs when the Company
vacates a facility.
The Companys estimates of future liabilities may change,
requiring it to record additional restructuring charges or
reduce the amount of liabilities recorded. At the end of each
reporting period, the Company evaluates the remaining accrued
restructuring charges to ensure their adequacy, that no excess
accruals are retained and the utilization of the provisions are
for their intended purposes in accordance with developed exit
plans.
Research and
Development Costs
Research and development costs are expensed as incurred.
Income
Taxes
Deferred tax assets and liabilities are recorded for temporary
differences between the tax basis of assets and liabilities and
their reported amounts in the consolidated financial statements,
using statutory tax rates in effect for the year in which the
differences are expected to reverse. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
the Companys statement of operations in the period that
includes the enactment date. A valuation allowance is recorded
to reduce the carrying amounts of deferred tax assets unless it
is more likely than not that such assets will be realized.
Management considers various sources of future taxable income
including projected book earnings, the reversal of temporary
differences, and prudent and feasible tax planning strategies in
determining the need for a valuation allowance.
Share-Based
Compensation
The Company estimates the fair value of stock options on the
date of grant using an option pricing model. The Company uses
the Black-Scholes option pricing model to determine the fair
value of its options. The determination of the fair value of
stock based awards using an option pricing model is affected by
a number of assumptions including expected volatility of the
common stock over the expected term, the expected term, the risk
free interest rate during the expected term and the expected
dividends to be paid. The value of the portion of the award that
is ultimately expected to vest is recognized as compensation
expense over the requisite service periods.
Share-based compensation expense related to employee stock
options for 2007, 2008 and 2009 was $1,308, $124 and $856 which
was charged to selling, general and administrative expenses. As
of December 31, 2009 total unamortized stock-based
compensation cost related to non-vested stock options, net of
expected forfeitures, was $673 which is expected to be
recognized over a weighted-average period of 1.69 years.
Net Income
(Loss) per Share
Basic net loss per share is computed by dividing net income
(loss) by the weighted average number of shares outstanding
during each period. Diluted net income (loss) per share is
computed by dividing net income (loss) by the weighted average
shares outstanding, as adjusted for the dilutive effect of
common stock equivalents, which consist of stock options,
convertible notes and certain obligations which may be settled
by the Company through issue of shares using the treasury stock
method.
F-12
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
The table below reflects basic and diluted net loss per share
for the periods ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Six Months Ended June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
Net income (loss) attributable to CBaySystems Holdings Limited
|
|
$
|
(2,596
|
)
|
|
$
|
(113,673
|
)
|
|
$
|
735
|
|
|
$
|
(2,770
|
)
|
|
$
|
553
|
|
Less: amount payable to principal shareholders
|
|
|
|
|
|
|
(1,113
|
)
|
|
|
(2,750
|
)
|
|
|
(1,375
|
)
|
|
|
(1,375
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available for common shareholders
|
|
$
|
(2,596
|
)
|
|
$
|
(114,786
|
)
|
|
$
|
(2,015
|
)
|
|
$
|
(4,145
|
)
|
|
$
|
(822
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
57,929
|
|
|
|
101,669
|
|
|
|
156,116
|
|
|
|
154,991
|
|
|
|
157,705
|
|
Effect of dilutive stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
57,929
|
|
|
|
101,669
|
|
|
|
156,116
|
|
|
|
154,991
|
|
|
|
157,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share attributable to CBaySystems Holdings
Limited:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.04
|
)
|
|
$
|
(1.13
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
Diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(1.13
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
The computation of diluted net loss per share does not assume
conversion, exercise or issuance of shares that would have an
anti-dilutive effect on diluted net loss per share. Potentially
dilutive shares having an anti-dilutive effect on net loss per
share and, therefore, excluded from the calculation of diluted
net loss per share, totaled 250, 24,051 and 59,073 shares
for the years ended December 31, 2007, 2008 and 2009,
respectively and 60,580 and 62,460 shares for the six months
ended June 30, 2009 and 2010, respectively. The net income
(loss) for the purpose of the basic loss per share is adjusted
for the amounts payable to the Companys principal
shareholders amounting to $1,113 and $2,750 for the years ended
December 31, 2008 and 2009, respectively and $1,375 for the
six months ended June 30, 2009 and 2010, under the
management services agreement, see Note 9, other
commitments.
Advertising
Costs
Advertising costs are expensed as incurred and for the years
ended December 31, 2007, 2008 and 2009 were $828, $1,169
and $1,734, respectively and for the six months ended
June 30, 2009 and 2010 were $361 and $812, respectively.
Cash and Cash
Equivalents
The Company considers all highly liquid instruments with
original maturities of three months or less to be cash
equivalents. The Companys cash management and investment
policies dictate that cash equivalents be limited to investment
grade, highly liquid securities. The Company places its
temporary cash investments with high-credit rated, quality
financial institutions. Deposits held with banks may exceed the
amount of insurance provided on such deposits. Consequently, the
Companys cash equivalents are subject to potential credit
risk. As of December 31, 2008, 2009 and June 30, 2010,
cash equivalents consisted of money market investments. The
carrying value of cash and cash equivalents approximates fair
value.
Restricted cash of $133, $93 and $1,160, as of December 31,
2008, 2009 and June 30, 2010, respectively, represents
deposits that are maintained with banks as security for
guarantees issued by them. Such amounts are included in other
current assets in the consolidated balance sheets.
F-13
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount and do
not bear interest. The carrying value of accounts receivable
approximates fair value. The allowance for doubtful accounts is
the Companys best estimate for losses inherent in its
accounts receivable portfolio. The sales return and allowance
reserve is the Companys best estimate of sales credits
that will be issued related to its accounts receivable
portfolio. These allowances are used to state trade receivables
at estimated net realizable value.
The Company estimates uncollectible amounts based upon its
historical write-off experience, current customer receivable
balances, age of customer receivable balances, the
customers financial condition and current economic
conditions. Historically, these estimates have been adequate to
cover its accounts receivable exposure.
The Company enters into medical transcription service
arrangements which contain provisions for performance penalties
in the event certain service levels, primarily related to
turnaround time on transcribed reports, are not achieved. The
Company reduces revenues for any performance penalties incurred
and have included an estimate of such credits in its allowance
for uncollectible accounts.
Product revenues for sales to end-user customers and resellers
are recognized upon passage of title if all other revenue
recognition criteria have been met. End-user customers generally
do not have a right of return. The Company provides certain of
its resellers and distributors with limited rights of return of
its products. The Company reduces revenues for rights to return
its product based upon our historical experience and have
included an estimate of such credits in its allowance for
doubtful accounts.
Deferred
Equity Offering Costs
Costs have been incurred in connection with the planned initial
public offering of the Companys common stock. As of
December 31, 2009 and June 30, 2010, legal, consulting
and accounting costs aggregating approximately $270 and $1,300,
respectively, have been deferred and are included in other
current assets in the accompanying consolidated balance sheets.
Upon the consummation of the offering, these costs will be
treated as a reduction of the proceeds from the offering and
will be included as a component of additional
paid-in-capital.
If the offering is terminated, the costs will be charged to
expense in the period that it becomes probable that the costs
are no longer realizable.
Property and
Equipment
Property and equipment are stated at cost less accumulated
depreciation. Depreciation is calculated on a straight-line
basis over the estimated useful lives of the assets which range
from two to seven years for furniture, equipment and software,
and the lesser of the lease term or estimated useful life for
leasehold improvements. Repairs and maintenance costs are
charged to expense as incurred while additions and betterments
are capitalized. Gains or losses on disposals are charged to
operations. Upon retirement, sale or other disposition, the
related cost and accumulated depreciation are eliminated from
the accounts and any gain or loss is included in operations.
Valuation of
Long-Lived and Other Intangible Assets and
Goodwill
In connection with acquisitions, the Company allocates portions
of the purchase price to tangible and intangible assets,
consisting primarily of acquired technologies and customer
relationships, based on independent appraisals received after
each acquisition, with the remainder allocated to goodwill. The
Company assesses the realizability of goodwill and intangible
assets with indefinite useful lives at least annually, or sooner
if events or changes in circumstances indicate that the carrying
amount may not be recoverable. The Company has determined that
the Companys three reporting units are MedQuist Inc., CBay
Transcription Business and Patient Financial Services (PFS). See
Note 8 for goodwill impairment charge recorded in 2008.
F-14
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
Software
Development
Costs incurred in creating a computer software product are
charged to expense when incurred as research and development
until technical feasibility has been established. Technical
feasibility is established upon completion of a detail program
design or, in its absence, completion of a working model.
Thereafter, all software production costs are capitalized until
the product is available for release to customers.
Software costs for internal use incurred in the preliminary
project stage are expensed as incurred. Capitalization of costs
begins when the preliminary project stage is completed and
management, with the relevant authority, authorizes and commits
funding of the project and it is probable that the project will
be completed and the software will be used to perform the
function intended. Capitalization ceases no later than the point
at which the project is substantially complete and ready for its
intended use.
Capitalized software is reported at the lower of unamortized
cost or net realizable value and is amortized over the
products estimated economic life which is generally three
years. As of December 31, 2008 and 2009, $942 and $1,321,
respectively, of unamortized software development costs are
included in other intangible assets in the accompanying
consolidated balance sheets. For the years ended
December 31, 2007, 2008 and 2009, software amortization
expense was $0, $40 and $220, respectively.
Long-Lived and
Other Intangible Assets
Long-lived assets, including property and equipment and
purchased intangible assets subject to amortization, are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. To determine the recoverability of
long-lived assets, the estimated future undiscounted cash flows
expected to be generated by an asset is compared to the carrying
value of the asset. If the carrying value of the long-lived
asset exceeds its estimated future undiscounted cash flows, an
impairment charge is recognized in the amount by which the
carrying value of the asset exceeds its fair value. Annually,
the Company evaluates the reasonableness of the useful lives of
these assets.
Intangible assets include certain assets (primarily customer
relationships and trade names) obtained from business
acquisitions and are being amortized using the straight-line
method over their estimated useful lives which range from three
to 10 years.
Foreign
Currency Translation
The Companys operating subsidiaries in the United Kingdom,
Canada and India use the local currency as their functional
currency. The Company translates the assets and liabilities of
those entities into U.S. dollars using the month-end
exchange rate. The Company translates revenues and expenses
using the average exchange rates prevailing during the reporting
period. The resulting translation adjustments are recorded in
accumulated other comprehensive income (loss) within equity.
Gains and losses from foreign currency transactions are included
in net gain and were $1,314, $203 and $325 for the years ended
December 31, 2007, 2008 and 2009, respectively.
Business
Enterprise Segments
The Company operates in one reportable operating segment which
is technology enabled BPO (Business Process Outsourcing) for the
healthcare industry based on the fact that the Company engages
primarily in outsourcing services for the health care business
solutions.
Concentration
of Risk, Geographic Data and Enterprise-wide
Disclosures
No single customer accounted for more than 10% of the
Companys net revenues in any period. There is no single
geographic area of significant concentration other than the
United States.
F-15
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
The following table summarizes the net revenues by the
categories of the Companys services and products as a
percentage of its total net revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Six Months Ended June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
Medical transcription
|
|
|
73.0%
|
|
|
|
80.0%
|
|
|
|
84.2%
|
|
|
|
84.5%
|
|
|
|
87.7%
|
|
Products and related services
|
|
|
|
|
|
|
1.9%
|
|
|
|
2.7%
|
|
|
|
2.0%
|
|
|
|
1.5%
|
|
PCS
|
|
|
|
|
|
|
3.7%
|
|
|
|
4.9%
|
|
|
|
4.7%
|
|
|
|
4.3%
|
|
PFS
|
|
|
27.0%
|
|
|
|
11.5%
|
|
|
|
4.8%
|
|
|
|
5.0%
|
|
|
|
3.5%
|
|
Other
|
|
|
|
|
|
|
2.9%
|
|
|
|
3.4%
|
|
|
|
3.8%
|
|
|
|
3.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0%
|
|
|
|
100.0%
|
|
|
|
100.0%
|
|
|
|
100.0%
|
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other includes medical coding, application service provider and
other miscellaneous revenues.
The following summarizes the Companys revenues and
long-lived assets by geography.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Six Months Ended June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
55,249
|
|
|
$
|
190,176
|
|
|
$
|
360,619
|
|
|
$
|
183,343
|
|
|
$
|
197,521
|
|
Others
|
|
|
2,445
|
|
|
|
3,497
|
|
|
|
11,149
|
|
|
|
5,196
|
|
|
|
3,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
57,694
|
|
|
$
|
193,673
|
|
|
$
|
371,768
|
|
|
$
|
188,539
|
|
|
$
|
200,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
United States
|
|
$
|
18,556
|
|
|
$
|
13,765
|
|
|
$
|
18,826
|
|
Others
|
|
|
2,750
|
|
|
|
5,746
|
|
|
|
7,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
21,306
|
|
|
$
|
19,511
|
|
|
$
|
26,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of
Financial Instruments
Cash and cash equivalents, accounts receivable, accounts payable
and accrued expenses are reflected in the accompanying
consolidated balance sheets at carrying values which approximate
fair value due to the short-term nature of these instruments.
Comprehensive
Income (Loss)
Comprehensive income (loss) is comprised of net income (loss)
and Other comprehensive income (loss). Other comprehensive
income (loss) consists of foreign currency translation
adjustments. Other comprehensive income (loss) and comprehensive
income (loss) are displayed separately in the Consolidated
Statements of Equity and Other Comprehensive Income (loss).
F-16
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
Acquisition
Related Costs
Effective January 1, 2009, the Company expenses costs
incurred in reviewing potential acquisitions in the period
incurred. This includes legal, investment banking, accounting,
tax and other consulting, as well as any internal costs. Prior
to this date direct and incremental external costs of
acquisitions were included in the purchase price.
Operating
Leases
Lease rent expenses on operating leases are charged to expense
over the lease term. Certain operating lease agreements provide
for scheduled rent increases over the lease term. Rent expense
for such leases is recognized on a straight-line basis over the
lease term.
Supplemental
Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Six Months Ended June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
Capital lease obligations incurred to acquire equipment
|
|
$
|
308
|
|
|
$
|
247
|
|
|
$
|
3,523
|
|
|
$
|
|
|
|
$
|
|
|
Cash paid for interest
|
|
|
1,739
|
|
|
|
862
|
|
|
|
3,000
|
|
|
|
302
|
|
|
|
3,404
|
|
Cash paid for income taxes
|
|
|
84
|
|
|
|
160
|
|
|
|
796
|
|
|
|
497
|
|
|
|
(478
|
)
|
Issuance of notes payable for acquisition of MedQuist Inc
|
|
|
|
|
|
|
117,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets acquired for settlement of receivables
|
|
|
|
|
|
|
1,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption of preferred stock for settlement of receivables
|
|
|
|
|
|
|
1,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accommodation payments paid with credits
|
|
|
|
|
|
|
|
|
|
|
103
|
|
|
|
82
|
|
|
|
|
|
Fees to principal shareholders by issuing common stock
|
|
|
|
|
|
|
|
|
|
|
1,678
|
|
|
|
|
|
|
|
|
|
Conversion of interest on convertible notes to additional notes
|
|
|
|
|
|
|
|
|
|
|
5,484
|
|
|
|
|
|
|
|
|
|
Non cash debt incurred in connection with acquisition of Spheris
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,570
|
|
Recent
Accounting Pronouncements
In September 2009, the FASB ratified two consensuses affecting
revenue recognition:
The first consensus, Revenue
RecognitionMultiple-Element Arrangements, sets forth
requirements that must be met for an entity to recognize revenue
from the sale of a delivered item that is part of a
multiple-element arrangement when other items have not yet been
delivered. One of those current requirements is that there be
objective and reliable evidence of the standalone selling price
of the undelivered items, which must be supported by either
vendor-specific objective evidence (VSOE) or third-party
evidence (TPE).
This consensus eliminates the requirement that all undelivered
elements have VSOE or TPE before an entity can recognize the
portion of an overall arrangement fee that is attributable to
items that already have been delivered. In the absence of VSOE
or TPE of the standalone selling price for one or more delivered
or undelivered elements in a multiple-element arrangement,
entities will be required to estimate the selling prices of
those elements. The overall arrangement fee will be allocated to
each element (both delivered and undelivered items) based on
their relative selling prices, regardless of whether those
selling prices are evidenced by VSOE or TPE or are based on the
entitys estimated selling price. Application of the
residual method of allocating an overall arrangement
fee between delivered and undelivered elements will no longer be
permitted.
F-17
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
The second consensus, Software-Revenue Recognition
addresses the accounting for transactions involving software
to exclude from its scope tangible products that contain both
software and non-software and non-software components that
function together to deliver a products functionality.
The Consensuses are effective prospectively for revenue
arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010. The Company is
evaluating the potential impact of these requirements on its
financial statements.
|
|
3.
|
Comprehensive
(Loss) Income
|
Comprehensive (loss) income was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Six Months Ended June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to CBaySystems Holdings Limited
|
|
$
|
(2,596
|
)
|
|
$
|
(113,673
|
)
|
|
$
|
735
|
|
|
$
|
(2,770
|
)
|
|
$
|
553
|
|
Foreign currency translation adjustment gain (loss)
|
|
|
734
|
|
|
|
(2,039
|
)
|
|
|
1,017
|
|
|
|
421
|
|
|
|
(675
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income
|
|
$
|
(1,862
|
)
|
|
$
|
(115,712
|
)
|
|
$
|
1,752
|
|
|
$
|
(2,349
|
)
|
|
$
|
(122
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
Cost of Legal
Proceedings and Settlements
|
For the years ended December 31, 2007, 2008 and 2009 and
for the six months ended June 30, 2009 and 2010, the
Company recorded charges of $0, $5,311, $14,943, $12,158 and
$2,152 respectively, for costs associated with legal proceedings
and settlements. The following is a summary of the amounts
recorded in the accompanying consolidated statements of
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
Legal fees and professional fees
|
|
$
|
5,311
|
|
|
$
|
8,593
|
|
|
$
|
6,278
|
|
|
$
|
1,242
|
|
Other, including settlements
|
|
|
|
|
|
|
6,350
|
|
|
|
5,880
|
|
|
|
910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,311
|
|
|
$
|
14,943
|
|
|
$
|
12,158
|
|
|
$
|
2,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount included in Other, including settlements for 2009, is
primarily for the settlement amount of $5,850 related to the
Anthurium patent claim which was settled and paid in June 2009
and $500 for the reseller arbitration. The amount included in
Other, including settlements for 2010, represents an additional
charge of $900 required to bring the total Kaiser litigation
settlement amount to $2,000 as a result of the settlement
agreement with Kaiser more fully discussed in Note 14.
2008
Restructure Plan
During the fourth quarter of 2008, the Company implemented a
restructuring plan related to a reduction in workforce in order
to better align costs with revenues. The Company recorded $2,135
in severance charges related to the 2008 restructuring plan. The
remaining restructuring costs are included in accrued expenses
in the
F-18
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
accompanying consolidated balance sheet as of December 31,
2008. The table below reflects the financial statement activity
related to the 2008 restructuring plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
Beginning balance
|
|
$
|
|
|
|
$
|
1,323
|
|
Charge (reversal)
|
|
|
2,135
|
|
|
|
(83
|
)
|
Cash paid
|
|
|
(812
|
)
|
|
|
(1,240
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
1,323
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
2009
Restructure Plan
During the third and fourth quarters of 2009, as a result of
managements continued planned process improvement and
technology development investments MedQuist committed to an exit
and disposal plan which includes projected employee severance
for planned reduction in headcount. Because of planned
development in late 2009 and execution of the plan over multiple
quarters in 2009 and 2010, not all personnel affected by the
plan know of the plan or its impact. The plan includes costs of
$2,500 for employee severance and $300 for vacating operating
leases. The table below reflects the financial statement
activity related to the 2009 restructuring plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Six Month Ended
|
|
|
|
December 31, 2009
|
|
|
June 30, 2010
|
|
|
Beginning balance
|
|
$
|
|
|
|
$
|
2,064
|
|
Charge
|
|
|
2,810
|
|
|
|
121
|
|
Cash paid
|
|
|
(746
|
)
|
|
|
(834
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
2,064
|
|
|
$
|
1,351
|
|
|
|
|
|
|
|
|
|
|
The Company expects this to be paid in 2010.
2010
Restructuring Plan
During the second quarter of 2010, managements ongoing
cost reduction initiatives, including process improvement,
combined with the acquisition of Spheris resulted in a
restructuring plan involving staff reductions and other actions
designed to maximize operating efficiencies. The affected
employees are entitled to receive severance benefits under
existing established severance policies. The employees were
primarily in the operations and administrative functions. This
initial action under the plan was approved during the second
quarter of 2010. The table below reflects the financial
statement activity related to the 2010 restructuring plan:
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30, 2010
|
|
|
Beginning balance
|
|
$
|
|
|
Charge
|
|
|
846
|
|
Cash paid
|
|
|
(194
|
)
|
|
|
|
|
|
Ending balance
|
|
$
|
652
|
|
|
|
|
|
|
The Company expects that restructuring activities may continue
in 2010 as management identifies opportunities for synergies
resulting from the acquisition of Spheris including the
elimination of redundant functions.
F-19
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
Accounts receivable consisted of the following as of December 31
and June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Trade accounts receivable
|
|
$
|
60,824
|
|
|
$
|
54,852
|
|
|
$
|
74,699
|
|
Less: Allowance for doubtful accounts
|
|
|
(1,713
|
)
|
|
|
(1,753
|
)
|
|
|
(2,512
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
59,111
|
|
|
$
|
53,099
|
|
|
$
|
72,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The activity in the allowance for doubtful accounts for the
years ended December 31, 2007, 2008 and 2009 and for the
six months ended June 30, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Beginning balance
|
|
$
|
|
|
|
$
|
43
|
|
|
$
|
1,713
|
|
|
$
|
1,753
|
|
Allowance for doubtful accounts recognized during the year
|
|
|
43
|
|
|
|
2,424
|
|
|
|
2,306
|
|
|
|
1,085
|
|
Doubtful accounts written-off
|
|
|
|
|
|
|
(754
|
)
|
|
|
(2,266
|
)
|
|
|
(326
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
43
|
|
|
$
|
1,713
|
|
|
$
|
1,753
|
|
|
$
|
2,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Includes amounts written off to costs and expenses for bad debts
of $43, $1,584, $197 and $377 for the years ended
December 31, 2007, 2008 and 2009 and the six months ended
June 30, 2010, respectively, and amounts charged to
revenues for customer credits of $0, $840, $2,109 and $708 for
the years ended December 31, 2007, 2008 and 2009 and the
six months ended June 30, 2010, respectively.
|
|
7.
|
Property and
Equipment
|
Property and equipment consisted of the following as of December
31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
Computer equipment
|
|
$
|
18,301
|
|
|
$
|
26,567
|
|
Software
|
|
|
4,346
|
|
|
|
1,961
|
|
Furniture and office equipment
|
|
|
1,577
|
|
|
|
1,495
|
|
Leasehold improvements
|
|
|
2,509
|
|
|
|
4,869
|
|
Land
|
|
|
1,326
|
|
|
|
1,379
|
|
Others
|
|
|
1,730
|
|
|
|
1,452
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
29,789
|
|
|
|
37,723
|
|
Less: accumulated depreciation
|
|
|
(8,483
|
)
|
|
|
(18,212
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
21,306
|
|
|
$
|
19,511
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the year ended December 31, 2007,
2008 and 2009 is $1,478, $6,756 and $12,014, respectively.
|
|
8.
|
Goodwill and
Other Intangible Assets
|
In connection with acquisitions, the Company allocates portions
of the purchase price to tangible and intangible assets,
consisting primarily of acquired technologies and customer
relationships, based on independent appraisals
F-20
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
received after each acquisition, with the remainder allocated to
goodwill. The Company assesses the realizability of goodwill and
intangible assets with indefinite useful lives at least
annually, or sooner if events or changes in circumstances
indicate that the carrying amount may not be recoverable. The
Company has determined that the impairment testing is to be
conducted at our three reporting unit levels which are:
MedQuist, CBay Transcription Business and PFS.
Goodwill
The changes in the carrying amount of goodwill for the years
ended December 31, 2008 and 2009 and for the six months
ended June 30, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Balance as of January 1,
|
|
$
|
18,361
|
|
|
$
|
148,915
|
|
|
$
|
152,159
|
|
Accumulated impairment loss
|
|
|
|
|
|
|
(98,972
|
)
|
|
|
(98,972
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,361
|
|
|
|
49,943
|
|
|
|
53,187
|
|
Goodwill from acquisitions
|
|
|
118,274
|
|
|
|
|
|
|
|
46,174
|
|
Noncontrolling interests in goodwill of MedQuist
|
|
|
12,366
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
|
|
|
|
|
3,100
|
|
|
|
|
|
Goodwill impairment charge
|
|
|
(98,972
|
)
|
|
|
|
|
|
|
|
|
Foreign currency adjustments and other
|
|
|
(86
|
)
|
|
|
144
|
|
|
|
15
|
|
Balance at period end
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
148,915
|
|
|
|
152,159
|
|
|
|
251,535
|
|
Accumulated impairment losses
|
|
|
(98,972
|
)
|
|
|
(98,972
|
)
|
|
|
(98,972
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill at period end
|
|
$
|
49,943
|
|
|
$
|
53,187
|
|
|
$
|
99,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the fourth quarter of 2008 which included the Companys
annual impairment testing, the Company determined the fair value
using a combination of market capitalization based on market
price per share for approximately the 60 days before
December 31, 2008 and a discounted cash flow analysis.
Determining fair value requires the exercise of significant
judgment, including judgment about appropriate discount rates,
perpetual growth rates, the amount and timing of expected future
cash flows, as well as relevant comparable company earnings
multiples for the market-based approach. The cash flows employed
in the discounted cash flow analyses are based on the
Companys internal business model for 2009 and, for years
beyond 2009, the growth rates the Company used were an estimate
of the future growth in the industry in which the Company
participates. The discount rates used in the discounted cash
flow analyses are intended to reflect the risks inherent in the
future cash flows of the reporting unit and are based on an
estimated cost of capital, which the Company determined based on
estimated cost of capital relative to its capital structure. In
addition, the market-based approach utilizes comparable company
public trading values, research analyst estimates and, where
available, values observed in private market transactions. In
2008, the analysis indicated that the reporting units fair
value was below the book value for the MedQuist and PFS
reporting units, and accordingly an impairment charge was
recorded to reduce the carrying value of goodwill to its fair
value. The test of impairment of goodwill is a two-step process:
|
|
|
|
|
First, the Company compares the carrying amount of the reporting
units, which is the book value to the fair value of its
reporting unit. If the carrying amount of its reporting unit
exceeds its fair value, the Company has to perform the second
step of the process. If not, no further testing is needed. In
the fourth quarter of 2008, the Company determined that the
carrying amount of two of its reporting units: MedQuist and PFS
exceeded the fair value and accordingly performed the second
step in the analysis.
|
F-21
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
|
|
|
|
|
If the second part of the analysis is required, the Company
allocates the fair value of its reporting unit to all assets and
liabilities as if the reporting unit had been acquired in a
business combination at the date of the impairment test. The
Company then compares the implied fair value of its reporting
units goodwill to its carrying amount. If the carrying
amount of the Companys goodwill exceeds its implied fair
value, the Company recognizes an impairment loss in an amount
equal to that excess.
|
In the second step, the Company allocated the fair value of the
respective reporting unit to all assets and liabilities as if
the respective reporting unit had been acquired in a business
combination at the date of the impairment test. The Company then
compared the implied fair value of goodwill of the respective
reporting unit to its respective carrying amount. As the
respective carrying amount of goodwill exceeded its respective
implied fair value, a pre-tax impairment charge for the MedQuist
and PFS reporting units of $89,633 and $9,339, respectively, was
recorded for the year ended December 31, 2008.
The Company carried out its goodwill impairment test during the
fourth quarter of 2009 and determined that the fair value of its
reporting units exceeded its carrying value. In 2009 the fair
value of the MedQuist reporting unit substantially exceeded its
carrying value and the fair value of the PFS reporting unit
exceeded its carrying value by 7%, and accordingly, no second
step of the goodwill impairment test was performed and no
impairment charge was recorded.
In estimating the fair value of the CBay Transcription reporting
unit, the market approach and the income approach were used. The
fair value of the reporting unit substantially exceeded its
carrying value, and accordingly, no second step of the goodwill
impairment test was performed and no impairment charge was
recorded in 2008 and 2009.
Other
Intangible Assets
The Company reviews its long-lived assets, including amortizable
intangibles, for impairment when events indicate that their
carrying amount may not be recoverable. When the Company
determines that one or more impairment indicators are present
for an asset, it compares the carrying amount of the asset to
net future undiscounted cash flows that the asset is expected to
generate. If the carrying amount of the asset is greater than
the net future undiscounted cash flows that the asset is
expected to generate, it compares the fair value to the book
value of the asset. If the fair value is less than the book
value, the Company recognizes an impairment loss. The impairment
loss is the excess of the carrying amount of the asset over its
fair value.
Some of the events that the Company considers as impairment
indicators for our long-lived assets, including goodwill, are:
|
|
|
|
|
net book value compared to its fair value;
|
|
|
|
significant adverse economic and industry trends;
|
|
|
|
significant decrease in the market value of the asset;
|
|
|
|
the extent that the Company uses an asset or changes in the
manner that it uses it;
|
|
|
|
significant changes to the asset since acquired; and
|
|
|
|
other changes in circumstances that potentially indicate all or
a portion of the company will be sold.
|
During 2008 and 2009, the Company reviewed the carrying value of
its long-lived assets other than goodwill and determined that
the carrying amounts of such assets was less than the
undiscounted cash flows and accordingly no impairment charge was
recorded.
F-22
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
As of December 31, 2008, 2009 and June 30, 2010 other
intangible asset balances were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Value
|
|
|
Customer relationships
|
|
$
|
55,891
|
|
|
$
|
4,552
|
|
|
$
|
51,339
|
|
Technological knowhow
|
|
|
5,575
|
|
|
|
662
|
|
|
|
4,913
|
|
Software licenses
|
|
|
1,676
|
|
|
|
1,051
|
|
|
|
625
|
|
Trade names
|
|
|
21,892
|
|
|
|
1,358
|
|
|
|
20,534
|
|
Marketing related intangibles
|
|
|
561
|
|
|
|
265
|
|
|
|
296
|
|
Internally developed software
|
|
|
2,056
|
|
|
|
1,115
|
|
|
|
941
|
|
Covenants not to compete
|
|
|
2,363
|
|
|
|
318
|
|
|
|
2,045
|
|
Other
|
|
|
3,818
|
|
|
|
337
|
|
|
|
3,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
93,832
|
|
|
$
|
9,658
|
|
|
$
|
84,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Value
|
|
|
Customer relationships
|
|
$
|
55,891
|
|
|
$
|
12,064
|
|
|
$
|
43,827
|
|
Technological knowhow
|
|
|
5,575
|
|
|
|
1,874
|
|
|
|
3,701
|
|
Software licenses
|
|
|
2,953
|
|
|
|
2,457
|
|
|
|
496
|
|
Trade names
|
|
|
21,893
|
|
|
|
4,725
|
|
|
|
17,168
|
|
Marketing related intangibles
|
|
|
561
|
|
|
|
452
|
|
|
|
109
|
|
Internally developed software
|
|
|
4,024
|
|
|
|
420
|
|
|
|
3,604
|
|
Covenants not to compete
|
|
|
2,363
|
|
|
|
1,105
|
|
|
|
1,258
|
|
Other
|
|
|
4,907
|
|
|
|
2,232
|
|
|
|
2,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
98,167
|
|
|
$
|
25,329
|
|
|
$
|
72,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Value
|
|
|
Customer relationships
|
|
$
|
90,596
|
|
|
$
|
13,080
|
|
|
$
|
77,516
|
|
Technological knowhow
|
|
|
18,013
|
|
|
|
2,566
|
|
|
|
15,447
|
|
Software licenses
|
|
|
3,711
|
|
|
|
3,147
|
|
|
|
564
|
|
Trade names
|
|
|
23,532
|
|
|
|
6,490
|
|
|
|
17,042
|
|
Marketing related intangibles
|
|
|
561
|
|
|
|
545
|
|
|
|
16
|
|
Internally developed software
|
|
|
4,766
|
|
|
|
572
|
|
|
|
4,194
|
|
Covenants not to compete
|
|
|
2,363
|
|
|
|
1,499
|
|
|
|
864
|
|
Other
|
|
|
4,909
|
|
|
|
2,510
|
|
|
|
2,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
148,451
|
|
|
$
|
30,409
|
|
|
$
|
118,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-23
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
The estimated useful life and the weighted average remaining
lives of the intangible assets as of December 31, 2009 were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
Weighted Average
|
|
|
|
Useful Life
|
|
|
Remaining Lives
|
|
|
Customer relationships
|
|
|
7-10 years
|
|
|
|
7 years
|
|
Technological knowhow
|
|
|
3-5 years
|
|
|
|
3 years
|
|
Software licenses
|
|
|
2-3 years
|
|
|
|
3 years
|
|
Trade names
|
|
|
6-7 years
|
|
|
|
5 years
|
|
Marketing related intangibles
|
|
|
3 years
|
|
|
|
3 years
|
|
Internally developed software
|
|
|
3 years
|
|
|
|
3 years
|
|
Others
|
|
|
3 years
|
|
|
|
3 years
|
|
Estimated annual amortization expense for intangible assets is
as follows:
|
|
|
|
|
|
2010 (represents amortization for period July 1, 2010 -
December 31, 2010)
|
|
$
|
16,604
|
|
2011
|
|
|
32,639
|
|
2012
|
|
|
31,838
|
|
2013
|
|
|
19,836
|
|
2014
|
|
|
8,688
|
|
Thereafter
|
|
|
8,437
|
|
|
|
|
|
|
Total
|
|
$
|
118,042
|
|
|
|
|
|
|
The Company recorded amortization expense of $1,437, $8,150 and
$14,963 for the years ended December 31, 2007, 2008 and
2009, respectively.
|
|
9.
|
Contractual
Obligations
|
Leases
The Company has acquired certain computers, office equipment and
other assets under capital leases. The gross amount recorded in
property and equipment for such capital leases and the related
accumulated amortization amounted to $1,062 and $623 as of
December 31, 2008 and $4,585 and $1,611 as of
December 31, 2009, respectively. Amortization expense is
$234, $400 and $988 for the years ended December 31, 2007,
2008 and 2009, respectively. See Note 13 for classification
of capital lease obligations.
Minimum rental payments under operating leases are recognized on
a straight-line basis over the term of the lease, including any
periods of free rent and landlord incentives. Rental expense for
operating leases for the years ended December 31, 2007,
2008 and 2009 was $1,318, $3,622 and $5,320, respectively.
Future minimum lease
F-24
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
payments under non-cancelable leases (with initial or remaining
lease terms in excess of one year) are as follows as of
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Operating
|
|
|
|
Leases
|
|
|
Leases
|
|
|
2010
|
|
$
|
1,130
|
|
|
$
|
5,561
|
|
2011
|
|
|
1,655
|
|
|
|
4,747
|
|
2012
|
|
|
463
|
|
|
|
4,435
|
|
2013
|
|
|
358
|
|
|
|
3,970
|
|
2014 and thereafter
|
|
|
273
|
|
|
|
2,057
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
3,879
|
|
|
$
|
20,770
|
|
|
|
|
|
|
|
|
|
|
Less: amount representing interest
|
|
|
(745
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of net minimum lease payments
|
|
|
3,134
|
|
|
|
|
|
Less: Current portion of obligations under capital leases
|
|
|
(817
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations, under capital leases, excluding current portion
|
|
$
|
2,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
CommitmentsRelated Party
Pursuant to an agreement entered into on August 19, 2008
the Company is obligated to pay S.A.C. PEI CB Investment II, LLC
and Lehman Brothers Commercial Corporation Asia, an annual
amount of $1,863 and $887, respectively, which the Company can
elect to pay in cash or shares. Under the agreement, the Company
is committed to pay for the remaining unexpired term on
termination of the agreement or upon a change in control, the
sum of the present value (using the discount rate equal to the
yield on U.S. Treasury securities of like maturity) of the
annual amounts that would have been payable with respect to the
period from the date of such change of control or termination,
as applicable through August 18, 2013. Such amounts are
being recorded as a capital transaction. For the years ended
December 31, 2008 and 2009 $1,113 and $2,750, respectively,
have been recorded in the consolidated statements of equity and
comprehensive income. During 2009, 2,566 shares of the
Companys common stock were issued to satisfy a portion of
the annual amounts. As of December 31, 2008 and 2009 and
June 30, 2010, $1,113, $2,185 and $2,162, respectively, of
these amounts is accrued and recorded in due to related parties
in the consolidated balance sheets.
Other
Contractual Obligations
The following summarizes our other contractual obligations as of
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and Other
|
|
|
|
|
|
|
|
|
|
Guaranteed
|
|
|
|
Total
|
|
|
Purchase
|
|
|
Payments
|
|
|
2010
|
|
$
|
12,759
|
|
|
$
|
8,666
|
|
|
$
|
4,093
|
|
2011
|
|
|
2,203
|
|
|
|
2,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,962
|
|
|
$
|
10,869
|
|
|
$
|
4,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase obligations represent telecommunication contracts
($9,619), software development ($1,000) and other recurring
purchase obligations ($250).
F-25
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
As of December 31, 2009, the Company has agreements with
certain of its senior management and board of directors that
provided for severance payments in the event these individuals
were terminated without cause. The maximum exposure related to
these agreements was $4,093 as of December 31, 2009.
Acquisition of
MedQuist Inc.
On August 6, 2008, CBay Inc acquired approximately
69.5 percent of the outstanding common shares of MedQuist
from Philips (the MedQuist Acquisition). The results
of MedQuist operations have been included in the consolidated
financial statements from that date. MedQuist is engaged in the
business of medical transcription technology and services, which
are integral to the clinical documentation workflow. It services
health systems, hospitals and large medical practices throughout
the U.S; in the clinical documentation workflow, it provides, in
addition to medical transcription technology and services,
digital dictation, speech recognition, electronic signature and
medical coding technology and services. MedQuist is listed on
The NASDAQ Global Market.
The acquisition is considered to be beneficial to the Company
based upon the size and projected growth of the U.S. Medical
Transcription industry, the leading market position of MedQuist
and the complementary and potentially synergistic nature of
MedQuist and Companys businesses in terms of products and
services, operations and technology.
The acquisition of a majority share in MedQuist will provide the
Company with the scope, scale and resources to invest in new
technology, to expand its suite of products and services and to
pursue revenue and market share growth.
The total purchase price was as follows:
|
|
|
|
|
|
Cash
|
|
$
|
98,079
|
|
Issue of 6% Convertible note
|
|
|
90,935
|
|
Issue of Promissory Note (Bridge note)
|
|
|
26,244
|
|
Acquisition expenses
|
|
|
24,446
|
|
|
|
|
|
|
Total
|
|
$
|
239,704
|
|
|
|
|
|
|
The Company accounted for the acquisition as a purchase in
accordance with FASB guidance on Business Combinations. In
accordance with the guidance, the purchase price was allocated
to the assets acquired and liabilities assumed based on their
fair values as at the date of acquisition. The Company prepared
the purchase price allocations and in doing so considered the
report of an independent valuation firm. The fair value of
experienced management and delivery team (assembled workforce),
which was one of the key drivers for this acquisition, was not
separately recognized and has been included in the value of
goodwill.
F-26
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed at the date of
acquisition:
|
|
|
|
|
|
|
|
|
Date of
|
|
|
|
Acquisition
|
|
|
|
August 6, 2008
|
|
|
Tangible assets
|
|
$
|
12,757
|
|
Intangible assets
|
|
|
71,599
|
|
Current assets
|
|
|
74,720
|
|
Other assets
|
|
|
6,756
|
|
Current liabilities
|
|
|
(44,337
|
)
|
Other liabilities
|
|
|
(65
|
)
|
|
|
|
|
|
Net assets
|
|
|
121,430
|
|
Consideration paid
|
|
|
239,704
|
|
|
|
|
|
|
Goodwill
|
|
$
|
118,274
|
|
|
|
|
|
|
Goodwill recognized from the transaction is a result of the
growth opportunity the investors anticipate in the
Companys core business, medical transcription.
No part of the goodwill is expected to be deductible for tax
purposes.
Intangible assets recognized on acquisition of MedQuist on the
date of acquisition are set out in the table below:
|
|
|
|
|
|
|
|
|
Date of
|
|
|
|
Acquisition
|
|
|
|
August 6, 2008
|
|
|
Customer Relationships
|
|
$
|
40,380
|
|
Trade Names
|
|
|
21,892
|
|
Developed Technology
|
|
|
5,101
|
|
Others
|
|
|
4,226
|
|
|
|
|
|
|
Total
|
|
$
|
71,599
|
|
|
|
|
|
|
AMS Plus Inc.
(AMS Plus)
On August 13, 2007, the Company acquired 100% of the equity
shares of AMS Plus, through its U.S. subsidiary Mirrus for total
consideration of $12,500 comprising an upfront payment of $9,400
and a performance-related earn-out payment of $3,100 after two
years.
AMS Plus manages billing and collections for physician practices
and hospitals.
The Company accounted for the acquisition as a purchase in
accordance with FASB guidance on Business Combinations.
Accordingly, the results of operations have been included in the
accompanying consolidated financial statements from the date of
acquisition. In accordance with this guidance the purchase price
was allocated to the assets acquired and liabilities assumed
based on their fair values as at the date of acquisition based
on fair values determined by an independent appraiser.
In May 2009, the performance-related earn-out amount of $3,100
became payable and has been accounted for as additional purchase
price with a corresponding increase in goodwill.
F-27
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
Acquisition of
Spheris
On April 22, 2010, the Company through its subsidiaries
MedQuist and CBay Inc (the Purchasers), completed
the acquisition of substantially all of the assets of Spheris,
Inc. (Spheris) and certain of its affiliates
including Spheris India Private Limited (SIPL)
(collectively with Spheris and SIPL, the Sellers), pursuant to
the terms of the Stock and Asset Purchase Agreement (the
Purchase Agreement) entered into between the
Purchasers and Sellers on April 15, 2010 for
$112.4 million. Spheris provides medical transcription
services in the United States. Costs incurred for the
Acquisition and direct integration costs are included in the
line item Acquisition related charges on the accompanying
statements of operations. The Acquisition was funded from the
proceeds of new credit facilities. See Note 13 for a
description of the Acquisition financing.
The acquired business contributed net revenues of
$26.4 million and a net loss of $4.5 million,
inclusive of $6.0 million of Acquisition charges and
$1.2 million of amortization of acquired intangibles, to
the Company for the period from April 22, 2010 to
June 30, 2010. The following unaudited pro forma summary
presents the consolidated information of the Company as if the
business combination had occurred at the beginning of each
period.
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Six Months
|
|
|
|
Ended June 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
Net revenues
|
|
$
|
270,381
|
|
|
$
|
243,963
|
|
Net income (loss) attributable to CBaySystems Holdings Limited
|
|
|
(646
|
)
|
|
|
4,648
|
|
Net income (loss) per share attributable to CBaySystems Holdings
Limited (Basic)
|
|
|
(0.01
|
)
|
|
|
0.02
|
|
Net income (loss) per share attributable to CBaySystems Holdings
Limited (Diluted)
|
|
$
|
(0.01
|
)
|
|
$
|
0.02
|
|
These amounts have been calculated after applying the
Companys accounting policies and adjusting the results of
Spheris and SIPL to reflect the additional amortization of
intangibles that would have been charged assuming the fair value
adjustments to tangible and intangible assets had been applied
from the beginning of the period being reported on, and the
additional interest expense assuming the acquisition related
debt had been incurred at the beginning of the period being
reported on, excluding the acquisition costs and bankruptcy
costs incurred by Spheris prior to the acquisition and including
the related tax effects.
In the fourth quarter of 2009 and the first six months of 2010,
the Company incurred $1,200 and $6,000, respectively, of
acquisition related charges. These expenses are recorded in the
line item Acquisition related charges on the Companys
consolidated statements of operations.
The net income (loss) for the purpose of the basic loss per
share is adjusted for the amounts payable to the Companys
principal shareholders.
F-28
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
The following table summarizes the consideration transferred by
the Company to acquire the assets of Spheris and stock of SIPL,
and the amounts of identified assets acquired and liabilities
assumed at the acquisition date.
|
|
|
|
|
|
|
Cash consideration paid
|
|
$
|
98,834
|
|
Fair value of unsecured Subordinated Promissory Note
|
|
|
13,570
|
|
|
|
|
|
|
Total consideration transferred
|
|
$
|
112,404
|
|
|
|
|
|
|
Recognized amounts of identifiable assets acquired and
liabilities assumed:
|
|
|
|
|
Fair value of Spheris net assets acquired
|
|
|
|
|
Cash
|
|
$
|
797
|
|
Trade receivables
|
|
|
22,407
|
|
Other current assets
|
|
|
4,142
|
|
Property, plant and equipment
|
|
|
9,133
|
|
Deposits
|
|
|
1,036
|
|
Developed technology (included in intangibles)
|
|
|
11,390
|
|
Customer relationships (included in intangibles)
|
|
|
37,210
|
|
Trademarks and trade name (included in intangibles)
|
|
|
1,640
|
|
Goodwill
|
|
|
45,344
|
|
Trade and other payables
|
|
|
(20,695
|
)
|
|
|
|
|
|
Identifiable assets acquired and liabilities assumed
|
|
$
|
112,404
|
|
|
|
|
|
|
The total amount assigned to identified intangible assets and
the related amortization period is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
Fair Value
|
|
|
Period
|
|
|
Developed technology
|
|
$
|
11,390
|
|
|
|
9 years
|
|
Customer relationships
|
|
|
37,210
|
|
|
|
7-9 years
|
|
Trademarks and tradenames
|
|
|
1,640
|
|
|
|
4 years
|
|
Goodwill
|
|
$
|
45,344
|
|
|
|
Indefinite
|
|
The amounts and lives of the identified intangibles other than
goodwill were valued at fair value. The Company prepared the
purchase price allocations and in doing so considered the report
of an independent valuation firm. The analysis included a
combination of the cost approach, and an income approach. The
valuation used discount rates from 15% to 17%.
The goodwill is attributable to the workforce of the acquired
business and the significant synergies expected to arise after
the Companys acquisition of Spheris. The goodwill and
intangible assets are deductible for tax purposes.
As outlined in the Purchase Agreement, the resolution of defined
uncertain tax positions for tax years ended 2004 and
2005 may result in an obligation to the Sellers. Based upon
the Companys current estimates, it has recognized a
liability to the Sellers in an amount of $900.
Under ASC Topic 820, Fair Value Measurements and Disclosures,
fair value is defined as the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the
measurement date. ASC 820 specifies a hierarchy of
valuation techniques based on the nature of the inputs used to
develop the fair value measures. This is an exit price concept
for the valuation of the asset or liability. In addition, market
participants are assumed to be unrelated buyers and sellers in
the principal or the most advantageous
F-29
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
market for the asset or liability. Fair value measurements for
an asset assume the highest and best use by these market
participants. Many of these fair value measurements can be
highly subjective and it is also possible that other
professionals, applying reasonable judgment to the same facts
and circumstances, could develop and support a range of
alternative estimated amounts.
Total acquisition related transaction costs incurred by the
Company are expensed in the periods in which the costs are
incurred. Under ASC Topic 805, acquisition-related transaction
costs (such as advisory, legal, valuation and other professional
fees) are not included as components of consideration
transferred but are accounted for as expenses in the periods in
which the costs are incurred. External costs incurred to acquire
the business, incremental direct integration costs, primarily
travel, have been included in the line item Acquisition
related charges on the statement of operations.
|
|
11.
|
Investments in
Affiliated Companies
|
A-Life Medical
Inc. (A-Life)
As of December 31, 2008 and December 31, 2009, the
Company had an investment of $7,381 and $9,996, respectively, in
A-Life, a privately held entity which provides advanced natural
language processing technology for the medical industry,
representing 32% of the outstanding ownership. For the year
ended December 31, 2009, the investment increased by $2,015
related to the Companys share of A-Lifes net income,
primarily related to a gain resulting from an acquisition,
additional cash investments in A-Life of $852 offset by $252 for
a dilution which was recorded in equity in the consolidated
balance sheet.
The table below represents the carrying value of the investment
and the share in net assets in A-Life and other equity
investments as of December 31, 2009, which is recorded in
Other assets in the accompanying consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A-Life
|
|
|
Others
|
|
|
Total
|
|
|
Beginning balance
|
|
$
|
7,263
|
|
|
$
|
432
|
|
|
$
|
7,695
|
|
Share in income
|
|
|
118
|
|
|
|
(37
|
)
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
7,381
|
|
|
|
395
|
|
|
|
7,776
|
|
Additional cash investments
|
|
|
852
|
|
|
|
|
|
|
|
852
|
|
Share in income
|
|
|
2,015
|
|
|
|
(82
|
)
|
|
|
1,933
|
|
Dilution
|
|
|
(252
|
)
|
|
|
|
|
|
|
(252
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
$
|
9,996
|
|
|
$
|
313
|
|
|
$
|
10,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Note 21 for subsequent events.
F-30
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
|
|
12.
|
Accrued Expenses
and Other Current Liabilities
|
Accrued expenses and other current liabilities consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
As of June 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Customer accommodations
|
|
$
|
12,055
|
|
|
$
|
11,635
|
|
|
$
|
11,477
|
|
Other accrued expenses
|
|
|
19,647
|
|
|
|
18,168
|
|
|
|
28,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses
|
|
$
|
31,702
|
|
|
$
|
29,803
|
|
|
$
|
40,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In November 2003, one of the employees of MedQuist raised
allegations that it had engaged in improper billing practices.
In response, the board of directors of MedQuist undertook an
independent review of these allegations (Review). In response to
MedQuists customers concern over its public disclosure of
the certain findings from the Review, it took action in the
fourth quarter of 2005 to avoid unnecessary litigation, which
preserved and solidified its customer business relationships by
offering a financial accommodation to certain of its customers.
In connection with MedQuists decision to offer financial
accommodations to certain of its customers (Accommodation
Customers), MedQuist analyzed its historical billing information
and the available report level data (Management Billing
Assessment) to develop individualized accommodation offers to be
made to accommodate customers (Accommodation Analysis). Based on
the Accommodation Analysis, MedQuist board of directors
authorized management to make cash or credit accommodation
offers to Accommodation Customers in the aggregate amount of
$75,818. By accepting MedQuists accommodation offer, the
customer agreed, among other things, to release MedQuist from
any and all claims and liability regarding the billing related
issues. MedQuist is unable to predict how many customers, if
any, may accept the outstanding accommodation offers on the
terms proposed by it, nor it is able to predict the timing of
the acceptance (or rejection) of any outstanding accommodation
offers. Until any offers are accepted, it may withdraw or modify
the terms of the accommodation program or any outstanding offers
at any time. In addition, MedQuist is unable to predict how many
future offers, if made, will be accepted on the terms proposed
by it. MedQuist regularly evaluates whether to proceed with,
modify or withdraw the accommodation program or any outstanding
offers.
The following is a summary of the financial statement activity
related to the customer accommodation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Beginning balance
|
|
$
|
12,206
|
|
|
$
|
12,055
|
|
|
$
|
11,635
|
|
Payments and other adjustments
|
|
|
(151
|
)
|
|
|
(317
|
)
|
|
|
(158
|
)
|
Credits
|
|
|
|
|
|
|
(103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
12,055
|
|
|
$
|
11,635
|
|
|
$
|
11,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For each period presented, $1,100 of the balance is related to
the Kaiser litigation as discussed in Note 14.
F-31
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
Current portion of debt consisted of the following as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Short term credit facilities
|
|
$
|
4,396
|
|
|
$
|
4,769
|
|
|
$
|
6,594
|
|
Current portion of long term borrowings
|
|
|
2,465
|
|
|
|
621
|
|
|
|
31,649
|
|
Bridge note
|
|
|
26,348
|
|
|
|
|
|
|
|
|
|
Current portion of capital lease obligations
|
|
|
288
|
|
|
|
817
|
|
|
|
3,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of debt
|
|
$
|
33,497
|
|
|
$
|
6,207
|
|
|
$
|
41,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt consisted of the following as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Capital lease obligations
|
|
$
|
657
|
|
|
$
|
3,134
|
|
|
$
|
4,841
|
|
Bridge note
|
|
|
26,348
|
|
|
|
|
|
|
|
|
|
Term loans from banks
|
|
|
3,672
|
|
|
|
3,018
|
|
|
|
2,668
|
|
6% Convertible note
|
|
|
90,935
|
|
|
|
96,419
|
|
|
|
96,419
|
|
Term loan due from 2010 to 2012, with interest at Prime plus
3.25%
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
Revolving loan with interest at Prime plus 3% with a scheduled
termination date of April 22, 2014
|
|
|
|
|
|
|
|
|
|
|
40,000
|
|
Subordinated promissory note, due in 2015 with varying interest
rates
|
|
|
|
|
|
|
|
|
|
|
13,570
|
|
Short-term credit facilities
|
|
|
4,396
|
|
|
|
4,769
|
|
|
|
6,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
126,008
|
|
|
|
107,340
|
|
|
|
214,092
|
|
Less: current portion
|
|
|
33,497
|
|
|
|
6,207
|
|
|
|
41,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
$
|
92,511
|
|
|
$
|
101,133
|
|
|
$
|
172,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
Facilities
Line of
CreditK Bank
The Company has a revolving line of credit (LOC)
from K Bank. Subject to certain terms and conditions of the
agreement with K Bank, the agreement provides a revolving line
of credit of a maximum of $5,725. The amount available for
borrowing is based on eligible accounts receivable. The rate of
interest on this note is Prime + 1% with a floor of 6%. The note
is payable on demand and is renewed annually. Under the
agreement, certain subsidiaries of the Company assigned all
their accounts receivable to K Bank with full recourse. The
agreement contains certain covenants, which require the
borrowers to notify the Bank of the important developments,
including raising additional equity, borrowings, acquisition
etc. The agreement does not contain any financial covenants. For
the years ended December 31, 2007, 2008 and 2009 and for
the six months ended June 30, 2009 and 2010 interest
expense of $438, $273, $266, $142 and $162 respectively, was
recorded in the consolidated statements of operations. The
amount outstanding as of December 31, 2008, 2009 and
June 30, 2010 was $2,688, $3,343, and $3,393 respectively.
The remaining available amount under the line of credit was
$3,062, $2,407, and $2,357 as of December 31, 2008, 2009,
and as of June 30, 2010, respectively.
F-32
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
Credit
AgreementICICI Bank
The Company has a Credit Arrangement with ICICI Bank, Mumbai,
India of $2,772, at interest rates ranging from LIBOR + 2.5% and
15.5%, respectively, which is secured by CBay Indias
current assets and fixed assets. The amount outstanding as of
December 31, 2008, 2009, and June 30, 2010 was $1,712,
$1,426, and $194, respectively. For the years ended
December 31, 2007, 2008 and 2009 and for the six months
ended June 30, 2009 and 2010 interest expense of $36, $98,
$205, $77 and $74, respectively, was recorded in interest
expense in the consolidated statements of operations.
Credit
AgreementIndusInd Bank
The Company has a Credit Arrangement with IndusInd Bank, Mumbai,
India of $3,227, at interest rates ranging from LIBOR + 3%,
respectively, which is secured by current assets and fixed
assets of CBay Systems (India) Private Limited (CBay
India) a 100% subsidiary of the Company. The amount
outstanding as of December 31, 2009 and June 30, 2010
was $0 and $3,003, respectively. For the six months ended
June 30, 2009 and 2010 interest expense of $0 and $18,
respectively, was recorded in interest expense in the
consolidated statements of operations.
Line of
CreditWells Fargo
In August 2009, MedQuist entered into a five-year
$25 million revolving credit agreement (the Credit
Agreement) with Wells Fargo Foothill, LLC. Subject to certain
terms and conditions, the Credit Agreement provides committed
revolving funding through August 2014 and includes an option
whereby MedQuist can increase its maximum credit to
$40 million. The amount available for borrowings is based
upon a percentage of eligible accounts receivable. Under the
agreement, there are reserves established which limit the
amounts that can be available. At December 31, 2009,
$21.0 million was available under the Credit Agreement. The
Credit Agreement is a working capital facility that may be used
for general corporate purposes. The Credit Agreement enables
MedQuist to borrow funds in U.S. dollars, at variable
interest rates. The Credit Agreement provides the lender a
security interest in and against significantly all of our
assets. Under the Credit Agreement, MedQuist agreed to certain
covenants customarily found in such agreements including, but
not limited to, financial covenants requiring us to maintain
certain minimum levels of EBITDA and a minimum fixed charge
coverage ratio. At December 31, 2009, MedQuist was in
compliance with the financial covenants of the agreement. At
December 31, 2009 there were no borrowings outstanding
under the Credit Agreement.
Bridge
Note
The Bridge Note carried an interest rate of 1.67% per annum from
August 6, 2008 to November 4, 2008. This note was
renewed at an interest rate of 6% per annum until
February 4, 2009 and at a rate of 10% per annum thereafter.
The note was due on May 4, 2009, but was further extended
to September 30, 2009 on the same terms. During September
2009, the Company repaid the Bridge Note along with accrued
interest amounting to $28,352. The Company has no future
obligations under the Bridge Note.
6% Convertible
Note
The Company issued a 6% Convertible Notes in connection
with the acquisition of MedQuist which is due August 5,
2015. Any portion of the note can be converted at the option of
Philips (the holder) into common stock of the
Company, anytime after November 4, 2008. The conversion
rate for this purpose shall be $1 of the principal amount equals
0.6048 shares of common stock of the Company. If this
option is exercised by the holder, 58,314 shares of common
stock will become issuable. The Company has the option to redeem
this note or any
F-33
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
portion thereof after August 6, 2011 at a premium of 8%,
after August 6, 2012 at a premium of 3%, and, after
August 6, 2013, at par.
Further, after August 6, 2012, the holders representing at
least 50% of the aggregate principal amount of the notes
outstanding have a collective one time right to require the
Company to repurchase for cash a portion of the notes which has
not been previously purchased or redeemed by the Company. Also,
if a change of control event occurs at any time prior to the
maturity and if the note has not been purchased or redeemed by
the Company, it shall be repurchased by the Company, at the
option of the holder. The Company will evaluate the
classification of the note at each reporting date considering
the early redemption option available to the Company or the one
time repurchase right available to the holder.
In March and August 2009, the Company exercised its interest on
this convertible note from August 6, 2008 to August 5,
2009 into additional convertible notes aggregating to $5,484
with the same terms and conditions as the original note.
For the years ended December 31, 2008 and 2009 and for the
six months ended June 30, 2010, interest expense accrued on
the note was $2,212, $5,447 and $2,893, respectively.
Term and
equipment loans
The Company has term loans payable to four banks which carry
interest rates ranging from 6.5% to 16% per annum and are
repayable monthly through August 2013. One loan contains certain
non-financial covenants and limits borrowings for one of the
Companys subsidiaries and the Company is in compliance
with these covenants. The Company has a working capital term
loan which is a Rupee denominated loan from EXIM Bank. This loan
is repayable in full in June 2011 and carries an interest rate
of 12%. This loan is secured by certain assets of one of the
Companys subsidiaries.
The Company has various equipment and vehicle loans that carry
interest rates ranging from 10% to 15% per annum and are
repayable monthly through 2013. These loans are secured by the
related equipment and vehicles.
Acquisition
debt
In connection with the Acquisition, MedQuist Transcriptions,
Ltd. a subsidiary of MedQuist, (MedQuist
Transcriptions), and certain other subsidiaries of
MedQuist (collectively, the Loan Parties) entered
into a Credit Agreement (the GE Credit Agreement)
with General Electric Capital Corporation, CapitalSource Bank,
and Fifth Third Bank. The GE Credit Agreement provides for up to
$100.0 million in senior secured credit facilities,
consisting of a $50.0 million term loan, and a revolving
credit facility of up to $50.0 million. The credit
facilities are secured by a first priority lien on substantially
all of the property of the Loan Parties. The term loan is
repayable in equal quarterly installments of $5.0 million
beginning October 1, 2010, with the balance payable
2.5 years from the date of closing. The Term Loan maturity
date is the earlier of October 22, 2012 or the date on
which the Companys 6% Convertible note is repaid or
otherwise becomes due and payable. Borrowings under the
revolving credit facility may be made from time to time, subject
to availability under such facility, until the fourth
anniversary of the closing date. Amounts borrowed under the GE
Credit Agreement bear interest at a rate selected by MedQuist
Transcriptions equal to the Base Rate or the Eurodollar Rate
(each as defined in the GE Credit Agreement) plus a margin, all
as more fully set forth in the GE Credit Agreement. At
June 30, 2010, the revolving credit facility and the term
loan had interest rates of 6.25% and 6.75%, respectively.
The GE Credit Agreement contains customary covenants, including
covenants relating to reporting and notification, payment of
indebtedness, taxes and other obligations, and compliance with
applicable laws. There are also financial covenants, which
include a Minimum Consolidated Fixed Charge Coverage Ratio, and
a Maximum Consolidated Senior Leverage Ratio and a Maximum
Consolidated Total Leverage Ratio and a Minimum Liquidity, each
as defined In the GE Credit Agreement. The GE Credit Agreement
also imposes certain customary
F-34
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
limitations and requirements with respect to the incurrence of
indebtedness and liens, investments, mergers, acquisitions and
dispositions of assets. Amounts due under the GE Credit
Agreement may be accelerated upon an Event of Default (as
defined in the GE Credit Agreement), including failure to comply
with obligations under the credit agreement, bankruptcy or
insolvency, and termination of certain material agreements. The
Company will continue to evaluate the classification of the term
loan at each reporting date.
The Company incurred $6.1 million in costs with the GE
Credit Agreement which are included in Other current assets and
Other assets. These costs associated with debt incurred in
connection with the Acquisition will be amortized as additional
interest expense over the life of the underlying debt
instruments.
Borrowings under the revolving credit facility are limited to
the lesser of 85% of Eligible Receivables or the aggregate
Revolving Credit Commitments, as defined in the credit facility.
As of June 30, 2010, the Company had available borrowings
under the facility of $8.9 million.
The GE Credit Agreement also contains subjective acceleration
clauses and a springing lock box arrangement under which
MedQuist retains control and dominion over cash receipts unless
there is an Event of Default or Excess Availability is less than
20% of the aggregate Revolving Credit Commitments, as defined in
the GE Credit Agreement. Pursuant to these provisions, MedQuist
elected to make a payment of $5 million in July 2010 to
maintain cash dominion and prevent enactment of the springing
lock box provisions. The Company believes this payment will be
sufficient to avoid enactment of the springing lock box in
future periods. The Company also believes the probability of
default under the agreement within the next 12 months to be
remote.
The GE Credit Agreement also contains excess cash flow
repayments provisions that require 25% of Excess Cash Flows, as
defined in the agreement, to be remitted to the lenders within
95 days after year-end. The Company currently estimates
that the amount of repayments that would be due during April
2011 at approximately $10 million. Such amount is currently
classified as current. Actual payments, if any, may differ from
this estimate.
Total Current maturities under the GE Credit Agreement consists
of (a) the $5 million paid during July 2010 related to
prevention of enactment of the springing lockbox,
(b) $10 million estimated for excess cash flow sweeps
in April 2011, and (c) $15 million of contractual
maturities of the term loan obligations.
As of June 30, 2010, the Company believes that it is in
compliance with the covenants of the GE Credit Agreement.
However, there can be no assurance of future compliance.
When the Company entered into the GE Credit Agreement, the
five-year $25.0 million revolving credit agreement with
Wells Fargo Foothill, LLC (the Wells Credit
Agreement) that it entered into on August 31, 2009
was terminated. No borrowings were ever made under the Wells
Credit Agreement. In the three month period ended June 30,
2010 the Company wrote off deferred financing fees of
$1.1 million and incurred termination fees of
$0.6 million in connection with the termination of this
facility. Such costs are included in Interest Expense on the
accompanying Consolidated Statements of Operations.
In connection with the Acquisition, the Company entered into a
subordinated promissory note with Spheris, Inc. (the
Subordinated Promissory Note). The loan matures in
five years from the date of the Acquisition. The face amount of
the Subordinated Promissory Note totals $17.5 million with
provisions for prepayment at discounted amounts, ranging from
77.5% of the principal if paid within six months, 87.5% from six
to nine months, 97.5% from nine to twelve months, 102.0% by year
two, 101.0% by year three and 100.0% thereafter. For purposes of
the purchase price allocation, the note is discounted at 77.5%
of the principal ($13.6 million). This note was a non-cash
transaction. The fair value of the note was determined through
the use of a Monte Carlo model which is Level 3 in the Fair
Value hierarchy based upon significant unobservable inputs.
The Subordinated Promissory Note bears interest at 8.0% for the
first six months, 9.0% from six to nine months, and 12.5%
thereafter of which 2.5% may be paid by increasing the principal
amount. Payments of interest are
F-35
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
made semi-annually on each six month anniversary of the
Acquisition. For financial statement purposes the interest has
been calculated using the average interest rates over the term
of the Subordinated Promissory Note.
Future minimum principal payments on long term debt as of
June 30, 2010 are as follows:
|
|
|
|
|
|
Year ending December 31:
|
|
|
|
|
2010 (represent payments for period July 1,
2010December 31, 2010)
|
|
$
|
13,878
|
|
2011
|
|
|
23,304
|
|
2012
|
|
|
122,028
|
|
2013
|
|
|
1,044
|
|
2014
|
|
|
40,247
|
|
2015
|
|
|
13,591
|
|
|
|
|
|
|
Total
|
|
$
|
214,092
|
|
|
|
|
|
|
The Company recorded interest expense of $1,513, $3,416, $8,387,
$4,660 and $7,361 during the years ended December 31, 2007,
2008, 2009 and the six months ended June 30, 2009 and 2010,
respectively, on these borrowings.
See note 21 for subsequent events.
|
|
14.
|
Commitments and
Contingencies
|
Customer
Litigation
Kaiser
Litigation
On June 6, 2008, plaintiffs Kaiser Foundation Health Plan,
Inc., Kaiser Foundation Hospitals, The Permanente Medical Group,
Inc., Kaiser Foundation Health Plan of the Mid-Atlantic States,
Inc., and Kaiser Foundation Health Plan of Colorado
(collectively, Kaiser) filed suit against MedQuist Inc. and
MedQuist Transcriptions, Ltd. (collectively, MedQuist) in the
Superior Court of the State of California in and for the County
of Alameda. The action is entitled Foundation Health Plan Inc.,
et al v. MedQuist Inc. et al., Case
No. CV-078-03425
PJH. The complaint asserts five causes of action, for common law
fraud, breach of contract, violation of California Business and
Professions Code section 17200, unjust enrichment, and a
demand for an accounting.
On August 12, 2010, the parties entered into a Settlement
Agreement and General Release (Settlement Agreement)
whereby MedQuist made a lump sum payment of $2,000 to resolve
all of Kaisers claims. Neither MedQuist, nor Kaiser,
admitted to any liability or wrongdoing in connection with the
settlement. On July 15, 2010, after the parties notified
the Court that they had reached an agreement in principle to
settle the action, the Court entered an Order of Dismissal
without costs and without prejudice to the right, upon motion
and good cause shown, within 60 days, to reopen the Action.
Upon the parties entry into the Settlement Agreement on
August 12, 2010, the dismissal became final, with prejudice
and without right of appeal. Under the Settlement Agreement, the
parties further agreed that each of the parties shall be solely
responsible for their own costs and that the Court shall retain
continuing jurisdiction over implementation of the Settlement
Agreement.
Kahn Putative
Class Action
On January 22, 2008, Alan R. Kahn, one of MedQuists
shareholders, filed a shareholder putative class action lawsuit
against MedQuist, Koninklijke Philips Electronics N.V.
(Philips), its former majority shareholder, and four of its
former non-independent directors, Clement Revetti, Jr.,
Stephen H. Rusckowski, Gregory M. Sebasky and Scott Weisenhoff.
The action, entitled Alan R. Kahn v. Stephen H. Rusckowski,
et al., Docket
No. BUR-C-000007-08,
F-36
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
was venued in the Superior Court of New Jersey, Chancery
Division, Burlington County. In the action, plaintiff purports
to bring the action on his own behalf and on behalf of all
current holders of MedQuist common stock. The original complaint
alleged that defendants breached their fiduciary duties of good
faith, fair dealing, loyalty, and due care by purportedly
agreeing to and initiating a process for MedQuists sale or
a change of control transaction which will allegedly cause harm
to plaintiff and members of the putative class. Plaintiff sought
damages in an unspecified amount, plus costs and interest, a
judgment declaring that defendants breached their fiduciary
duties and that any proposed transactions regarding
MedQuists sale or change of control are void, an
injunction preventing its sale or any change of control
transaction that is not entirely fair to the class, an order
directing it to appoint three independent directors to its board
of directors, and attorneys fees and expenses.
On June 12, 2008, plaintiff filed an amended class action
complaint against MedQuist, eight of its then current and former
directors, and Philips in the Superior Court of New Jersey,
Chancery Division. In the amended complaint, plaintiff alleged
that MedQuists then current and former directors breached
their fiduciary duties of good faith, fair dealing, loyalty, and
due care by not providing its public shareholders with the
opportunity to decide whether they wanted to participate in a
share purchase offer with non-party CBaySystems Holdings Ltd.
(CBaySystems Holdings) that would have allowed the public
shareholders to sell their shares of MedQuists common
stock for an amount above market price. Plaintiff further
alleged that CBaySystems Holdings made the share purchase offer
to Philips and that Philips breached its fiduciary duties by
accepting CBaySystems Holdings offer. Based on these
allegations, plaintiff sought declaratory, injunctive, and
monetary relief from all defendants. Plaintiff claimed that
MedQuist was only named as a party to the litigation for
purposes of injunctive relief.
On July 14, 2008, MedQuist moved to dismiss
plaintiffs amended class action complaint, arguing
(1) that plaintiffs amended class action complaint
did not allege that MedQuist engaged in any wrongdoing which
supported a breach of fiduciary duty claim and (2) that a
breach of fiduciary duty claim is not legally cognizable against
a corporation. Plaintiff filed an opposition to MedQuists
motion to dismiss on July 21, 2008.
On November 21, 2008, the Court granted MedQuists
motion and the motions filed by the other defendants and
dismissed plaintiffs amended class action complaint with
prejudice. On December 31, 2008, plaintiff filed an appeal
of the trial courts dismissal order with the New Jersey
Appellate Division. Thereafter, the parties briefed all the
issues raised in plaintiffs appeal. In MedQuists
opposition brief, it opposed all the arguments plaintiff raised
with respect to the dismissal of the claims against it.
On September 24, 2009, the Appellate Division held oral
argument on plaintiffs appeal. On July 1, 2010, the
Appellate Division entered an Order and Opinion that affirmed
the dismissal of the claims against MedQuist and two of the
MedQuist director defendants, Mr. Edward Siegel and Warren
E. Pinckert II. The Appellate Division reversed the dismissal of
the claims against the remaining defendants Philips and certain
of our former directors and remanded those claims back to the
Chancery Division. As a result of the Appellate Divisions
July 1, 2010 Order and Opinion, MedQuist is no longer a
defendant in this matter.
Reseller
Arbitration Demand
On October 1, 2007, MedQuist received from counsel to nine
current and former resellers of its products (Claimants), a copy
of an arbitration demand filed by the Claimants, initiating an
arbitration proceeding styled Diskriter, Inc., Electronic Office
Systems, Inc., Milner Voice & Data, Inc., Nelson
Systems, Inc., NEO Voice and Communications, Inc., Office
Business Systems, Inc., Roach-Reid Office Systems, Inc., Stiles
Office Systems, Inc., and Travis Voice and Data, Inc. v.
MedQuist Inc. and MedQuist Transcriptions, Ltd. (collectively
MedQuist) (filed on September 27, 2007, AAA,
30-118-Y-00839-07).
The arbitration demand purports to set forth claims for breach
of contract; breach of covenant of good faith and fair dealing;
promissory estoppel; misrepresentation; and tortious
interference with contractual relations. The Claimants allege
that MedQuist breached its written agreements with the Claimants
by: (i) failing to provide reasonable training, technical
support, and other services; (ii) using the Claimants
confidential information to compete against the Claimants;
(iii) directly competing with
F-37
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
the Claimants territories; and (iv) failing to make
new products available to the Claimants. In addition, the
Claimants allege that MedQuist made false oral representations
that it: (i) would provide new product, opportunities and
support to the Claimants; (ii) were committed to continuing
to use Claimants; (iii) did not intend to create its own
sales force with respect to the Claimants territory; and
(iv) would stay out of Claimants territories and
would not attempt to take over the Claimants business and
relationships with the Claimants customers and end-users.
The Claimants assert that they are seeking damages in excess of
$24.3 million. MedQuist also moved to dismiss MedQuist Inc.
as a party to the arbitration since MedQuist Inc. is not a party
to the Claimants agreements, and accordingly, has never
agreed to arbitration. The AAA initially agreed to rule on these
matters, but then decided to defer a ruling to the panel of
arbitrators selected pursuant to the parties agreements
(Panel). In response, MedQuist informed the Panel that a court,
not the Panel, should rule on these issues. When it appeared
that the Panel would rule on these issues, MedQuist initiated a
lawsuit in the Superior Court of DeKalb County (the Court) and
requested an injunction enjoining the Panel from deciding these
issues. The Court denied the request, and indicated that a new
motion could be filed if the Panels ruling was adverse to
MedQuist Inc. or MedQuist Transcriptions, Ltd. On May 6,
2008, the Panel dismissed MedQuist Inc. as a party, but ruled
against MedQuist opposition to a consolidated arbitration.
MedQuist asked the Court to stay the arbitration in order to
review that decision. The Court initially granted the stay, but
later lifted the stay. The Court did not make any substantive
rulings regarding consolidation, and in fact, left that decision
and others to the assigned judge, who was unable to hear those
motions. Accordingly, until further order of the Court, the
arbitration will proceed forward.
MedQuist filed an answer and counterclaim in the arbitration,
which generally denied liability. In the lawsuit, the defendants
filed a motion to dismiss alleging that its complaint
failed to state an actionable claim for relief. On July 25,
2008, MedQuist filed its response which opposed the motion to
dismiss in all respects. On September 10, 2008, the Court
heard argument on defendants motion to dismiss. The Court
did not issue a decision, but rather, took the matter under
advisement.
During discovery in the arbitration, Claimants repeatedly
modified the individual damage claims and asserted two
alternative damage theories. Claimants did not specify what the
two alternative damage theories were, but stated that they were
seeking alternative damage amounts for each Claimant. The Panel
issued a Revised Scheduling Order, which tentatively scheduled
the arbitration to begin in February 2010.
On March 31, 2010, the parties entered into a Settlement
Agreement and Release pursuant to which MedQuist paid the
Claimants $500 on April 1, 2010 to resolve all claims.
Under the Settlement Agreement and Release, (i) the parties
exchanged mutual releases, (ii) the arbitration and related
state court litigation were dismissed with prejudice and
(iii) MedQuist did not admit to any liability or
wrongdoing. MedQuist accrued the entire amount of this
settlement as of December 31, 2009.
SEC Investigation
of Former MedQuist Officer
With respect to MedQuists historical billing practices,
the SEC is pursuing civil litigation against its former chief
financial officer, whose employment with MedQuist ended in July
2004. Pursuant to its bylaws, MedQuist has indemnification
obligations for the legal fees for its former chief financial
officer.
15. Stock
Option Plans
2007 Equity
incentive plan (the EI Plan)
The EI Plan was adopted by the Board of Directors (the
Board) of the Company on June 12, 2007. The EI
Plan is administered and operated by the Board in consultation
with the Remuneration Committee of the Board.
F-38
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
The EI Plan provides a framework for the grant of equity and
other equity related incentives to directors, officers,
consultants and other employees of the Company in different
jurisdictions. Awards may be in the form of share options,
including incentive stock options (which comply with U.S. tax
requirements), share appreciation rights, restricted shares,
restricted stock units and other share, share based or cash
awards.
In accordance with the EI Plan, share options for 951 ordinary
shares were granted by the Board on June 12, 2007, at a
price of $1.75. The options were granted to members of the
senior management and key employees of the Company.
In cases where the options granted to any option holder were
less than 20, such options vested in full on the date the shares
of the Company were admitted on AIM. The shares of the Company
were admitted to trading on AIM on June 18, 2007.
Where options granted to any option holder were equal to or more
than 20, such options vested as follows50% on the date of
grant, 25% on the first anniversary of the date of grant and the
balance on the second anniversary of the date of grant.
The options are exercisable no later than 10 years from the
date of grant subject to vesting as stated above. However, the
options are subject to early exercise upon a change in control
of the Company, as defined. The options shall lapse at the end
of the option period. Additionally, the options of any option
holder, would lapse on the expiry of three months from the date
of cessation of employment or services to the Company for cause
(unless otherwise determined by the Board). However, if such
option holder leaves otherwise than for cause (as defined in the
option agreement), the option holder would be entitled to
exercise their options within a period of six months from the
date of cessation of employment or service. All share based
employee compensation is settled in equity. The Company has no
legal or constructive obligation to repurchase or cash settle
the options.
Additionally, on June 12, 2007, the board of directors of
the Company approved the grant of 3,034 options to certain
directors and senior management personnel of the Company. The
options were granted in 3 Tranches in the amounts of
1,517 options, 1,011 options and 506 options for
Tranche 1, Tranche 2 and Tranche 3, respectively.
The exercise price for the options in Tranche 1 was $1.30
per share and for the options in Tranche 2 it was $1.75.
Options in Tranche 1 and 2 were exercisable until
December 31, 2008 and all such options expired unexercised
on December 31, 2008. As of December 31, 2008 and
2009, there are 506 and 404, respectively, of outstanding
options in Tranche 3, of which all are exercisable and 102
were forfeited in 2009.
Due to change in control on August 6, 2008, all unvested
options vested immediately on that date, which resulted in a
share based compensation expense of $18.
In April 2009, the board of directors of the Company approved
the key terms of an option award to certain management employees
for the completion of acquisition of MedQuist and 9,935 options
were granted at an exercise at a price of $1.48 per share. The
options vest in a graded manner over a period ending on
August 6, 2011, with one third of the options vesting on
August 6, 2009 and one sixth of the options vesting every
six months thereafter. These options expire on August 6,
2018.
F-39
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
Share options and weighted average exercise price are as follows
for the reporting periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Weighted Average
|
|
|
|
Options
|
|
|
Exercise Price
|
|
Outstanding at January 1, 2007
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
3,985
|
|
|
|
1.58
|
|
Forfeited
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2008
|
|
|
3,985
|
|
|
$
|
1.58
|
|
Granted
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(2,714
|
)
|
|
$
|
1.50
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2009
|
|
|
1,271
|
|
|
$
|
1.75
|
|
Granted
|
|
|
10,086
|
|
|
|
1.11
|
|
Forfeited
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(231
|
)
|
|
|
1.75
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009
|
|
|
11,126
|
|
|
$
|
1.17
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2009
|
|
|
4,502
|
|
|
$
|
1.17
|
|
Options outstanding that have vested and are expected to vest as
of December 31, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Aggregate Intrinsic
|
|
|
Outstanding
|
|
Weighted Average
|
|
Remaining Contract
|
|
Intrinsic
|
|
Value as of
|
|
|
Options
|
|
Exercise Price in $
|
|
Term (in years)
|
|
Value
|
|
December 31, 2009
|
|
Vested and exercisable at year end
|
|
|
4,502
|
|
|
$
|
1.17
|
|
|
|
8.04
|
|
|
$
|
138
|
|
|
$
|
138
|
|
Expected to vest
|
|
|
6,529
|
|
|
$
|
1.15
|
|
|
|
8.29
|
|
|
$
|
402
|
|
|
$
|
402
|
|
The Company recognized $664 as compensation cost during the
period in respect of these options. The fair values of these
options have been calculated using a Black Scholes model using
the following assumptions:
|
|
|
|
|
|
Dividend yield
|
|
|
0
|
%
|
Expected life
|
|
|
4.8 5.8 years
|
|
Risk free interest rate
|
|
|
4.42
|
%
|
Volatility
|
|
|
34%-35
|
%
|
The unamortized cost of the options as of December 31, 2009
was $333. The total fair value of the shares vested during
December 31, 2009 was $664. The weighted average grant date
fair values of options granted during the year ended
December 31, 2009 was $0.1. As of December 31, 2009,
there were 5,034 additional options available for grant under
the EI Plan.
F-40
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
MedQuist Stock
option plan
MedQuist stock option plans provide for the granting of options
to purchase shares of common stock to eligible employees
(including officers) as well as to our non-employee directors.
Options may be issued with the exercise prices equal to the fair
market value of the common stock on the date of grant or at a
price determined by a committee of our board of directors. Stock
options vest and are exercisable over periods determined by the
committee, generally five years, and expire no more than
10 years after the grant.
In July 2004, the board of directors of MedQuist affirmed its
June 2004 decision to indefinitely suspend the exercise and
future grant of options under our stock option plans. Ten former
executives separated from MedQuist in 2005 and 2004.
Notwithstanding the suspension, to the extent such executives
held options that were vested as of their resignation date, such
options remained exercisable for the post-termination period,
generally 90 days, commencing on the date that the
suspension was lifted for the exercise of options. There were
704 shares that qualified for this post-termination
exercise period. The suspension was lifted on October 4,
2007 and all but 154 of these options terminated on
February 1, 2008. In July 2008, 12 of the 154 options were
exercised for an aggregate exercise amount of $68. As of
December 31, 2009 there are no options outstanding related
to the 10 former executives.
Information with respect to MedQuists common stock options
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
Share
|
|
|
Weighted
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
Subject to
|
|
|
Average
|
|
|
Life in
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Years
|
|
|
Value
|
|
Outstanding, January 1, 2007
|
|
|
2,312
|
|
|
$
|
32.57
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
200
|
|
|
$
|
11.20
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(4
|
)
|
|
$
|
2.71
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(137
|
)
|
|
$
|
29.10
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(12
|
)
|
|
$
|
17.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2007
|
|
|
2,359
|
|
|
$
|
31.08
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
296
|
|
|
$
|
11.20
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(12
|
)
|
|
$
|
2.71
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(827
|
)
|
|
$
|
29.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2008
|
|
|
1,816
|
|
|
$
|
23.34
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(553
|
)
|
|
$
|
22.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2009
|
|
|
1,263
|
|
|
$
|
24.47
|
|
|
|
3.3
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2009
|
|
|
1,065
|
|
|
$
|
27.47
|
|
|
|
2.3
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest as of December 31, 2009
|
|
|
1,263
|
|
|
$
|
24.47
|
|
|
|
3.3
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value is calculated using the difference
between the closing stock price on the last trading day of 2009
and the option exercise price, multiplied by the number of
in-the-money
options. As of December 31, 2009, no options were in the
money.
F-41
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
There were no options granted or exercised in 2009. There were
296 options granted and 12 options exercised in 2008. MedQuist
estimated fair value for the option grant by applying the Black-
Scholes option pricing valuation model. The application of this
model involves assumptions that are judgmental and sensitive in
the determination of compensation expense. The key assumptions
used in determining the fair value of the options were:
|
|
|
|
|
|
Expected term (years)
|
|
|
5.92
|
|
Expected volatility
|
|
|
54.5
|
%
|
Dividend Yield
|
|
|
0
|
%
|
Expected risk free interest rate
|
|
|
3.25
|
%
|
Significant assumptions required to estimate the fair value of
stock options include the following:
|
|
|
|
|
Expected term: The SEC Staff Accounting Bulletin No 107
Simplified method has been used to determine a
weighted average expected term of options granted.
|
|
|
|
Expected volatility: We have estimated expected volatility based
on the historical stock price volatility of a company of similar
publicly traded companies. We believe that our historical
volatility is not indicative of future volatility.
|
The weighted average grant date fair value of options modified
in the first quarter of 2009 was $1.97 per share.
A summary of outstanding and exercisable options as of
December 31, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Contractual Life
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
Range of Exercise Price
|
|
Shares
|
|
|
(in years)
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
$2.71-$10.00
|
|
|
296
|
|
|
|
8.8
|
|
|
$
|
8.25
|
|
|
|
98
|
|
|
$
|
8.25
|
|
$10.01-$20.00
|
|
|
260
|
|
|
|
2.4
|
|
|
$
|
17.13
|
|
|
|
260
|
|
|
$
|
17.13
|
|
$20.01-$30.00
|
|
|
514
|
|
|
|
1.6
|
|
|
$
|
26.41
|
|
|
|
514
|
|
|
$
|
26.41
|
|
$30.01-$40.00
|
|
|
36
|
|
|
|
0.9
|
|
|
$
|
32.29
|
|
|
|
36
|
|
|
$
|
32.29
|
|
$40.01-$70.00
|
|
|
157
|
|
|
|
0.4
|
|
|
$
|
59.13
|
|
|
|
157
|
|
|
$
|
59.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,263
|
|
|
|
3.3
|
|
|
$
|
24.47
|
|
|
|
1,065
|
|
|
$
|
27.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were 296 and 0 options granted during 2008 and 2009. There
were 0 options exercised in 2008 and 2009.
The total fair value of shares vested during 2009 was $193.
As of December 31, 2009, there were 969 additional options
available for grant under MedQuists stock option plans.
On August 27, 2009, MedQuist board of directors, upon the
recommendation of its compensation committee, approved the
MedQuist Inc, Long-Term Incentive Plan. The Incentive Plan is
designed to encourage and reward the creation of long-term
equity value by certain members of its senior management team.
The executive and key employees will be selected by the
Compensation Committee and will be eligible to participate in
the Incentive Plan.
No amounts have been accrued through June 30, 2010 under
the Incentive Plan as no awards have been made as of
June 30, 2010.
F-42
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
Other
plan
A subsidiary of the Company has granted stock options under
non-qualified stock option agreements to certain of the
subsidiary employees, officers and directors. As of
December 31, 2008 and 2009, there are 72 and 42,
respectively, of outstanding options, of which 36 and 34,
respectively, are exercisable. The weighted average exercise
price is $0.40 as of December 31, 2008 and 2009 and the
weighted average remaining contract term as of December 31,
2009 is 3.50 years and there is no unamortized compensation
expense.
Domestic refers to income taxes recorded on our operations in
the British Virgin Islands and foreign refers to income taxes
recorded on operations in the United States and India. The
sources of income (loss) before income taxes and the income tax
provision (benefit) for the years ended December 31, 2007,
2008 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
Income (loss) before income taxes and noncontrolling interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
(1,345
|
)
|
|
$
|
(775
|
)
|
|
$
|
(2,510
|
)
|
Foreign
|
|
|
(1,421
|
)
|
|
|
(113,142
|
)
|
|
|
11,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and noncontrolling interest
|
|
|
(2,766
|
)
|
|
|
(113,917
|
)
|
|
|
8,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax provision (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
191
|
|
|
|
1,034
|
|
|
|
403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax provision
|
|
|
191
|
|
|
|
1,034
|
|
|
|
403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax provision (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
(304
|
)
|
|
|
(6,432
|
)
|
|
|
679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax provisions (benefit)
|
|
|
(304
|
)
|
|
|
(6,432
|
)
|
|
|
679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision (benefit)
|
|
$
|
(113
|
)
|
|
$
|
(5,398
|
)
|
|
$
|
1,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reconciliation of the income tax provision (benefit) at
statutory federal income tax rate to the Companys income
tax provision (benefit):
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
Provision (benefit) at statutory tax rate
|
|
$
|
|
|
|
$
|
(39,871
|
)
|
|
$
|
3,116
|
|
Valuation allowance
|
|
|
|
|
|
|
21,593
|
|
|
|
(2,300
|
)
|
Goodwill impairment
|
|
|
|
|
|
|
13,119
|
|
|
|
|
|
Foreign rate differential
|
|
|
|
|
|
|
|
|
|
|
801
|
|
Adjustments to tax reserves
|
|
|
(968
|
)
|
|
|
342
|
|
|
|
(62
|
)
|
Permanent differences
|
|
|
|
|
|
|
168
|
|
|
|
(189
|
)
|
Intercompany dividend
|
|
|
|
|
|
|
|
|
|
|
389
|
|
State taxes
|
|
|
|
|
|
|
(2,049
|
)
|
|
|
(302
|
)
|
Other, net
|
|
|
855
|
|
|
|
1,300
|
|
|
|
(371
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision (benefit)
|
|
$
|
(113
|
)
|
|
$
|
(5,398
|
)
|
|
$
|
1,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-43
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
Companys deferred tax assets and liabilities as of
December 31, 2008 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Foreign net operating loss carry forwards
|
|
$
|
52,665
|
|
|
$
|
54,734
|
|
Accounts receivable
|
|
|
2,028
|
|
|
|
1,321
|
|
Property and equipment
|
|
|
1,790
|
|
|
|
2,526
|
|
Intangibles
|
|
|
8,884
|
|
|
|
6,499
|
|
Employee compensation and benefit plans
|
|
|
1,295
|
|
|
|
1,770
|
|
Deferred compensation
|
|
|
164
|
|
|
|
|
|
Customer accommodation
|
|
|
4,668
|
|
|
|
4,515
|
|
Accruals and reserves
|
|
|
4,810
|
|
|
|
3,520
|
|
Other
|
|
|
1,291
|
|
|
|
1,673
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
77,595
|
|
|
|
76,558
|
|
Less: Valuation allowance
|
|
|
(70,711
|
)
|
|
|
(71,183
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
6,884
|
|
|
|
5,375
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(41
|
)
|
|
|
(12
|
)
|
Intangibles
|
|
|
(5,109
|
)
|
|
|
(4,085
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(5,150
|
)
|
|
|
(4,097
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
1,734
|
|
|
$
|
1,278
|
|
|
|
|
|
|
|
|
|
|
Under the Indian Income Tax Act, a substantial portion of the
profits of the Companys Indian operations is exempt from
Indian income tax. The Indian tax year ends on March 31.
This tax holiday is available for a period of ten consecutive
years beginning in the year in which the respective Indian
undertaking commenced operations. The tax holiday expires with
respect to the Companys Indian operations through the year
ended March 31, 2011.
As of December 31, 2009, the Company had federal net
operating loss carry forwards of approximately $130,000 which
will begin to expire in 2026. The Company had state net
operating losses of approximately $250,000 which will expire
from 2010 to 2029.
Utilization of the net operating loss carry forwards will be
subject to an annual limitation in future years as a result of
the change in ownership as defined by Section 382 of the
Internal Revenue Code and similar state provisions. The Group
performed an analysis on the annual limitation as a result of
the ownership change that occurred in 2008.
In assessing the future realization of deferred taxes, the
Company considers whether it is more likely than not that some
portion or all of the deferred income tax assets will not be
realized based on projections of our future taxable earnings.
The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods
in which those temporary differences become deductible.
F-44
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
After consideration of all evidence, both positive and negative,
management concluded that it was more likely than not that a
majority of the deferred tax assets would not be realized. As of
December 31, 2009, this valuation allowance has increased
from $70,711 as of December 31, 2008 to $71,183.
Deferred tax assets were recognized to the extent that objective
positive evidence existed with respect to their future
utilization. The objective positive evidence included income
expected to be recognized due to the reversal of deferred tax
liabilities as of December 31, 2009. In analyzing deferred
tax liabilities as a source for potential income for purposes of
recognizing deferred tax assets, the deferred tax liabilities
related to excess book basis in goodwill over tax basis in
goodwill were considered a source of future income for
benefiting deferred tax assets with indefinite lives only due to
the indefinite life and uncertainty of reversal of these
liabilities during the same period as the non-indefinite life
deferred tax assets.
The total amount of unrecognized tax benefits as of
December 31, 2009 was $5,497 which includes $484 of accrued
interest related to unrecognized income tax benefits which we
recognize as a component of the provision for income taxes. Of
the $5,497 unrecognized tax benefits, $4,613 relates to tax
positions which if recognized would impact the effective tax
rate, not considering the impact of any valuation allowance. Of
the $4,613, $3,576 is attributable to uncertain tax positions
with respect to certain deferred tax assets which if recognized
would currently be offset by a full valuation allowance due to
the fact that at the current time it is more likely than not
that these assets would not be recognized due to a lack of
sufficient projected income in the future.
The following is a roll-forward of the changes in the Company
unrecognized tax benefits:
|
|
|
|
|
|
Total unrecognized tax benefits as of January 1, 2009
|
|
$
|
5,090
|
|
Gross amount of increases in unrecognized tax benefits as a
result of tax positions taken during the prior period
|
|
|
(9
|
)
|
Gross amount of increases in unrecognized tax benefits as a
result of tax positions taken during the current period
|
|
|
62
|
|
Amount of decreases in the unrecognized tax benefits relating to
settlements with taxing authorities
|
|
|
|
|
Reduction to unrecognized tax benefits as a result of a lapse of
applicable statute of limitations
|
|
|
(130
|
)
|
|
|
|
|
|
Total unrecognized tax benefits as of December 31, 2009
|
|
$
|
5,013
|
|
|
|
|
|
|
Total unrecognized tax benefits that would impact the effective
tax rate if recognized
|
|
$
|
4,613
|
|
|
|
|
|
|
Total amount of interest and penalties recognized in the
accompanying consolidated statement of operations for the year
ended December 31, 2009
|
|
$
|
(126
|
)
|
|
|
|
|
|
Total amount of interest and penalties recognized in the
accompanying consolidated balance sheet as of December 31,
2009
|
|
$
|
484
|
|
|
|
|
|
|
Total unrecognized tax benefits as of January 1, 2010
|
|
$
|
5,013
|
|
Gross amount of increases in unrecognized tax benefits as a
result of tax positions taken during the prior period
|
|
|
4,909
|
|
Amount of decreases in the unrecognized tax benefits relating to
settlements with taxing authorities
|
|
|
(650
|
)
|
|
|
|
|
|
Total unrecognized tax benefits as of June 30, 2010
|
|
$
|
9,272
|
|
|
|
|
|
|
Total unrecognized tax benefits that would impact the effective
tax rate if recognized
|
|
$
|
8,925
|
|
|
|
|
|
|
Total amount of interest and penalties recognized in the
accompanying consolidated statement of operations for the six
months ended June 30, 2010
|
|
$
|
(237
|
)
|
|
|
|
|
|
Total amount of interest and penalties recognized in the
accompanying consolidated balance sheet as of June 30, 2010
|
|
$
|
780
|
|
|
|
|
|
|
F-45
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
A majority of the $4,909 increase to the reserve for uncertain
tax positions recorded during the period ended June 30,
2010 relates to certain tax exposure items acquired as a result
of the Spheris Acquisition. As such, the liability related to
these amounts was accounted for as part of the purchase price
allocations and was not charged to income tax expense.
The Company files income tax returns in the U.S. federal
jurisdiction, all U.S. states which require income tax
returns and foreign jurisdictions. Due to the nature of the
Companys operations, no state or foreign jurisdiction is
individually significant. With limited exceptions the Company is
no longer subject to examination by the U.S. federal or
states jurisdiction for years prior to 2007. The Internal
Revenue Service concluded a federal tax audit for MedQuist Inc
and its subsidiaries for the tax years 2003 through 2006 with no
material adjustments. However those years have not been audited
for the other members of the Company. The Company is no longer
subject to examination by the UK federal jurisdiction for years
prior to 2007. The Company does have various state tax audits
and appeals in process at any given time. As of
December 31, 2009, the Indian tax authorities have
concluded their tax audits for the tax years through
March 31, 2008 with no significant tax adjustments.
The Company anticipates decreases in unrecognized tax benefits
of approximately $126 related to state statutes of limitations
expiring during 2010. The Companys unrecognized tax
benefits are expected to change in 2010. The Company is
currently in the process of negotiating with certain
jurisdictions to resolve specific issues related to tax
positions taken in prior periods.
|
|
17.
|
Employee Benefit
Plans
|
401(k) Plans
of U.S. subsidiaries
MedQuist401(k)
Plan
MedQuist maintains a tax-qualified retirement plan named the
MedQuist 401(k) Plan (401(k) Plan) that provides eligible
employees with an opportunity to save for retirement on a tax
advantaged basis. MedQuist 401(k) Plan allows eligible employees
to contribute up to 25% of their annual eligible compensation on
a pre-tax basis, subject to applicable Internal Revenue Code
limits. Elective deferral contributions are allocated to each
participants individual account and are then invested in
selected investment alternatives according to the
participants directives. Employee elective deferrals are
100% vested at all times. MedQuist 401(k) Plan provides that it
may make a discretionary matching contribution to the
participants in the 401(k) Plan. MedQuist discretionary matching
contribution, if any, shall be in an amount not to exceed 100%
of the first 25% of a plan participants compensation
contributed as pre-tax contributions to the 401(k) Plan. In its
sole discretion, it may make discretionary matching
contributions on a quarterly or annual basis. Historically
MedQuist has matched 50% of each participants
contribution, up to a maximum of 5% of each participants
total annual compensation. Matching contributions are 33% vested
after one year of service, 67% vested after two years of service
and 100% vested after three years of service. MedQuist did not
match the employee contributions for the years ended
December 31, 2008 and 2009.
401(k) Plan of
other U.S. subsidiaries
The Company maintains tax qualified retirement plans for its
U.S. employees that provide eligible employees the opportunity
to save for retirement on a tax advantage basis. The plans allow
for eligible employees to contribute a portion of their annual
eligible compensation on a pretax basis subject to applicable
internal revenue code limits. The Company may make discretionary
matching contributions to the participants accounts in its
sole discretion. The Company did not match employee
contributions for the years ended December 31, 2007, 2008
and 2009.
F-46
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
Executive
Deferred Compensation Plan
MedQuist had established the MedQuist Inc. Executive Deferred
Compensation Plan (EDCP) in 2001. The EDCP, which was
administered by the compensation committee of MedQuist board of
directors, allowed certain members of management and highly
compensated employees to defer a certain percentage of their
income. Participants were permitted to defer compensation into
an account in which proceeds were available either during or
after termination of employment.
In the third quarter of 2009 MedQuist terminated the plan and
distributed plan assets to participants, and liquidated the
remaining plan assets prior to December 31, 2009. As of
December 31, 2008 the value of the assets held, primarily
insurance contracts, managed and invested pursuant to the EDCP
was $787 and was included in other current assets in the
accompanying consolidated balance sheets. As of
December 31, 2008 the deferred compensation liability
reflecting amounts due to employees was $237 and was included in
accrued expenses in the accompanying consolidated balance sheets.
CBay India and
its Indian subsidiaries
Gratuity
In accordance with applicable Indian laws, CBay India and its
Indian subsidiaries provide for a defined benefit retirement
plan (the Gratuity Plan) covering eligible
employees. The Gratuity Plan provides for a lump sum payment to
vested employees on retirement, death, incapacitation or
termination of employment at an amount that is based on salary
and tenure of employment. Liabilities with regard to the
Gratuity Plan are determined by actuarial valuation. The
measurement date used to measure fair value of plan assets and
benefit obligations is December 31, 2009; however, the
Gratuity Plan is unfunded as of December 31, 2009.
As of December 31, 2008 and 2009 the projected benefit
obligation was $267 and $330, respectively. These amounts have
been included in other noncurrent liabilities in the
consolidated balance sheets. The accumulated benefit obligation
was $143 and $211 as of December 31, 2008 and 2009,
respectively. Net periodic benefit cost under the Gratuity Plan
amounted to $44, $187 and $65 for 2007, 2008 and 2009,
respectively.
Other Benefit
Plans
CBay India and its Indian subsidiaries also have a defined
contribution plans that are largely governed by local statutory
laws and covers the eligible employees. These plans are funded
both by the employees and by the Company with an equal
contribution, primarily based on a specified percentage of the
employees basic salary. The total contribution to these
plans by the Company during the years ended December 31,
2007, 2008 and 2009 was $350, $413, and $565, respectively, and
the Company has no obligation beyond the amounts contributed.
|
|
18.
|
Related Party
Transactions
|
Transactions
with affiliates of the Companys majority
shareholder
During the year ended December 31, 2008, $8,000 was paid to
affiliates of the Companys majority shareholder for
services in connection with the equity subscription in the
Company and the acquisition of MedQuist. The Company also
entered into an agreement with an affiliate of its majority
shareholder in August 2008. Fees in the amount of $1,113 and
$2,750 were recorded for the years ended December 31, 2008
and 2009, respectively. As of December 31, 2008 and 2009
and as of June 30, 2010, $1,113 $2,185 and $2,162,
respectively, is accrued as a result of this agreement and is
recorded in due to related parties in the consolidated balance
sheets.
F-47
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
On May 4, 2010, the audit committee of MedQuists
board of directors approved the payment of and the Company
expensed a $1,500 success-based fee to an affiliate of its
majority shareholder in connection with the Spheris Acquisition.
Transactions
with an entity under common control
During the years ended December 31, 2007 and 2008 the
Company provided transcription services, software development,
customer relationship and other services to an entity in which
the Companys director exercised significant influence.
Such entity was an entity under common control until the
August 6, 2008 investment by the Companys current
majority shareholder. The amounts charged by the Company for
such services aggregated $9,156 and $633 respectively for 2007
and 2008. Additionally, the Company at various times prior to
August 6, 2008 made and received short-term advances to and
from the related party. During the year ended December 31,
2008, the Company redeemed mandatory redeemable preferred stock
previously issued to the related party. Also during the year
ended December 31, 2008, the Company accepted transfers of
certain assets as repayment for amounts owed it by this party.
The balance receivable from this entity of $760 as of
December 31, 2008 was not considered to be recoverable and
accordingly it was written off. There were no transactions with
this party during the year ended December 31, 2009.
Mirrus Systems
Inc.
Effective February 10, 2009 the former CEO and President of
Mirrus Systems Inc. (Mirrus) and former executive director on
the Board of the Company resigned from services with the
company. Under the terms of his settlement among other matters,
he transferred his holdings of approximately 13% in Mirrus to
the Company. As a result of the settlement, Mirrus is a
100% subsidiary of the Company. The difference between the
consideration paid and the carrying value of the non-controlling
interest in Mirrus acquired of $690 has been recorded as
additional paid in capital.
Transactions
with entities in which Directors exercise significant
influence
The Company occupied property owned by a significant shareholder
and paid rent and service charges totaling $557, $429 and $0 for
the years ended December 31, 2007, 2008 and 2009,
respectively. Effective August 6, 2008, this shareholder
ceased to be a significant shareholder. The Company also
occupies a property owned by a trust in which the President, CEO
and a director of one of its subsidiary, has an interest as a
sole trustee and owner of the trust. An amount of $59, $179 and
$181, was paid as rent for the years ended December 31,
2007, 2008 and 2009, respectively.
During the year ended December 31, 2008 and 2009, the
Company paid $240 and $113 to a Director to purchase the
noncontrolling interest in one of its subsidiaries. The Company
sold software solution services to a company in which a Director
exercises significant influence aggregating $923 and $471 for
the years ended December 31, 2007 and 2008, respectively.
Transactions
with affiliated companies
The Company purchased transcription services from an affiliated
Company during the years ended December 31, 2007, 2008 and
2009 aggregating $479, $601 and $819, respectively. As of
December 31, 2008 and 2009, $38 and $222 is receivable from
this company. During 2008, the Company made an additional equity
investment in this company amounting to $116.
During the year ended December 31, 2008 and 2009, the
Company purchased certain services of $162 and $365,
respectively, from an affiliated company.
F-48
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
|
|
19.
|
Financial
Instruments
|
Effective January 1, 2008, the Company adopted the
provisions for fair value accounting for financial assets and
financial liabilities. This did not have a material impact on
the Companys financial position, results of operations and
cash flows. The statement establishes a fair value hierarchy
that prioritizes the inputs to valuation techniques used to
measure fair value into three broad categories.
Level 1: Quoted market prices in active markets for
identical assets or liabilities that the company has the ability
to access. Level 2: Observable market based inputs or
unobservable inputs that are corroborated by market data such as
quoted prices, interest rates and yield curves. Level 3:
Inputs are unobservable data points that are not corroborated by
market data. At December 31, 2008, the Company held one
financial asset, Executive Deferred Compensation Plan,
Note 16, assets (EDCP) included in other current assets.
The Company measured the fair value of our EDCP on a recurring
basis using Level 2 (significant other observable) inputs.
In the third quarter of 2009 the Company terminated the plan and
distributed plan assets to participants and liquidated the
remaining plan assets. Accordingly there were no financial
instruments as defined as of December 31, 2009.
|
|
20.
|
Quarterly
Financial Information (Unaudited)
|
The following table sets forth selected quarterly consolidated
financial information for the years ended December 31, 2008
and 2009. The operating results for any given quarter are not
necessarily indicative of results for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
|
2nd Quarter
|
|
|
3rd Quarter
|
|
|
4th Quarter
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
17,224
|
|
|
$
|
17,896
|
|
|
$
|
64,338
|
|
|
$
|
94,215
|
|
Gross profit
|
|
$
|
8,046
|
|
|
$
|
9,157
|
|
|
$
|
19,557
|
|
|
$
|
31,839
|
|
Net income (loss) attributable to CBaySystems Holdings
Limited
|
|
$
|
493
|
|
|
$
|
978
|
|
|
$
|
(10,087
|
)(a)
|
|
$
|
(105,057
|
)(b)
|
Net income (loss) per share attributable to CBaySystems Holdings
Limited(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
|
$
|
0.02
|
|
|
$
|
(0.09
|
)
|
|
$
|
(0.68
|
)
|
Diluted
|
|
$
|
0.01
|
|
|
$
|
0.02
|
|
|
$
|
(0.09
|
)
|
|
$
|
(0.68
|
)
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
65,002
|
|
|
|
65,002
|
|
|
|
119,996
|
|
|
|
154,991
|
|
Diluted
|
|
|
65,002
|
|
|
|
65,167
|
|
|
|
119,996
|
|
|
|
154,991
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
94,669
|
|
|
$
|
93,871
|
|
|
$
|
93,289
|
|
|
$
|
89,939
|
|
Gross profit
|
|
$
|
32,566
|
|
|
$
|
34,220
|
|
|
$
|
32,119
|
|
|
$
|
33,314
|
|
Net income (loss) attributable to CBaySystems Holdings
Limited
|
|
$
|
(3,195
|
)(c)
|
|
$
|
425
|
|
|
$
|
2,539
|
|
|
$
|
966
|
(d)
|
Net income (loss) per share attributable to CBaySystems Holdings
Limited(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.03
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
0.01
|
|
|
$
|
0.00
|
|
Diluted
|
|
$
|
(0.03
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
0.01
|
|
|
$
|
0.00
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
154,991
|
|
|
|
154,991
|
|
|
|
156,930
|
|
|
|
157,557
|
|
Diluted
|
|
|
154,991
|
|
|
|
154,991
|
|
|
|
156,930
|
|
|
|
157,557
|
|
|
|
|
|
(a) |
|
Includes expenses of $5,622 for management bonus and other legal
expenses related to acquisition of MedQuist recorded in selling,
general and administrative expense, and include $3,482 recorded
in cost of legal proceedings and settlements related to
settlement of all claims related to the DOJ investigation. |
F-49
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
|
|
|
(b) |
|
Includes $98,972 for goodwill impairment charge. |
|
|
|
(c) |
|
Includes $5,950 recorded in cost of legal proceedings and
settlements related to the settlement of all claims related to
the Anthurium patent litigation settlement. |
|
|
|
(d) |
|
Includes $500 recorded in cost of legal proceedings and
settlements related to the settlement of all claims related to
the reseller arbitration settlement. |
|
|
|
(e) |
|
The sum of quarterly net income (loss) per share may differ from
the full year amount due to the change in the number of shares
outstanding during the year. |
|
|
21.
|
Subsequent Events
(Unaudited)
|
Recapitalization
Transactions
On October 1, 2010, MedQuist as borrower, and our
subsidiaries, MedQuist Transcriptions and CBay Inc. as
co-borrowers and guarantors, and we and certain of our other
subsidiaries, as guarantors, entered into a senior secured
credit facility, or the Senior Secured Credit Facility, with
certain lenders and General Electric Capital Corporation, as
Administrative Agent. The Senior Secured Credit Facility
contains a number of significant covenants and consists of
$225.0 million in senior secured credit facilities
comprised of:
|
|
|
|
|
a $200.0 million term loan, advanced in one drawing on
October 14, 2010 (the Closing Date), with a term of
five years, repayable in equal quarterly installments of
$5.0 million, commencing on the first day of the first
fiscal quarter beginning after the Closing Date, with the
balance payable at maturity; and
|
|
|
|
a $25.0 million revolving credit facility under which
borrowings may be made from time to time during the period from
the Closing Date until the fifth anniversary of the Closing
Date. The revolving facility includes a $5.0 million
letter-of-credit
sub-facility
and a $5.0 million swing line loan
sub-facility.
|
The borrowings under the Senior Secured Credit Facility bear
interest at a rate equal to an applicable margin plus, at the
co-borrowers option, either (a) a base rate
determined by reference to the highest of (1) the rate last
quoted by the Wall Street Journal as the Prime Rate
in the United States, (2) the federal funds rate plus
1/2
of 1% and (3) the LIBOR rate for a one-month interest
period plus 1.00% or (b) the higher of (1) a LIBOR
rate determined by reference to the costs of funds for deposits
in the currency of such borrowing for the interest period
relevant to such borrowing adjusted for certain additional costs
and (2) 1.75%. The applicable margin is 4.50% with respect
to base rate borrowings and 5.50% with respect to LIBOR
borrowings.
In addition to the Senior Secured Credit Facility, MedQuist, as
issuer, and or subsidiaries MedQuist Transcriptions and CBay
Inc. as co-issuers, and we and certain of our other
subsidiaries, as guarantors, issued $85.0 million aggregate
principal amount of 13% senior subordinated notes due 2016,
or the Senior Subordinated Notes, pursuant to a note purchase
agreement with BlackRock Kelso Capital Corporation, PennantPark
Investment Corporation, Citibank, N.A., and THL Credit, Inc. The
Senior Subordinated Notes are guaranteed on a joint and several,
absolute, unconditional and irrevocable basis, by us and certain
of our subsidiaries. Interest on the notes is payable in
quarterly installments at the issuers option at either
(i) 13% in cash or (ii) 12% in cash payment plus 2% in
the form of additional senior subordinated notes. The Senior
Subordinated Notes are non-callable for two years after the
closing date after which they are redeemable at 105.0% declining
ratably until four years after the closing date.
The Senior Secured Credit Facility and the Senior Subordinated
Notes contain a number of significant covenants that, among
other things, restrict our ability to dispose of assets, repay
other indebtedness, incur additional indebtedness, pay
dividends, prepay subordinated indebtedness, incur liens, make
capital expenditures, investments or acquisitions, engage in
mergers of consolidations, engage in certain types of
transactions with affiliates and otherwise restrict our
activities.
Proceeds from the Senior Secured Credit Facility and the Senior
Subordinated Notes were used to repay $80.0 million of
MedQuists indebtedness under the GE Credit Agreement,
to repay $13.6 million of MedQuists
F-50
CBaySystems
Holdings Limited and Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
indebtedness under the Subordinated Promissory Note it issued in
connection with the Acquisition and to pay a $176.5 million
special dividend to MedQuist stockholders. The Company received
$122.6 million of this special dividend and used
$105.3 million to extinguish our 6% Convertible Notes
issued in connection with the MedQuist Acquisition and
$4.1 million to extinguish other credit facilities.
Exchange
Transactions
On September 30, 2010, certain of MedQuists
noncontrolling stockholders entered into an exchange agreement
(the MedQuist Exchange), whereby the Company agreed
to issue approximately 20.3 million shares of our common
stock in exchange for their 4.8 million shares of MedQuist
common stock, subject to certain adjustments to the exchange
ratio. The MedQuist Exchange is contingent upon, among other
conditions, our completion of an initial public offering,
listing our shares on The NASDAQ Global Market, our
reincorporation in Delaware, and assuming the MedQuist Exchange
is consummated without adjustments, would increase our ownership
in MedQuist from 69.5% to 82.5%.
On October 18, 2010, the Company filed with the SEC a
registration statement on
Form S-4
(the Exchange Offer) offering those noncontrolling
MedQuist stockholders who did not participate in the MedQuist
Exchange shares of our common stock in exchange for their
MedQuist shares. Assuming the MedQuist Exchange is consummated,
a full exchange in the Exchange Offer would increase our
ownership in MedQuist from 82.5% to 100.0%. We can give no
assurance as to the level of participation in the Exchange Offer.
Sale of
A-Life
MedQuist has an investment in A-Life, which is accounted for
under the equity method and the carrying amount of the
investment in A-Life is $10.5 million as of June 30,
2010 and is included in Other assets in the accompanying
consolidated balance sheets. In September 2010, an Agreement and
Plan of Merger was executed, the sale is contingent upon
clearance of certain governmental approvals and other matters
and is expected to close by November 2010. Under this
transaction, MedQuists shares in A-Life will be sold for
cash consideration of approximately $23.8 million, of which
$5.0 million will be held in escrow until March 2012.
F-51
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of MedQuist Inc.:
We have audited the accompanying consolidated balance sheets of
MedQuist Inc. and subsidiaries as of December 31, 2006 and
2007, and the related consolidated statements of operations,
shareholders equity and other comprehensive income, and
cash flows for each of the years in the three-year period ended
December 31, 2007. These consolidated financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). 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, 2006 and 2007, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2007, in conformity
with U.S. generally accepted accounting principles.
As discussed in Notes 3 and 14 to the consolidated
financial statements, effective January 1, 2006, MedQuist
Inc. and subsidiaries adopted the fair value method of
accounting for stock-based compensation as required by Statement
of Financial Accounting Standards No. 123(R),
Share-Based Payment.
As discussed in Note 15 to the consolidated financial
statements, effective January 1, 2007, MedQuist Inc. and
subsidiaries adopted Financial Accounting Standards Board
Interpretation No. 48, Accounting for Uncertainty in
Income Taxesan Interpretation of
SFAS No. 109.
Philadelphia, Pennsylvania
March 17, 2008
F-52
MedQuist Inc. and
Subsidiaries
(In thousands, except per share
amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Net revenues
|
|
$
|
353,005
|
|
|
$
|
358,091
|
|
|
$
|
340,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
315,399
|
|
|
|
280,273
|
|
|
|
260,879
|
|
Selling, general and administrative
|
|
|
54,558
|
|
|
|
53,675
|
|
|
|
62,288
|
|
Research and development
|
|
|
9,784
|
|
|
|
13,219
|
|
|
|
13,695
|
|
Depreciation
|
|
|
17,099
|
|
|
|
11,802
|
|
|
|
10,988
|
|
Amortization of intangible assets
|
|
|
8,193
|
|
|
|
5,829
|
|
|
|
5,511
|
|
Cost of investigation and legal proceedings, net
|
|
|
34,127
|
|
|
|
13,001
|
|
|
|
6,083
|
|
Shareholder securities litigation settlement
|
|
|
7,750
|
|
|
|
|
|
|
|
|
|
Impairment charges
|
|
|
148
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
3,257
|
|
|
|
3,442
|
|
|
|
2,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
450,315
|
|
|
|
381,241
|
|
|
|
362,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(97,310
|
)
|
|
|
(23,150
|
)
|
|
|
(21,858
|
)
|
Equity in income of affiliated company
|
|
|
500
|
|
|
|
874
|
|
|
|
625
|
|
Interest income, net
|
|
|
5,940
|
|
|
|
7,628
|
|
|
|
8,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(90,870
|
)
|
|
|
(14,648
|
)
|
|
|
(12,867
|
)
|
Income tax provision
|
|
|
20,762
|
|
|
|
2,294
|
|
|
|
2,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(111,632
|
)
|
|
$
|
(16,942
|
)
|
|
$
|
(15,206
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(2.98
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(0.41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(2.98
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(0.41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
37,484
|
|
|
|
37,484
|
|
|
|
37,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
37,484
|
|
|
|
37,484
|
|
|
|
37,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-53
MedQuist Inc. and
Subsidiaries
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
175,412
|
|
|
$
|
161,582
|
|
Accounts receivable, net
|
|
|
54,778
|
|
|
|
48,725
|
|
Income tax receivable
|
|
|
1,772
|
|
|
|
815
|
|
Deferred income taxes
|
|
|
298
|
|
|
|
|
|
Other current assets
|
|
|
8,352
|
|
|
|
7,920
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
240,612
|
|
|
|
219,042
|
|
Property and equipment, net
|
|
|
20,969
|
|
|
|
21,366
|
|
Goodwill
|
|
|
124,826
|
|
|
|
125,505
|
|
Other intangible assets, net
|
|
|
45,448
|
|
|
|
42,262
|
|
Deferred income taxes
|
|
|
2,378
|
|
|
|
2,712
|
|
Other assets
|
|
|
6,906
|
|
|
|
6,885
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
441,139
|
|
|
$
|
417,772
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
10,779
|
|
|
$
|
12,754
|
|
Accrued expenses
|
|
|
28,812
|
|
|
|
18,989
|
|
Accrued compensation
|
|
|
15,558
|
|
|
|
14,826
|
|
Customer accommodation and quantification
|
|
|
24,777
|
|
|
|
18,459
|
|
Deferred income tax liabilitycurrent
|
|
|
|
|
|
|
4,783
|
|
Deferred revenue
|
|
|
15,202
|
|
|
|
16,023
|
|
Total current liabilities
|
|
|
95,128
|
|
|
|
85,834
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
18,034
|
|
|
|
15,151
|
|
|
|
|
|
|
|
|
|
|
Other non-current liabilities
|
|
|
458
|
|
|
|
2,143
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 13)
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
Common stockno par value; authorized 60,000 shares;
37,484 and 37,544 shares issued and outstanding,
respectively
|
|
|
235,080
|
|
|
|
236,412
|
|
Retained earnings
|
|
|
87,693
|
|
|
|
72,876
|
|
Deferred compensation
|
|
|
332
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
4,414
|
|
|
|
5,356
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
327,519
|
|
|
|
314,644
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
441,139
|
|
|
$
|
417,772
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-54
MedQuist Inc. and
Subsidiaries
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(111,632
|
)
|
|
$
|
(16,942
|
)
|
|
$
|
(15,206
|
)
|
Adjustments to reconcile net loss to cash (used in) provided
by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
25,292
|
|
|
|
17,631
|
|
|
|
16,499
|
|
Equity in income of affiliated company
|
|
|
(500
|
)
|
|
|
(874
|
)
|
|
|
(625
|
)
|
Write-off and impairment of intangible assets
|
|
|
148
|
|
|
|
|
|
|
|
|
|
Deferred income tax provision (benefit)
|
|
|
36,655
|
|
|
|
5,225
|
|
|
|
1,878
|
|
Stock option expense
|
|
|
37
|
|
|
|
2,117
|
|
|
|
565
|
|
Stock based compensationBoard Members
|
|
|
|
|
|
|
|
|
|
|
150
|
|
Provision for doubtful accounts
|
|
|
8,111
|
|
|
|
4,955
|
|
|
|
4,967
|
|
Asset writeoff charges
|
|
|
4,096
|
|
|
|
767
|
|
|
|
168
|
|
Changes in operating assets and liabilities excluding effects of
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(2,749
|
)
|
|
|
11,066
|
|
|
|
(1,359
|
)
|
Income tax receivable
|
|
|
(15,981
|
)
|
|
|
19,889
|
|
|
|
957
|
|
Other current assets
|
|
|
1,132
|
|
|
|
1,666
|
|
|
|
431
|
|
Other non-current assets
|
|
|
600
|
|
|
|
1,216
|
|
|
|
646
|
|
Accounts payable
|
|
|
(2,583
|
)
|
|
|
92
|
|
|
|
1,981
|
|
Accrued expenses
|
|
|
16,799
|
|
|
|
(9,366
|
)
|
|
|
(9,378
|
)
|
Accrued compensation
|
|
|
527
|
|
|
|
(5,537
|
)
|
|
|
(727
|
)
|
Customer accommodation and quantification
|
|
|
37,176
|
|
|
|
(21,121
|
)
|
|
|
(3,723
|
)
|
Deferred revenue
|
|
|
(3,737
|
)
|
|
|
(3,343
|
)
|
|
|
592
|
|
Other non-current liabilities
|
|
|
(1,142
|
)
|
|
|
(2,090
|
)
|
|
|
1,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(7,751
|
)
|
|
|
5,351
|
|
|
|
(274
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(9,535
|
)
|
|
|
(8,191
|
)
|
|
|
(11,639
|
)
|
Capitalized software
|
|
|
(638
|
)
|
|
|
(58
|
)
|
|
|
(2,035
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(10,173
|
)
|
|
|
(8,249
|
)
|
|
|
(13,674
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of debt
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(25
|
)
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
1
|
|
|
|
39
|
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(17,948
|
)
|
|
|
(2,859
|
)
|
|
|
(13,830
|
)
|
Cash and cash equivalentsbeginning of year
|
|
|
196,219
|
|
|
|
178,271
|
|
|
|
175,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalentsend of year
|
|
$
|
178,271
|
|
|
$
|
175,412
|
|
|
$
|
161,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (recovered) paid for income taxes
|
|
$
|
162
|
|
|
$
|
(22,381
|
)
|
|
$
|
(451
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accommodation payments paid with credits
|
|
$
|
|
|
|
$
|
980
|
|
|
$
|
2,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-55
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
Common Stock
|
|
|
Retained
|
|
|
Deferred
|
|
|
Comprehensive
|
|
|
Shareholders
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Earnings
|
|
|
Compensation
|
|
|
Income (loss)
|
|
|
Equity
|
|
|
|
|
|
Balance, January 1, 2005
|
|
|
37,484
|
|
|
$
|
232,926
|
|
|
$
|
216,267
|
|
|
$
|
332
|
|
|
$
|
4,425
|
|
|
$
|
453,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(111,632
|
)
|
|
|
|
|
|
|
|
|
|
|
(111,632
|
)
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,135
|
)
|
|
|
(1,135
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(112,767
|
)
|
|
|
|
|
Employee stock compensation
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
37,484
|
|
|
|
232,963
|
|
|
|
104,635
|
|
|
|
332
|
|
|
|
3,290
|
|
|
|
341,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(16,942
|
)
|
|
|
|
|
|
|
|
|
|
|
(16,942
|
)
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,124
|
|
|
|
1,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,818
|
)
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
2,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
37,484
|
|
|
|
235,080
|
|
|
|
87,693
|
|
|
|
332
|
|
|
|
4,414
|
|
|
|
327,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(15,206
|
)
|
|
|
|
|
|
|
|
|
|
|
(15,206
|
)
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
942
|
|
|
|
942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,264
|
)
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
565
|
|
|
|
|
|
Exercise of stock options
|
|
|
4
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
Adoption of FIN 48
|
|
|
|
|
|
|
|
|
|
|
389
|
|
|
|
|
|
|
|
|
|
|
|
389
|
|
|
|
|
|
Deferred compensation-stock grants
|
|
|
56
|
|
|
|
757
|
|
|
|
|
|
|
|
(332
|
)
|
|
|
|
|
|
|
425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
37,544
|
|
|
$
|
236,412
|
|
|
$
|
72,876
|
|
|
$
|
|
|
|
$
|
5,356
|
|
|
$
|
314,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-56
MedQuist Inc. and
Subsidiaries
(In
thousands, except per share amounts)
|
|
1.
|
Description of
Business
|
We are a provider of medical transcription technology and
services which are integral to the clinical documentation
workflow. We service health systems, hospitals and large group
medical practices throughout the U.S. In the clinical
documentation workflow, we provide, in addition to medical
transcription technology and services, digital dictation, speech
recognition and electronic signature services. We are a member
of the Philips Group of Companies and collaborate with Philips
Medical Systems in product development. On November 2,
2007, our majority shareholder, Koninklijke Philips Electronics
N.V. (Philips), announced that it was going to proceed with the
sale of its ownership interest in us if a satisfactory price and
other acceptable terms can be realized. In addition, on
November 2, 2007 we announced, in light of Philips
announcement, that our board of directors, in connection with
its previously disclosed review of our strategic alternatives,
is evaluating whether a sale of us is in our best interests and
the best interests of our shareholders.
In November 2003, one of our employees raised allegations that
we had engaged in improper billing practices. In response, our
board of directors undertook an independent review of these
allegations and engaged the law firm of Debevoise and Plimpton
LLP, who in turn retained PricewaterhouseCoopers LLP, to assist
in the review (Review). On March 16, 2004, we announced
that we had delayed the filing of our 2003 annual report on
Form 10-K
pending completion of the Review. Subsequently, on
March 25, 2004, we filed a
Form 8-K
detailing our determination that the Review would not be
completed by the March 30, 2004 filing deadline for our
2003
Form 10-K.
As a result of our noncompliance with the U.S. Securities
and Exchange Commissions (SEC) periodic disclosure
requirements, our common stock was delisted from the NASDAQ
National Market on June 16, 2004.
On July 30, 2004, we issued a press release entitled
MedQuist Announces Key Findings Of Independent Review Of
Client Billing, which announced certain findings in the
Review regarding our billing practices (July 2004 Press
Release). The Review found, among other things, that with
respect to our medical transcription services contracts that
called for billing based on the AAMT line billing
unit of measure, we used ratios and formulae to help calculate
the number of AAMT transcription lines for which our customers
(AAMT Customers) were billed rather than counting each of the
relevant characters to determine a billable line as provided for
in the contracts. With respect to these contracts, our use of
ratios and formulae to arrive at AAMT line counts was generally
not disclosed to our AAMT Customers.
The AAMT line unit of measure was developed in 1993 by three
medical transcription industry groups, including the American
Association for Medical Transcription (AAMT), in an attempt to
standardize industry billing practices for medical transcription
services. Following the development of the AAMT line unit of
measure, customers increasingly began to request AAMT line
billing. Accordingly, we, along with other vendors in the
medical transcription industry, began to incorporate the AAMT
line unit of measure into certain customer contracts. The AAMT
line definition provides that a line consists of 65
characters and defined the term character to include
such things as macros and function keys as well as other
information necessary for the final appearance and content of a
document. However, these definitions turned out to be inherently
ambiguous and difficult to apply in practice. As a result, the
AAMT line was applied inconsistently throughout the medical
transcription industry. In fact, no single set of AAMT
characters was ever defined or agreed upon for this unit of
measure, and it was eventually renounced by the groups
responsible for its development.
The Review concluded that our rationale for using ratios and
formulae to determine the number of AAMT transcription lines for
billing was premised on a good faith attempt to adopt a
consistent and commercially reasonable billing method given the
lack of common standards in the industry and ambiguities
inherent in the AAMT line definition. The Review concluded that
the use of ratios and formulae within the medical transcription
platform setups may have resulted in over billing and under
billing of some customers. In addition, in some
F-57
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
instances, customers ratios and formulae were adjusted
without disclosure to the AAMT Customers. However, the Review
found no evidence that the amounts we billed AAMT Customers
were, in general, commercially unfair or inconsistent with what
competitors would have charged. Moreover, it was noted in the
Review that we have been able to attract and retain customers in
a competitive market.
Following the issuance of the July 2004 Press Release, we began
an extensive review of our historical AAMT line billing
(Managements Billing Assessment) and in August 2004
informed our current and former customers that we would be
contacting them to discuss how they might have been impacted. In
response, several former and current customers, including some
of our largest customers, contacted us requesting, among other
things, (i) an explanation of the billing methods employed
by us for the customers account; (ii) an
individualized review of the customers past billings,
and/or
(iii) a meeting with a member of our management team to
discuss the July 2004 Press Release as it pertained to the
customers particular account. Some customers demanded an
immediate refund or credit to their account; others threatened
to withhold payment on invoices
and/or take
their business elsewhere unless we timely responded to their
information
and/or audit
requests.
In response to our customers concern over the July 2004
Press Release, we made the decision to take action to try to
avoid litigation and preserve and solidify our customer business
relationships by offering a financial accommodation to our AAMT
Customers. See Note 4.
Disclosure of the findings of the Review, along with the
delisting of our common stock, precipitated a number of
governmental investigations and civil lawsuits. See Note 13.
|
|
3.
|
Significant
Accounting Policies
|
Principles of
Consolidation
Our consolidated financial statements include the accounts of
MedQuist Inc. and its subsidiary companies. All intercompany
balances and transactions have been eliminated in consolidation.
Use of
Estimates and Assumptions in the Preparation of Consolidated
Financial Statements
The preparation of our consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect amounts reported in our consolidated
financial statements. Significant items subject to such
estimates and assumptions include the carrying amount of
property and equipment, valuation of long-lived and intangible
assets and goodwill, valuation allowances for receivables,
inventories and deferred income taxes, revenue recognition,
stock-based compensation and commitments and contingencies.
Actual results could differ from those estimates.
Revenue
Recognition
We follow revenue recognition criteria outlined in Staff
Accounting Bulletin (SAB) 101, Revenue Recognition in
Financial Statements, as amended by SAB 104. The
majority of our revenues are derived from providing medical
transcription services. Revenues for medical transcription
services are recognized when the services are rendered. These
services are based on contracted rates. The remainder of our
revenues are derived from the sale of voice-capture and document
management products including software, hardware and
implementation, training and maintenance service related to
these products.
We recognize software and software-related revenues pursuant to
the requirements of American Institute of Certified Public
Accountants (AICPA) Statement of Position (SOP)
97-2
Software Revenue Recognition
(SOP 97-2),
as amended by
SOP 98-9,
Software Revenue Recognition, With Respect to Certain
Transactions,
SOP 81-1,
Accounting for Performance of Construction-type and Certain
Production-type Contracts, Emerging Issues Task Force (EITF)
F-58
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
00-03
Application of AICPA Statement of Position
97-2 to
Arrangements That Include the Right to Use Software Stored on
Another Entitys Hardware,
EITF 03-05
Applicability of AICPA Statement of Position
97-2 to
Non-Software Deliverables in an Arrangement Containing
More-Than-Incidental
Software and other authoritative accounting guidance.
We recognize software-related revenues using the residual method
when vendor-specific objective evidence (VSOE) of fair value
exists for all of the undelivered elements in the arrangement,
but does not exist for one or more delivered elements. We
allocate revenues to each undelivered element based on its
respective fair value determined by the price charged when that
element is sold separately or, for elements not yet sold
separately, the price established by management if it is
probable that the price will not change before the element is
sold separately. We defer revenues for the undelivered elements
and recognize the residual amount of the arrangement fee, if
any, when the basic criteria in
SOP 97-2
have been met.
Under
SOP 97-2,
provided that the arrangement does not involve significant
production, modification, or customization of the software,
revenues are recognized when all of the following four criteria
have been met; persuasive evidence of an arrangement exists,
delivery has occurred, the fee is fixed or determinable and
collectability is probable.
If at the outset of an arrangement, we determine that the
arrangement fee is not fixed or determinable, revenues are
deferred until the arrangement fee becomes due and payable by
the customer. If at the outset of an arrangement we determine
that collectability is not probable, revenues are deferred until
payment is received. Our license agreements typically do not
provide for a right of return other than during the standard
warranty period. If an arrangement allows for customer
acceptance of the software or services, we defer revenues until
the earlier of customer acceptance or when the acceptance rights
lapse.
We separately market and sell hardware and software post
contract customer support (PCS). PCS covers phone support,
hardware parts and labor, software bug fixes and limited
upgrades, if and when available. We do not commit to specific
future software upgrades or releases. The contract period for
PCS is generally one year. We recognize both hardware and
software PCS on a straight line basis over the life of the
underlying PCS contract. In some of our PCS contracts, we bill
the customer prior to performing the services. As of
December 31, 2006 and 2007, deferred PCS revenues of
$12,235 and $11,494, respectively, are included in deferred
revenues and $450 and $221, respectively, are included in
non-current liabilities in the accompanying consolidated balance
sheets.
Certain arrangements include multiple elements involving
software, hardware and implementation, training, or other
services that are not essential to the functionality of the
software. VSOE for services does not exist. Since the
undelivered elements are typically services, we recognize the
entire arrangement fee ratably over the period during which the
services are expected to be performed or the PCS period,
whichever is longer, beginning with delivery of the software,
provided that all other revenue recognition criteria in
SOP 97-2
are met. The services are typically completed before the PCS
term expires. As such, upon completion of the services, the
difference between the VSOE of fair value for the remaining PCS
period and the remaining unrecognized portion of the arrangement
fee is recognized as revenue (i.e. the residual method), and the
remaining deferred revenue is recognized ratably over the
remaining PCS period, provided that all other revenue
recognition criteria in
SOP 97-2
are met.
Sales
Taxes
We present taxes assessed by a governmental authority including
sales, use, value added and excise taxes on a net basis and
therefore the presentation of these taxes is excluded from our
revenues and is included in accrued expenses in the accompanying
consolidated balance sheets until such amounts are remitted to
the taxing authorities.
F-59
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
Accounting for
Consideration Given to a Customer
As a result of the Accommodation Analysis (which is described in
Note 4), we offered financial accommodations to our
customers. Pursuant to EITF Issue
01-9,
Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendors Products)
(EITF 01-9),
consideration given by a vendor to a customer is presumed to be
a reduction of the selling price of the vendors services
and, therefore, should be characterized as a reduction of
revenues when recognized in the vendors income statement.
For the years ended December 31, 2005, 2006 and 2007,
$57,678, $10,402 and $0, respectively, was recorded as a
reduction of revenues related to the Accommodation Analysis.
Litigation and
Settlement Costs
From time to time, we are involved in litigation, claims,
contingencies and other legal matters. We record a charge equal
to at least the minimum estimated liability for a loss
contingency when both of the following conditions are met:
(i) information available prior to issuance of the
financial statements indicates that it is probable that an asset
had been impaired or a liability had been incurred at the date
of the financial statements and (ii) the range of the loss
can be reasonably estimated. We expense legal costs, including
those legal costs expected to be incurred in connection with a
loss contingency, as incurred.
Services
Provided by Independent Registered Public
Accountant
Services provided by our independent registered public
accounting firm are expensed as the services are provided and
were $1,254, $6,429, and $6,840 for the years ended
December 31, 2005, 2006 and 2007, respectively.
Restructuring
Costs
A liability for restructuring costs associated with an exit or
disposal activity is recognized and measured initially at fair
value when the liability is incurred. We record a liability for
severance costs when employees are notified that they are to be
terminated and for future, non-cancellable operating lease costs
when we vacate a facility.
Our estimates of future liabilities may change, requiring us to
record additional restructuring charges or reduce the amount of
liabilities recorded. At the end of each reporting period, we
evaluate the remaining accrued restructuring charges to ensure
their adequacy, that no excess accruals are retained and the
utilization of the provisions are for their intended purposes in
accordance with developed exit plans.
We periodically evaluate currently available information and
adjust our accrued restructuring charges as necessary. Changes
in estimates are accounted for as restructuring costs or credits
in the period identified.
Research and
Development Costs
Research and development costs are expensed as incurred.
Income
Taxes
Deferred tax assets and liabilities are recorded for temporary
differences between the tax basis of assets and liabilities and
their reported amounts in the consolidated financial statements,
using statutory tax rates in effect for the year in which the
differences are expected to reverse. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
our statements of operations in the period that includes the
enactment date. A valuation allowance is recorded to reduce the
carrying amounts of deferred tax assets unless it is more likely
than not that such assets will be realized. Management considers
various sources of future taxable income including projected
book earnings, the reversal of deferred tax liabilities, and
prudent and feasible tax planning strategies in determining the
need for a valuation allowance.
F-60
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
Stock-Based
Compensation
On January 1, 2006, we adopted the fair value recognition
provisions of Financial Accounting Standards Board (FASB)
Statement 123 (revised 2004), Share-Based Payment,
(Statement 123(R)), using the modified prospective transition
method which requires application of Statement 123(R) on the
date of adoption and, therefore, we have not retroactively
adjusted results from periods prior to 2006. Under the modified
prospective transition method, compensation costs associated
with share-based awards recognized in 2006 include compensation
costs for all share-based payments granted prior to, but not yet
vested as of January 1, 2006, based on the grant-date fair
value previously estimated in accordance with the provisions of
FASB Statement 123, Accounting for Stock-Based Compensation
(Statement 123). Had we granted options in 2006, the
compensation costs for those options would have been based on
the grant-date fair value estimated in accordance with the
provisions of Statement 123(R). In March 2005, the SEC issued
SAB 107 (SAB 107) which provided supplemental
guidance related to Statement 123(R). We have applied the
provisions of SAB 107 in our adoption of Statement 123(R).
Statement 123(R) requires companies to estimate the fair value
of stock options on the date of grant using an option pricing
model. We use the Black-Scholes option pricing model to
determine the fair value of our options. The determination of
the fair value of stock based awards using an option pricing
model is affected by a number of assumptions including expected
volatility of the common stock over the expected term, the
expected term, the risk free interest rate during the expected
term and the expected dividends to be paid. The value of the
portion of the award that is ultimately expected to vest is
recognized as compensation expense over the requisite service
periods.
Stock-based compensation expense related to employee stock
options recognized under Statement 123(R) for 2006 and 2007 was
$2,117 and $565 which was charged to selling, general and
administrative expenses ($562 and $255), research and
development expenses ($240 and $91) and cost of revenues ($1,315
and $219). Included in the $2,117 and $565 is $194 and $120,
respectively, of expense related to options that were issued to
certain executive officers when we became current in our
periodic reporting obligations with the SEC in October 2007. As
of December 31, 2007, total unamortized stock-based
compensation cost related to non-vested stock options, net of
expected forfeitures, was $1,371 which is expected to be
recognized over a weighted-average period of 4.7 years.
Prior to the adoption of Statement 123(R), we accounted for
stock-based awards to employees and directors using the
intrinsic value method in accordance with Accounting Principles
Board (APB) Opinion 25, Accounting for Stock Issued to
Employees (APB 25), as allowed under Statement 123. Under
the intrinsic value method, no compensation expense for employee
stock options was recognized in our consolidated statements of
operations because the exercise price of the stock options
granted to employees was greater than or equal to the fair
market value of the underlying stock at the date of grant.
F-61
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
The following table illustrates the pro forma effect on net loss
and loss per share amounts for the year ended December 31,
2005 as if we had applied the fair-value recognition provisions
of Statement 123 to stock-based employee compensation.
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(111,632
|
)
|
Add: Stock-based employee compensation expense included in
reported net loss
|
|
|
37
|
|
Deduct: Total stock-based employee compensation expense
determined under fair-value based method for all awards
|
|
|
(3,487
|
)
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(115,082
|
)
|
|
|
|
|
|
Basic net loss per share:
|
|
|
|
|
As reported
|
|
$
|
(2.98
|
)
|
Pro forma
|
|
$
|
(3.07
|
)
|
Diluted net loss per share:
|
|
|
|
|
As reported
|
|
$
|
(2.98
|
)
|
Pro forma
|
|
$
|
(3.07
|
)
|
We did not grant any options for the years ended
December 31, 2005 and 2006.
Net Loss per
Share
Basic net loss per share is computed by dividing net loss by the
weighted average number of shares outstanding during each
period. Diluted net loss per share is computed by dividing net
loss by the weighted average shares outstanding, as adjusted for
the dilutive effect of common stock equivalents, which consist
only of stock options, using the treasury stock method.
The table below reflects basic and diluted net loss per share
for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Net loss
|
|
$
|
(111,632
|
)
|
|
$
|
(16,942
|
)
|
|
$
|
(15,206
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
37,484
|
|
|
|
37,484
|
|
|
|
37,488
|
|
Effect of dilutive stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
37,484
|
|
|
|
37,484
|
|
|
|
37,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(2.98
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(0.41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The computation of diluted net loss per share does not assume
conversion, exercise or issuance of shares that would have an
anti-dilutive effect on diluted net loss per share. During 2005,
2006 and 2007, we had a net loss. As a result, any assumed
conversions would result in reducing the net loss per share and,
therefore, are not included in the calculation. Shares having an
anti-dilutive effect on net loss per share and, therefore,
excluded from the calculation of diluted net loss per share,
totaled 3,432 shares, 2,150 shares and
2,298 shares for the years ended December 31, 2005,
2006 and 2007, respectively.
F-62
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
Advertising
Costs
Advertising costs are expensed as incurred and for the years
ended December 31, 2005, 2006 and 2007 were $2,098, $1,903
and $1,674, respectively.
Cash and Cash
Equivalents
We consider all highly liquid instruments with original
maturities of three months or less to be cash equivalents. Our
cash management and investment policies dictate that cash
equivalents be limited to investment grade, highly liquid
securities. We place our temporary cash investments with
high-credit rated, quality financial institutions. Deposits held
with banks may exceed the amount of insurance provided on such
deposits. Consequently, our cash equivalents are subject to
potential credit risk. As of December 31, 2006 and 2007,
cash equivalents consisted of money market investments. The
carrying value of cash and cash equivalents approximates fair
value.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount and do
not bear interest. The carrying value of accounts receivable
approximates fair value. The allowance for doubtful accounts is
our best estimate for losses inherent in our accounts receivable
portfolio. The sales return and allowance reserve is our best
estimate of sales credits that will be issued related to our
accounts receivable portfolio. These allowances are used to
state trade receivables at estimated net realizable value.
We estimate uncollectible amounts based upon our historical
write-off experience, current customer receivable balances, age
of customer receivable balances, the customers financial
condition and current economic conditions. Historically, these
estimates have been adequate to cover our accounts receivable
exposure.
We enter into medical transcription service arrangements which
contain provisions for performance penalties in the event
certain service levels, primarily related to turnaround time on
transcribed reports, are not achieved. We reduce revenues for
any performance penalties incurred and have included an estimate
of such credits in our allowance for uncollectible accounts.
Product revenues for sales to end-user customers and resellers
is recognized upon passage of title if all other revenue
recognition criteria have been met. End-user customers generally
do not have a right of return. We provide certain of our
resellers and distributors with limited rights of return of our
products. We reduce revenues for rights to return our product
based upon our historical experience and have included an
estimate of such credits in our allowance for doubtful accounts.
Inventories
Inventories, which are primarily comprised of finished goods,
are stated at the lower of cost or market, with cost determined
on a weighted-average basis. Inventories in excess of
anticipated future demand or for obsolete products are reserved.
As of December 31, 2006 and 2007, the net inventory
balances were $2,608 and $2,011, respectively, and are included
in other current assets in the accompanying consolidated balance
sheets.
Property and
Equipment
Property and equipment are stated at cost less accumulated
depreciation. Depreciation is calculated on a straight-line
basis over the estimated useful lives of the assets which range
from two to seven years for furniture, equipment and software,
and the lesser of the lease term or estimated useful life for
leasehold improvements. Repairs and maintenance costs are
charged to expense as incurred while additions and betterments
are capitalized. Gains or losses on disposals are charged to
operations. Upon retirement, sale or other disposition, the
related cost and accumulated depreciation are eliminated from
the accounts and any gain or loss is included in operations.
F-63
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
Goodwill
Goodwill represents the excess of the aggregate purchase price
over the fair value of the net assets acquired in a purchase
business combination. Goodwill is reviewed for impairment on
December 1 of each year.
The goodwill impairment test is a two-step test. Under the first
step, the fair value of the reporting unit is compared with its
carrying value (including goodwill). We consider three methods
when determining fair value; the discounted cash flow method,
the quoted price method and the public company method. Of these
three methods, we assign the most significant weighting to the
discounted cash flow method. If the fair value of the reporting
unit is less than its carrying value, an indication of goodwill
impairment exists for the reporting unit and the enterprise must
perform step two of the impairment test. Under step two, an
impairment loss is recognized for any excess of the carrying
amount of the reporting units goodwill over the implied
fair value of that goodwill. The implied fair value of goodwill
is determined by allocating the fair value of the reporting unit
in a manner similar to a purchase price allocation, in
accordance with FASB Statement 141, Business
Combinations. The residual fair value after this allocation
is the implied fair value of the reporting units goodwill.
Software
Development
We capitalize software development costs pursuant to the
requirements of FASB Statement 86, Accounting for the Costs
of Computer Software to be Sold, Leased, or Otherwise Marketed
(Statement 86), for our software developed for sale and
AICPA
SOP 98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for internal Use
(SOP 98-1),
for our software developed for internal use.
Statement 86 specifies that costs incurred in creating a
computer software product shall be charged to expense when
incurred as research and development until technical feasibility
has been established. Technical feasibility is established upon
completion of a detail program design or, in its absence,
completion of a working model. Thereafter, all software
production costs shall be capitalized until the product is
available for release to customers.
SOP 98-1
specifies that software costs incurred in the preliminary
project stage should be expensed as incurred. Capitalization of
costs should begin when the preliminary project stage is
completed and management, with the relevant authority,
authorizes and commits funding of the project and it is probable
that the project will be completed and the software will be used
to perform the function intended. Capitalization should cease no
later than the point at which the project is substantially
complete and ready for its intended use.
Capitalized software is reported at the lower of unamortized
cost or net realizable value and is amortized over the
products estimated economic life which is generally three
years. As of December 31, 2006 and 2007, $485 and $2,343,
respectively, of unamortized software development costs are
included in other intangible assets in the accompanying
consolidated balance sheets. For the years ended
December 31, 2005, 2006 and 2007, software amortization
expense was $336, $262 and $360, respectively.
Long-Lived and
Other Intangible Assets
Long-lived assets, including property and equipment and
purchased intangible assets subject to amortization, are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. To determine the recoverability of
long-lived assets, the estimated future undiscounted cash flows
expected to be generated by an asset is compared to the carrying
value of the asset. If the carrying value of the long-lived
asset exceeds its estimated future undiscounted cash flows, an
impairment charge is recognized in the amount by which the
carrying value of the asset exceeds its fair value. Annually we
evaluate the reasonableness of the useful lives of these assets.
Intangible assets include certain assets (primarily customer
lists) obtained from business acquisitions and are being
amortized using the straight-line method over their estimated
useful lives which range from three to 20 years.
F-64
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
Foreign
Currency Translation
Our operating subsidiaries in the United Kingdom and Canada use
the local currency as their functional currency. We translate
the assets and liabilities of those entities into
U.S. dollars using the month-end exchange rate. We
translate revenues and expenses using the average exchange rates
prevailing during the reporting period. The resulting
translation adjustments are recorded in accumulated other
comprehensive income within shareholders equity. Gains and
losses from foreign currency transactions are included in net
loss and were not material for the years ended December 31,
2005, 2006 and 2007, respectively.
Business
Enterprise Segments
We operate in one reportable operating segment which is medical
transcription technology and services.
Concentration
of Risk, Geographic Data and Enterprise-wide
Disclosures
No single customer accounted for more than 10% of our net
revenues in any period. There is no single geographic area of
significant concentration other than the United States.
The following table summarizes the net revenues by the
categories of our products and services as a percentage of our
total net revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Medical transcription
|
|
|
79.5
|
%
|
|
|
83.8
|
%
|
|
|
83.3
|
%
|
Products and related services
|
|
|
8.1
|
%
|
|
|
4.6
|
%
|
|
|
4.7
|
%
|
PCS
|
|
|
9.3
|
%
|
|
|
8.5
|
%
|
|
|
8.2
|
%
|
Other
|
|
|
3.1
|
%
|
|
|
3.1
|
%
|
|
|
3.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other includes medical coding, application service provider and
other miscellaneous revenues.
Fair Value of
Financial Instruments
Cash and cash equivalents, accounts receivable, accounts payable
and accrued expenses are reflected in the accompanying
consolidated balance sheets at carrying values which approximate
fair value due to the short-term nature of these instruments and
the variability of the respective interest rates where
applicable.
Comprehensive
Income/Loss
Comprehensive income is comprised of Net income and Other
comprehensive income/loss.
Other comprehensive income/loss consists of foreign currency
translation adjustments. Other comprehensive income/loss and
comprehensive income are displayed separately in the
Consolidated Statements of Shareholders Equity and Other
Comprehensive Income.
Recent
Accounting Pronouncements
In September 2006, the FASB issued Statement 157, Fair Value
Measurements, (Statement 157) which defines fair value,
establishes guidelines for measuring fair value and expands
disclosures regarding fair value measurements. Statement 157
does not require any new fair value measurements. The provisions
of this statement are effective for fiscal years beginning after
November 15, 2007. On February 12, 2008, the FASB
delayed the effective date of
F-65
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
Statement 157 for non-financial assets and liabilities until
fiscal years beginning after November 15, 2008. We do not
expect the adoption of Statement 157 to have a material impact
on our consolidated financial statements.
In February 2007, the FASB issued Statement 159, The Fair
Value Option for Financial Assets and Financial Liabilities,
including an amendment of FASB Statement 115 (Statement
159) which permits entities to choose to measure eligible
items at fair value at specified election dates. Unrealized
gains and losses on items for which the fair value option has
been elected will be reported in earnings at each subsequent
reporting date. The following balance sheet items are within the
scope of Statement 159:
|
|
|
|
|
Recognized financial assets and financial liabilities unless a
special exception applies;
|
|
|
|
Firm commitments that would otherwise not be recognized at
inception and that involve only financial instruments;
|
|
|
|
Non-financial insurance contracts; and
|
|
|
|
Host financial instruments resulting from separation of an
embedded non-financial derivative instrument from a
non-financial hybrid instrument
|
Statement 159 will be effective for fiscal years beginning after
November 2007 with early adoption possible but subject to
certain requirements. We do not expect the adoption of Statement
159 to have a material impact on our consolidated financial
statements.
In December 2007, the FASB issued Statement 141(R), Business
Combinations (Statement 141R). Statement 141R establishes
principles and requirements for how the acquirer of a business
recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree. Statement 141R also
provides guidance for recognizing and measuring the goodwill
acquired in the business combination and determines what
information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the
business combination. Statement 141R will become effective as of
the beginning of our fiscal year beginning after
December 15, 2008.
In December 2007, the FASB issued Statement No. 160,
Noncontrolling Interests in Consolidated Financial
Statementsan amendment of ARB No. 51 (Statement
160). Statement 160 establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary and
for the deconsolidation of a subsidiary. Statement 160 will
become effective as of the beginning of our fiscal year
beginning after December 15, 2008. We do not believe that
Statement 160 will have a material effect on our consolidated
financial statements.
|
|
4.
|
Customer
Accommodation and Quantification
|
As discussed in Note 2, in connection with our decision to
offer financial accommodations to our AAMT Customers, we
analyzed our historical billing information and the available
report-level data to develop individualized accommodation offers
to be made to our AAMT Customers (Accommodation Analysis). This
analysis took approximately one year to complete. The
methodology utilized to develop the individual accommodation
offers was designed to generate positive accommodation outcomes
for our AAMT Customers. As such, the methodology was not a
calculation of potential over billing nor was it intended as a
measure of damages or a reflection of any admission of liability
due and owed to our AAMT Customers. Instead, the Accommodation
Analysis was a methodology that was developed to arrive at
commercially reasonable and fair accommodation offers that would
be acceptable to our AAMT Customers without negotiation.
In the fourth quarter of 2005, based on the Accommodation
Analysis, our board of directors authorized management to make
cash accommodation offers to AAMT customers in the aggregate
amount of $65,413. In 2006, this amount was adjusted by a net
additional amount of $1,157 based on a refinement of the
Accommodation Analysis resulting in an aggregate amount of
$66,570. By accepting our accommodation offer, an
F-66
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
AAMT Customer must agree, among other things, to release us from
any and all claims and liability regarding AAMT line and other
billing related issues.
As part of this process, we also conducted an analysis in an
attempt to quantify the economic consequences of potentially
unauthorized adjustments to AAMT Customers ratios and
formulae within the transcription platform setups
(Quantification). This Quantification was calculated to be
$9,835.
Of the authorized cash accommodation amount of $66,570, $57,678
and $1,157 were treated as consideration given by a vendor to a
customer and accordingly recorded as a reduction in revenues in
2005 and 2006, respectively. The balance of $7,735 plus an
additional $2,100 has been accounted for as a billing error
associated with the Quantification resulting in a reduction of
revenues in various reporting periods from 1999 to 2005.
The goal of our customer accommodation was to reach a settlement
with our AAMT Customers. However, the Accommodation Analysis for
certain AAMT Customers did not result in positive accommodation
outcomes. For certain other customers, the Accommodation
Analysis resulted in calculated cash accommodation offers that
we believed were insufficient as a percentage of their
historical AAMT line billing to motivate such customers to
resolve their billing disputes with us. Therefore, in 2006 we
modified our customer accommodation to enable us to offer this
group of AAMT Customers credits for the purchase of future
products
and/or
services from us over a defined period of time. On July 21,
2006, our board of directors authorized management to make
credit accommodation offers up to an additional $8,676 beyond
amounts previously authorized. During 2006, this amount was
adjusted by a net additional amount of $569 based on a
refinement of the Accommodation Analysis, resulting in an
aggregate amount of $9,245. In connection with the credit
accommodation offers we recorded a reduction in revenues and
corresponding increase in accrued expenses of $9,245 in 2006.
The following is a summary of the financial statement activity
related to the customer accommodation and the Quantification
which is included as a separate line item in the accompanying
consolidated balance sheets as of December 31, 2006 and
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
Beginning balance
|
|
$
|
46,878
|
|
|
$
|
24,777
|
|
Customer accommodation
|
|
|
10,402
|
|
|
|
|
|
Payments and other adjustments
|
|
|
(31,523
|
)
|
|
|
(3,723
|
)
|
Credits
|
|
|
(980
|
)
|
|
|
(2,595
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
24,777
|
|
|
$
|
18,459
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Cost of
Investigation and Legal Proceedings, net
|
For the years ended December 31, 2005, 2006 and 2007, we
recorded a charge of $34,127, $13,001 and $6,083, respectively,
for costs associated with the Review, Managements Billing
Assessment as well as defense and other costs associated with
the SEC and U.S. Department of Justice (DOJ) investigations
and civil litigation that we deemed to be unusual in nature.
These costs are net of insurance claim reimbursements. We record
insurance
F-67
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
claims when the realization of the claim is probable. The
following is a summary of the amounts recorded in the
accompanying consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Legal fees
|
|
$
|
20,858
|
|
|
$
|
14,427
|
|
|
$
|
18,678
|
|
Other professional fees
|
|
|
9,789
|
|
|
|
4,787
|
|
|
|
2,592
|
|
Nightingale and Associates, LLC (Nightingale) services
|
|
|
3,207
|
|
|
|
3,005
|
|
|
|
197
|
|
Insurance recoveries and claims
|
|
|
|
|
|
|
(9,409
|
)
|
|
|
(15,386
|
)
|
Other
|
|
|
273
|
|
|
|
191
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
34,127
|
|
|
$
|
13,001
|
|
|
$
|
6,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other professional fees represent accounting and dispute
analysis costs and document search and retrieval costs. In 2006,
insurance recoveries and claims represent insurance recoveries
($8,702) and insurance claims ($707). The insurance claims were
recorded in other current assets in the accompanying
consolidated balance sheet as of December 31, 2006 and
payment related to these claims was received in the first
quarter of 2007. During 2007 we recorded ($15,386) in additional
insurance recoveries and received payment of this entire amount
in 2007.
2005
Restructuring Plan
During 2005, we implemented a restructuring plan (2005 Plan)
based on the implementation of a centralized national service
delivery model. The 2005 Plan involved the consolidation of
operating facilities and a related reduction in workforce. The
table below reflects the financial statement activity related to
the 2005 Plan which is included in accrued expenses in the
accompanying consolidated balance sheets as of December 31,
2006 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Cancelable
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Leases
|
|
|
Severance
|
|
|
Equipment
|
|
|
Balance as of January 1, 2006
|
|
$
|
2,050
|
|
|
$
|
1,693
|
|
|
$
|
357
|
|
|
$
|
|
|
Additional charge
|
|
|
3,442
|
|
|
|
1,653
|
|
|
|
1,447
|
|
|
|
342
|
|
Usage
|
|
|
(4,780
|
)
|
|
|
(2,698
|
)
|
|
|
(1,740
|
)
|
|
|
(342
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
|
712
|
|
|
|
648
|
|
|
|
64
|
|
|
|
|
|
Additional Charge
|
|
|
493
|
|
|
|
322
|
|
|
|
146
|
|
|
|
25
|
|
Usage
|
|
|
(1,079
|
)
|
|
|
(844
|
)
|
|
|
(210
|
)
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
$
|
126
|
|
|
$
|
126
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments related to the 2005 Plan were made in 2007 for
severance and non-cancelable leases. The remainder of payments
related to the 2005 Plan will be made by 2009 for non-cancelable
leases.
2007
Restructuring Plans
During the third quarter of 2007, we implemented a restructuring
plan related to a reduction in workforce of 104 employees
as a result of the refinement of our centralized national
services delivery model. In addition, during the fourth quarter
of 2007 we implemented a restructuring plan related to an
additional reduction in workforce of 183 employees
attributable to our efforts to reduce costs. We recorded $2,263
in severance charges related to the 2007 restructuring plans.
The remaining restructuring costs are included in accrued
expenses in the accompanying
F-68
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
consolidated balance sheet as of December 31, 2007. The
table below reflects the financial statement activity related to
the 2007 restructuring plans for the year ended
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
Initial charge
|
|
$
|
2,263
|
|
Usage
|
|
|
(770
|
)
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
$
|
1,493
|
|
|
|
|
|
|
The remainder of payments related to the 2007 restructuring
plans will be made in 2008.
Accounts receivable consisted of the following as of December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
Trade accounts receivable
|
|
$
|
59,272
|
|
|
$
|
53,084
|
|
Less: Allowance for doubtful accounts
|
|
|
(4,494
|
)
|
|
|
(4,359
|
)
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
54,778
|
|
|
$
|
48,725
|
|
|
|
|
|
|
|
|
|
|
|
|
8.
|
Property and
Equipment
|
Property and equipment consisted of the following as of December
31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
Computer equipment
|
|
$
|
28,541
|
|
|
$
|
27,610
|
|
Communication equipment
|
|
|
6,602
|
|
|
|
6,932
|
|
Software
|
|
|
18,002
|
|
|
|
20,889
|
|
Furniture and office equipment
|
|
|
1,586
|
|
|
|
1,650
|
|
Leasehold improvements
|
|
|
4,076
|
|
|
|
3,057
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
58,807
|
|
|
|
60,138
|
|
Less: accumulated depreciation
|
|
|
(37,838
|
)
|
|
|
(38,772
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
20,969
|
|
|
$
|
21,366
|
|
|
|
|
|
|
|
|
|
|
During 2006, we recorded a write-off of $767 which was allocated
between cost of revenues ($425) and restructuring charges
related to the 2005 Plan ($342). In the fourth quarter of 2005,
based upon an inventory of fixed assets, we recorded a write-off
of $4,070 (original cost $29,116 less accumulated depreciation
$25,046). This expense was allocated between cost of revenues
($3,851) and restructuring charges related to the 2005 Plan
($219). In addition, during 2005 approximately $50,832 in fully
depreciated assets no longer in use were written off which had
no impact on net loss.
F-69
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
|
|
9.
|
Goodwill and
Other Intangible Assets
|
Goodwill
The following table reflects the financial statement activity
related to the carrying amount of goodwill as of
December 31, 2006 and 2007:
|
|
|
|
|
|
Balance as of January 1, 2006
|
|
$
|
123,849
|
|
Foreign currency adjustments
|
|
|
977
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
|
124,826
|
|
Foreign currency adjustments
|
|
|
679
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
$
|
125,505
|
|
|
|
|
|
|
The foreign currency adjustments reflect changes in the
period-end currency rates of our foreign subsidiaries.
Other
Intangible Assets
As of December 31, other intangible asset balances were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Value
|
|
|
Customer lists
|
|
$
|
77,185
|
|
|
$
|
(32,654
|
)
|
|
$
|
44,531
|
|
Noncompete agreements
|
|
|
4,559
|
|
|
|
(4,559
|
)
|
|
|
|
|
Tradenames
|
|
|
5,325
|
|
|
|
(4,893
|
)
|
|
|
432
|
|
Capitalized software
|
|
|
2,597
|
|
|
|
(2,112
|
)
|
|
|
485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
89,666
|
|
|
$
|
(44,218
|
)
|
|
$
|
45,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Value
|
|
|
Customer lists
|
|
$
|
77,331
|
|
|
$
|
(37,412
|
)
|
|
$
|
39,919
|
|
Tradenames
|
|
|
5,325
|
|
|
|
(5,325
|
)
|
|
|
|
|
Capitalized software
|
|
|
4,815
|
|
|
|
(2,472
|
)
|
|
|
2,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
87,471
|
|
|
$
|
(45,209
|
)
|
|
$
|
42,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated useful life and the weighted average remaining
lives of the intangible assets as of December 31, 2007 were
as follows:
|
|
|
|
|
|
|
|
Estimated
|
|
Weighted Average
|
|
|
Useful Life
|
|
Remaining Lives
|
|
Customer lists
|
|
10 - 20 years
|
|
10.7 years
|
Capitalized software
|
|
3 years
|
|
2.7 years
|
F-70
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
Estimated annual amortization expense for intangible assets is
as follows:
|
|
|
|
|
|
2008
|
|
$
|
5,693
|
|
2009
|
|
|
5,479
|
|
2010
|
|
|
5,328
|
|
2011
|
|
|
4,584
|
|
2012
|
|
|
3,634
|
|
Thereafter
|
|
|
17,544
|
|
|
|
|
|
|
Total
|
|
$
|
42,262
|
|
|
|
|
|
|
|
|
10.
|
Contractual
Obligations
|
Leases
Minimum rental payments under operating leases are recognized on
a straight-line basis over the term of the lease, including any
periods of free rent and landlord incentives. Rental expense for
operating leases for the years ended December 31, 2005,
2006 and 2007 was $5,710, $4,089 and $2,489, respectively.
Future minimum lease payments under non-cancelable operating
leases (with initial or remaining lease terms in excess of one
year) as of December 31, 2007 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Continuing
|
|
|
Restructuring
|
|
|
2008
|
|
$
|
4,650
|
|
|
$
|
4,571
|
|
|
$
|
79
|
|
2009
|
|
|
3,809
|
|
|
|
3,768
|
|
|
|
41
|
|
2010
|
|
|
3,419
|
|
|
|
3,419
|
|
|
|
|
|
2011
|
|
|
2,212
|
|
|
|
2,212
|
|
|
|
|
|
2012 and thereafter
|
|
|
1,642
|
|
|
|
1,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
15,732
|
|
|
$
|
15,612
|
|
|
$
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Contractual Obligations
The following summarizes our other contractual obligations as of
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and Other
|
|
|
|
Total
|
|
|
Purchase
|
|
|
Guaranteed Payments
|
|
|
2008
|
|
$
|
8,328
|
|
|
$
|
5,650
|
|
|
$
|
2,678
|
|
2009
|
|
|
5,400
|
|
|
|
5,400
|
|
|
|
|
|
2010
|
|
|
5,400
|
|
|
|
5,400
|
|
|
|
|
|
2011
|
|
|
4,027
|
|
|
|
4,027
|
|
|
|
|
|
2012 and thereafter
|
|
|
947
|
|
|
|
947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
24,102
|
|
|
$
|
21,424
|
|
|
$
|
2,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase obligations represent telecommunication contracts
($21,174), and other recurring purchase obligations ($250).
Severance and other guaranteed payments are comprised of
severance payments ($1,493), employee retention payments ($785)
and amounts owed to Nightingale ($400).
F-71
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
As of December 31, 2007, we had agreements with certain of
our senior management that provided for severance payments in
the event these individuals were terminated without cause. The
maximum cost exposure related to these agreements was $1,207 as
of December 31, 2007.
As of December 31, 2007, we had agreements with certain of
our senior management other than our President and Chief
Executive Officer that provided for payments to such individuals
in the event we are able to successfully complete a strategic
transaction and such individuals remained employed by us (or the
successor company as the case may be) for the
90-day
period immediately following the closing of the strategic
transaction or such individuals experience an involuntary
termination at any time during such
90-day
period. The maximum cost exposure related to these agreements
was $504 as of December 31, 2007.
As of December 31, 2007, we had an agreement with
Nightingale that provided for a payment to Nightingale in the
event we are able to successfully complete a strategic
transaction and Mr. Hoffmann continues to serve as our
President and Chief Executive Officer for the
90-day
period immediately following the closing of a strategic
transaction or Nightingales engagement with us (or any
successor to our business), including the retention of
Mr. Hoffmann as our President and Chief Executive Officer
(or any successor to our business), is terminated upon the
closing of a strategic transaction or during such
90-day
period. The maximum cost exposure related to this agreement was
$133 as of December 31, 2007.
|
|
11.
|
Investment in
A-Life Medical, Inc. (A-Life)
|
We have an investment in A-Life, a privately held entity which
provides advanced natural language processing technology for the
medical industry. Our investment is recorded under the equity
method of accounting since we owned 33.6% of A-Lifes
outstanding voting shares as of December 31, 2006 and 2007.
The table below reflects the financial statement activity
related to A-Life as of December 31, 2006 and 2007 that is
recorded in other assets in the accompanying consolidated
balance sheets.
|
|
|
|
|
|
Balance as of January 1, 2006
|
|
$
|
5,015
|
|
Share in income
|
|
|
874
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
|
5,889
|
|
Share in income
|
|
|
625
|
|
Reclassification
|
|
|
(498
|
)
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
$
|
6,016
|
|
|
|
|
|
|
Our investment in A-Life included a note receivable plus accrued
interest due from A-Life which matured on December 31,
2003. Prior to 2007, this note receivable and accrued interest
had been recorded in other assets. In January 2008, A-Life paid
us $1,250 to satisfy this note receivable and accrued interest
in full, as well as all other disputes and claims between A-Life
and us. Accordingly, we reclassified the note receivable and
accrued interest balances to other current assets in the
accompanying December 31, 2007 consolidated balance sheet.
F-72
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
Accrued expenses consisted of the following as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
Professional services
|
|
$
|
4,938
|
|
|
$
|
4,959
|
|
Shareholder litigation settlement
|
|
|
7,750
|
|
|
|
|
|
Other
|
|
|
16,124
|
|
|
|
14,030
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses
|
|
$
|
28,812
|
|
|
$
|
18,989
|
|
|
|
|
|
|
|
|
|
|
No other individual accrued expense is in excess of 5% of total
current liabilities.
|
|
13.
|
Commitments and
Contingencies
|
Governmental
Investigations
The SEC is currently conducting a formal investigation of us
relating to our billing practices. We have been fully
cooperating with the SEC since it opened its investigation in
2004. We have complied, and are continuing to comply, with
information and document requests by the SEC.
We also received an administrative HIPAA subpoena for documents
from the DOJ on December 17, 2004. The subpoena sought
information primarily about our provision of medical
transcription services to governmental and non-governmental
customers. The information was requested in connection with a
government investigation into whether we and others violated
federal laws in connection with the provision of medical
transcription services. We have complied, and are continuing to
comply, with information and document requests by the DOJ.
The DOL is currently conducting a formal investigation into the
administration of our 401(k) plan. We have been fully
cooperating with the DOL since it opened its investigation in
2004. We have complied, and are continuing to comply, with
information and document requests by the DOL.
Developments relating to the SEC, DOJ
and/or DOL
investigations will continue to create various risks and
uncertainties that could materially and adversely affect our
business and our historical and future financial condition,
results of operations and cash flows.
Shareholder
Securities Litigation
A shareholder putative class action lawsuit was filed against us
in the United States District Court District of New Jersey
on November 8, 2004. The action, entitled William
Steiner v. MedQuist, Inc., et al., Case
No. 1:04-cv-05487-FLW
(Shareholder Putative Action), was filed against us and certain
of our former officers, purportedly on behalf of an alleged
class of all persons who purchased our common stock during the
period from April 23, 2002 through November 2, 2004,
inclusive (Securities Class Period). The complaint
specifically alleged that defendants violated federal securities
laws by purportedly issuing a series of false and misleading
statements to the market throughout the Securities
Class Period, which statements allegedly had the effect of
artificially inflating the market price of our securities. The
complaint asserted claims under Section 10(b) and 20(a) of
the Exchange Act and
Rule 10b-5,
thereunder. Named as defendants, in addition to us, were our
former President and Chief Executive Officer and our former
Executive Vice President and Chief Financial Officer.
On August 16, 2005, a First Amended Complaint in the
Shareholder Putative Class Action was filed against us in
the United States District Court District of New Jersey. The
First Amended Complaint named additional defendants, including
certain current and former directors, certain of our former
officers, our former and current external auditors and Philips.
Like the original complaint, the First Amended Complaint
asserted claims under
F-73
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
Sections 10(b) and 20(a) of the Exchange Act and
Rule 10b-5
thereunder. The Securities Class Period of the original
complaint was expanded 20 months to include the period from
March 29, 2000 through June 14, 2004. Pursuant to an
October 17, 2005 consent order approved by the Court, lead
plaintiff Greater Pennsylvania Pension Fund filed a Second
Amended Complaint on November 15, 2005. The Second Amended
Complaint dropped Philips as a defendant, but alleged the same
claims and the same purported class period as the First Amended
Complaint. Plaintiffs sought unspecified damages. Pursuant to
the provisions of the Private Securities Litigation Reform Act,
discovery in the action was stayed pending the filing and
resolution of the defendants motions to dismiss, which
were filed on January 17, 2006, and which were fully
briefed as of June 16, 2006. On September 29, 2006,
the Court denied our motions to dismiss and the motion to
dismiss of the individual defendants. In the same order, the
Court granted the motion to dismiss filed by our former and
current external auditors. On November 3, 2006, we filed
our Answer denying the material allegations contained in the
Second Amended Complaint. On March 23, 2007, we entered
into a memorandum of understanding and a stipulation of
settlement with the lead plaintiff in which we agreed to pay
$7,750 to settle all claims, throughout the class period,
against all defendants in the action. We accrued the
aforementioned $7,750 as of December 31, 2005. In April
2007, we paid the entire $7,750 into an escrow account for the
eventual distribution to the plaintiffs. On May 16, 2007,
the Court issued an Order Preliminarily Approving Settlement and
Providing for Notice. The Court conducted a final approval
hearing and approved the settlement on August 15, 2007.
Neither we nor any of the individuals named in the action has
admitted to liability or any wrongdoing in connection with the
settlement. On August, 17, 2007, the Court entered final
judgment and dismissed the case with prejudice.
Customer
Litigation
A putative class action was filed in the United States District
Court for the Central District of California. The action,
entitled South Broward Hospital District, d/b/a Memorial
Regional Hospital, et al. v. MedQuist, Inc. et al., Case
No. CV-04-7520-TJH-VBKx,
was filed on September 9, 2004 against us and certain of
our present and former officials, purportedly on behalf of an
alleged class of non-federal governmental hospitals and medical
centers that the complaint claims were wrongfully and
fraudulently overcharged for transcription services by
defendants based primarily on our use of the AAMT line billing
unit of measure. The complaint charged fraud, violation of the
California Business and Professions Code, unjust enrichment,
conversion, negligent supervision and violation of RICO.
Plaintiffs seek damages in an unspecified amount, plus costs and
interest, an injunction against alleged continuing illegal
activities, an accounting, punitive damages and attorneys
fees. Named as defendants, in addition to us, were one of our
senior vice presidents, our former executive vice president of
marketing and new business development, our former executive
vice president and chief legal officer, and our former executive
vice president and chief financial officer.
On December 20, 2004, we and the individual defendants
filed motions to dismiss for lack of personal jurisdiction and
improper venue, or in the alternative, to transfer the putative
action to the United States District Court for the District of
New Jersey. On February 2, 2005, plaintiffs filed a Second
Amended Complaint both adding and deleting named plaintiffs in
an attempt to keep the putative action in the United States
District Court for the Central District of California. On
March 30, 2005, the United States District Court for the
Central District of California issued an order transferring the
putative action to the United States District Court District of
New Jersey and assigning Case
No. 05-CV-2206-JBS-AMD.
On August 1, 2005, we and the individual defendants filed
their respective Answers denying the material allegations
contained in the Second Amended Complaint. On August 31,
2005, we and the individual defendants filed motions to dismiss
the Second Amended Complaint for failure to state a claim and a
motion to dismiss in favor of arbitration, or in the
alternative, to stay pending arbitration. On December 12,
2005, the plaintiffs filed an Amendment to the Second Amended
Complaint. On December 13, 2005, the Court issued an order
requiring plaintiffs to file a Third Amended Complaint.
F-74
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
Plaintiffs filed the Third Amended Complaint on January 4,
2006. The Third Amended Complaint expands the claims made beyond
issues arising from contracts based on AAMT line billing and
beyond customers billed based on an AAMT line, alleging that we
engaged in a scheme to inflate customers invoices without
regard to the terms of individual contracts and even in the
absence of any written contract. The Third Amended Complaint
also limits plaintiffs claim for fraud in the inducement
of the agreement to arbitrate to the three named plaintiffs
whose contracts contain an arbitration provision and a subclass
of similarly situated customers. On January 20, 2006 we and
the individual defendants filed motions to dismiss the Third
Amended Complaint for failure to state a claim and a motion to
compel arbitration of all claims by the arbitration subclass and
to stay the case in its entirety pending arbitration. On
March 8, 2006 the Court held a hearing on these motions,
and took the matter under submission. On March 30, 2007,
the Court issued an order holding that plaintiffs could not make
out a claim that we had violated the federal RICO statute, thus
eliminating any claim against us for treble damages. The Court
also found that plaintiffs could not make out a claim that we
had engaged in any unfair or deceptive acts or practices in
violation of state law, or that we had made any negligent
misrepresentations to plaintiffs. In its ruling, the Court,
without reaching a decision of whether any wrongdoing had
occurred, allowed plaintiffs to proceed with their claims
against us for fraud, unjust enrichment and an accounting. In
its order, the Court denied our motion to compel arbitration
regarding those customers whose contracts contained an agreement
to arbitrate. We have appealed that decision to the Third
Circuit Court of Appeals, and we moved the District Court to
stay the matter pending that appeal. The District Court heard
oral argument on our motion to stay on May 30, 2007 and
took the motion under submission.
On December 18, 2007, the Third Circuit entered judgment
denying our appeal and affirming the order of the District
Court. That same day, the District Court entered an order
denying our motion to stay pending appeal as moot and ordering
all Initial Disclosures, all
class-certification
related discovery, and all briefing upon
class-certification
motion practice completed within three months unless enlarged
for good cause. On February 21, 2008, the District Court
entered a scheduling order pursuant to which all fact discovery
related to class certification must be completed by
April 15, 2008 and plaintiffs motion for class
certification must be filed by April 30, 2008. All other
fact discovery must be completed by July 31, 2008, and all
expert discovery must be completed by October 31, 2008.
Dispositive motions must be filed by November 24, 2008. The
parties exchanged Initial Disclosures and commenced discovery.
The parties participated in court-ordered mediation in late
2007, but no settlement was reached. The parties continued to
explore the possibility of resolving the litigation before
trial, and have now reached agreement on settlement terms
resolving all claims by the named plaintiffs. Under the
parties agreement, we will make a lump sum payment of
$7,537 to resolve all claims by the individual named plaintiffs
and certain other additional putative class members represented
by plaintiffs counsel but not named in the action. We have
accrued the entire amount of this lump sum payment, $5,205 of
which was accrued during 2005, in the accompanying consolidated
balance sheet as of December 31, 2007. Neither we, nor any
of the individual defendants, will admit to any liability or any
wrongdoing in connection with the settlement. The District Court
has entered a consent order staying the action through
April 18, 2008 to allow the parties to finalize the
settlement. We anticipate that the parties will execute a final
settlement agreement and the case will be dismissed with
prejudice in its entirety within the next four to eight weeks.
Because the settlement will not be on a
class-wide
basis, no class will be certified and thus there is no
requirement to give notice.
Medical
Transcriptionist Litigation
Hoffmann Putative
Class Action
A putative class action lawsuit was filed against us in the
United States District Court for the Northern District of
Georgia. The action, entitled Brigitte Hoffmann, et al. v.
MedQuist, Inc., et al., Case
No. 1:04-CV-3452,
was filed with the Court on November 29, 2004 against us
and certain current and former officials, purportedly on behalf
F-75
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
of an alleged class of current and former employees and
statutory workers, who are or were compensated on a per
line basis for medical transcription services
(Class Members) from January 1, 1998 to the time of
the filing of the complaint (Class Period). The complaint
specifically alleged that defendants systematically and
wrongfully underpaid the Class Members during the
Class Period. The complaint asserted the following causes
of action: fraud, breach of contract, demand for accounting,
quantum meruit, unjust enrichment, conversion, negligence,
negligent supervision, and RICO violations. Plaintiffs sought
unspecified compensatory damages, punitive damages, disgorgement
and restitution. On December 1, 2005, the Hoffmann matter
was transferred to the United States District Court for the
District of New Jersey. On January 12, 2006, the Court
ordered this case consolidated with the Myers Putative
Class Action discussed below. As set forth below, we
believe that the claims asserted in the consolidated Myers
Putative Class Action have no merit and intend to
vigorously defend that action.
Force Putative
Class Action
A putative class action entitled Force v. MedQuist Inc. and
MedQuist Transcriptions, Ltd., Case
No. 05-cv-2608-WSD,
was filed against us on October 11, 2005, in the United
States District Court for the Northern District of Georgia. The
action was brought on behalf of a putative class of current and
former employees who claim they are or were compensated on a
per line basis for medical transcription services
but were allegedly underpaid due to the actions of defendants.
The named plaintiff asserted claims for breach of contract,
quantum meruit, unjust enrichment, and for an accounting. Upon
stipulation and consent of the parties, on February 17,
2006, the Force matter was ordered transferred to the United
States District Court for the District of New Jersey.
Subsequently, on April 4, 2006, the parties entered into a
stipulation and consent order whereby the Force matter was
consolidated with the Myers Putative Class Action discussed
below, and the consolidated amended complaint filed in the Myers
action on January 31, 2006 was deemed to supersede the
original complaint filed in the Force matter. As set forth
below, we believe that the claims asserted in the consolidated
Myers Putative Class Action have no merit and intend to
vigorously defend that action.
Myers Putative
Class Action
A putative class action entitled Myers, et al. v. MedQuist Inc.
and MedQuist Transcriptions, Ltd., Case
No. 05-cv-4608
(JBS), was filed against us on September 22, 2005 in the
United States District Court for the District of New Jersey. The
action was brought on behalf of a putative class of our employee
and independent contractor transcriptionists who claim that they
contracted with us to be paid on a 65 character line, but were
allegedly underpaid due to intentional miscounting of the number
of characters and lines transcribed. The named plaintiffs
asserted claims for breach of contract, unjust enrichment, and
request an accounting.
The allegations contained in the Myers case are substantially
similar to those contained in the Hoffmann and Force putative
class actions and, as detailed above, the three actions have now
been consolidated. A consolidated amended complaint was filed on
January 31, 2006. In the consolidated amended complaint,
the named plaintiffs assert claims for breach of contract,
breach of the covenant of good faith and fair dealing, unjust
enrichment and demand an accounting. On March 7, 2006 we
filed a motion to dismiss all claims in the consolidated amended
complaint. The motion was fully briefed and argued on
August 7, 2006. The Court denied the motion on
December 21, 2006. On January 19, 2007, we filed our
answer denying the material allegations pleaded in the
consolidated amended complaint.
On May 17, 2007, the Court issued a Scheduling Order,
ordering all pretrial fact discovery completed by
October 30, 2007. The Court subsequently ordered plaintiffs
to file their motion for class certification by
December 14, 2007 and continued the date to complete fact
discovery to January 14, 2007. On October 18, 2007,
the Court heard oral argument on plaintiffs motion to
compel further responses to written discovery regarding our
billing practices. At the conclusion of the hearing, the Court
denied plaintiffs motion, finding plaintiffs had not
established that the billing discovery sought was relevant to
the claims or defenses regarding
F-76
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
transcriptionist pay alleged in their case. On December 14,
2007, plaintiffs filed their motion for class certification,
identifying a proposed class of all our transcriptionists who
were compensated on a per line basis for work completed on
MedRite, MTS or DEP transcription platforms from
November 29, 1998 to the present and alleging that the
proposed class was underpaid by more than $80 million, not
including interest.
On January 4, 2008, the Court entered a Consent Order,
ordering our opposition to the motion for class certification to
be filed by March 14, 2008, plaintiffs reply brief to
be filed by May 14, 2008 and setting oral argument for
June 2, 2008. No date has been set for trial. On
January 9, 2008, the Court entered a Consent Order
extending the deadline for the parties to complete depositions
of identified witnesses through February 15, 2008. We have
now deposed each of the named plaintiffs and all witnesses who
offered declarations in support of plaintiffs motion for
class certification, and plaintiffs have deposed numerous
MedQuist present and former employees. On February 8, 2008,
plaintiffs indicated that they will seek leave to file an
amended class certification brief to narrow their claims. On
February 19, 2008, the parties exchanged their Initial
Disclosures. Plaintiffs disclosures limit their damages
estimate to $41 million related to alleged underpayment on
the MedRite transcription platform; however, plaintiffs state
that they are continuing to analyze potential undercounting and
will supplement their damages claim. On March 10, 2008,
plaintiffs moved for leave to file an amended motion for
class certification dropping all allegations involving our DEP
transcription platform and narrowing the claims asserted
regarding the legacy MTS transcription platform. We did not
oppose plaintiffs motion for leave. On March 11,
2008, the Court granted plaintiffs motion, ordering us to
file our opposition to plaintiffs amended motion for class
certification by April 4, 2008 and ordering plaintiffs to
file their reply by May 23, 2008. The hearing date was not
changed and oral argument remains set for June 2, 2008. We
believe that the claims asserted in the consolidated actions
have no merit and intend to vigorously defend the suit.
Shareholder
Derivative Litigation
On October 4, 2005, we announced the dismissal with
prejudice of a shareholder derivative action filed in
United States District Court for the District of New
Jersey. The suit, Rhoda Kanter (Plaintiff) v. Hans M.
Barella et al. (Defendants), was filed on November 12, 2004
against Philips and 10 current and former members of our board
of directors. We were named as a nominal defendant.
In a ruling dated September 21, 2005, the Court found
plaintiffs allegations that our board of directors
breached their fiduciary duties to us to be insufficient. The
plaintiff had alleged that for a period from 2001 through 2004,
the Defendants violated their fiduciary duties by permitting
artificial inflation of billing figures; failing to adequately
ensure accurate and lawful billing practices; and failing to
accurately report our true financial condition in our published
financial statements. On October 3, 2005, plaintiff filed a
motion for reconsideration of the Courts order dismissing
the action with prejudice. On November 16, 2005, the Court
denied plaintiffs motion for reconsideration. On
December 13, 2005, plaintiff filed a Notice of Appeal with
the United States Court of Appeals for the Third Circuit.
Plaintiffs appeal was fully briefed as of May 2006, and
the Court of Appeals heard oral argument on the appeal on
March 1, 2007. Plaintiffs appeal was denied by the
Court of Appeals on May 25, 2007.
Shareholder
Litigation
Costa Brava
Partnership III, L.P. Shareholder Litigation
On October 9, 2007, a single count Complaint and an Order
to Show Cause were filed against us in the Superior Court of New
Jersey, Chancery Division, Burlington County by one of our
shareholders. The action, entitled Costa Brava Partnership III,
L.P. v. MedQuist Inc. (Bur-C-0149-07), sought to compel us
to hold an annual meeting of shareholders (Annual Meeting Claim).
F-77
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
On October 30, 2007, plaintiff requested access under New
Jersey law to certain of our books and records. In response to
plaintiffs request, we voluntarily provided plaintiff with
those books and records that we believed we were required to
produce under New Jersey law. Thereafter, on November 9,
2007, plaintiff filed an Amended Complaint to assert a second
claim to compel us to provide it with access to certain other
books and records (Books and Records Claim). The Annual Meeting
Claim and the Books and Records Claim sought equitable relief
only.
In December 2007, we agreed to hold our annual meeting of
shareholders on December 31, 2007. This resolved the Annual
Meeting Claim. Prior to the annual meeting, we voluntarily
produced to plaintiff certain additional books and records that
plaintiff requested in the Books and Records Claim. Thereafter,
on January 24, 2008, we filed an opposition to
plaintiffs Order to Show Cause to compel access to the
remaining books and records. On February 4, 2008, plaintiff
filed a reply brief. The Books and Records Claim has been
briefed and the parties are waiting for the Court to schedule a
hearing date to resolve the matter. We believe that the books
and records requests at issue in the Books and Records Claim are
burdensome and overbroad and intend to vigorously defend the
action.
Kahn Putative
Class Action
A shareholder putative class action lawsuit was filed against us
in the Superior Court of New Jersey, Chancery Division,
Burlington County. The action, entitled Alan R. Kahn v.
Stephen H. Rusckowski, et al., Docket
No. BUR-C-000007-08,
was filed with the Court on January 22, 2008 against us,
Philips and our four non-independent directors, Clement
Revetti, Jr., Stephen H. Rusckowski, Gregory M. Sebasky and
Scott Weisenhoff. Plaintiff purports to bring the action on his
own behalf and on behalf of all current holders of our common
stock. The complaint alleges that defendants breached their
fiduciary duties of good faith, fair dealing, loyalty, and due
care by purportedly agreeing to and initiating a process for our
sale or a change of control transaction which will allegedly
cause harm to plaintiff and the putative class. Plaintiff seeks
damages in an unspecified amount, plus costs and interest, a
judgment declaring that defendants breached their fiduciary
duties and that any proposed transactions regarding our sale or
change of control are void, an injunction preventing our sale or
any change of control transaction that is not entirely fair to
the class, an order directing us to appoint three independent
directors to our board of directors, and attorneys fees
and expenses. We have not yet been required to file a responsive
pleading. We believe that the claims asserted have no merit and
intend to defend the case vigorously
Reseller
Arbitration Demand
On October 1, 2007, we received from counsel to nine
current and former resellers of our products (Claimants), a copy
of an arbitration demand filed by the Claimants, initiating an
arbitration proceeding styled Diskriter, Inc., Electronic Office
Systems, Inc., Milner Voice & Data, Inc., Nelson
Systems, Inc., NEO Voice and Communications, Inc., Office
Business Systems, Inc., Roach-Reid Office Systems, Inc., Stiles
Office Systems, Inc., and Travis Voice and Data, Inc. v.
MedQuist Inc. and MedQuist Transcriptions, Ltd. (filed on
September 27, 2007, AAA, Case Number Not Yet Assigned). The
arbitration demand purports to set forth claims for breach of
contract; breach of covenant of good faith and fair dealing;
promissory estoppel; misrepresentation; and tortuous
interference with contractual relations. The Claimants allege
that we breached our written agreements with the Claimants by:
(i) failing to provide reasonable training, technical
support, and other services; (ii) using the Claimants
confidential information to compete against the Claimants;
(iii) directly competing with the Claimants
territories; and (iv) failing to make new products
available to the Claimants. In addition, the Claimants
allege that we made false oral representations that we:
(i) would provide new product, opportunities and support to
the Claimants; (ii) were committed to continuing to use
Claimants; (iii) did not intend to create our own sales
force with respect to the Claimants territory; and
(iv) would stay out of Claimants territories and
would not attempt to take over the Claimants business and
relationships with the Claimants customers and end-users.
The Claimants assert that they are seeking damages in excess of
$24.3 million. The arbitrator has not yet set a date for us
to
F-78
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
formally respond to the arbitration demand. We deny all
wrongdoing and intend to defend ourselves vigorously including
asserting counterclaims against the Claimants as appropriate.
Anthurium
Patent Litigation
On November 6, 2007, Anthurium Solutions, Inc. filed an
action entitled Anthurium Solutions, Inc. v. MedQuist
Inc., et al., Civil Action
No. 2-07CV-484,
in the United States District Court for the Eastern District of
Texas, alleging that we infringed and continue to infringe
United States Patent No. 7,031,998 through our DEP
transcription platform. The complaint also alleges patent
infringement claims against Spheris, Inc. and Arrendale
Associates, Inc. The complaint seeks injunctive relief and
unspecified damages, including enhanced damages and
attorneys fees. We filed our answer on January 15,
2008 and counterclaimed seeking a declaratory judgment of
non-infringement and invalidity. No scheduling order has been
issued, and no pretrial dates have been set. Our investigation
of the claims is ongoing, and we are awaiting plaintiffs
preliminary infringement contentions. We believe that the claims
asserted have no merit and intend to vigorously defend the suit.
Other
Matters
From time to time, we have been involved in various claims and
legal actions arising in the ordinary course of business. In our
opinion, the outcome of such actions will not have a material
adverse effect on our consolidated financial position, results
of operations, liquidity or cash flows.
We provide certain indemnification provisions within our
standard agreement for the sale of software and hardware
(collectively, Products) to protect our customers from any
liabilities or damages resulting from a claim of
U.S. patent, copyright or trademark infringement by third
parties relating to our Products. We believe that the likelihood
of any future payout relating to these provisions is remote.
Accordingly, we have not recorded any liability in our
consolidated financial statements as of December 31, 2006
or 2007 related to these indemnification provisions.
We had insurance policies which provided coverage for certain of
the matters related to the legal actions described herein. We
received total insurance recoveries of $24,795 related to these
policies (See Note 5). We do not expect to receive any
additional insurance recoveries related to the legal actions
described above.
Our stock option plans provide for the granting of options to
purchase shares of common stock to eligible employees (including
officers) as well as to our non-employee directors. Options may
be issued with the exercise prices equal to the fair market
value of the common stock on the date of grant or at a price
determined by a committee of our board of directors. Stock
options vest and are exercisable over periods determined by the
committee, generally five years, and expire no more than
10 years after the grant.
In July 2004, our board of directors affirmed our June 2004
decision to indefinitely suspend the exercise and future grant
of options under our stock option plans. Ten former executives
separated from us in 2004 and 2005. Notwithstanding the
suspension, to the extent such executives held options that were
vested as of their resignation date, such options remain
exercisable for the post-termination period, generally
90 days, commencing on the date that the suspension is
lifted for the exercise of options. This suspension was lifted
on October 4, 2007. There were
F-79
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
704 shares that qualified for this post-termination
exercise period. A summary of these remaining post-termination
options as of December 31, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Intrinsic
|
|
|
Exercise
|
|
Range of Exercise Prices
|
|
Shares
|
|
|
Value
|
|
|
Price
|
|
|
$ 2.71-$10.00
|
|
|
31
|
|
|
$
|
161
|
|
|
$
|
5.71
|
|
$10.01-$20.00
|
|
|
142
|
|
|
|
|
|
|
$
|
15.04
|
|
$20.01-$70.00
|
|
|
512
|
|
|
|
|
|
|
$
|
47.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
685
|
|
|
$
|
161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The extension of the life of the awards was recorded as a
modification of the grants. Under APB 25, the modification
created intrinsic value for vested stock if the market value of
the stock on the date of termination exceeded the exercise
price. Therefore, these grants required an immediate recognition
of the compensation expense with an offsetting credit to common
stock. We recorded a charge of $37, $0 and $0 for the years
ended December 31, 2005, 2006 and 2007, respectively.
Information with respect to our common stock options is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Shares
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Subject to
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Life in Years
|
|
|
Value
|
|
|
Outstanding, January 1, 2005
|
|
|
4,211
|
|
|
$
|
29.27
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(216
|
)
|
|
$
|
34.25
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(401
|
)
|
|
$
|
27.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2005
|
|
|
3,594
|
|
|
$
|
28.80
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(75
|
)
|
|
$
|
22.11
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(1,207
|
)
|
|
$
|
22.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2006
|
|
|
2,312
|
|
|
$
|
32.57
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
200
|
|
|
$
|
11.20
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(4
|
)
|
|
$
|
2.71
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(137
|
)
|
|
$
|
29.10
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(12
|
)
|
|
$
|
17.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2007
|
|
|
2,359
|
|
|
$
|
31.08
|
|
|
|
3.0
|
|
|
$
|
162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2007
|
|
|
2,108
|
|
|
$
|
33.30
|
|
|
|
2.3
|
|
|
$
|
162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest as of December 31, 2007
|
|
|
2,273
|
|
|
$
|
31.64
|
|
|
|
2.8
|
|
|
$
|
162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value is calculated using the difference
between the closing stock price on the last trading day of 2007
and the option exercise price, multiplied by the number of
in-the-money
options.
F-80
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
Under the Black-Scholes option pricing model, input assumptions
are determined at the time of option grant and are not adjusted
during the life of that grant. The following are assumptions
used in the 2007 option fair value calculations.
|
|
|
|
|
|
Expected term (years)
|
|
|
6.50
|
|
Expected volatility
|
|
|
61.6
|
%
|
Dividend Yield
|
|
|
0
|
%
|
Expected risk free interest rate
|
|
|
4.40
|
%
|
Significant assumptions required to estimate the fair value of
stock options include the following:
|
|
|
|
|
Expected term: The SEC Staff Accounting Bulletin No 107
Simplified method has been used to determine a
weighted average expected term of options granted.
|
|
|
|
|
|
Expected volatility: We have estimated expected volatility based
on the historical stock price volatility of a group of similar
publicly traded companies. We believe that our historical
volatility is not indicative of future volatility.
|
The weighted average grant date fair value of options issued in
2007 was $7.03 per share.
A summary of outstanding and exercisable options as of
December 31, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Contractual Life
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
Range of Exercise Prices
|
|
Shares
|
|
|
(in years)
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
$2.71-$10.00
|
|
|
31
|
|
|
|
1.8
|
|
|
$
|
5.71
|
|
|
|
31
|
|
|
$
|
5.71
|
|
$10.01-$20.00
|
|
|
728
|
|
|
|
5.0
|
|
|
$
|
15.03
|
|
|
|
477
|
|
|
$
|
16.37
|
|
$20.01-$30.00
|
|
|
830
|
|
|
|
3.0
|
|
|
$
|
26.61
|
|
|
|
830
|
|
|
$
|
26.61
|
|
$30.01-$40.00
|
|
|
218
|
|
|
|
1.2
|
|
|
$
|
32.23
|
|
|
|
218
|
|
|
$
|
32.23
|
|
$40.01-$70.00
|
|
|
552
|
|
|
|
1.1
|
|
|
$
|
59.84
|
|
|
|
552
|
|
|
$
|
59.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,359
|
|
|
|
3.0
|
|
|
$
|
31.08
|
|
|
|
2,108
|
|
|
$
|
33.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were 0 and 200 options granted during 2006 and 2007. There
were 0, 0 and 4 shares exercised in 2005, 2006 and 2007.
The total fair value of shares vested during 2007 was $396.
As of December 31, 2007, there were 962 additional options
available for grant under our stock option plans. When we became
up to date in our reporting to the SEC in October 2007, certain
executive officers, in accordance with their employment
agreements, received an aggregate of 200 options with an
exercise price equal to the then market value of our common
stock on the date of grant. In 2005, $78 is included in the pro
forma stock-based compensation amount depicted in Note 3
related to these options. In 2006 and 2007, $136 and $84,
respectively, is included as selling, general and administrative
expenses and $58 and $36 is included in research and development
expenses in the accompanying consolidated statement of
operations related to these options with the total of $194 and
$120 included in common stock in the accompanying consolidated
balance sheet as of December 31, 2006.
F-81
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
The sources of loss before income taxes and the income tax
provision for the years ended December 31, 2005, 2006 and
2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Loss before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
(93,021
|
)
|
|
$
|
(15,302
|
)
|
|
$
|
(13,557
|
)
|
Foreign
|
|
|
2,151
|
|
|
|
654
|
|
|
|
690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
$
|
(90,870
|
)
|
|
$
|
(14,648
|
)
|
|
$
|
(12,867
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(16,171
|
)
|
|
$
|
(3,615
|
)
|
|
$
|
34
|
|
State and local
|
|
|
(151
|
)
|
|
|
291
|
|
|
|
194
|
|
Foreign
|
|
|
429
|
|
|
|
393
|
|
|
|
233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax provision
|
|
$
|
(15,893
|
)
|
|
$
|
(2,931
|
)
|
|
$
|
461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Deferred income tax provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
28,702
|
|
|
$
|
4,825
|
|
|
$
|
2,735
|
|
State and local
|
|
|
7,830
|
|
|
|
(259
|
)
|
|
|
(499
|
)
|
Foreign
|
|
|
123
|
|
|
|
659
|
|
|
|
(358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax provision
|
|
|
36,655
|
|
|
|
5,225
|
|
|
|
1,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
$
|
20,762
|
|
|
$
|
2,294
|
|
|
$
|
2,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reconciliation of the statutory federal income tax rate to
our effective income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Statutory federal income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income taxes, net of federal tax effect
|
|
|
5.0
|
|
|
|
(2.5
|
)
|
|
|
3.6
|
|
Valuation allowance
|
|
|
(62.5
|
)
|
|
|
(40.4
|
)
|
|
|
(53.0
|
)
|
Impact of foreign operations
|
|
|
(0.5
|
)
|
|
|
(1.1
|
)
|
|
|
(0.4
|
)
|
Adjustments to tax reserves
|
|
|
0.5
|
|
|
|
1.7
|
|
|
|
(0.6
|
)
|
Permanent differences
|
|
|
(0.7
|
)
|
|
|
(7.1
|
)
|
|
|
(3.4
|
)
|
Tax law changes
|
|
|
|
|
|
|
|
|
|
|
1.8
|
|
Other
|
|
|
0.4
|
|
|
|
(1.3
|
)
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
(22.8
|
)%
|
|
|
(15.7
|
)%
|
|
|
(18.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-82
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of our
deferred tax assets and liabilities as of December 31,
2005, 2006 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign net operating loss carryforwards
|
|
$
|
3,022
|
|
|
$
|
3,349
|
|
|
$
|
2,733
|
|
Domestic net operating loss carryforwards
|
|
|
2,687
|
|
|
|
18,492
|
|
|
|
36,295
|
|
Accounts receivable
|
|
|
1,964
|
|
|
|
1,846
|
|
|
|
1,673
|
|
Property and equipment
|
|
|
1,285
|
|
|
|
1,975
|
|
|
|
1,917
|
|
Intangibles
|
|
|
24,192
|
|
|
|
22,285
|
|
|
|
21,746
|
|
Employee compensation and benefit plans
|
|
|
2,136
|
|
|
|
1,250
|
|
|
|
953
|
|
Deferred compensation
|
|
|
954
|
|
|
|
446
|
|
|
|
617
|
|
Customer accommodation and quantification
|
|
|
18,485
|
|
|
|
6,374
|
|
|
|
7,087
|
|
Accruals and reserves
|
|
|
8,078
|
|
|
|
10,556
|
|
|
|
4,855
|
|
Other
|
|
|
1,761
|
|
|
|
2,113
|
|
|
|
1,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
64,564
|
|
|
|
68,686
|
|
|
|
79,590
|
|
Less: Valuation allowance
|
|
|
(58,039
|
)
|
|
|
(64,601
|
)
|
|
|
(74,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
6,525
|
|
|
|
4,085
|
|
|
|
5,090
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles
|
|
|
(15,947
|
)
|
|
|
(18,704
|
)
|
|
|
(21,377
|
)
|
Other
|
|
|
(919
|
)
|
|
|
(739
|
)
|
|
|
(935
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(16,866
|
)
|
|
|
(19,443
|
)
|
|
|
(22,312
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
(10,341
|
)
|
|
$
|
(15,358
|
)
|
|
$
|
(17,222
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, we had federal net operating loss
carry forwards of approximately $80,520 which will partially
expire in 2027 and 2028.
As of December 31, 2006 and 2007, we had state net
operating loss carry forwards of approximately $115,632 and
$167,750, respectively, which will expire between 2008 and 2027.
In addition, we have foreign net operating loss carry forwards
of approximately $15,492, which do not expire. Utilization of
the net operating loss carry forwards may be subject to an
annual limitation in the event of a change in ownership in
future years as defined by Section 382 of the Internal
Revenue Code and similar state provisions.
In assessing the future realization of deferred taxes, we
consider whether it is more likely than not that some portion or
all of the deferred income tax assets will not be realized based
on projections of our future taxable earnings. The ultimate
realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which
those temporary differences become deductible.
During 2007, we decreased our valuation allowance against our
deferred tax assets generated in foreign tax jurisdictions from
$1,803 to $1,217 based on managements assessment of future
earnings available to utilize these deferred tax assets.
In the fourth quarter of 2005, a valuation allowance of $56,808
was established against various domestic deferred tax assets.
After consideration of all evidence, both positive and negative,
management concluded that it was more
F-83
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
likely than not that a majority of the domestic deferred tax
assets would not be realized. In 2006 and 2007, we increased
this valuation allowance to $62,798 and $73,313, respectively.
Domestic deferred tax assets were recognized to the extent that
objective positive evidence existed with respect to their future
utilization. The objective positive evidence included the
potential to carry back any losses generated by the deferred tax
assets in the future as well as income expected to be recognized
due to the reversal of deferred tax liabilities as of
December 31, 2007. In analyzing deferred tax liabilities as
a source for potential income for purposes of recognizing
deferred tax assets, the deferred tax liabilities related to
excess book basis in goodwill over tax basis in goodwill were
considered a source of future income for benefiting deferred tax
assets with indefinite lives only due to the indefinite life and
uncertainty of reversal of these liabilities during the same
period as the non-indefinite life deferred tax assets.
Our consolidated income tax expense for the years ended
December 31, 2005, 2006 and 2007 consists principally of an
increase in deferred tax liabilities related to goodwill
amortization deductions for income tax purposes during the
applicable year as well as state and foreign income taxes.
Effective January 1, 2007, we adopted FASB Interpretation
48, Accounting for Uncertainty in Income Taxesan
interpretation of FASB Statement 109 (FIN 48).
FIN 48 prescribes, among other things, a recognition
threshold and measurement attributes for the financial statement
recognition and measurement of uncertain tax positions taken or
expected to be taken in a companys income tax return.
FIN 48 utilizes a two-step approach for evaluating
uncertain tax positions accounted for in accordance with FASB
Statement 109, Accounting for Income Taxes. Step one,
Recognition, requires a company to determine if the
weight of available evidence indicates that a tax position is
more likely than not to be sustained upon audit, including
resolution of related appeals or litigation processes, if any.
Step two, Measurement, is based on the largest amount of
benefit, which is more likely than not to be realized on
settlement with the taxing authority. We recorded a cumulative
effect increase to retained earnings of $389 upon adoption.
In accordance with FIN 48, the total amount of unrecognized
tax benefits as of December 31, 2007 was $5,614, which
includes $581 of accrued interest related to unrecognized income
tax benefits which we recognize as a component of the provision
for income taxes. Of the $5,614 unrecognized tax benefits,
$4,773 relates to tax positions which if recognized would impact
the effective tax rate, not considering the impact of any
valuation allowance. Of the $4,773, $2,859 is attributable to
uncertain tax positions with respect to certain deferred tax
assets which if recognized would currently be offset by a full
valuation allowance due to the fact that at the current time it
is more likely than not that these assets would not be
recognized due to a lack of sufficient projected income in the
future.
F-84
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
The following is a roll-forward of the changes in our
unrecognized tax benefits:
|
|
|
|
|
|
Total unrecognized tax benefits as of January 1, 2007
|
|
$
|
5,002
|
|
Gross amount of decreases in unrecognized tax benefits as a
result of tax positions taken during the prior period
|
|
|
(64
|
)
|
Gross amount of increases in unrecognized tax benefits as a
result of tax positions taken during the prior period
|
|
|
10
|
|
Gross amount of increases in unrecognized tax benefits as a
result of tax positions taken during the current period
|
|
|
252
|
|
Amount of decreases in the unrecognized tax benefits relating to
settlements with taxing authorities
|
|
|
(10
|
)
|
Reduction to unrecognized tax benefits as a result of a lapse of
applicable statute of limitations
|
|
|
(157
|
)
|
|
|
|
|
|
Total unrecognized tax benefits as of December 31, 2007
|
|
$
|
5,033
|
|
|
|
|
|
|
|
|
|
|
|
Total unrecognized tax benefits that would impact the effective
tax rate if recognized
|
|
$
|
4,773
|
|
|
|
|
|
|
Total amount of interest and penalties recognized in the
accompanying consolidated statement of operations for the year
ended December 31, 2007
|
|
$
|
141
|
|
|
|
|
|
|
Total amount of interest and penalties recognized in the
accompanying consolidated balance sheet as of December 31,
2007
|
|
$
|
581
|
|
|
|
|
|
|
We file income tax returns in the U.S. federal
jurisdiction, all U.S. states which require income tax
returns and foreign jurisdictions. Due to the nature of our
operations, no state or foreign jurisdiction is individually
significant. With limited exceptions we are no longer subject to
examination by the U.S. federal or states jurisdiction for
years beginning prior to 2003. We are currently under federal
tax audit for the tax years 2003 through 2006. We are no longer
subject to examination by the UK federal jurisdiction for years
beginning prior to 2005. We do have various state tax audits and
appeals in process at any given time.
We anticipate decreases in unrecognized tax benefits of
approximately $304 related to state statutes of limitations
expiring during 2008. Our unrecognized tax benefits are expected
to change in 2008. However, we do not anticipate any significant
increases or decreases within the next twelve months.
|
|
16.
|
Employee Benefit
Plans
|
401(k)
Plan
We maintain a tax-qualified retirement plan named the MedQuist
401(k) Plan (401(k) Plan) that provides eligible employees with
an opportunity to save for retirement on a tax advantaged basis.
Our 401(k) Plan allows eligible employees to contribute up to
25% of their annual eligible compensation on a pre-tax basis,
subject to applicable Internal Revenue Code limits. Elective
deferral contributions are allocated to each participants
individual account and are then invested in selected investment
alternatives according to the participants directives.
Employee elective deferrals are 100% vested at all times. Our
401(k) Plan provides that we may make a discretionary matching
contribution to the participants in the 401(k) Plan. Our
discretionary matching contribution, if any, shall be in an
amount not to exceed 100% of the first 25% of a plan
participants compensation contributed as pre-tax
contributions to the 401(k) Plan. In our sole discretion, we may
make descretionary matching contributions on a quarterly or
annual basis. Historically we have matched 50% of each
participants contribution, up to a maximum of 5% of each
participants total annual compensation. Matching
contributions are 33% vested after one year of service, 67%
vested after two years of service and 100% vested after three
years of service. The charge to operations for our matching
contributions for the years ended December 31, 2005, 2006
and 2007 was $1,380, $1,432 and $1,547 respectively.
F-85
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
Executive
Deferred Compensation Plan
We established the MedQuist Inc. Executive Deferred Compensation
Plan (EDCP) in 2001. The EDCP, which is administered by the
compensation committee of our board of directors, allowed
certain members of management and highly compensated employees
to defer a certain percentage of their income. Participants were
permitted to defer compensation into an account in which
proceeds were available either during or after termination of
employment. The compensation committee authorized that certain
contributions made to a retirement distribution account be
matched with either shares of our common stock or cash.
Participants were not entitled to receive matching contributions
if they elected to make deferrals to an account into which
proceeds are available during employment. Participants were able
to defer up to 15% of their base salary (or such other maximum
percentage as may be approved by the compensation committee) and
90% of their bonus (or such other maximum percentage as may be
approved by the compensation committee). Distributions to a
participant made pursuant to a retirement distribution account
may be made to the participant upon the participants
termination or attainment of age 65, as elected by the
participant in their enrollment agreement. Distributions to a
participant made pursuant to an in-service distribution account
may be made at the election of the participant in their
enrollment agreement, subject to certain exceptions. The
balances in the EDCP are not funded, but are segregated, and
participants in the EDCP are our general creditors. All amounts
deferred in the EDCP increase or decrease based on hypothetical
investment results of the participants selected investment
alternatives. However, EDCP distributions are paid out of our
funds rather than from a dedicated investment portfolio. As of
December 31, 2006 and 2007, the value of the assets held,
managed and invested pursuant to the EDCP was $1,120 and $1,118,
respectively, and is included in other current assets in the
accompanying consolidated balance sheets. As of
December 31, 2006 and 2007, the corresponding deferred
compensation liability reflecting amounts due to employees was
$827 and $637, respectively, and is included in accrued expenses
in the accompanying consolidated balance sheets.
Effective January 1, 2005, the EDCP was suspended and no
further contributions have been made.
Board of
Directors Deferred Compensation Plan
Commencing on January 1, 2005, a portion of the
compensation paid to our independent directors was deferred
compensation in the form of common stock having a fair market
value of $50 on the date of grant. Our board of directors
postponed the granting of the deferred compensation awards for
2006 and 2007 until October 2007 which is when we became up to
date with our periodic reporting obligations with the SEC. As of
December 31, 2006 and 2007, $332 and $0, respectively,
related to deferred compensation is included in the accompanying
consolidated statements of shareholders equity and other
comprehensive income. This plan was terminated in February 2008.
|
|
17.
|
Related-Party
Transactions
|
From time to time, we enter into transactions in the normal
course of business with related parties. The audit committee of
our board of directors has been charged with the responsibility
of approving or satisfying all related party transactions other
than those between us and Philips. In any situation where the
audit committee sees fit to do so, any related party
transaction, other than those between us and Philips, may be
presented to disinterested members of our board of directors for
approval or ratification.
In connection with Philips investment in us, we have
entered into various agreements with Philips. All material
transactions between Philips and us are reviewed and approved by
the supervisory committee of our board of directors. The
supervisory committee is comprised of directors
independent from Philips. Listed below is a summary of our
material agreements with Philips.
F-86
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
Licensing
Agreement
In connection with Philips tender offer, we entered into a
Licensing Agreement with Philips Speech Processing GmbH, an
affiliate of Philips which is now known as Philips Speech
Recognition Systems GmbH (PSRS), on May 22, 2000 (Licensing
Agreement). The Licensing Agreement was subsequently amended by
the parties as of January 1, 2002, February 23, 2003,
August 10, 2003, September 1, 2004, December 30,
2005 and February 13, 2007.
Under the Licensing Agreement, we license from PSRS its
SpeechMagic speech recognition and processing software,
including any updated versions of the software developed by PSRS
during the term of the License Agreement (Licensed Product), for
use by us anywhere in the world. We pay a fee for use of this
license based upon a per line fee for each transcribed line of
text processed through the Licensed Product.
Upon the expiration of its initial term on June 28, 2005,
the Licensing Agreement was renewed for an additional five year
term.
In connection with the Licensing Agreement, we have a consulting
arrangement with PSRS whereby PSRS assists us with the
integration of its speech and transcription technologies.
OEM Supply
Agreement
On September 21, 2007, we entered into an Amended and
Restated OEM Supply Agreement (Amended OEM Agreement) with PSRS.
The Amended OEM Agreement amends and restates a previous OEM
Supply Agreement with PSRS dated September 23, 2004. In
connection with the Amended OEM Agreement certain amounts paid
to PSRS were capitalized in fixed assets and are being amortized
over a three-year period.
Pursuant to the Amended OEM Agreement, we purchased a
co-ownership interest in all rights and interests in and to
SpeechQ for Radiology together with its components, including
object and source code for the SpeechQ for Radiology application
and the SpeechQ for Radiology integration SDK (collectively, the
Product), but excluding the SpeechMagic speech recognition and
processing software, which we separately license from PSRS for a
fee under the Licensing Agreement. Additionally, the Amended OEM
Agreement provides that we shall receive, in exchange for a fee,
the exclusive right in the United States, Canada and certain
islands of the Caribbean (collectively the Exclusive Territory)
to sell, service and deliver the Product. In addition, PSRS has
agreed that for the term of the Amended OEM Agreement it will
not release a front-end multi-user reporting solution (including
one similar to the Product) in the medical market in the
Exclusive Territory nor will it directly authorize or assist any
of its affiliates to do so either; provided that the restriction
does not prevent PSRSs affiliates from integrating
SpeechMagic within their general medical application products.
The Amended OEM Agreement further provides that we shall make
payments to PSRS for PSRS development of an interim
version of the software included in the Product (Interim
Version). Except for the Interim Version which we and PSRS will
co-own, the Amended OEM Agreement provides that any
improvements, developments or other enhancements either we or
PSRS makes to the Product (collectively, Improvements) shall be
owned exclusively by the party that developed such Improvement.
Each party has the right to seek patent or other protection of
the Improvements it owns independent of the other party.
The term of the Amended OEM Agreement extends through
June 30, 2010 and will automatically renew for an
additional three year term provided that we are in material
compliance with the Amended OEM Agreement as of such date. If
PSRS decides to discontinue all business relating to the Product
in the Exclusive Territory on or after June 30, 2010, PSRS
can effect such discontinuation by terminating the Amended OEM
Agreement by providing us with six months prior written
notice of such discontinuation, provided the earliest such
notice can be delivered is June 30, 2010. Either party may
terminate the Amended OEM Agreement for cause immediately in the
event that a material breach by the other party remains uncured
for more than 30 days following delivery of written notice
or in the event that the other party becomes insolvent or files
for bankruptcy.
F-87
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
Equipment
Sales
We purchase dictation related equipment from Philips.
Insurance
Coverage through Philips
We obtain all of our business insurance coverage (other than
workers compensation) through Philips.
Purchasing
Agreements
For the three years ended December 31, 2007 we entered into
annual letter agreements with Philips Electronics North America
Corporation (PENAC), an affiliate of Philips, to purchase
products and services from certain suppliers under the terms of
the prevailing agreements between such suppliers and PENAC. As
of January 1, 2008, we are no longer a party to an
agreement with PENAC to purchase the aforementioned products and
services.
From time to time, we enter into other miscellaneous
transactions with Philips including Philips purchasing certain
products and implementation services from us. We recorded net
revenues from sales to Philips of $754, $26 and $0 for the years
ended December 31, 2005, 2006 and 2007, respectively.
Our consolidated balance sheets as of December 31, 2006 and
2007 reflect other assets related to Philips of $0 and $1,002,
respectively, and accrued expenses related to Philips of $2,030
and $1,534, respectively.
Listed below is a summary of the expenses incurred by us in
connection with the various Philips agreements noted above for
the years ended December 31, 2005, 2006 and 2007. Charges
related to these agreements are included in cost of revenues and
selling, general and administrative expenses in the accompanying
consolidated statements of operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
PSRS licensing
|
|
$
|
1,216
|
|
|
$
|
2,390
|
|
|
$
|
2,479
|
|
PSRS consulting
|
|
|
162
|
|
|
|
3
|
|
|
|
|
|
OEM agreement
|
|
|
1,521
|
|
|
|
1,429
|
|
|
|
2,252
|
|
Dictation equipment
|
|
|
1,238
|
|
|
|
878
|
|
|
|
854
|
|
Insurance
|
|
|
957
|
|
|
|
1,601
|
|
|
|
1,794
|
|
PENAC
|
|
|
54
|
|
|
|
30
|
|
|
|
40
|
|
Other
|
|
|
248
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,396
|
|
|
$
|
6,373
|
|
|
$
|
7,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On July 29, 2004, we entered into an agreement with
Nightingale under which Nightingale agreed to provide interim
chief executive services to us. On July 30, 2004, our board
of directors appointed Howard S. Hoffmann to serve as our
non-employee Chief Executive Officer (CEO). Mr. Hoffmann
serves as the Managing Partner of Nightingale. With the
departure of our former President in May 2007, our board of
directors appointed Mr. Hoffmann to the additional position
of President in June 2007. Mr. Hoffmann serves as our
President and Chief Executive Officer pursuant to the terms of
the agreement between us and Nightingale which was amended on
March 14, 2008 (Amendment). The Amendment, among other
things, extends the term of Mr. Hoffmanns role as our
President and Chief Executive Officer through August 1,
2008. Our board of directors is responsible for monitoring and
reviewing the performance of Mr. Hoffmann on an ongoing
basis. Our agreement with Nightingale also permits us to engage
additional personnel employed by Nightingale to provide
consulting services to us from time to time.
F-88
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
For the years ended December 31, 2005, 2006 and 2007, we
incurred charges of $3,207, $3,005 and $2,914, respectively, for
Nightingale services. From February 1, 2007 through
December 31, 2007, the Nightingale charges were recorded in
selling, general and administrative expenses in the accompanying
consolidated statements of operations due to Nightingales
focus on operational matters instead of the Review and
Managements Billing Assessment. Prior to February 1,
2007, charges related to Nightingale were recorded in cost of
investigation and legal proceedings, net (see Note 5). As
of December 31, 2006 and 2007, accrued expenses included
$548 and $400, respectively, for amounts due to Nightingale for
services performed.
See Note 11 for a discussion of our agreements with A-Life.
|
|
18.
|
Quarterly Data
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st
|
|
|
2nd
|
|
|
3rd
|
|
|
4th
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
96,014
|
|
|
$
|
93,359
|
|
|
$
|
82,096
|
|
|
$
|
86,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,471
|
)
|
|
$
|
(2,416
|
)
|
|
$
|
(2,104
|
)
|
|
$
|
(3,951
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.23
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.11
|
)
|
Diluted
|
|
$
|
(0.23
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.11
|
)
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
37,484
|
|
|
|
37,484
|
|
|
|
37,484
|
|
|
|
37,484
|
|
Diluted
|
|
|
37,484
|
|
|
|
37,484
|
|
|
|
37,484
|
|
|
|
37,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
89,066
|
|
|
$
|
88,692
|
|
|
$
|
82,518
|
|
|
$
|
80,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,886
|
)
|
|
$
|
5,886
|
|
|
$
|
(8,935
|
)
|
|
$
|
(10,271
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.05
|
)
|
|
$
|
0.16
|
|
|
$
|
(0.24
|
)
|
|
$
|
(0.27
|
)
|
Diluted
|
|
$
|
(0.05
|
)
|
|
$
|
0.16
|
|
|
$
|
(0.24
|
)
|
|
$
|
(0.27
|
)
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
37,484
|
|
|
|
37,484
|
|
|
|
37,484
|
|
|
|
37,500
|
|
Diluted
|
|
|
37,484
|
|
|
|
37,497
|
|
|
|
37,484
|
|
|
|
37,500
|
|
F-89
MedQuist Inc. and
Subsidiaries
(In thousands, except per share
amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
Net revenues
|
|
$
|
177,758
|
|
|
$
|
166,179
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
134,628
|
|
|
|
119,273
|
|
Selling, general and administrative
|
|
|
32,610
|
|
|
|
25,899
|
|
Research and development
|
|
|
6,265
|
|
|
|
7,854
|
|
Depreciation
|
|
|
5,179
|
|
|
|
5,924
|
|
Amortization of intangible assets
|
|
|
2,704
|
|
|
|
2,734
|
|
Cost of investigation and legal proceedings, net
|
|
|
(4,897
|
)
|
|
|
8,126
|
|
Restructuring charges
|
|
|
381
|
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
176,870
|
|
|
|
169,765
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
888
|
|
|
|
(3,586
|
)
|
Equity in income of affiliated company
|
|
|
323
|
|
|
|
41
|
|
Other income
|
|
|
|
|
|
|
438
|
|
Interest income, net
|
|
|
4,175
|
|
|
|
2,183
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
5,386
|
|
|
|
(924
|
)
|
Income tax provision
|
|
|
1,386
|
|
|
|
1,658
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
4,000
|
|
|
$
|
(2,582
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.11
|
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.11
|
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
37,484
|
|
|
|
37,544
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
37,499
|
|
|
|
37,544
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-90
MedQuist Inc. and
Subsidiaries
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
161,582
|
|
|
$
|
151,095
|
|
Accounts receivable, net of allowance of $4,359 and $4,417,
respectively
|
|
|
48,725
|
|
|
|
48,215
|
|
Income tax receivable
|
|
|
815
|
|
|
|
716
|
|
Other current assets
|
|
|
7,920
|
|
|
|
8,757
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
219,042
|
|
|
|
208,783
|
|
Property and equipment, net of accumulated depreciation of
$38,772 and $38,825, respectively
|
|
|
21,366
|
|
|
|
18,920
|
|
Goodwill
|
|
|
125,505
|
|
|
|
125,418
|
|
Other intangible assets, net of accumulated amortization of
$45,209 and $44,610, respectively
|
|
|
42,262
|
|
|
|
41,363
|
|
Deferred income taxes
|
|
|
2,712
|
|
|
|
2,722
|
|
Other assets
|
|
|
6,885
|
|
|
|
6,117
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
417,772
|
|
|
$
|
403,323
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
12,754
|
|
|
$
|
11,137
|
|
Accrued expenses
|
|
|
18,989
|
|
|
|
13,501
|
|
Accrued compensation
|
|
|
14,826
|
|
|
|
14,495
|
|
Customer accommodation and quantification
|
|
|
18,459
|
|
|
|
12,242
|
|
Deferred income tax liabilitycurrent
|
|
|
4,783
|
|
|
|
4,783
|
|
Deferred revenue
|
|
|
16,023
|
|
|
|
16,280
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
85,834
|
|
|
|
72,438
|
|
Deferred income taxes
|
|
|
15,151
|
|
|
|
16,635
|
|
|
|
|
|
|
|
|
|
|
Other non-current liabilities
|
|
|
2,143
|
|
|
|
2,065
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 11)
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
Common stockno par value; authorized 60,000 shares;
37,544 and 37,544 shares issued and outstanding,
respectively
|
|
|
236,412
|
|
|
|
236,574
|
|
Retained earnings
|
|
|
72,876
|
|
|
|
70,294
|
|
Accumulated other comprehensive income
|
|
|
5,356
|
|
|
|
5,317
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
314,644
|
|
|
|
312,185
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
417,772
|
|
|
$
|
403,323
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-91
MedQuist Inc. and
Subsidiaries
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
4,000
|
|
|
$
|
(2,582
|
)
|
Adjustments to reconcile net income (loss) to cash provided
by (used in) operating activities
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
7,883
|
|
|
|
8,658
|
|
Equity in income of affiliated company
|
|
|
(323
|
)
|
|
|
(41
|
)
|
Deferred income tax provision
|
|
|
974
|
|
|
|
1,491
|
|
Stock option expense
|
|
|
207
|
|
|
|
162
|
|
Provision for doubtful accounts
|
|
|
2,431
|
|
|
|
1,205
|
|
Loss on disposal of property and equipment
|
|
|
61
|
|
|
|
38
|
|
Changes in operating assets and liabilities excluding effects
of acquisitions
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(4,088
|
)
|
|
|
(1,334
|
)
|
Income tax receivable
|
|
|
(267
|
)
|
|
|
99
|
|
Insurance receivable
|
|
|
(11,143
|
)
|
|
|
|
|
Other current assets
|
|
|
(511
|
)
|
|
|
(837
|
)
|
Other non-current assets
|
|
|
(52
|
)
|
|
|
116
|
|
Accounts payable
|
|
|
1,613
|
|
|
|
(2,065
|
)
|
Accrued expenses
|
|
|
(8,060
|
)
|
|
|
(5,405
|
)
|
Accrued compensation
|
|
|
297
|
|
|
|
(309
|
)
|
Customer accommodation and quantification
|
|
|
(2,976
|
)
|
|
|
(5,593
|
)
|
Deferred revenue
|
|
|
(1,210
|
)
|
|
|
172
|
|
Other non-current liabilities
|
|
|
1,962
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
$
|
(9,202
|
)
|
|
$
|
(6,217
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(4,137
|
)
|
|
|
(3,078
|
)
|
Capitalized software
|
|
|
(824
|
)
|
|
|
(1,862
|
)
|
Proceeds from sale of investments
|
|
|
|
|
|
|
692
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(4,961
|
)
|
|
|
(4,248
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes
|
|
|
32
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(14,131
|
)
|
|
|
(10,487
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalentsbeginning of period
|
|
|
175,412
|
|
|
|
161,582
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalentsend of period
|
|
$
|
161,281
|
|
|
$
|
151,095
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
276
|
|
|
$
|
263
|
|
|
|
|
|
|
|
|
|
|
Accommodation payments paid with credits
|
|
$
|
1,288
|
|
|
$
|
611
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements
F-92
MedQuist Inc. and
Subsidiaries
(In
thousands, except for per share amounts)
(Unaudited)
|
|
1.
|
Description of
Business
|
MedQuist is the largest Medical Transcription Service
Organization (MTSO) in the world, and a leader in technology
enabled clinical documentation workflow. We service health
systems, hospitals and large group medical practices throughout
the U.S., and we employ approximately 5,600 skilled medical
transcriptionists (MTs), making us the largest employer of MTs
in the U.S. We believe our services and enterprise
technology solutionsincluding mobile voice capture
devices, speech recognition technologies, Web-based workflow
platforms, and global network of MTs and editorsenable
healthcare facilities to improve patient care, increase
physician satisfaction, and lower operational costs.
Change In
Majority Owner
On August 6, 2008, CBaySystems Holdings Limited
(CBaySystems Holdings), a company that is publicly traded on the
AIM market of the London Stock Exchange with a portfolio of
investments in medical transcription, which includes a company
that competes in the medical transcription market, healthcare
technology, and healthcare financial services, acquired a 69.5%
ownership interest in MedQuist from Koninklijke Philips
Electronics N.V. (Philips) for $11.00 per share (CBaySystems
Holdings Purchase). Immediately prior to the closing of the
CBaySystems Holdings Purchase, four of our directors affiliated
with Philips resigned from our board of directors and four
individuals affiliated with CBaySystems Holdings were appointed
to our board of directors.
In November 2003, one of our employees raised allegations that
we had engaged in improper billing practices. In response, our
board of directors undertook an independent review of these
allegations (Review). On March 16, 2004, we announced that
we had delayed the filing of our
Form 10-K
for the year ended December 31, 2003 pending the completion
of the Review. As a result of our noncompliance with the
U.S. Securities and Exchange Commissions (SEC)
periodic disclosure requirements, our common stock was delisted
from the NASDAQ National Market on June 16, 2004.
In response to our customers concern over the public
disclosure of certain findings from the Review, we made the
decision in the fourth quarter of 2005 to take action to try to
avoid litigation and preserve and solidify our customer business
relationships by offering a financial accommodation to certain
of our customers. See Note 7.
Disclosure of the findings of the Review, along with the
delisting of our common stock, precipitated a number of
governmental investigations and civil lawsuits. See Note 11.
On July 5, 2007, we filed our
Form 10-K
for the year ended December 31, 2005 (2005
Form 10-K).
The 2005
Form 10-K
was our first periodic report covering the period after
September 30, 2003. On August 31, 2007, we filed our
Forms 10-Q
for the quarters ended March 31, 2006, June 30, 2006
and September 30, 2006 as well as our
Form 10-K
for the year ended December 31, 2006. On October 4,
2007, we filed our
Forms 10-Q
for the quarters ended March 31, 2007 and June 30,
2007. On November 9, 2007, we timely filed our
Form 10-Q
for the quarter ended September 30, 2007 and we have timely
filed all periodic reports since that date.
Our common stock was relisted on the Global Market of The NASDAQ
Stock Market LLC on July 17, 2008.
The consolidated financial statements included herein are
unaudited and have been prepared by us pursuant to the rules and
regulations of the SEC. Certain information and footnote
disclosures normally included in financial statements prepared
in accordance with U.S. generally accepted accounting
principles (GAAP) have been omitted
F-93
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
pursuant to such rules and regulations although we believe that
the disclosures are adequate to make the information presented
not misleading. The consolidated financial statements include
our accounts and the accounts of all of our wholly-owned
subsidiaries. All significant inter-company accounts and
transactions have been eliminated in consolidation.
These statements reflect all normal recurring adjustments that,
in the opinion of management, are necessary for the fair
presentation of the information contained herein. These
consolidated financial statements should be read in conjunction
with Managements Discussion and Analysis of Financial
Condition and Results of Operations. As permitted under GAAP,
interim accounting for certain expenses is based upon full year
assumptions. Such amounts are expensed in full in the year
incurred. For interim financial reporting purposes, income taxes
are recorded based upon actual year to date income tax rates as
permitted by Financial Accounting Standards Board (FASB)
Interpretation 18, Accounting for Income Taxes in Interim
Periods.
Our accounting policies are set forth in detail in Note 3
to the consolidated financial statements in our Annual Report on
Form 10-K
for the year ended December 31, 2007 filed with the SEC on
March 17, 2008.
In September 2006, FASB issued Statement of Financial Accounting
Standards (SFAS) No. 157, Fair Value
Measurements (SFAS 157). SFAS 157 defines
fair value, creates a framework within GAAP for measuring fair
value, and expands disclosures about fair value measurements. In
defining fair value, SFAS 157 emphasizes a market-based
measurement approach that is based on the assumptions that
market participants would use in pricing an asset or liability.
SFAS 157 does not require any new fair value measurements,
but does generally apply to other accounting pronouncements that
require or permit fair value measurements. In February 2008, the
FASB issued FSP
FAS 157-2,
Effective Date of FASB Statement No. 157,
which delays for one year the effective date of
SFAS 157 for most nonfinancial assets and nonfinancial
liabilities. Nonfinancial instruments affected by this deferral
include assets and liabilities such as reporting units measured
at fair value in a goodwill impairment test and nonfinancial
assets acquired and liabilities assumed in a business
combination. Effective January 1, 2008, we adopted
SFAS 157 for financial assets and financial liabilities
recognized at fair value on a recurring basis. The partial
adoption of SFAS 157 for these items did not have a
material impact on our financial position, results of operations
and cash flows. The statement establishes a fair value hierarchy
that prioritizes the inputs to valuation techniques used to
measure fair value into three broad categories. Level 1:
Quoted market prices in active markets for identical assets or
liabilities that the company has the ability to access.
Level 2: Observable market based inputs or unobservable
inputs that are corroborated by market data such as quoted
prices, interest rates and yield curves. Level 3: Inputs
are unobservable data points that are not corroborated by market
data. At June 30, 2008, we held two financial assets, cash
and cash equivalents (Level 1) and our Executive
Deferred Compensation Plan (EDCP) included in other current
assets with a fair value of $975. We measure the fair value of
our EDCP on a recurring basis using Level 2 (significant
other observable) inputs as defined by SFAS 157. The
adoption of SFAS 157 did not have a material impact on the
basis for measuring the fair value of these items.
In February 2007, FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilitiesincluding an amendment of FASB
Statement No. 115. This statement permits
entities to choose to measure many financial instruments and
certain other items at fair value. This statement is effective
for financial statements issued for fiscal years beginning after
November 15, 2007, including interim periods within that
fiscal year. We did not elect the fair value option for any of
our existing financial instruments as of June 30, 2008 and
we have not determined whether or not we will elect this option
for financial instruments we may acquire in the future.
In December 2007, FASB issued SFAS No. 141 (revised
2007), Business Combinations
(SFAS 141R). SFAS 141R defines a business combination
as a transaction or other event in which an acquirer obtains
control of one or more businesses. Under SFAS 141R, all
business combinations are accounted for by applying the
acquisition method (previously referred to as the purchase
method), under which the acquirer measures all identified assets
acquired, liabilities assumed, and noncontrolling interests in
the acquiree at their acquisition date fair values. Certain
forms
F-94
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
of contingent consideration and certain acquired contingencies
are also recorded at their acquisition date fair values.
SFAS 141R also requires that most acquisition related costs
be expensed in the period incurred. SFAS 141R is effective
for us in January 2009. SFAS 141R will change our
accounting for business combinations on a prospective basis.
In December 2007, FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statementsan amendment of ARB No. 51
(SFAS 160). SFAS 160 requires a company to recognize
noncontrolling interests (previously referred to as
minority interests) as a separate component in the
equity section of the consolidated statement of financial
position. It also requires the amount of consolidated net income
specifically attributable to the noncontrolling interest be
identified in the consolidated statement of income.
SFAS 160 also requires changes in ownership interest to be
accounted for similarly, as equity transactions; and when a
subsidiary is deconsolidated, any retained noncontrolling equity
investment in the former subsidiary and the gain or loss on the
deconsolidation of the subsidiary be measured at fair value.
SFAS 160 is effective for us in January 2009. We are
currently evaluating the impact, if any, SFAS 160 will have
on our financial position, results of operations and cash flows.
In March 2008, FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities (SFAS 161). SFAS 161 requires a
company with derivative instruments to disclose information that
should enable financial statement users to understand how and
why a company uses derivative instruments, how derivative
instruments and related hedged items are accounted for under
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and how derivative
instruments and related hedged items affect a companys
financial position, financial performance, and cash flows.
SFAS 161 is effective for us in January 2009.
The FASB recently issued a Staff Position (FSP)
No. FAS 142-3,
Determination of the Useful Life of Intangible
Assets, which amends the factors a company should
consider when developing renewal assumptions used to determine
the useful life of an intangible asset under SFAS 142.
Paragraph 11 of SFAS 142 requires companies to
consider whether renewal can be completed without substantial
cost or material modification of the existing terms and
conditions associated with the asset.
FSP 142-3
replaces the previous useful life criteria with a new
requirementthat an entity consider its own historical
experience in renewing similar arrangements. If historical
experience does not exist then the company would consider market
participant assumptions regarding renewal including
1) highest and best use of the asset by a market
participant, and 2) adjustments for other entity-specific
factors included in paragraph 11 of SFAS 142. We are
currently evaluating the impact, if any,
SFAS 142-3
will have on our financial position, results of operations or
cash flows.
|
|
4.
|
Stock-Based
Compensation
|
The following table summarizes our stock-based compensation
expense related to employee stock options recognized under
SFAS No. 123R, Share Based Payment,
(SFAS 123R).
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
Selling, general and administrative
|
|
$
|
58
|
|
|
$
|
105
|
|
Research and development
|
|
|
23
|
|
|
|
45
|
|
Cost of revenues
|
|
|
126
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
207
|
|
|
$
|
162
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2008, total unamortized stock-based
compensation cost related to non-vested stock options, net of
expected forfeitures, was $1,199 which is expected to be
recognized over a weighted-average period of 4.3 years.
Our stock option plans provide for the granting of options to
purchase shares of common stock to eligible employees (including
officers) as well as to our non-employee directors. Options may
be issued with the exercise
F-95
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
prices equal to the fair market value of the common stock on the
date of grant or at a price determined by a committee of our
board of directors. Stock options vest and are exercisable over
periods determined by the committee, generally five years, and
generally expire no more than 10 years after the grant.
In July 2004, our board of directors affirmed our June 2004
decision to indefinitely suspend the exercise and future grant
of options under our stock option plans. For 10 of our former
executives (who separated from us in 2004 and 2005) who
held options that were vested as of their resignation date, our
board of directors allowed their options to remain exercisable
for the post-termination period commencing on the date that the
suspension was lifted for the exercise of options. There were
704 options that qualified for this post-termination exercise
period. The suspension was lifted on October 4, 2007 and
all but 154 of these options terminated on February 1,
2008. A summary of these remaining options as of June 30,
2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable(1)
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Intrinsic
|
|
|
Exercise
|
|
Range of Exercise Prices
|
|
Shares
|
|
|
Value
|
|
|
Price
|
|
|
$
|
2.71
|
|
|
|
|
$
|
10.00
|
|
|
|
|
|
31
|
|
|
$
|
65
|
|
|
$
|
5.71
|
|
$
|
10.01
|
|
|
|
|
$
|
20.00
|
|
|
|
|
|
47
|
|
|
|
|
|
|
$
|
14.38
|
|
$
|
20.01
|
|
|
|
|
$
|
70.00
|
|
|
|
|
|
76
|
|
|
|
|
|
|
$
|
33.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
154
|
|
|
$
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Of the remaining 154 options, 12 were exercised in July 2008 and
the remaining 142 expire on October 3, 2009. |
The extension of the life of the awards was recorded as a
modification of the grants in 2004 and 2005. Under Accounting
Principles Board Opinion No 25, Accounting for Stock
Issued to Employees, (APB 25), the modification
created intrinsic value for vested stock if the market value of
the stock on the date of termination exceeded the exercise
price. Therefore, these grants required an immediate recognition
of the compensation expense with an offsetting credit to common
stock. No charges were incurred for the six month periods ended
June 30, 2007 and 2008.
Information with respect to our common stock options is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Shares
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Subject to
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Life in Years
|
|
|
Value
|
|
|
Outstanding, December 31, 2007
|
|
|
2,359
|
|
|
$
|
31.08
|
|
|
|
|
|
|
|
|
|
Forefeited
|
|
|
(2
|
)
|
|
$
|
17.45
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(762
|
)
|
|
$
|
40.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, June 30, 2008
|
|
|
1,595
|
|
|
$
|
26.80
|
|
|
|
3.7
|
|
|
$
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, June 30, 2008
|
|
|
1,396
|
|
|
$
|
29.03
|
|
|
|
2.9
|
|
|
$
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest as of June 30, 2008
|
|
|
1,566
|
|
|
$
|
27.09
|
|
|
|
3.6
|
|
|
$
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value is calculated using the difference
between the closing stock price on the last trading day of the
quarter and the option exercise price, multiplied by the number
of
in-the-money
options.
There were no options granted or exercised during the six months
ended June 30, 2007 and 2008.
F-96
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
A summary of outstanding and exercisable common stock options as
of June 30, 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Contractual Life
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Range of Exercise Prices
|
|
of Shares
|
|
|
(in years)
|
|
|
Price
|
|
|
of Shares
|
|
|
Price
|
|
|
$
|
2.71
|
|
|
|
|
$
|
10.00
|
|
|
|
|
|
30
|
|
|
|
1.3
|
|
|
$
|
5.71
|
|
|
|
30
|
|
|
$
|
5.71
|
|
$
|
10.01
|
|
|
|
|
$
|
20.00
|
|
|
|
|
|
569
|
|
|
|
5.6
|
|
|
$
|
14.80
|
|
|
|
369
|
|
|
$
|
16.75
|
|
$
|
20.01
|
|
|
|
|
$
|
30.00
|
|
|
|
|
|
658
|
|
|
|
3.1
|
|
|
$
|
26.41
|
|
|
|
658
|
|
|
$
|
26.41
|
|
$
|
30.01
|
|
|
|
|
$
|
40.00
|
|
|
|
|
|
121
|
|
|
|
1.5
|
|
|
$
|
32.89
|
|
|
|
121
|
|
|
$
|
32.89
|
|
$
|
40.01
|
|
|
|
|
$
|
70.00
|
|
|
|
|
|
217
|
|
|
|
2.0
|
|
|
$
|
58.88
|
|
|
|
217
|
|
|
$
|
58.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,595
|
|
|
|
3.7
|
|
|
$
|
26.80
|
|
|
|
1,395
|
|
|
$
|
29.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2008, there were 1,019 additional options
available for grant under our stock option plans. When we became
current in our reporting obligations with the SEC on
October 4, 2007, certain executive officers, in accordance
with their employment agreements, received a grant of an
aggregate of 200 options with an exercise price equal to the
grant date market value of our common stock on October 4,
2007.
|
|
5.
|
Other
Comprehensive Income (Loss)
|
Other comprehensive income (loss) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
Net income (loss)
|
|
$
|
4,000
|
|
|
$
|
(2,582
|
)
|
Foreign currency translation adjustment
|
|
|
402
|
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
4,402
|
|
|
$
|
(2,621
|
)
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Net Income (Loss)
per Share
|
Basic net income (loss) per share is computed by dividing net
income (loss) by the weighted average number of shares
outstanding during each period. Diluted net income (loss) per
share is computed by dividing net income (loss) by the weighted
average shares outstanding, as adjusted for the dilutive effect
of common stock equivalents, which consist only of stock
options, using the treasury stock method.
F-97
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
The following table reflects the weighted average shares
outstanding used to compute basic and diluted net income (loss)
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
Net income (loss)
|
|
$
|
4,000
|
|
|
$
|
(2,582
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
37,484
|
|
|
|
37,544
|
|
Effect of dilutive shares
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
37,499
|
|
|
|
37,544
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.11
|
|
|
$
|
(0.07
|
)
|
Diluted
|
|
$
|
0.11
|
|
|
$
|
(0.07
|
)
|
The computation of diluted net income (loss) per share does not
assume conversion, exercise or issuance of shares that would
have an anti-dilutive effect on diluted net loss per share. For
the six months ended June 30, 2008 we had a net loss. As a
result, any assumed conversions would result in reducing the net
loss per share and, therefore, are not included in the
calculation. Shares having an anti-dilutive effect on net loss
per share and, therefore, excluded from the calculation of
diluted net loss per share, totaled 1,565 shares for the
six months ended June 30, 2008.
|
|
7.
|
Customer
Accommodation and Quantification
|
As noted in Note 2, in connection with our decision to
offer financial accommodations to certain of our customers
(Accommodation Customers), we analyzed our historical billing
information and the available report-level data
(Managements Billing Assessment) to develop individualized
accommodation offers to be made to Accommodation Customers
(Accommodation Analysis). The Accommodation Analysis took
approximately one year to complete. The methodology utilized to
develop the individual accommodation offers was designed to
generate positive accommodation outcomes for Accommodation
Customers. As such, the methodology was not a calculation of
potential over billing nor was it intended as a measure of
damages or a reflection of any admission of liability due and
owed to Accommodation Customers. Instead, the Accommodation
Analysis was a methodology that was developed to arrive at
commercially reasonable and fair accommodation offers that would
be acceptable to Accommodation Customers without negotiation.
In the fourth quarter of 2005, based on the Accommodation
Analysis, our board of directors authorized management to make
cash accommodation offers to Accommodation Customers in the
aggregate amount of $65,413. In 2006, this amount was adjusted
by a net additional amount of $1,157 based on a refinement of
the Accommodation Analysis resulting in an aggregate amount of
$66,570. By accepting our accommodation offer, an Accommodation
Customer must agree, among other things, to release us from any
and all claims and liability regarding certain billing related
issues.
As part of this process, we also conducted an analysis in an
attempt to quantify the economic consequences of potentially
unauthorized adjustments to Accommodation Customers ratios
and formulae within the transcription platform setups
(Quantification). This Quantification was calculated to be
$9,835.
Of the authorized cash accommodation amount of $66,570, $57,678
and $1,157 were treated as consideration given by a vendor to a
customer and accordingly recorded as a reduction in revenues in
2005 and 2006, respectively. The balance of $7,735 plus an
additional $2,100 has been accounted for as a billing error
associated with the Quantification resulting in a reduction of
revenues in various reporting periods from 1999 to 2005.
F-98
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
The goal of our customer accommodation was to reach a settlement
with certain of our customers. However, the Accommodation
Analysis for certain customers did not result in positive
accommodation outcomes. For certain other Accommodation
Customers, the Accommodation Analysis resulted in calculated
cash accommodation offers that we believed were insufficient as
a percentage of their historical line billing to motivate such
customers to resolve their billing disputes with us. Therefore,
in 2006 we modified our customer accommodation to enable us to
offer this group of Accommodation Customers credits for the
purchase of future products
and/or
services from us over a defined period of time. On July 21,
2006, our board of directors authorized management to make
credit accommodation offers up to an additional $8,676 beyond
amounts previously authorized. During 2006, this amount was
adjusted by a net additional amount of $569 based on a
refinement of the Accommodation Analysis, resulting in an
aggregate amount of $9,245. In connection with the credit
accommodation offers we recorded a reduction in revenues and
corresponding increase in accrued expenses of $9,245 in 2006.
The following is a summary of the financial statement activity
for the periods indicated related to the customer accommodation
and the Quantification which is included as a separate line item
in the accompanying consolidated balance sheets as of
December 31, 2007 and June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Six Months Ended
|
|
|
|
December 31, 2007
|
|
|
June 30, 2008
|
|
|
Beginning balance
|
|
$
|
24,777
|
|
|
$
|
18,459
|
|
Payments and other adjustments
|
|
|
(3,723
|
)
|
|
|
(5,606
|
)
|
Credits
|
|
|
(2,595
|
)
|
|
|
(611
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
18,459
|
|
|
$
|
12,242
|
|
|
|
|
|
|
|
|
|
|
|
|
8.
|
Cost of
Investigation and Legal Proceedings, Net
|
For the six months ended June 30, 2007 and 2008, we
recorded a credit of ($4,897) and a charge of $8,126,
respectively for costs associated with the Review and
Managements Billing Assessment, as well as defense and
other costs associated with governmental investigations and
civil litigation, including, in 2007, $197 of consulting
services provided by Nightingale and Associates, LLC
(Nightingale), a management consulting company specializing in
turnarounds and crisis management, that we deemed to be unusual
in nature. Howard Hoffmann, our former President and Chief
Executive Officer, provided services to us pursuant to the terms
of an agreement between us and Nightingale. Nightingale also
provided certain consulting services to us related to the Review
and Managements Billing Assessment. The agreement with
Nightingale was terminated consensually on June 10, 2008,
which was also the date that Mr. Hoffmann ceased being our
President and Chief Executive Officer. These costs are net of
insurance claim reimbursements. We record insurance claims when
the realization of the claim is probable. The following is a
summary of the amounts recorded as Cost of investigation and
legal proceedings, net, in the accompanying consolidated
statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
Legal fees
|
|
$
|
8,846
|
|
|
$
|
6,267
|
|
Other professional fees
|
|
|
1,444
|
|
|
|
359
|
|
Nightingale services
|
|
|
197
|
|
|
|
|
|
Insurance recoveries and claims
|
|
|
(15,386
|
)
|
|
|
|
|
Other
|
|
|
2
|
|
|
|
1,500
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(4,897
|
)
|
|
$
|
8,126
|
|
|
|
|
|
|
|
|
|
|
F-99
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
Other professional fees represent accounting and dispute
analysis costs and document search and retrieval costs. In 2007,
insurance recoveries and claims represent insurance recoveries
($4,243) and insurance claims ($11,143). The insurance claims
were recorded in other current assets and payment related to
these claims was received in the third quarter of 2007. We do
not expect to receive any additional insurance recoveries in the
future. The 2008 Other amount of $1,500 is for the proposed
settlement of all claims related to the consolidated medical
transcriptionists putative class action.
2005
Restructuring Plan
During 2005, we implemented a restructuring plan (2005 Plan)
based on the implementation of a centralized national service
delivery model. The 2005 Plan involved the consolidation of
operating facilities and a related reduction in workforce. The
table below reflects the financial statement activity related to
the 2005 Plan which is included in accrued expenses in the
accompanying consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Six Months Ended
|
|
|
|
December 31, 2007
|
|
|
June 30, 2008
|
|
|
|
Total Non-Cancelable
|
|
|
Total Non-Cancelable
|
|
|
|
Leases
|
|
|
Leases
|
|
|
Beginning balance
|
|
$
|
648
|
|
|
$
|
126
|
|
Additional charge
|
|
|
322
|
|
|
|
|
|
Cash paid
|
|
|
(844
|
)
|
|
|
(70
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
126
|
|
|
$
|
56
|
|
|
|
|
|
|
|
|
|
|
The remainder of payments related to the 2005 Plan will be made
by 2009 for non-cancelable leases.
2007
Restructuring Plans
During the third quarter of 2007, we implemented a restructuring
plan related to a reduction in workforce of 104 employees
as a result of the refinement of our centralized national
services delivery model. In addition, during the fourth quarter
of 2007, we implemented a restructuring plan related to an
additional reduction in workforce of 183 employees
attributable to our efforts to reduce costs. All of the
restructuring costs incurred are severance related. The table
below reflects the financial statement activity related to the
2007 Plan which is included in accrued expenses in the
accompanying consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Six Months Ended
|
|
|
|
December 31, 2007
|
|
|
June 30, 2008
|
|
|
|
Total Severance
|
|
|
Total Severance
|
|
|
Beginning balance
|
|
$
|
2,263
|
|
|
$
|
1,493
|
|
Reversal
|
|
|
|
|
|
|
(45
|
)
|
Cash paid
|
|
|
(770
|
)
|
|
|
(1,417
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
1,493
|
|
|
$
|
31
|
|
|
|
|
|
|
|
|
|
|
In the second quarter of 2008, we reversed $45 related to the
2007 restructuring plan because certain employee severance
expenses will not be incurred. The remainder of payments related
to the 2007 restructuring plans will be made by the end of 2008.
F-100
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
Our consolidated income tax expense consists principally of an
increase in deferred tax liabilities related to goodwill
amortization deductions for income tax purposes during the
applicable period as well as state and foreign income taxes
offset by the reversal of certain state tax reserves due to the
expiration of the statutes of limitations. We have recorded a
valuation allowance to reduce our net deferred tax assets to an
amount that is more likely than not to be realized in future
years.
Under FASB Interpretation 48, Accounting for Uncertainty in
Income Taxesan interpretation of FASB Statement 109
(FIN 48), we classify penalties and interest related to
uncertain tax positions as part of income tax expense. There
were no material changes to our uncertain tax positions,
including penalties and interest for the three and six months
ended June 30, 2008.
|
|
11.
|
Commitments and
Contingencies
|
Governmental
Investigations
The SEC is currently conducting a formal investigation of us
relating to our billing practices. We have been fully
cooperating with the SEC since it opened its investigation in
2004 and we have complied with information and document requests
by the SEC.
We also received an administrative subpoena under Health
Insurance Portability and Accountability Act of 1996 (HIPAA) for
documents from the U.S. Department of Justice (DOJ) on
December 17, 2004. The subpoena sought information
primarily about our provision of medical transcription services
to governmental and non-governmental customers. The information
was requested in connection with a government investigation into
whether we and others violated federal laws in connection with
the provision of medical transcription services. We have
complied, and are continuing to comply, with information and
document requests by the DOJ.
The U.S. Department of Labor (DOL) conducted a formal
investigation into the administration of our 401(k) plan. We
fully cooperated with the DOL from the inception of its
investigation in 2004 and we complied with information and
document requests by the DOL. In April 2008, we made an
additional contribution of approximately $41 to our 401(k) plan
and certain current or former plan participants in an attempt to
resolve the DOL investigation. In July 2008, we received written
confirmation from the DOL that it has concluded its
investigation.
Developments relating to the SEC
and/or DOJ
investigations may continue to represent various risks and
uncertainties that could materially and adversely affect our
business and our historical and future financial condition,
results of operations and cash flows.
Customer
Litigation
South Broward
Putative Class Action
A putative class action was filed in the United States District
Court for the Central District of California. The action,
entitled South Broward Hospital District, d/b/a Memorial
Regional Hospital, et al. v. MedQuist Inc. et al., Case
No. CV-04-7520-TJH-VBKx,
was filed on September 9, 2004 against us and certain of
our present and former officers, purportedly on behalf of an
alleged class of non-federal governmental hospitals and medical
centers that the complaint claims were wrongfully and
fraudulently overcharged for transcription services by
defendants based primarily on our use of the AAMT line billing
unit of measure. The complaint charged fraud, violation of the
California Business and Professions Code, unjust enrichment,
conversion, negligent supervision and violation of RICO. Named
as defendants, in addition to us, were one of our senior vice
presidents, our former executive
F-101
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
vice president of marketing and new business development, our
former executive vice president and chief legal officer, and our
former executive vice president and chief financial officer.
On March 10, 2008, the parties reached agreement on
settlement terms resolving all claims by the named plaintiffs.
The parties entered into a final settlement agreement on or
about May 21, 2008. Under the parties agreement, we
made a lump sum payment of $7,520 to resolve all claims by the
individual named plaintiffs and certain other additional
putative class members represented by plaintiffs counsel
but not named in the action. We have accrued the entire amount
of this lump sum payment, $5,205 of which was accrued during
2005, in the accompanying consolidated balance sheet as of
December 31, 2007. Neither we, nor any of the individual
defendants, admitted to any liability or any wrongdoing in
connection with the settlement. On June 16, 2008, the
District Court dismissed the case with prejudice in its entirety
and without costs. Because the settlement is not be on a
class-wide
basis, no class will be certified and thus there is no
requirement to give notice.
Kaiser
Litigation
On June 6, 2008, plaintiffs Kaiser Foundation Health Plan,
Inc., Kaiser Foundation Hospitals, The Permanente Medical Group,
Inc., Kaiser Foundation Health Plan of the Mid-Atlantic States,
Inc., and Kaiser Foundation Health Plan of Colorado
(collectively, Kaiser) filed suit against MedQuist Inc. and
MedQuist Transcriptions, Ltd. (collectively, MedQuist) in the
Superior Court of the State of California in and for the County
of Alameda. The action is entitled Foundation Health Plan Inc.,
et al v. MedQuist Inc. et al., Case
No. CV-078-03425
PJH. The complaint asserts five causes of action, for common law
fraud, breach of contract, violation of California Business and
Professions Code section 17200, unjust enrichment, and a
demand for an accounting. More specifically, Kaiser alleges that
MedQuist fraudulently inflated the payable units of measure in
medical transcription reports generated by MedQuist for Kaiser
pursuant to the contracts between the parties. The damages
alleged in the complaint include an estimated $7 million in
compensatory damages, as well as punitive damages,
attorneys fees and costs, and injunctive relief. MedQuist
contends that it did not breach the contracts with Kaiser, or
commit the fraud alleged, and it intends to defend the suit
vigorously. MedQuist removed the case to the United States
District Court for the Northern District of California, and has
filed motions to dismiss Kaisers complaint and to transfer
venue of the case to the United Stated District Court for the
District of New Jersey. The parties participated in mediation on
July 24, 2008, but the case was not settled. An initial
case management conference has been set for October 23,
2008.
Medical
Transcriptionist Litigation
Hoffmann Putative
Class Action
A putative class action lawsuit was filed against us in the
United States District Court for the Northern District of
Georgia. The action, entitled Brigitte Hoffmann, et al. v.
MedQuist Inc., et al., Case
No. 1:04-CV-3452,
was filed with the Court on November 29, 2004 against us
and certain current and former officials, purportedly on behalf
of an alleged class of current and former employees and
statutory workers, who are or were compensated on a per
line basis for medical transcription services
(Class Members) from January 1, 1998 to the time of
the filing of the complaint (Class Period). The complaint
specifically alleged that defendants systematically and
wrongfully underpaid the Class Members during the
Class Period. The complaint asserted the following causes
of action: fraud, breach of contract, demand for accounting,
quantum meruit, unjust enrichment, conversion, negligence,
negligent supervision, and RICO violations. Plaintiffs sought
unspecified compensatory damages, punitive damages, disgorgement
and restitution. On December 1, 2005, the Hoffmann matter
was transferred to the United States District Court for the
District of New Jersey. On January 12, 2006, the Court
ordered this case consolidated with the Myers Putative
Class Action discussed below. As set forth below, the
parties have reached an agreement in principle to settle all
claims.
F-102
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
Force Putative
Class Action
A putative class action entitled Force v. MedQuist Inc. and
MedQuist Transcriptions, Ltd., Case
No. 05-cv-2608-WSD,
was filed against us on October 11, 2005 in the United
States District Court for the Northern District of Georgia. The
action was brought on behalf of a putative class of current and
former employees who claim they are or were compensated on a
per line basis for medical transcription services
but were allegedly underpaid due to the actions of defendants.
The named plaintiff asserted claims for breach of contract,
quantum meruit, unjust enrichment, and for an accounting. Upon
stipulation and consent of the parties, on February 17,
2006, the Force matter was ordered transferred to the United
States District Court for the District of New Jersey.
Subsequently, on April 4, 2006, the parties entered into a
stipulation and consent order whereby the Force matter was
consolidated with the Myers Putative Class Action discussed
below, and the consolidated amended complaint filed in the Myers
action on January 31, 2006 was deemed to supersede the
original complaint filed in the Force matter. As set forth
below, the parties have reached an agreement in principle to
settle all claims.
Myers Putative
Class Action
A putative class action entitled Myers, et al. v. MedQuist Inc.
and MedQuist Transcriptions, Ltd., Case
No. 05-cv-4608
(JBS), was filed against us on September 22, 2005 in the
United States District Court for the District of New Jersey. The
action was brought on behalf of a putative class of our employee
and independent contractor transcriptionists who claim that they
contracted with us to be paid on a 65 character line, but were
allegedly underpaid due to intentional miscounting of the number
of characters and lines transcribed. The named plaintiffs
asserted claims for breach of contract, unjust enrichment, and
requested an accounting.
The allegations contained in the Myers case are substantially
similar to those contained in the Hoffmann and Force putative
class actions and, as detailed above, the three actions have now
been consolidated. A consolidated amended complaint was filed on
January 31, 2006. In the consolidated amended complaint,
the named plaintiffs assert claims for breach of contract,
breach of the covenant of good faith and fair dealing, unjust
enrichment and demand an accounting. On March 7, 2006 we
filed a motion to dismiss all claims in the consolidated amended
complaint. The motion was fully briefed and argued on
August 7, 2006. The Court denied the motion on
December 21, 2006. On January 19, 2007, we filed our
answer denying the material allegations pleaded in the
consolidated amended complaint.
On May 17, 2007, the Court issued a Scheduling Order,
ordering all pretrial fact discovery completed by
October 30, 2007. The Court subsequently ordered plaintiffs
to file their motion for class certification by
December 14, 2007 and continued the date to complete fact
discovery to January 14, 2008. On October 18, 2007,
the Court heard oral argument on plaintiffs motion to
compel further responses to written discovery regarding our
billing practices. At the conclusion of the hearing, the Court
denied plaintiffs motion, finding plaintiffs had not
established that the billing discovery sought was relevant to
the claims or defenses regarding transcriptionist pay alleged in
their case. On December 14, 2007, plaintiffs filed their
motion for class certification, identifying a proposed class of
all of our transcriptionists who were compensated on a per line
basis for work completed on MedRite, MTS or DEP transcription
platforms from November 29, 1998 to the present and
alleging that the proposed class was underpaid by more than
$80 million, not including interest.
On January 4, 2008, the Court entered a Consent Order
ordering our opposition to the motion for class certification to
be filed by March 14, 2008, plaintiffs reply brief to
be filed by May 14, 2008 and setting oral argument for
June 2, 2008. No date has been set for trial. On
January 9, 2008, the Court entered a Consent Order
extending the deadline for the parties to complete depositions
of identified witnesses through February 15, 2008. We have
now deposed each of the named plaintiffs and all witnesses who
offered declarations in support of plaintiffs motion for
class certification, and plaintiffs have deposed numerous
MedQuist present and former employees. On February 8, 2008,
plaintiffs indicated that they would seek leave to file an
amended class certification brief to narrow their claims. On
February 19, 2008, the parties exchanged their Initial
Disclosures.
F-103
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
Plaintiffs disclosures limited their damages estimate to
$41.0 million related to alleged underpayment on the
MedRite transcription platform; however, plaintiffs stated that
they were continuing to analyze potential undercounting and
would supplement their damages claim. On March 10, 2008,
plaintiffs moved for leave to file an amended motion for class
certification dropping all allegations involving our DEP
transcription platform and narrowing the claims asserted
regarding the legacy MTS transcription platform. We did not
oppose plaintiffs motion for leave. On March 11,
2008, the Court granted plaintiffs motion, ordering us to
file our opposition to plaintiffs amended motion for class
certification by April 4, 2008 and ordering plaintiffs to
file their reply by May 23, 2008. On April 4, 2008, we
filed our opposition to plaintiffs amended motion for
class certification.
On or about April 21, 2008, the parties reached a tentative
settlement of all claims in exchange for payment by MedQuist of
$1.5 million plus certain injunctive relief. The parties
are in the process of documenting their agreement. The court has
been notified of the tentative settlement and the lawsuit has
been stayed while the parties continue to negotiate the
settlement documentation. The tentative settlement contemplates
notice to a settlement class consisting of all medical
transcriptionists paid by the line for the period from
November 29, 1998 through execution of the stipulation of
settlement and is conditioned on final approval by the court.
Neither MedQuist, nor any other party, has admitted or will
admit liability or any wrongdoing in connection with the
proposed settlement.
Shareholder
Litigation
Costa Brava
Partnership III, L.P. Shareholder Litigation
Annual Meeting
and Books and Records Claims
On October 9, 2007, a single count Complaint and an Order
to Show Cause were filed against us in the Superior Court of New
Jersey, Chancery Division, Burlington County by one of our
shareholders. The action, entitled Costa Brava Partnership III,
L.P. v. MedQuist Inc. (Bur-C-0149-07), sought to compel us
to hold an annual meeting of shareholders (Annual Meeting Claim).
On October 30, 2007, plaintiff requested access under New
Jersey law to certain of our books and records. In response to
plaintiffs request, we voluntarily provided plaintiff with
those books and records that we believed we were required to
produce under New Jersey law. Thereafter, on November 9,
2007, plaintiff filed an Amended Complaint to assert a second
claim to compel us to provide it with access to certain other
books and records (Books and Records Claim). The Annual Meeting
Claim and the Books and Records Claim sought equitable relief
only.
In December 2007, we agreed to hold our annual meeting of
shareholders on December 31, 2007. This resolved the Annual
Meeting Claim. Prior to the annual meeting, we produced to
plaintiff certain additional books and records that plaintiff
requested in the Books and Records Claim. Thereafter, on
January 24, 2008, we filed an opposition to
plaintiffs Order to Show Cause to compel access to the
remaining books and records. On February 4, 2008, plaintiff
filed a reply brief. In June 2008, we and the plaintiff settled
the Books and Records Claim on terms acceptable for all parties.
No monetary payments were made by either party and each party
was responsible for its own attorneys fees and costs
incurred in the litigation.
Claim for
Preliminary and Injunctive Relief
On July 30, 2008, Costa Brava Partnership III, L.P. filed a
verified complaint and jury demand in the United States District
Court District of New Jersey against MedQuist Inc., Philips,
CBay Inc., CBaySystems Holdings, SAC Capital Management, LLC,
SAC Private Capital Group, LLC, SAC PEI CB Investment, L.P., and
four of our former, non-independent directors, Clement
Revetti, Jr., Gregory M. Sebasky and Scott M. Weisenhoff
and Edward H. Siegel. It subsequently filed a first amended
complaint on August 1, 2008. The amended complaint alleges
that
F-104
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
the defendants violated the Clayton Act, the New Jersey
Shareholder Protection Act, and federal securities laws, by
engaging in certain actions that were anti-competitive, harmful
to us and in furtherance of the CBaySystems Holdings purchase of
Philips stock in MedQuist. Certain of the claims are
purportedly asserted derivatively on our behalf. On
August 1, 2008, the plaintiff also sought an ex parte
temporary restraining order and entry of an order to show cause
requiring the defendants to appear and show cause why a
preliminary injunction should not be issued enjoining the
complained of actions. A hearing was held on the preliminary
injunction motion on August 5, 2008. At the conclusion of
the hearing, the Court denied the request for a temporary
restraining order and denied the request to enter an order to
show cause. The Court ruled that the plaintiff had not met the
standards for injunctive relief, including a showing of
likelihood of success on the merits or irreparable harm. The
Court allowed the plaintiff two weeks to file a further amended
complaint, and directed the parties to engage in discovery on an
expedited schedule. We deny any liability and intend to defend
this action vigorously.
Kahn Putative
Class Action
A shareholder putative class action lawsuit was filed against us
in the Superior Court of New Jersey, Chancery Division,
Burlington County. The action, entitled Alan R. Kahn v.
Stephen H. Rusckowski, et al., Docket
No. BUR-C-000007-08,
was filed with the Court on January 22, 2008 against us,
Philips and four of our former non-independent directors,
Clement Revetti, Jr., Stephen H. Rusckowski, Gregory M.
Sebasky and Scott Weisenhoff. Plaintiff purports to bring the
action on his own behalf and on behalf of all current holders of
our common stock. The complaint alleged that defendants breached
their fiduciary duties of good faith, fair dealing, loyalty, and
due care by purportedly agreeing to and initiating a process for
our sale or a change of control transaction which will allegedly
cause harm to plaintiff and the putative class. Plaintiff sought
damages in an unspecified amount, plus costs and interest, a
judgment declaring that defendants breached their fiduciary
duties and that any proposed transactions regarding our sale or
change of control are void, an injunction preventing our sale or
any change of control transaction that is not entirely fair to
the class, an order directing us to appoint three independent
directors to our board of directors, and attorneys fees
and expenses.
On June 12, 2008, plaintiff filed an amended class action
complaint against us, eight of our current and former directors,
and Philips in the Superior Court of New Jersey, Chancery
Division. In the amended complaint, plaintiff alleges that our
current and former directors breached their fiduciary duties of
good faith, fair dealing, loyalty, and due care by not
permitting our public shareholders the opportunity to decide
whether they wanted to participate in a share purchase offer
with non-party CBaySystems Holdings that would have allowed the
public shareholders to sell their shares of our common stock for
an amount above market price. Plaintiff further alleges that
CBaySystems Holdings also made the share purchase offer to our
majority shareholder, Philips, and that Philips breached its
fiduciary duties by accepting CBaySystems Holdings offer.
Based on these allegations, plaintiff seeks declaratory,
injunctive, and monetary relief from all defendants.
On July 14, 2008, we moved to dismiss plaintiffs
amended class action complaint, arguing (1) that
plaintiffs amended class action complaint did not allege
that we engaged in any wrongdoing which supported a breach of
fiduciary duty claim and (2) that a breach of fiduciary
duty claim is not legally cognizable against a corporation.
Plaintiff filed an opposition to our motion to dismiss on
July 21, 2008. The Court will hold oral argument on our
motion some time in October 2008.
We deny any liability and intend to defend this action
vigorously.
Newcastle
Shareholder Litigation
On June 30, 2008, Newcastle Partners, L.P. (Newcastle), a
shareholder affiliated with one of our directors, derivatively
on our behalf, filed an action against Philips, CBaySystems
Holdings, CBay Inc., Stephen H. Rusckowski, Clement
Revetti, Jr., Greg Sebasky, Jr., Scott M. Weisenhoff
and Edward H. Siegel, each of whom is one of our former
non-independent directors, in the Superior Court of New Jersey,
Chancery Division, Burlington
F-105
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
County. The complaint also named us as a Nominal
Defendant, meaning that no monetary relief is being sought
against us.
On July 9, 2008, Newcastle amended the complaint to add
Arklow Master Fund, Ltd. (Arklow), one of our shareholders and
affiliated with one of our directors, as an additional
plaintiff. Plaintiffs allege that defendants have taken steps to
sell Philips entire interest in MedQuist (i.e., 69.5% of
our outstanding shares) to CBaySystems Holdings and CBay Inc.
(collectively, CBay). Plaintiffs assert four counts in the
complaint. First, plaintiffs contend that Rusckowski, Revetti,
Sebasky, Weisenhoff and Siegel (collectively, the Philips
Directors), who are also senior officers of Philips, breached
their fiduciary duties, to the Company by taking steps to
consummate the proposed sale of Philips shares in MedQuist
to CBay Inc. that will adversely affect the Company. Second,
plaintiffs aver that all of the defendants, individually and
together, aided and abetted the Philips Directors breach
of their fiduciary duties. In light of the first two counts,
plaintiffs sought injunctive relief (including an order
enjoining the proposed sale of Philips shares in MedQuist
to CBay Inc.), declaratory relief and attorneys fees and
costs. Third, as an alternative form of relief, plaintiffs plead
that in the event that Philips sells its stake in MedQuist,
plaintiffs demand a declaration that a certain agreement related
to the governance of the Company remain in full force and
effect. Fourth, plaintiffs assert that CBay breached the
standstill provision contained in an April 2008 confidentiality
agreement between us and CBay and demand an injunction to
prevent CBay from violating that agreement.
On July 8, 2008, Newcastle filed an Application for an
Order to Show Cause (OSC) to (i) preliminarily enjoin
Philips and CBay from consummating the sale of Philips
MedQuist stock to CBay; (ii) preliminarily enjoin the
Philips Directors from taking any action to consummate the
proposed sale; and (iii) preliminarily enjoin CBay from
violating the Confidentiality Agreement. As part of the relief
requested in the OSC, plaintiffs sought a Temporary Restraining
Order (TRO) that would restrain all defendants from taking any
action in violation of the proposed OSC until a preliminary
injunction hearing could be held.
On July 9, 2008, counsel for MedQuist, Philips, the Philips
Directors, CBay, Newcastle and Arklow appeared before Judge
Michael Hogan of the Superior Court of New Jersey, for a hearing
on the TRO application. After entertaining argument from the
parties, Judge Hogan denied the TRO application. Judge Hogan
scheduled a preliminary injunction hearing for July 31,
2008 and ordered expedited discovery. The parties subsequently
agreed to an expedited discovery schedule, as well as a briefing
schedule on OSC for a preliminary injunction. The hearing was
held on July 31, 2008, and on August 1, 2008, the
Court issued an order denying plaintiffs motion seeking
preliminary injunctive relief. The Court found, among other
things, that the plaintiffs failed to establish by clear and
convincing evidence a reasonable probability of success on their
underlying claims, or that absent injunctive relief they would
suffer immediate irreparable harm.
Reseller
Arbitration Demand
On October 1, 2007, we received from counsel to nine
current and former resellers of our products (Claimants), a copy
of an arbitration demand filed by the Claimants, initiating an
arbitration proceeding styled Diskriter, Inc., Electronic Office
Systems, Inc., Milner Voice & Data, Inc., Nelson
Systems, Inc., NEO Voice and Communications, Inc., Office
Business Systems, Inc., Roach-Reid Office Systems, Inc., Stiles
Office Systems, Inc., and Travis Voice and Data, Inc. v.
MedQuist Inc. and MedQuist Transcriptions, Ltd. (collectively
MedQuist) (filed on September 27, 2007, AAA,
30-118-Y-00839-07).
The arbitration demand purports to set forth claims for breach
of contract; breach of covenant of good faith and fair dealing;
promissory estoppel; misrepresentation; and tortious
interference with contractual relations. The Claimants allege
that we breached our written agreements with the Claimants by:
(i) failing to provide reasonable training, technical
support, and other services; (ii) using the Claimants
confidential information to compete against the Claimants;
(iii) directly competing with the Claimants
territories; and (iv) failing to make new products
available to the Claimants. In addition, the Claimants allege
that we made false oral representations that we: (i) would
provide new product, opportunities and support to the Claimants;
(ii) were committed to continuing to use Claimants;
(iii) did not intend to create our own sales force
F-106
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
with respect to the Claimants territory; and
(iv) would stay out of Claimants territories and
would not attempt to take over the Claimants business and
relationships with the Claimants customers and end-users.
The Claimants assert that they are seeking damages in excess of
$24.3 million. We also moved to dismiss MedQuist Inc. as a
party to the arbitration since MedQuist Inc. is not a party to
the Claimants agreements, and accordingly, has never
agreed to arbitration. The AAA initially agreed to rule on these
matters, but then decided to defer a ruling to the panel of
arbitrators selected pursuant to the parties agreements
(Panel). In response, we informed the Panel that a court, not
the Panel, should rule on these issues. When it appeared that
the Panel would rule on these issues, we initiated a lawsuit in
the Superior Court of DeKalb County (the Court) and requested an
injunction enjoining the Panel from deciding these issues. The
Court denied the request, and indicated that a new motion could
be filed if the Panels ruling was adverse to MedQuist Inc.
or MedQuist Transcriptions, Ltd. On May 6, 2008, the Panel
dismissed MedQuist Inc. as a party, but ruled against our
opposition to a consolidated arbitration. We asked the Court to
stay the arbitration in order to review that decision. The Court
initially granted the stay, but later lifted the stay. The Court
did not make any substantive rulings regarding consolidation,
and in fact, left that decision and others to the assigned
judge, who was unable to hear those motions. Accordingly, until
further order of the Court, the arbitration will proceed forward.
We filed an answer and counterclaim in the arbitration, which
generally denied liability. In the lawsuit, the defendants filed
a motion to dismiss alleging that the our complaint failed to
state an actionable claim for relief. On July 25, 2008, we
filed our response which opposed the motion to dismiss in all
respects. Discovery has now commenced in both the arbitration
and the lawsuit. We deny all wrongdoing and intend to defend
ourselves vigorously including asserting counterclaims against
the Claimants as appropriate.
Anthurium
Patent Litigation
On November 6, 2007, Anthurium Solutions, Inc. filed an
action entitled Anthurium Solutions, Inc. v. MedQuist Inc.,
et al., Civil Action
No. 2-07CV-484,
in the United States District Court for the Eastern District of
Texas, alleging that we infringed and continue to infringe
United States Patent No. 7,031,998 through our DEP
transcription platform. The complaint also alleges patent
infringement claims against Spheris, Inc. and Arrendale
Associates, Inc. The complaint seeks injunctive relief and
unspecified damages, including enhanced damages and
attorneys fees. We filed our answer on January 15,
2008 and counterclaimed seeking a declaratory judgment of
non-infringement and invalidity. Plaintiff filed its preliminary
infringement contentions on May 2, 2008. Our investigation
of the claims is ongoing. We believe that the claims asserted
have no merit and intend to vigorously defend the suit.
Other
Matters
From time to time, we have been involved in various claims and
legal actions arising in the ordinary course of business. In our
opinion, the outcome of such actions will not have a material
adverse effect on our consolidated financial position, results
of operations, liquidity or cash flows.
We provide certain indemnification provisions within our
standard agreement for the sale of software and hardware
(collectively, Products) to protect our customers from any
liabilities or damages resulting from a claim of
U.S. patent, copyright or trademark infringement by third
parties relating to our Products. We believe that the likelihood
of any future payout relating to these provisions is remote.
Accordingly, we have not recorded any liability in our
consolidated financial statements as of December 31, 2007
or June 30, 2008 related to these indemnification
provisions.
We had insurance policies which provided coverage for certain of
the matters related to the legal actions described herein and
certain other legal actions that were previously settled or
dismissed. To date, we have received total insurance recoveries
of $24,795 related to these policies (See Note 8). We do
not expect to receive any additional insurance recoveries
related to these legal actions.
F-107
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
|
|
12.
|
Related Party
Transactions
|
From time to time, we enter into transactions in the normal
course of business with related parties. The audit committee of
our board of directors has been charged with the responsibility
of approving or ratifying all related party transactions other
than those between us and Philips. In any situation where the
audit committee sees fit to do so, any related party
transaction, other than those between us and Philips, may be
presented to disinterested members of our board of directors for
approval or ratification.
We are a party to various agreements with Philips, our former
majority shareholder. All material transactions between Philips
and us have been reviewed and approved by the supervisory
committee of our board of directors. The supervisory committee
is comprised of directors independent from Philips. Listed below
is a summary of our material agreements with Philips.
On August 6, 2008, the supervisory committee of our board
of directors was eliminated by our board of directors after the
consummation of the CBaySystems Holdings Purchase. We are not a
party to any material agreements with CBaySystems Holdings.
Licensing
Agreement
We are a party to a Licensing Agreement with Philips Speech
Processing GmbH, an affiliate of Philips which is now known as
Philips Speech Recognition Systems GmbH (PSRS), on May 22,
2000 (Licensing Agreement). The Licensing Agreement was
subsequently amended by the parties as of January 1, 2002,
February 23, 2003, August 10, 2003, September 1,
2004, December 30, 2005 and February 13, 2007.
Under the Licensing Agreement, we license from PSRS its
SpeechMagic speech recognition and processing software,
including any updated versions of the software developed by PSRS
during the term of the License Agreement (Licensed Product), for
use by us anywhere in the world. We pay a fee for use of this
license based upon a per line fee for each transcribed line of
text processed through the Licensed Product.
Upon the expiration of its initial term on June 28, 2005,
the Licensing Agreement was renewed for an additional five year
term. As part of the CBaySystems Holdings Purchase, Philips
waived its ability to terminate the Licensing Agreement until
the expiration of the current renewal term, conditioned upon a
similar waiver from us.
In connection with the Licensing Agreement, we have a consulting
arrangement with PSRS whereby PSRS assists us with the
integration of its speech and transcription technologies.
OEM Supply
Agreement
On September 21, 2007, we entered into an Amended and
Restated OEM Supply Agreement (Amended OEM Agreement) with PSRS.
The Amended OEM Agreement amends and restates a previous OEM
Supply Agreement with PSRS dated September 23, 2004. In
connection with the Amended OEM Agreement certain amounts paid
to PSRS were capitalized in fixed assets and are being amortized
over a three-year period.
Pursuant to the Amended OEM Agreement, we purchased a
co-ownership interest in all rights and interests in and to
SpeechQ for Radiology together with its components, including
object and source code for the SpeechQ for Radiology application
and the SpeechQ for Radiology integration SDK (collectively, the
Product), but excluding the SpeechMagic speech recognition and
processing software, which we separately license from PSRS for a
fee under the Licensing Agreement. Additionally, the Amended OEM
Agreement provides that we shall receive, in exchange for a fee,
the exclusive right in the United States, Canada and certain
islands of the Caribbean (collectively the Exclusive Territory)
to sell, service and deliver the Product. In addition, PSRS has
agreed that for the term of the Amended OEM Agreement it will
not release a front-end multi-user reporting solution (including
one similar to the Product) in the medical market in the
Exclusive Territory nor will it directly authorize or assist any
of its affiliates to do so either; provided that the restriction
does not prevent PSRSs affiliates from integrating
F-108
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
SpeechMagic within their general medical application products.
The Amended OEM Agreement further provides that we shall make
payments to PSRS for PSRSs development of an interim
version of the software included in the Product (Interim
Version). Except for the Interim Version which we and PSRS will
co-own, the Amended OEM Agreement provides that any
improvements, developments or other enhancements either we or
PSRS makes to the Product (collectively, Improvements) shall be
owned exclusively by the party that developed such Improvement.
Each party has the right to seek patent or other protection of
the Improvements it owns independent of the other party.
The term of the Amended OEM Agreement extends through
June 30, 2010 and will automatically renew for an
additional three year term provided that we are in material
compliance with the Amended OEM Agreement as of such date. If
PSRS decides to discontinue all business relating to the Product
in the Exclusive Territory on or after June 30, 2010, PSRS
can effect such discontinuation by terminating the Amended OEM
Agreement by providing us with six months prior written
notice of such discontinuation, provided the earliest such
notice can be delivered is June 30, 2010. Either party may
terminate the Amended OEM Agreement for cause immediately in the
event that a material breach by the other party remains uncured
for more than 30 days following delivery of written notice
or in the event that the other party becomes insolvent or files
for bankruptcy.
Equipment
Purchases
We purchase certain dictation related equipment from Philips.
Insurance
Coverage
Prior to the closing of the CBaySystems Holdings Purchase on
August 6, 2008, we obtained all of our business insurance
coverage (other than workers compensation) through
Philips. As of August 7, 2008, we have insurance policies
through CBaySystems Holdings.
Purchasing
Agreements
For each of the three years ended December 31, 2007 we
entered into annual letter agreements with Philips Electronics
North America Corporation (PENAC), an affiliate of Philips, to
purchase products and services from certain suppliers under the
terms of the prevailing agreements between such suppliers and
PENAC. As of January 1, 2008, we are no longer a party to
an agreement with PENAC to purchase the aforementioned products
and services.
CBaySystems
Holdings Purchase
Philips will reimburse us for certain incremental and direct
costs incurred by us in connection with the CBaySystems Holdings
Purchase. These costs totaled $0 for the six months ended
June 30, 2007 and $119 for the six months ended
June 30, 2008.
From time to time prior to the CBaySystems Holdings Purchase, we
entered into other miscellaneous transactions with Philips
including Philips purchasing certain products and implementation
services from us. We recorded net revenues from sales to Philips
of $0 and $39 for the six months ended June 30, 2007 and
2008, respectively.
Our consolidated balance sheets as of December 31, 2007 and
June 30, 2008 reflect other assets related to Philips of
$1,003 and $955, respectively, and accrued expenses due to
Philips of $1,534 and $2,413, respectively.
Listed below is a summary of the expenses incurred by us in
connection with the various Philips agreements noted above for
the three and six months ended June 30, 2007 and 2008.
Charges related to these agreements are included in cost of
revenues and selling, general and administrative expenses in the
accompanying consolidated statements of operations.
F-109
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
Licensing agreement
|
|
$
|
1,102
|
|
|
$
|
1,715
|
|
OEM supply agreement
|
|
|
301
|
|
|
|
1,500
|
|
Equipment purchases
|
|
|
321
|
|
|
|
489
|
|
Insurance coverage
|
|
|
1,561
|
|
|
|
334
|
|
Purchasing agreement
|
|
|
40
|
|
|
|
|
|
CBay Transaction
|
|
|
|
|
|
|
(119
|
)
|
Other
|
|
|
|
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,325
|
|
|
$
|
3,880
|
|
|
|
|
|
|
|
|
|
|
On July 29, 2004, we entered into an agreement with
Nightingale under which Nightingale agreed to provide interim
chief executive officer services to us. On July 30, 2004,
our board of directors appointed Howard S. Hoffmann to serve as
our non-employee chief executive officer. Mr. Hoffmann
served as the Managing Partner of Nightingale. With the
departure of our former president in May 2007, our board of
directors appointed Mr. Hoffmann to the additional position
of president in June 2007. Mr. Hoffmann served as our
president and chief executive officer pursuant to the terms of
the agreement between us and Nightingale which was amended on
March 14, 2008 (Amendment). The Amendment, among other
things, extended the term of Mr. Hoffmanns role as
our president and chief executive officer through August 1,
2008. Our agreement with Nightingale also permitted us to engage
additional personnel employed by Nightingale to provide
consulting services to us from time to time.
Mr. Hoffmans service as president and chief executive
officer and the related engagement of Nightingale terminated
consensually on June 10, 2008.
For the six months ended June 30, 2007 and 2008, we
incurred charges of $1,487 and $1,073, respectively for
Nightingale services. From February 1, 2007 through
June 10, 2008, the Nightingale charges were recorded in
selling, general and administrative expenses in the accompanying
consolidated statements of operations due to Nightingales
focus on operational matters instead of the Review and
Managements Billing Assessment. Prior to February 1,
2007, charges related to Nightingale were recorded in cost of
investigation and legal proceedings, net (see Note 8). As
of December 31, 2007 and June 30, 2008, accrued
expenses included $400 and $40, respectively, for amounts due to
Nightingale for services performed.
|
|
13.
|
Investment in
A-Life Medical, Inc. (A-Life)
|
As of December 31, 2007 and June 30, 2008, we had an
investment of $6,016 and $6,056, respectively, in A-Life, a
privately held entity which provides advanced natural language
processing technology for the medical industry. Our investment
is recorded under the equity method of accounting since we owned
33.6% of A-Lifes outstanding voting shares as of
December 31, 2007 and June 30, 2008. Our investment in
A-Life is recorded in other assets in the accompanying condensed
consolidated balance sheets.
Our investment in A-Life included a note receivable plus accrued
interest due from A-Life which matured on December 31,
2003. Prior to 2007, this note receivable and accrued interest
had been recorded in other assets. In January 2008, A-Life paid
us $1,250 to satisfy this note receivable and accrued interest
in full, as well as all other disputes and claims between A-Life
and us. Accordingly, we reclassified the note receivable and
accrued interest balances to other current assets in the
accompanying December 31, 2007 consolidated balance sheet.
In January 2008, we recorded $438 of other income related to
this transaction.
F-110
MedQuist Inc. and
Subsidiaries
Notes to
Consolidated Financial Statements(Continued)
On July 14, 2008, we announced that our board of directors
had declared a dividend of $2.75 per share of our common stock.
The dividend, aggregating $103,300, was paid on August 4,
2008 to shareholders of record as of the close of business on
July 25, 2008.
On July 17, 2008, we announced that our common stock began
trading on the Global Market of The NASDAQ Stock Market LLC
under the ticker symbol MEDQ. The Company had been
trading on the pink sheets since 2004.
On August 6, 2008, the CBaySystems Holdings Purchase was
consummated.
F-111
Report of
Independent Auditors
To the Board of Directors and Stockholders of
Spheris Inc.
We have audited the accompanying consolidated balance sheets of
Spheris Inc. (the Company) as of December 31,
2008 and 2009, and the related consolidated statements of
operations, stockholders equity (deficit) and cash flows
for each of the three years in the period ended
December 31, 2009. These consolidated financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require
that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. We were not engaged to perform an audit
of the Companys internal control over financial reporting.
Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Spheris Inc. at December 31, 2008 and
2009, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended
December 31, 2009 in conformity with U.S. generally
accepted accounting principles.
The accompanying consolidated financial statements have been
prepared assuming that Spheris Inc. would continue as a going
concern. As more fully described in Notes 2 and 22 to the
consolidated financial statements, on February 3, 2010, the
100% owner of Spheris Inc., Spheris Holding II, Inc.,
voluntarily filed petitions on behalf of itself and each of its
direct and indirect subsidiaries (except for Spheris India
Private Limited) for relief under Chapter 11 of the United
States Bankruptcy Code. This filing, along with debt covenant
violations as of the balance sheet date, caused the Company to
be in default with covenants under its loan agreements and
senior subordinated notes. These conditions raise substantial
doubt about the Companys ability to continue as a going
concern. Managements plans in regard to these matters,
including the sale of substantially all of its assets, also are
described in Notes 2 and 22. The financial statements do
not include any adjustments relating to the recoverability of
assets and the amounts, classification and satisfaction of
liabilities that resulted from the uncertainty regarding the
Companys ability to continue as a going concern and its
subsequent sale of assets.
Nashville, Tennessee
June 29, 2010
F-112
Spheris Inc.
(In
thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Unrestricted cash and cash equivalents
|
|
$
|
3,262
|
|
|
$
|
8,817
|
|
Restricted cash
|
|
|
309
|
|
|
|
1,399
|
|
Accounts receivable, net of allowance of $1,332 and $632,
respectively
|
|
|
28,510
|
|
|
|
20,787
|
|
Deferred taxes
|
|
|
372
|
|
|
|
11,995
|
|
Prepaid expenses and other current assets
|
|
|
4,430
|
|
|
|
8,015
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
36,883
|
|
|
|
51,013
|
|
Property and equipment, net
|
|
|
12,309
|
|
|
|
9,782
|
|
Internal-use software, net
|
|
|
1,586
|
|
|
|
1,021
|
|
Goodwill
|
|
|
218,841
|
|
|
|
19,969
|
|
Deferred taxes
|
|
|
|
|
|
|
4,338
|
|
Other noncurrent assets
|
|
|
5,459
|
|
|
|
3,288
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
275,078
|
|
|
$
|
89,411
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,893
|
|
|
$
|
1,215
|
|
Accrued wages and benefits
|
|
|
8,545
|
|
|
|
6,945
|
|
Current portion of long-term debt and lease obligations
|
|
|
683
|
|
|
|
198,440
|
|
Other current liabilities
|
|
|
5,327
|
|
|
|
11,943
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
17,448
|
|
|
|
218,543
|
|
Long-term debt and lease obligations, net of current portion
|
|
|
195,499
|
|
|
|
80
|
|
Deferred tax liabilities
|
|
|
300
|
|
|
|
|
|
Other noncurrent liabilities
|
|
|
5,710
|
|
|
|
3,370
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
218,957
|
|
|
|
221,993
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 100 shares authorized,
10 shares issued and outstanding
|
|
|
|
|
|
|
|
|
Other comprehensive loss, net of tax effects of $0 and $1,500,
respectively
|
|
|
(1,344
|
)
|
|
|
(2,332
|
)
|
Contributed capital
|
|
|
111,680
|
|
|
|
111,874
|
|
Accumulated deficit
|
|
|
(54,215
|
)
|
|
|
(242,124
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders (deficit) equity
|
|
|
56,121
|
|
|
|
(132,582
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders(deficit) equity
|
|
$
|
275,078
|
|
|
$
|
89,411
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-113
Spheris Inc.
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Net revenues
|
|
$
|
200,392
|
|
|
$
|
182,843
|
|
|
$
|
156,596
|
|
Direct cost of revenues (exclusive of depreciation and
amortization below)
|
|
|
144,255
|
|
|
|
131,039
|
|
|
|
109,059
|
|
Marketing and selling expenses
|
|
|
4,782
|
|
|
|
2,790
|
|
|
|
2,501
|
|
General and administrative expenses
|
|
|
19,730
|
|
|
|
20,845
|
|
|
|
16,592
|
|
Depreciation and amortization
|
|
|
24,273
|
|
|
|
21,613
|
|
|
|
7,230
|
|
Goodwill impairment charge
|
|
|
|
|
|
|
|
|
|
|
198,872
|
|
Transaction charges
|
|
|
|
|
|
|
|
|
|
|
6,961
|
|
Costs of legal proceedings and settlements
|
|
|
|
|
|
|
425
|
|
|
|
1,246
|
|
Operational restructuring charges
|
|
|
|
|
|
|
484
|
|
|
|
775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs
|
|
|
193,040
|
|
|
|
177,196
|
|
|
|
343,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
7,352
|
|
|
|
5,647
|
|
|
|
(186,640
|
)
|
Interest expense, net
|
|
|
21,171
|
|
|
|
19,104
|
|
|
|
17,439
|
|
Loss on debt refinancing
|
|
|
1,828
|
|
|
|
|
|
|
|
|
|
Foreign currency (gain) loss
|
|
|
559
|
|
|
|
(1,338
|
)
|
|
|
(1,433
|
)
|
Other (income) expense
|
|
|
1,011
|
|
|
|
3,190
|
|
|
|
(692
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before income taxes
|
|
|
(17,217
|
)
|
|
|
(15,309
|
)
|
|
|
(201,954
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Benefit from) provision for income taxes
|
|
|
(5,856
|
)
|
|
|
3,870
|
|
|
|
(14,571
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(11,361
|
)
|
|
$
|
(19,179
|
)
|
|
$
|
(187,383
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-114
Spheris Inc.
(In
thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Contributed
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
Equity (Deficit)
|
|
|
Balance, December 31, 2006
|
|
|
10
|
|
|
$
|
|
|
|
$
|
110,787
|
|
|
$
|
(474
|
)
|
|
$
|
(23,675
|
)
|
|
$
|
86,638
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,361
|
)
|
|
|
(11,361
|
)
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,038
|
|
|
|
|
|
|
|
1,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,038
|
|
|
|
(11,361
|
)
|
|
|
(10,323
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash equity compensation
|
|
|
|
|
|
|
|
|
|
|
371
|
|
|
|
|
|
|
|
|
|
|
|
371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
10
|
|
|
$
|
|
|
|
$
|
111,158
|
|
|
$
|
564
|
|
|
$
|
(35,036
|
)
|
|
$
|
76,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,179
|
)
|
|
|
(19,179
|
)
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,908
|
)
|
|
|
|
|
|
|
(1,908
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,908
|
)
|
|
|
(19,179
|
)
|
|
|
(21,087
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash equity compensation
|
|
|
|
|
|
|
|
|
|
|
522
|
|
|
|
|
|
|
|
|
|
|
|
522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
10
|
|
|
$
|
|
|
|
$
|
111,680
|
|
|
$
|
(1,344
|
)
|
|
$
|
(54,215
|
)
|
|
$
|
56,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(187,383
|
)
|
|
|
(187,383
|
)
|
Foreign currency translation, net of tax effects of $974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,514
|
)
|
|
|
|
|
|
|
(1,514
|
)
|
Effects of change in tax position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
526
|
|
|
|
(526
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(988
|
)
|
|
|
(187,909
|
)
|
|
|
(188,897
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash equity compensation
|
|
|
|
|
|
|
|
|
|
|
194
|
|
|
|
|
|
|
|
|
|
|
|
194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
10
|
|
|
$
|
|
|
|
$
|
111,874
|
|
|
$
|
(2,332
|
)
|
|
$
|
(242,124
|
)
|
|
$
|
(132,582
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-115
Spheris Inc.
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(11,361
|
)
|
|
$
|
(19,179
|
)
|
|
$
|
(187,383
|
)
|
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
24,273
|
|
|
|
21,613
|
|
|
|
7,230
|
|
Amortization of acquired technology
|
|
|
648
|
|
|
|
162
|
|
|
|
|
|
Goodwill impairment charge
|
|
|
|
|
|
|
|
|
|
|
198,872
|
|
Deferred taxes
|
|
|
(6,435
|
)
|
|
|
3,222
|
|
|
|
(15,287
|
)
|
Change in fair value of derivative financial instruments
|
|
|
1,112
|
|
|
|
2,593
|
|
|
|
(1,795
|
)
|
Loss on sale or disposal of assets
|
|
|
37
|
|
|
|
68
|
|
|
|
44
|
|
Non-cash equity compensation
|
|
|
371
|
|
|
|
522
|
|
|
|
194
|
|
Amortization of debt discounts and issuance costs
|
|
|
833
|
|
|
|
851
|
|
|
|
946
|
|
Loss on debt refinancing
|
|
|
1,828
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(19
|
)
|
|
|
5,085
|
|
|
|
7,723
|
|
Prepaid expenses and other current assets, net
|
|
|
(476
|
)
|
|
|
(53
|
)
|
|
|
(4,674
|
)
|
Accounts payable
|
|
|
1,717
|
|
|
|
(1,450
|
)
|
|
|
(1,572
|
)
|
Accrued wages and benefits
|
|
|
1,556
|
|
|
|
(10,069
|
)
|
|
|
(1,599
|
)
|
Other current liabilities
|
|
|
(57
|
)
|
|
|
471
|
|
|
|
5,946
|
|
Other noncurrent assets and liabilities
|
|
|
(417
|
)
|
|
|
(2,402
|
)
|
|
|
1,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
13,610
|
|
|
|
1,434
|
|
|
|
10,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(5,699
|
)
|
|
|
(5,423
|
)
|
|
|
(3,766
|
)
|
Purchase and development of internal-use software
|
|
|
(1,201
|
)
|
|
|
(873
|
)
|
|
|
(410
|
)
|
Purchase of Vianeta, net of cash acquired
|
|
|
(1,547
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(8,447
|
)
|
|
|
(6,296
|
)
|
|
|
(4,176
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the 2007 Senior Credit Facility
|
|
|
71,320
|
|
|
|
7,288
|
|
|
|
2,500
|
|
Payments on the 2007 Senior Credit Facility
|
|
|
(2,507
|
)
|
|
|
(4,081
|
)
|
|
|
(457
|
)
|
Payments on the 2004 Senior Facility
|
|
|
(73,500
|
)
|
|
|
|
|
|
|
|
|
Payments on lease obligations
|
|
|
(59
|
)
|
|
|
(370
|
)
|
|
|
(294
|
)
|
Debt issuance costs
|
|
|
(583
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(5,329
|
)
|
|
|
2,837
|
|
|
|
1,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate change on cash and cash equivalents
|
|
|
1,038
|
|
|
|
(1,908
|
)
|
|
|
(2,488
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in unrestricted cash and cash equivalents
|
|
|
872
|
|
|
|
(3,933
|
)
|
|
|
5,555
|
|
Unrestricted cash and cash equivalents, at beginning of period
|
|
|
6,323
|
|
|
|
7,195
|
|
|
|
3,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrestricted cash and cash equivalents, at end of period
|
|
$
|
7,195
|
|
|
$
|
3,262
|
|
|
$
|
8,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
20,432
|
|
|
$
|
18,425
|
|
|
$
|
9,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for taxes
|
|
$
|
1,312
|
|
|
$
|
906
|
|
|
$
|
1,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment and internal-use software
through lease obligations
|
|
$
|
|
|
|
$
|
1,019
|
|
|
$
|
|
|
|
See accompanying notes.
F-116
Spheris Inc.
December 31,
2009
|
|
1.
|
Description of
Business and Summary of Significant Accounting
Policies
|
Organization
and Operations
Spheris Inc. (Spheris) is a Delaware corporation.
Subsequent to its acquisition by certain institutional investors
in November 2004 (the November 2004
Recapitalization), Spheris became a wholly-owned
subsidiary of Spheris Holding II, Inc. (Spheris Holding
II), and an indirect wholly-owned subsidiary of Spheris
Holding III, Inc. (Spheris Holding III), an entity
owned by affiliates of Warburg Pincus LLC and TowerBrook Capital
Partners LLC, CHS/Community Health Systems, Inc.
(CHS), and indirectly by certain members of
Spheris current and past management team.
Spheris and its direct or indirect wholly-owned subsidiaries:
Spheris Operations LLC (Operations), Spheris Leasing
LLC, Spheris Canada Inc., Spheris, India Private Limited
(SIPL) and Vianeta Communications
(Vianeta) (sometimes referred to collectively as the
Company), provide clinical documentation technology
and services to health systems, hospitals and group medical
practices located throughout the United States. The Company
receives medical dictation in digital format from subscribing
physicians, converts the dictation into text format, stores
specific data elements from the records, then transmits the
completed medical record to the originating physician in the
prescribed format. As of December 31, 2009, the Company
employed approximately 4,000 skilled medical language
specialists (MLS) in the United States and India.
Approximately 1,800 of these MLS work out of the Companys
facilities in India, making the Company one of the largest
global providers of clinical documentation technology and
services.
Basis of
Presentation
For all periods presented in the accompanying consolidated
financial statements and footnotes, Spheris is the reporting
unit. All dollar amounts shown in these consolidated financial
statements and tables in the notes are in thousands unless
otherwise noted. The consolidated financial statements include
the financial statements of Spheris, including its direct or
indirect wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
The accompanying consolidated financial statements have been
prepared on a going concern basis which contemplates the
realization of assets and the satisfaction of liabilities in the
ordinary course of business. The financial statements do not
include any adjustments relating to the recoverability of assets
and the amounts, classification and satisfaction of liabilities
that resulted from the uncertainty regarding the Companys
ability to continue as a going concern following its bankruptcy
filing and its subsequent sale of assets. See further discussion
in Note 2 and Note 22.
In preparing the accompanying consolidated financial statements,
the Company evaluated events and transactions that occurred
subsequent to December 31, 2009, through the date that the
accompanying consolidated financial statements were available to
be issued on June 29, 2010.
Revenue
Recognition
The Companys customer contracts contain multiple elements
of services. The Company records service revenues as the
services are performed and defers one-time fees, which are
recognized as revenue over the life of the applicable contracts.
Software licensing revenues are recognized upon culmination of
the earnings process. Clinical documentation services are
provided at a contractual rate, and revenue is recognized when
the provision of services is complete including the satisfaction
of the following criteria: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred; (3) the
fee is fixed and determinable; and (4) collectability is
reasonably assured. The Company monitors actual performance
against contract standards and provides for credits against
billings as reductions to revenues.
F-117
Spheris Inc.
Notes to
Consolidated Financial Statements(Continued)
Cash and Cash
Equivalents
Cash and cash equivalents include highly liquid investments with
an original maturity of less than three months. At times, cash
balances in the Companys accounts may exceed Federal
Deposit Insurance Corporation insurance limits. Consequently,
our cash equivalents are subject to potential credit risk. The
unrestricted cash amounts of SIPL, the Companys Indian
subsidiary, are included as a component of unrestricted cash.
Transfers of funds between the Companys domestic
operations and SIPL may be subject to certain foreign tax
effects.
Restricted
Cash
The Companys cash balances include certain amounts that
are being held until the resolution of certain tax matters
related to the Vianeta acquisition, as well as amounts currently
available for distribution to former HealthScribe Inc.
(Healthscribe) and Vianeta shareholders. These
amounts are reflected as restricted cash in the accompanying
consolidated balance sheets. Certain cash deposits made that are
being held as security under certain of the Companys lease
obligations are reflected as other noncurrent assets in the
accompanying consolidated balance sheets.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded net of an allowance for
doubtful accounts based upon factors surrounding the credit risk
of a specific customer, historical trends and other information.
Accounts receivables are written off against the allowance for
doubtful accounts when accounts are deemed to be uncollectible
on a specific identification basis. The determination of the
amount of the allowance for doubtful accounts is subject to
judgment and estimation by management. Increases or decreases to
the allowance may be made if circumstances or economic
conditions change.
A summary of the activity in the Companys allowance for
doubtful accounts for the years ended December 31, 2007,
2008 and 2009, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Balance at beginning of period
|
|
$
|
1,191
|
|
|
$
|
1,569
|
|
|
$
|
1,332
|
|
Provisions and adjustments to expense
|
|
|
476
|
|
|
|
(55
|
)
|
|
|
344
|
|
Write-offs and adjustments, net of recoveries
|
|
|
(98
|
)
|
|
|
(182
|
)
|
|
|
(1,044
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
1,569
|
|
|
$
|
1,332
|
|
|
$
|
632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concentration
of Credit Risk
The Company performs ongoing credit evaluations of our
customers financial performance and generally requires no
collateral from customers. No individual customer accounted for
10% or more of the Companys net revenues during 2007, 2008
or 2009.
Property and
Equipment
Property and equipment are stated at cost less accumulated
depreciation. Depreciation is calculated on a
straight-line
basis over the estimated useful lives of the assets, generally
two to five years. Leasehold improvements are amortized on a
straight-line basis over the shorter of the lease term or the
estimated useful lives of the assets. Routine maintenance and
repairs are charged to expense as incurred, while betterments
and renewals are capitalized. Equipment under capital lease
obligations is amortized on a straight-line basis over the
shorter of the lease term or estimated useful life of the
applicable assets.
F-118
Spheris Inc.
Notes to
Consolidated Financial Statements(Continued)
Software
Costs
The costs of obtaining or developing internal-use software are
capitalized. Capitalized software is reported at the lower of
unamortized cost or net realizable value and is amortized over
its estimated useful life, which is generally two to five years.
The Company charges the development costs of software intended
for sale to expense as incurred until technological feasibility
is attained. Technological feasibility is attained upon
completion of a detailed program design or, in its absence,
completion of a working model. The time between the attainment
of technological feasibility and completion of software
development by the Company historically has been short. The
Company capitalizes software acquired through business
combinations and technology purchases if the related software
under development has reached technological feasibility or if
there are alternative future uses for the software.
Goodwill,
Intangibles and Other Long-lived Assets
Goodwill represents the excess of costs over the fair value of
assets acquired in a business combination. Goodwill and
intangible assets acquired in a business combination with
indefinite useful lives are not amortized, but are subject to
impairment tests at least annually.
The Company performs an analysis of potential impairment of its
goodwill assets annually, or whenever circumstances indicate
that the carrying value may be impaired. Goodwill impairment
testing requires a two step process. The first step is to
identify if a potential impairment exists by comparing the fair
value of each reporting unit with its carrying value, including
goodwill. Regarding the Companys specific analysis, this
assessment is made at the consolidated Company level as it only
has one reporting unit. If the fair value of the reporting unit
exceeds the carrying value, goodwill is not considered to have a
potential impairment, and the second step is not necessary.
However, if the fair value of the reporting unit is less than
the carrying value, the second step is performed to determine if
goodwill is impaired and to measure the amount of impairment
loss, if any.
Additionally, when events, circumstances or operating results
indicate that the carrying values of certain long-lived assets
and related identifiable intangible assets (excluding goodwill)
that are expected to be held and used might be impaired, the
Company prepares projections of the undiscounted future cash
flows expected to result from the use of the assets and their
eventual disposition. If the projections indicate that the
recorded amounts are not expected to be recoverable, such
amounts are reduced to estimated fair value. Fair value may be
estimated based upon internal evaluations that include
quantitative analysis of revenues and cash flows, reviews of
recent sales of similar assets and independent appraisals. As
further discussed in Note 3, the Company performed an
analysis during 2009 as circumstances arose that indicated that
the carrying value of its goodwill might be significantly
impaired.
Income
Taxes
The Companys deferred tax assets and liabilities are
determined based on differences between the financial reporting
and tax basis of assets and liabilities and are measured using
the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income during the period that includes the enactment date. The
Company periodically assesses the likelihood that net deferred
tax assets will be recovered in future periods. To the extent
the Company believes that deferred tax assets may not be fully
realizable, a valuation allowance is recorded to reduce such
assets to the carrying amounts that are more likely than not to
be realized. The Company accounts for income taxes associated
with SIPL in accordance with Indian tax guidelines and is
eligible for certain tax holiday programs pursuant to Indian law.
The Company exercises judgments regarding the recognition and
measurement of uncertain tax positions. The Company recognizes
interest and penalties, if any, related to unrecognized tax
benefits in income tax expense.
F-119
Spheris Inc.
Notes to
Consolidated Financial Statements(Continued)
Advertising
Costs
The Company expenses advertising costs as incurred. Advertising
expenses of $1.7 million, $0.8 million, and
$0.7 million for the years ended December 31, 2007,
2008 and 2009, respectively, were included as marketing and
selling expenses in the accompanying consolidated statements of
operations. Advertising costs primarily consist of brand
advertising, recruiting for MLS and trade show participation.
Stock-Based
Compensation
Spheris Holding III has issued, at various times,
restricted stock and stock option grants to the Companys
employees and the Companys non-employee directors. These
restricted stock and stock option grants have been recorded as
compensation under general and administrative expenses in the
accompanying consolidated statements of operations, due to
benefits received by the Company. These restricted stock and
stock option grants were valued at fair market value on the date
of grant using third-party valuations and typically vest over a
three or four-year period from the grant date. Accordingly,
compensation expense is currently being recognized ratably over
the applicable vesting periods.
The Company recognizes compensation expense, using a fair-value
based method, for costs related to share-based payments,
including stock options. The fair value of all share-based
payments received by the Companys employees, non-employee
directors and other designated persons providing substantial
services to the Company is based on the fair value assigned to
equity instruments issued by the Companys indirect parent,
Spheris Holding III.
In connection with an agreement for health information
processing services between Operations and Community Health
Systems Professional Services Corporation, an affiliate of CHS,
Spheris Holding III issued warrants to CHS to purchase
shares of common stock of Spheris Holding III upon the
attainment of certain revenue milestones set forth in the
warrants. Since the warrants were issued by Spheris
Holding III in order to induce sales by the Company, the
costs of the warrants subject to vesting are recognized over the
period in which the revenue is earned and are reflected as a
reduction of net revenues in the accompany consolidated
statements of operations.
Self-Insurance
The Company is significantly self-insured for employee health
and workers compensation insurance claims. As such, the
Companys insurance expense is largely dependent on claims
experience and the Companys ability to control its claims.
The Company has consistently accrued the estimated liability for
these insurance claims based on its claims experience and the
time lag between the incident date and the date the cost is paid
by the Company, and based on third-party valuations of the
outstanding liabilities. These estimates could change in the
future. As of December 31, 2008 and 2009, the Company had
$2.5 million and $2.2 million, respectively, in
accrued liabilities for employee health and workers
compensation risks.
In August 2009, the Company converted its self-insured
workers compensation policy to a premium based policy.
Comprehensive
Income (Loss) and Foreign Currency Translation
The Company uses the United States dollar as its functional and
reporting currency. SIPL uses the Indian rupee as its functional
currency. The assets and liabilities of SIPL were translated
using the current exchange rate at the corresponding balance
sheet date. Operating statement amounts for SIPL were translated
at the average exchange rate in effect during the applicable
periods. The resulting translation gains and losses are
reflected as a component of other comprehensive income (loss) in
the accompanying consolidated statements of stockholders
equity. Exchange rate adjustments resulting from foreign
currency transactions are included in the determination of net
income or loss. The income tax effects of the foreign currency
translation amounts reflect a change in the tax position as a
result of the sale of SIPL stock in April 2010 as discussed in
Note 17 and Note 22.
F-120
Spheris Inc.
Notes to
Consolidated Financial Statements(Continued)
Use of
Estimates
The preparation of financial statements in accordance with
United States generally accepted accounting principles
(GAAP) requires management of the Company 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 revenue and
expenses during the reporting period. Actual results could
differ from these estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to
the current year presentation in the financial statements and
notes as of and for the year ended December 31, 2009. These
reclassifications primarily reflect transaction charges, costs
of proceedings and settlements and operational restructuring
charges. These expenses had previously been included in direct
costs of revenues, marketing and selling expenses and general
and administrative expenses in the accompanying consolidated
financial statements. These items are further discussed in
Notes 4, 5 and 21. These reclassifications had no effect on
the Companys previously reported results of operations or
financial position.
Recently
Adopted Accounting Pronouncements
For the interim period ended September 30, 2009, the
Company adopted the FASB Accounting Standards
Codificationtm
(ASC), which the Financial Accounting Standards
Board (FASB) recognizes as the source of
authoritative accounting principles to be applied by
nongovernmental entities in the preparation of financial
statements in conformity with GAAP. Rules and interpretive
releases of the United States Securities and Exchange Commission
(SEC) under authority of federal securities laws are
also sources of authoritative GAAP for SEC registrants.
On January 1, 2009, the Company adopted the authoritative
guidance issued by the FASB on fair value measurement for
nonfinancial assets and liabilities that are not required or
permitted to be measured at fair value on a recurring basis.
Adoption of the new guidance did not have a material impact on
the accompanying consolidated financial statements.
On July 1, 2009, the Company adopted authoritative guidance
issued by the FASB on business combinations, which retains the
current purchase method of accounting for acquisitions, but
requires a number of changes, including changes in the way
assets and liabilities are recognized in purchase accounting.
The guidance also requires the capitalization of in-process
research and development at fair value and requires the
expensing of acquisition-related costs. The impact of this new
guidance did not have a material impact on the accompanying
consolidated financial statements as we have not completed any
acquisitions subsequent to its adoption.
On July 1, 2009, the Company adopted authoritative guidance
issued by the FASB that establishes accounting and reporting
standards for the non-controlling interest in a subsidiary and
for the deconsolidation of a subsidiary. As all of the
Companys subsidiaries are wholly-owned, adoption of the
new guidance did not have a material impact on the
Companys results of operations or financial position.
On January 1, 2009, the Company adopted the authoritative
guidance issued by the FASB relative to derivative instruments
and hedging activities, which requires entities that utilize
derivative instruments to provide qualitative disclosures about
their objectives and strategies for using such instruments, as
well as any details of
credit-risk-related
contingent features contained within the derivative instruments.
The new guidance requires disclosure of the amounts and location
of derivative instruments included in an entitys financial
statements, as well as the accounting treatment of such
instruments and the impact that hedges have on an entitys
financial position, financial performance and cash flows. See
Note 6 for the Companys disclosures about its
derivative financial instruments.
F-121
Spheris Inc.
Notes to
Consolidated Financial Statements(Continued)
Beginning with the interim period ended June 30, 2009, the
Company adopted the authoritative guidance issued by the FASB
that establishes general standards of accounting for and
disclosure of events occurring subsequent to the balance sheet
date but before financial statements are issued or are available
to be issued. The new guidance requires entities to disclose the
date through which it has evaluated subsequent events and the
basis for determining that date. See the Companys
disclosure relative to this new guidance above in this
Note 1.
In August 2009, the FASB issued new authoritative guidance on
the measurement and disclosure of the fair value of liabilities
that clarifies the valuation methodologies that may be used when
a quoted market price in an active market for an identical
liability is not available. This guidance was effective for the
Company beginning October 1, 2009. The adoption of this
guidance did not have a material impact on the accompanying
consolidated financial statements.
Recently
Issued Accounting Pronouncements Not Yet Adopted
In October 2009, the FASB issued
ASC 985-605,
Revenue Recognition Software, on revenue recognition
that will become effective for the Company beginning
January 1, 2011, with earlier adoption permitted. Under the
new guidance on arrangements that include software elements,
tangible products that have software components that are
essential to the functionality of the tangible product will no
longer be within the scope of the software revenue recognition
guidance, and software-enabled products will now be subject to
other relevant revenue recognition guidance. Additionally, the
FASB issued authoritative guidance on revenue arrangements with
multiple deliverables that are outside the scope of the software
revenue recognition guidance. Under the new guidance, when
vendor specific objective evidence or third party evidence for
deliverables in an arrangement cannot be determined, a best
estimate of the selling price is required to separate
deliverables and allocate consideration received using the
relative selling price method. The new guidance includes new
disclosure requirements on how the application of the relative
selling price method affects the timing and amount of revenue
recognition. The Company has not yet fully evaluated the impact
that this new guidance will have on its financial statements.
On September 23, 2009, the FASB ratified
ASC 605-25,
Revenue Recognition with Multiple Element
Arrangements (ASC
605-25).
ASC 605-25
requires the allocation of consideration among separately
identified deliverables contained within an arrangement, based
on their related selling prices. The Company utilizes current
accounting guidance, also titled Revenue Arrangements with
Multiple Deliverables, in the recognition of revenue
associated with the Companys customer contracts that
contain multiple elements of services.
ASC 605-25
will become effective for the Company beginning January 1,
2011. The Company has not yet fully evaluated the impact that
this new guidance will have on its financial statements.
In January 2010, the FASB issued
ASC 820-10,
Fair Value Measurements and Disclosures, an
amendment to earlier authoritative guidance concerning fair
value measurements and disclosures. This amendment requires an
entity to: (i) disclose separately the amounts of
significant transfers in and out of Level 1 and
Level 2 (as described in Note 6) fair value
measurements and describe the reasons for the transfers and
(ii) present separate information for Level 3 (as
described in Note 6) activity pertaining to gross
purchases, sales, issuances, and settlements. This guidance will
become effective for the Company beginning January 1, 2010.
The Company has not yet fully evaluated the impact that this new
guidance will have on its financial statements.
The accompanying consolidated financial statements for the year
ended December 31, 2009 were prepared under the assumption
that the Company would continue to operate as a going concern as
of December 31, 2009, which contemplates the realization of
assets and the satisfaction of liabilities in the ordinary
course of business. As of December 31, 2009, the Company
faced various uncertainties that raised substantial doubt about
its ability to continue as a going concern.
F-122
Spheris Inc.
Notes to
Consolidated Financial Statements(Continued)
On February 3, 2010, the Company, along with the other
Debtors (as defined in Note 22), filed voluntary petitions
for relief under Chapter 11 of Title 11 of the United
States Code. On February 2, 2010, the Debtors entered into
an agreement, as amended April 15, 2010, under which the
Debtors agreed to sell substantially all of their assets to
MedQuist Inc. (MedQuist) and the stock of SIPL to
CBay Inc. (CBay and together with Medquist, the
Purchasers), portfolio companies of CBaySystems
Holdings Ltd. and providers of medical transcription software
and services. In addition, the Purchasers agreed to assume
certain liabilities in connection with such sale. As further
discussed in Note 22, the United States Bankruptcy Court
for the District of Delaware (the Bankruptcy Court)
approved the sale on April 15, 2010, and the sale was
consummated on April 22, 2010.
|
|
3.
|
Impairment of
Goodwill
|
The Company performed an interim analysis of its goodwill as
circumstances arose that indicated that the carrying value of
its goodwill may be impaired. The potential impairment was
primarily due to deteriorating economic conditions and lower
projected future cash flows as of September 30, 2009.
Regarding the Companys specific analysis, this assessment
was made at the consolidated Company level as the Company only
has one reporting unit. The Company compared the fair value of
its reporting unit with its carrying value, including goodwill,
and identified a potential impairment. The Company assigned the
estimated fair value of the reporting unit to its respective
assets and liabilities, including goodwill, to determine if an
impairment charge was required. Fair value of the reporting unit
was estimated based upon internal evaluations and through the
use of independent third-party valuation professionals. The
impairment test resulted in an impairment charge of
$198.9 million. The remaining balance of goodwill of
approximately $20 million is reflected in the accompanying
consolidated balance sheet as of December 31, 2009.
The Company bases its estimates of fair value on various
assumptions that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates,
which may require an additional impairment charge that could
have a material adverse impact on the Companys financial
position and results of operations.
During 2009, the Company evaluated multiple strategic
opportunities including a technology license agreement, a sale
of the Company or its assets, or a restructuring of its capital
structure. The Company, along with the other Debtors, ultimately
chose to pursue a sale of their assets pursuant to voluntary
filings under Chapter 11 of the United States Bankruptcy
Code as further described in Note 22. In connection with
evaluating and pursuing its options, the Company retained
financial and other advisors, including restructuring
professionals. These fees included (a) costs paid to
professionals and others in connection with evaluating,
preparing for, and pursuing filing for Chapter 11 relief,
(b) costs paid to professionals and others related to
evaluating, preparing for, and pursuing sales and licensing
options, (c) costs paid to creditors and creditor committee
advisors, including costs incurred to obtain interim financing
facilities, and (d) costs to retain key employees. Some of
the professionals engaged to assist the Company in these efforts
were utilized to perform multiple functions.
The total of all of the related costs to the Company for
services performed through December 31, 2009, prior to the
Companys and the other Debtors filing for bankruptcy
in February 2010, were $7.0 million, and are reflected as
transaction charges in the accompanying consolidated statements
of operations. There were $1.6 million of retainers
representing prepayments for services reflected as a component
of prepaid expenses and other current assets in the accompanying
consolidated balance sheet as of December 31, 2009.
Additionally, there were $0.3 million of prepaid retention
bonus amounts related to employee obligations reflected as a
component of prepaid expenses and other current assets in the
accompanying consolidated balance sheet as of December 31,
2009.
F-123
Spheris Inc.
Notes to
Consolidated Financial Statements(Continued)
|
|
5.
|
Costs of Legal
Proceedings and Settlements
|
On November 6, 2007, the Company was sued for patent
infringement by Anthurium Solutions, Inc. in the United States
District Court for the Eastern District of Texas, alleging that
the Company had infringed and continues to infringe United
States Patent No. 7,031,998 through the Companys use
of its Clarity technology platform. The complaint also alleged
claims against MedQuist and Arrendale Associates, Inc., and
sought injunctive relief and damages. The Company entered into a
Mutual Release and Settlement Agreement with Anthurium on
August 19, 2009, the terms of which are confidential.
Defense costs, in addition to the confidential settlement paid
during 2009, were $0.4 million and $1.2 million for
the years ended December 31, 2008 and 2009, respectively,
and were reflected as costs of legal proceedings and settlements
in the accompanying consolidated statements of operations.
|
|
6.
|
Fair Value of
Financial Instruments
|
Derivative
Financial Instruments
The Company holds certain derivative financial instruments that
are required to be measured at fair value on a recurring basis.
These derivative financial instruments are utilized by the
Company to mitigate risks related to interest rates and foreign
currency exchange rates. The derivatives are measured at fair
value in accordance with the established fair value hierarchy,
which prioritizes the inputs used in measuring fair value into
the following three levels:
|
|
|
|
|
Level 1observable inputs such as quoted prices in
active markets.
|
|
|
|
Level 2inputs other than quoted prices in active
markets that are either directly or indirectly observable.
|
|
|
|
Level 3unobservable inputs in which little or no
market data exists, therefore requiring an entity to develop its
own assumptions.
|
The Company entered into certain interest rate management
agreements with a single counterparty to reduce its exposure to
fluctuations in market interest rates under the 2007 Senior
Credit Facility (as defined in Note 13). An event of
default under the 2007 Senior Credit Facility would create an
event of default under these interest rate management
agreements, which may cause amounts due under these agreements
to become due and payable. The Companys accounting for
these derivative financial instruments did not meet hedge
accounting criteria. Accordingly, changes in fair value were
included as a component of other (income) expense in the
accompanying consolidated statements of operations.
The fair value of these interest rate management agreements was
determined using valuation techniques including discounted cash
flow analysis on the expected cash flows of each derivative.
This analysis considered the contractual terms of the
derivatives, including the period to maturity, and used
observable market-based inputs, including interest rate curves
and implied volatilities. The interest rates used in the
calculation of projected cash flows were based on an expectation
of future interest rates derived from observable market interest
rate curves and volatilities. Additionally, the Company
incorporated credit valuation adjustments to appropriately
reflect nonperformance risk in the fair value measurements.
Although the Company determined that the majority of the inputs
used to value its interest derivatives fell within Level 2
of the fair value hierarchy, the credit valuation adjustments
associated with its interest derivatives utilized Level 3
inputs, such as estimates of current credit spreads to evaluate
the likelihood of default by its counterparties. The Company
assessed the significance of the impact of the credit valuation
adjustments on the overall valuation of its interest derivative
positions and determined that the credit valuation adjustments
were not significant to the overall valuation of its interest
derivatives. As a result, the Company determined that its
valuations for the interest derivatives in their entirety were
classified in Level 2 of the fair value hierarchy. This
contract expires during 2010.
F-124
Spheris Inc.
Notes to
Consolidated Financial Statements(Continued)
As a result, the full amount of the liability at
December 31, 2009 of $1.7 million is reflected as a
component of other current liabilities in the accompanying
consolidated balance sheet.
Payments to SIPL are denominated in United States dollars. In
order to hedge against fluctuations in exchange rates, SIPL
historically maintained a portfolio of forward currency exchange
contracts, which were transacted with a single counterparty. The
Companys accounting for these derivative financial
instruments, all of which expired during 2009, did not meet the
hedge accounting criteria. Accordingly, changes in fair value
were included as a component of other (income) expense in the
accompanying consolidated statements of operations.
The Company determined the fair value of its foreign currency
exchange contracts utilizing inputs for similar or identical
assets or liabilities that were either readily available in
public markets, derived from information available in publicly
quoted markets or quoted by counterparties to these contracts.
The future value of each contract out to its maturity was
calculated using observable market data, such as the foreign
currency exchange rate forward curve. The present value of each
contract was then determined by using discount factors based on
the forward curve for the more liquid currency. Additionally,
the Company incorporated credit valuation adjustments to
appropriately reflect nonperformance risk in the fair value
measurements.
Although the Company determined that the majority of the inputs
used to value its foreign currency exchange contracts fell
within Level 2 of the fair value hierarchy, the credit
valuation adjustments associated with these derivatives utilized
Level 3 inputs, such as estimates of current credit spreads
to evaluate the likelihood of default by its counterparties. The
Company assessed the significance of the impact of the credit
valuation adjustments on the overall valuation of its derivative
positions and determined that the credit valuation adjustments
were not significant to the overall valuation of the
derivatives. As a result, the Company determined that its
valuations for the foreign currency exchange contracts in their
entirety were classified in Level 2 of the fair value
hierarchy.
The Companys derivative financial instruments measured at
fair value on a recurring basis and recorded in the accompanying
consolidated balance sheets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification in the Accompanying
|
|
December 31,
|
|
|
December 31,
|
|
|
|
Consolidated Balance Sheets
|
|
2008
|
|
|
2009
|
|
|
Interest rate management agreements
|
|
Other current liabilities
|
|
$
|
106
|
|
|
$
|
1,687
|
|
|
|
Other noncurrent liabilities
|
|
|
2,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,466
|
|
|
$
|
1,687
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
|
|
Other current liabilities
|
|
$
|
1,016
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The (gains) losses from changes in fair value of the
Companys derivative financial instruments, as recorded in
the accompanying consolidated statements of operations, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
Location of (Gain) Loss Recognized
|
|
2008
|
|
|
2009
|
|
|
Interest rate management agreements
|
|
Other (income) expense
|
|
$
|
1,366
|
|
|
$
|
(779
|
)
|
Foreign currency exchange contracts
|
|
Other (income) expense
|
|
|
1,227
|
|
|
|
(1,016
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
2,593
|
|
|
$
|
(1,795
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Senior
Subordinated Notes
The Companys Senior Subordinated Notes had a quoted market
value of $37.5 million and $63.8 million at
December 31, 2008 and December 31, 2009, respectively.
The Company determined that its valuation of its Senior
Subordinated Notes was classified in Level 1 of the fair
value hierarchy as the fair value was determined
F-125
Spheris Inc.
Notes to
Consolidated Financial Statements(Continued)
through quoted prices in active markets. The carrying value of
the Senior Subordinated Notes was $123.2 million at
December 31, 2008, as included in current portion of
long-term debt and lease obligations, and was
$123.6 million at December 31, 2009, as included in
long-term debt and lease obligations, in the accompanying
consolidated balance sheets.
|
|
7.
|
Prepaid Expenses
and Other Current Assets
|
Prepaid expenses and other current assets at December 31,
2008 and 2009 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
Prepaid expenses
|
|
$
|
1,381
|
|
|
$
|
1,788
|
|
Income taxes receivable
|
|
|
752
|
|
|
|
211
|
|
Due from affiliate
|
|
|
832
|
|
|
|
|
|
Other receivables
|
|
|
1,254
|
|
|
|
1,354
|
|
Prepaid professional fees
|
|
|
|
|
|
|
1,557
|
|
Prepaid payroll
|
|
|
|
|
|
|
1,410
|
|
Debt issuance costs, net
|
|
|
|
|
|
|
1,285
|
|
Other
|
|
|
211
|
|
|
|
410
|
|
|
|
|
|
|
|
|
|
|
Total prepaid expenses and other current assets
|
|
$
|
4,430
|
|
|
$
|
8,015
|
|
|
|
|
|
|
|
|
|
|
Amounts due from affiliate relate to expenses paid on behalf of
Spheris Holding III. Due to circumstances described in
Note 22, management has provided a reserve for the full
amount at December 31, 2009. Accordingly, a bad debt
expense was recorded for $0.8 million relating to the
write-off of this amount in the direct costs of revenues on the
consolidated statement of operations for the year ended
December 31, 2009.
Prepaid payroll for the year ended December 31, 2009 was a
result of the Companys decision to prefund payroll at
December 31, 2009.
The classification of debt issuance costs at December 31,
2009 was a result of the classification of the related debt
reflected in total current liabilities as discussed in
Note 13.
|
|
8.
|
Property and
Equipment, Net
|
Property and equipment at December 31, 2008 and 2009
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
Furniture and equipment
|
|
$
|
2,550
|
|
|
$
|
2,120
|
|
Leasehold improvements
|
|
|
5,874
|
|
|
|
5,442
|
|
Computer equipment and software
|
|
|
25,427
|
|
|
|
27,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,851
|
|
|
|
34,921
|
|
Less accumulated depreciation and amortization
|
|
|
(21,542
|
)
|
|
|
(25,139
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
12,309
|
|
|
$
|
9,782
|
|
|
|
|
|
|
|
|
|
|
The amounts above include assets acquired under financed lease
obligations of $0.5 million as of both December 31,
2008 and 2009. Depreciation expense, including amortization on
equipment under capital lease obligations, of $5.4 million,
$6.3 million, and $6.2 million was recorded in the
accompanying consolidated statements of operations for the years
ended December 31, 2007, 2008 and 2009, respectively.
F-126
Spheris Inc.
Notes to
Consolidated Financial Statements(Continued)
Capitalized interest on leasehold improvements of approximately
$0.01 million and $0.02 million for the years ended
December 31, 2007 and 2008, respectively, was recorded as a
reduction to interest expense in the accompanying consolidated
statements of operations.
|
|
9.
|
Internal-Use
Software, Net of Amortization
|
The Company capitalizes its costs to purchase and develop
internal-use software, which is utilized primarily to provide
clinical documentation technology and services to its customers.
Net purchased and developed software costs at December 31,
2008 and 2009 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
Software under development
|
|
$
|
933
|
|
|
$
|
135
|
|
Software placed in service
|
|
|
16,363
|
|
|
|
17,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,296
|
|
|
|
17,707
|
|
Less accumulated amortization
|
|
|
(15,710
|
)
|
|
|
(16,686
|
)
|
|
|
|
|
|
|
|
|
|
Internal-use software, net
|
|
$
|
1,586
|
|
|
$
|
1,021
|
|
|
|
|
|
|
|
|
|
|
Amortization on projects begins when the software is ready for
its intended use and is recognized over the expected useful
life, which is generally two to five years. Amortization expense
related to internal-use software costs was $2.9 million,
$1.4 million and $1 million for the years ended
December 31, 2007, 2008 and 2009, respectively, and was
included in depreciation and amortization in the accompanying
consolidated statements of operations.
Capitalized interest on internal-use software development
projects of approximately $23,000, $29,000 and $28,000 for the
years ended December 31, 2007, 2008 and 2009, respectively,
was recorded as a reduction to interest expense in the
accompanying consolidated statements of operations.
In connection with the November 2004 Recapitalization, the
Company assigned a value of $50.7 million as the fair value
of Spheris customer contracts existing as of the date of the
transaction. These contracts were amortized over an expected
life of four years and were fully amortized as of
December 31, 2008. In connection with the HealthScribe
acquisition in December 2004, the Company assigned a value of
$13.1 million to the acquired contracts. These contracts
were amortized over an estimated life of four years and were
fully amortized as of December 31, 2008. Additionally, the
Company assigned a value of $0.1 million for customer
contracts acquired in connection with the Vianeta acquisition
consummated on March 31, 2006. These contracts were
amortized over an expected life of three years and were fully
amortized as of December 31, 2009. Amortization expense for
customer contracts for the years ended December 31, 2007,
2008 and 2009 was $16.0 million, $14.0 million, and
$9,000, respectively.
F-127
Spheris Inc.
Notes to
Consolidated Financial Statements(Continued)
|
|
11.
|
Other Noncurrent
Assets
|
Other noncurrent assets of the Company at December 31, 2008
and 2009 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
Debt issuance costs, net
|
|
$
|
1,643
|
|
|
$
|
|
|
Lease deposits
|
|
|
1,042
|
|
|
|
1,283
|
|
Insurance security deposits
|
|
|
2,288
|
|
|
|
1,847
|
|
Other
|
|
|
486
|
|
|
|
158
|
|
|
|
|
|
|
|
|
|
|
Total other noncurrent assets
|
|
$
|
5,459
|
|
|
$
|
3,288
|
|
|
|
|
|
|
|
|
|
|
Debt issuance costs are amortized to interest expense over the
life of the applicable credit facilities using the effective
interest method. These amounts were reflected in prepaid expense
and other current assets as discussed in Note 7 and
Note 13. Insurance security deposits include amounts
deposited to secure certain self-insurance obligations.
|
|
12.
|
Other Current
Liabilities
|
Other current liabilities of the Company at December 31,
2008 and 2009 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
Accrued acquisition liabilities
|
|
$
|
309
|
|
|
$
|
299
|
|
Taxes payable
|
|
|
339
|
|
|
|
227
|
|
Accrued interest
|
|
|
573
|
|
|
|
7,448
|
|
Accrued fees for professional services
|
|
|
209
|
|
|
|
67
|
|
Accrued group purchasing organization fees
|
|
|
867
|
|
|
|
315
|
|
Reserve for sales credits and adjustments
|
|
|
568
|
|
|
|
1,136
|
|
Restructuring charges
|
|
|
484
|
|
|
|
27
|
|
Deferred rent
|
|
|
605
|
|
|
|
326
|
|
Derivative financial instruments
|
|
|
1,016
|
|
|
|
1,687
|
|
Other
|
|
|
357
|
|
|
|
411
|
|
|
|
|
|
|
|
|
|
|
Total other current liabilities
|
|
$
|
5,327
|
|
|
$
|
11,943
|
|
|
|
|
|
|
|
|
|
|
The increase in accrued interest for the year-ended
December 31, 2009 was caused by the Companys decision
to not make its scheduled interest payment on its Senior
Subordinated Notes, as further described in Note 13.
F-128
Spheris Inc.
Notes to
Consolidated Financial Statements(Continued)
Outstanding debt obligations of the Company at December 31,
2008 and 2009 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2007 Senior Credit Facility, net of discount, with principal due
at maturity on July 17, 2012; interest payable periodically
at variable rates. The weighted average interest rate was 5.75%
at December 31, 2009
|
|
$
|
72,290
|
|
|
$
|
74,552
|
|
11.0% Senior Subordinated Notes, net of discount, with
principal due at maturity in December 2012; interest payable
semi-annually in June and December
|
|
|
123,208
|
|
|
|
123,578
|
|
Financed lease obligations
|
|
|
684
|
|
|
|
390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
196,182
|
|
|
|
198,520
|
|
Less: Current portion of long-term debt and financed lease
obligations
|
|
|
(683
|
)
|
|
|
(198,440
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt and financed lease obligations, net of current
portion
|
|
$
|
195,499
|
|
|
$
|
80
|
|
|
|
|
|
|
|
|
|
|
In July 2007, the Company entered into a financing agreement
(the 2007 Senior Credit Facility), which consisted
of a term loan in the amount of $69.5 million and a
revolving credit facility in an aggregate principal amount not
to exceed $25.0 million at any time outstanding. The
revolving loans and the term loan bore interest at LIBOR plus an
applicable margin or a reference banks base rate plus an
applicable margin, at the Companys option. Under the
revolving credit facility, the Company was permitted to borrow
up to the lesser of $25.0 million or a loan limiter amount,
as defined in the 2007 Senior Credit Facility, less amounts
outstanding under letters of credit. As of December 31,
2009, the Company had $5.7 million outstanding under the
revolver portion of the 2007 Senior Credit Facility.
Based on 2009 results of operations, the Company would not have
complied with the covenant requirements under the 2007 Senior
Credit Facility. The Company elected not to report its financial
results pursuant to year-end covenant requirements under this
facility, and the Company, along with the other Debtors, filed
voluntary petitions for relief under Chapter 11 of
Title 11 of the United States Code in February 2010. As a
result, all amounts due under the 2007 Senior Credit Facility
are reflected as current obligations in the accompanying
consolidated balance sheets. All amounts due under this facility
were paid in full on April 22, 2010 in connection with the
Debtors sale of substantially all of their assets to
MedQuist and the stock of SIPL to CBay, as further described in
Note 22.
Under the 2007 Senior Credit Facility, Operations was the
borrower. The 2007 Senior Credit Facility was secured by
substantially all of Operations assets and is guaranteed
by Spheris, Spheris Holding II and all of Operations
subsidiaries, except SIPL. The 2007 Senior Credit Facility
contained certain covenants which, among other things, limited
the incurrence of additional indebtedness, investments,
dividends, transactions with affiliates, asset sales,
acquisitions, mergers and consolidations, liens and encumbrances
and other matters customarily restricted in such agreements. The
2007 Senior Credit Facility also contained customary events of
default, including breach of financial covenants, the occurrence
of which could allow the collateral agent to declare any
outstanding amounts to be due and payable. The financial
covenants contained in the 2007 Senior Credit Facility included
(a) a maximum leverage test, (b) a minimum fixed
charge coverage test and (c) a minimum earnings before
interest, taxes, depreciation and amortization
(Consolidated EBITDA, as defined under the 2007
Senior Credit Facility) requirement, among others.
In connection with the borrowings under the 2007 Senior Credit
Facility, the Company incurred $0.6 million and
$1.1 million in debt issuance costs and debt discounts,
respectively. These costs are being amortized as additional
interest expense over the term of the debt. The balance of the
issuance costs at December 31, 2009 of $0.3 million,
net of accumulated amortization, was reflected in prepaid
expenses and other current assets in the
F-129
Spheris Inc.
Notes to
Consolidated Financial Statements(Continued)
accompanying consolidated balance sheet. The debt discount at
December 31, 2009 of $0.7 million was reflected as a
reduction in the carrying amount of the debt under the 2007
Senior Credit Facility.
Senior
Subordinated Notes
In December 2004, the Company issued its Senior Subordinated
Notes, which mature on December 15, 2012 (the Senior
Subordinated Notes). The Senior Subordinated Notes bear
interest at a fixed rate of 11.0% per annum. Interest is payable
in semi-annual installments through maturity on
December 15, 2012. The Company did not file a
Form 10-Q
with the SEC for the third quarter of 2009 which violated
certain covenants in the Indenture. In addition, the Company
elected not to make its scheduled interest payment on
December 15, 2009. As a result, the Company received a
notice from the Indenture Trustee on December 16, 2009 that
an Event of Default had occurred, as defined in the Indenture.
As further described in Note 22, the Company, along with
the other Debtors, elected to file for bankruptcy protection
under Chapter 11 of the United States Bankruptcy Code on
February 3, 2010. Resolution of final payments due under
the Senior Subordinated Notes is subject to the Companys
ongoing bankruptcy case.
The Senior Subordinated Notes are junior to the obligations of
the 2007 Senior Credit Facility. The Senior Subordinated Notes
are guaranteed by the Companys domestic operating
subsidiaries. The Senior Subordinated Notes contain certain
restrictive covenants that place limitations on the Company
regarding incurrence of additional debt, payment of dividends
and other items as specified in the indenture governing the
Senior Subordinated Notes. An acceleration of outstanding
indebtedness under the 2007 Senior Credit Facility creates an
event of default under the Senior Subordinated Notes, which
would allow the trustee or requisite holders of Senior
Subordinated Notes to declare the Senior Subordinated Notes to
be due and payable. As a result of the default under the 2007
Senior Credit Facility, the Company has reflected all amounts
due under the Senior Subordinated Notes as a current obligation
in the accompanying consolidated balance sheet as of
December 31, 2009.
The Company incurred $1.9 million and $2.9 million in
debt issuance costs and debt discounts, respectively, in
connection with the Senior Subordinated Notes. These costs are
being amortized as additional interest expense over the term of
the Senior Subordinated Notes. The remaining balance of the
issuance costs at December 31, 2009 of $0.9 million,
net of accumulated amortization, was reflected in prepaid
expenses and other current assets in the accompanying
consolidated balance sheet. The remaining debt discount at
December 31, 2009 of $1.4 million was reflected as a
reduction in the carrying amount of the Senior Subordinated
Notes.
|
|
14.
|
Other Noncurrent
Liabilities
|
Other noncurrent liabilities of the Company at December 31,
2008 and 2009 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
Deferred rent
|
|
$
|
2,569
|
|
|
$
|
2,735
|
|
Derivative financial instruments
|
|
|
2,360
|
|
|
|
|
|
Accrued workers compensation
|
|
|
506
|
|
|
|
399
|
|
Other
|
|
|
275
|
|
|
|
236
|
|
|
|
|
|
|
|
|
|
|
Total other noncurrent liabilities
|
|
$
|
5,710
|
|
|
$
|
3,370
|
|
|
|
|
|
|
|
|
|
|
The change in the derivative financial instruments reflects the
foreign currency exchange contracts which expired during 2009
and the reflection of the interest rate management agreements in
other current liabilities as described in Note 6 and
reflected in Note 12.
F-130
Spheris Inc.
Notes to
Consolidated Financial Statements(Continued)
|
|
15.
|
Contractual
Obligations
|
The following summarizes future minimum payments under the
Companys contractual obligations as of December 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Financed Lease
|
|
|
Purchase
|
|
|
|
Leases
|
|
|
Obligations
|
|
|
Obligations
|
|
|
2010
|
|
$
|
3,576
|
|
|
$
|
325
|
|
|
$
|
1,620
|
|
2011
|
|
|
3,704
|
|
|
|
81
|
|
|
|
403
|
|
2012
|
|
|
3,879
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
3,119
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2,458
|
|
|
|
|
|
|
|
|
|
Thereafter
|
|
|
4,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum payments
|
|
$
|
21,328
|
|
|
$
|
406
|
|
|
$
|
2,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company leases certain equipment and office space under
noncancellable operating leases. The majority of the operating
leases contain annual escalation clauses. Rental expense for
these operating leases is recognized on a straight-line basis
over the term of the lease. Total rent expense for the years
ended December 31, 2007, 2008 and 2009 was
$1.9 million, $1.8 million and $1.7 million,
respectively, under these lease obligations. As of
December 31, 2009, the Company had $1.3 million on
deposit as security for certain operating leases. The deposits
are included in other noncurrent assets in the accompanying
consolidated balance sheet.
The Company also leases certain hardware and software under
capital leases as defined in accordance with the provisions of
ASC 840 Leases. The related assets under
capital lease obligations are included in property and
equipment, net in the accompanying consolidated balance sheets.
Amortization expense related to assets under leases was
$0.1 million, $0.3 million and $0.3 million,
respectively, for the years ended December 31, 2007, 2008
and 2009 and was included in depreciation and amortization in
the accompanying consolidated statements of operations. Future
minimum payments under these capital leases include interest of
approximately $15,000. The present value of net minimum lease
payments is approximately $0.4 million, with
$0.3 million classified as current portion of long-term
debt and lease obligations and $0.1 million classified as
long-term debt and lease obligations, net of current portion in
the accompanying consolidated balance sheet at December 31,
2009.
Purchase obligations represent contractual commitments with
certain telecommunications vendors and technology providers that
include minimum purchase obligations.
As part of the sale agreement dated April 15, 2010 between
the Debtors and the Purchasers (as described in Note 22),
all of the non-cancellable operating leases, financed lease
obligations and purchase obligations were assigned to the
Purchasers as of April 22, 2010.
Subsequent to the November 2004 Recapitalization, Spheris
Holding III approved the establishment of the Spheris
Holding III, Inc. Stock Incentive Plan (as amended to date, the
Plan) for issuance of common stock to employees,
non-employee directors and other designated persons providing
substantial services to the Company. As of December 31,
2009, 15.6 million shares have been authorized for issuance
under the Plan. Shares are subject to restricted stock and stock
option agreements and typically vest over a three or four-year
period. As of December 31, 2009, an aggregate of
12.1 million shares of restricted stock and
1.9 million stock options were issued and outstanding under
the Plan. Additionally, 0.1 million shares of Series A
convertible preferred restricted stock have been issued by
Spheris Holding III to one of the Companys former
board members for services rendered. As these shares were issued
for services to be provided to the Company, compensation expense
of
F-131
Spheris Inc.
Notes to
Consolidated Financial Statements(Continued)
$0.4 million, $0.5 million and $0.2 million was
reflected in general and administrative expenses in the
accompanying consolidated statements of operations for the years
ended December 31, 2007, 2008 and 2009, respectively.
Under provisions of the Plan, all unvested shares and options
shall immediately vest and become exercisable upon an event of a
change in control. The sale of the Companys
assets as a result of the APA discussed in Note 22
constituted a change in control under these
provisions. Accordingly, all unvested options and shares were
immediately vested and exercisable on April 22, 2010.
During October 2008, Spheris Holding III issued warrants to
CHS to purchase 14.3 million shares of common stock of
Spheris Holding III upon the attainment of certain revenue
milestones set forth in the warrants. The costs of the warrants
subject to vesting are recognized over the period in which the
revenue is earned and are reflected as a reduction of revenue.
Accordingly, $23,000 of such costs was reflected as a reduction
to net revenues in the accompanying consolidated statements of
operations for the year ended December 31, 2008 while none
was recognized during 2009.
Income tax benefit on income (loss) consisted of the following
for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
17
|
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
226
|
|
|
|
117
|
|
|
|
84
|
|
Foreign
|
|
|
59
|
|
|
|
531
|
|
|
|
632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current provision
|
|
|
302
|
|
|
|
648
|
|
|
|
716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(6,680
|
)
|
|
|
2,800
|
|
|
|
(12,712
|
)
|
State
|
|
|
384
|
|
|
|
465
|
|
|
|
(2,629
|
)
|
Foreign
|
|
|
138
|
|
|
|
(43
|
)
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred (benefit) expense
|
|
|
(6,158
|
)
|
|
|
3,222
|
|
|
|
(15,287
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (benefit from) provision for income taxes
|
|
$
|
(5,856
|
)
|
|
$
|
3,870
|
|
|
$
|
(14,571
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-132
Spheris Inc.
Notes to
Consolidated Financial Statements(Continued)
A reconciliation of the U.S. federal statutory rate to the
effective rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Federal tax at statutory rate
|
|
$
|
(5,854
|
)
|
|
$
|
(5,206
|
)
|
|
$
|
(70,683
|
)
|
State income taxes
|
|
|
(90
|
)
|
|
|
(442
|
)
|
|
|
(944
|
)
|
Permanent differences for goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
66,703
|
|
Permanent differences, other
|
|
|
285
|
|
|
|
378
|
|
|
|
943
|
|
Foreign tax / tax holiday
|
|
|
(18
|
)
|
|
|
(47
|
)
|
|
|
(1,245
|
)
|
(Decrease) increase in valuation allowance
|
|
|
47
|
|
|
|
9,192
|
|
|
|
(8,294
|
)
|
Tax credits adjusted due to rate change
|
|
|
(219
|
)
|
|
|
9
|
|
|
|
(1,048
|
)
|
Other
|
|
|
(7
|
)
|
|
|
(14
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (benefit from) provision for income taxes
|
|
$
|
(5,856
|
)
|
|
$
|
3,870
|
|
|
$
|
(14,571
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of the Companys deferred tax assets and
liabilities at December 31, 2008 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
505
|
|
|
$
|
567
|
|
Accrued liabilities
|
|
|
2,751
|
|
|
|
2,413
|
|
Depreciation
|
|
|
861
|
|
|
|
930
|
|
Net operating lossesfederal
|
|
|
35,539
|
|
|
|
37,753
|
|
Net operating lossesstate
|
|
|
2,824
|
|
|
|
3,037
|
|
Tax credits
|
|
|
591
|
|
|
|
591
|
|
Amortization expensegoodwill and
start-up
costs
|
|
|
681
|
|
|
|
2,954
|
|
Other
|
|
|
2,316
|
|
|
|
5,459
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
46,068
|
|
|
|
53,704
|
|
Valuation allowancefederal
|
|
|
(40,116
|
)
|
|
|
(32,620
|
)
|
Valuation allowancestate
|
|
|
(3,288
|
)
|
|
|
(2,490
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
2,664
|
|
|
|
18,594
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Amortization expensecustomer list and technology
|
|
|
(557
|
)
|
|
|
|
|
Other
|
|
|
(2,035
|
)
|
|
|
(2,261
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(2,592
|
)
|
|
|
(2,261
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
72
|
|
|
$
|
16,333
|
|
|
|
|
|
|
|
|
|
|
F-133
Spheris Inc.
Notes to
Consolidated Financial Statements(Continued)
The Companys deferred tax assets and liabilities are
reported in the accompanying consolidated balance sheets at
December 31, 2008 and 2009 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
Deferred taxes (current assets)
|
|
$
|
372
|
|
|
$
|
11,995
|
|
Deferred taxes (noncurrent assets)
|
|
|
|
|
|
|
4,338
|
|
Deferred tax liabilities (noncurrent liabilities)
|
|
|
(300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
72
|
|
|
$
|
16,333
|
|
|
|
|
|
|
|
|
|
|
The Company records a valuation allowance to reduce its net
deferred tax assets to the amount that is more likely than not
to be realized. The valuation allowance decreased by
$8.3 million during 2009 due to the sale of most of the
Companys assets on April 22, 2010 (see
Note 22) which will allow the realization of certain
of the Companys deferred tax assets, compared with an
increase of $9.2 million during 2008. Future changes in
valuation allowance amounts will be reflected as a component of
provision for (benefit from) income taxes in future periods.
In the United States, the Company benefitted from federal and
state net operating loss carryforwards. The Companys
consolidated federal net operating loss carryforwards available
to reduce future taxable income were $104.5 million and
$107.9 million at December 31, 2008 and 2009,
respectively, which began to expire in 2007. State net operating
loss carryforwards at December 31, 2008 and 2009 were
$67.3 million and $71.5 million, respectively, and
began to expire in 2005. The majority of these federal and state
net operating loss carryforwards are restricted due to
limitations associated with ownership change, and as such, are
reserved to reduce the amount that is more likely than not to be
realized. In addition, the Company has alternative minimum tax
credits which do not have an expiration date and certain other
federal tax credits that will begin to expire in 2014.
In connection with the HealthScribe acquisition, the Company
acquired a wholly-owned Indian subsidiary, SIPL. The Company
accounts for income taxes associated with SIPL in accordance
with ASC 740, Income Taxes, following Indian
tax guidelines. At December 31, 2008, the Company was
considered permanently reinvested in SIPL; accordingly, deferred
taxes were not provided on the outside basis differences. Due to
the subsequent event of the sale of SIPL stock in April 2010,
the Company was no longer deemed to be indefinitely reinvested
in SIPL. Accordingly deferred tax was provided on the outside
basis differences for the year ended December 31, 2009.
Prior to 2009, because the Company was considered permanently
reinvested in SIPL, no taxes were provided on accumulated
translation adjustments recorded in other comprehensive income.
Due to the subsequent event of the sale of SIPL stock, the net
income tax effect of the currency translation adjustments
related to SIPL is reflected in other comprehensive income for
the year ended 2009.
Spheris Holding III and related subsidiaries (the
filing group members) file their U.S. federal
and certain state income tax returns on a consolidated, unitary,
combined or similar basis. To accurately reflect each filing
group members share of consolidated tax liabilities on
separate company books and records, on November 5, 2004,
Spheris Holding III and each of its subsidiaries entered
into a tax sharing agreement. Under the terms of the tax sharing
agreement, each subsidiary of Spheris Holding III is
obligated to make payments on behalf of Spheris Holding III
equal to the amount of the federal and state income taxes that
its subsidiaries would have owed if such subsidiaries did not
file federal and state income tax returns on a consolidated,
unitary, combined or similar basis. Likewise, Spheris
Holding III may make payments to subsidiaries if it
benefits from the use of a subsidiary loss or other tax benefit.
The tax sharing agreement allows each subsidiary to bear its
respective tax burden (or enjoy use of a tax benefit, such as a
net operating loss) as if its return was prepared on a
stand-alone basis. To date, no amounts have been paid under this
agreement.
Operations pays certain franchise tax obligations on behalf of
Spheris Holding III. Approximately $0.7 million of payments
by Operations related to these taxes were reflected by the
Company as a receivable due from affiliate and
F-134
Spheris Inc.
Notes to
Consolidated Financial Statements(Continued)
subsequently written off as bad debt expense described in
Note 7 in the accompanying consolidated statement of
operations for the year ended December 31, 2009.
The Company analyzed filing positions for all federal, state and
international jurisdictions for all open tax years where it is
required to file income tax returns. Although the Company files
tax returns in every jurisdiction in which it has a legal
obligation to do so, it has identified the following as
major tax jurisdictions: Tennessee and Texas, as
well as India. Within these major jurisdictions, the Company has
tax examinations in progress related to transfer pricing rates
for its Indian facilities, as discussed in Note 19. Based
on the facts of these examinations, the Company believes that it
is more likely than not that it will be successful in supporting
its current positions related to the applicable filings. The
Company believes that all income tax filing positions and
deductions will be sustained upon audit and does not anticipate
any adjustments resulting in a material adverse impact on the
Companys financial condition, results of operations or
cash flow. Therefore, no reserves for uncertain income tax
positions have been recorded pursuant to
ASC 740-10,
Income TaxesOverall (ASC
740-10).
In addition, the Company did not record a cumulative effect
adjustment related to the adoption of
ASC 740-10.
|
|
18.
|
Employee Benefit
Plans
|
The Company sponsors an employee savings plan, the Spheris
Operations 401(k) Plan (the Spheris 401(k) Plan),
which permits participants to make contributions by salary
reduction pursuant to Section 401(k) of the Internal
Revenue Code (IRC). Under the provisions of the
Spheris 401(k) Plan, participants may elect to contribute up to
75% of their compensation, up to the amount permitted under the
IRC. The Company also sponsored the Spheris Operations Amended
and Restated Deferred Compensation Plan (the Deferred
Compensation Plan). Under the provisions of the Deferred
Compensation Plan, participants may elect to defer up to 50% of
base salary and up to 100% of incentive pay, as defined in the
plan. This plan was terminated on October 22, 2009.
At the Companys option, the Company may elect to match up
to 50% of the employees first 4% of wages deferred, in
aggregate, to the Spheris 401(k) Plan. In the event the Spheris
401(k) Plan participants contributions are limited under
provisions of the IRC and the participant is also deferring
amounts into the Deferred Compensation Plan, then such matching
amounts may be made to the Deferred Compensation Plan. The
Company recognizes the matching expense during the year the
discretionary match is awarded while the actual cash
contribution is made to the plan in the following year. The
Company made a cash contribution of $1.1 million in 2008
related to matches for the 2007 plan year. The Company elected
not to make any matching contributions in 2009 or 2008 related
to the 2008 and 2007 plan years.
The Company offers medical benefits to substantially all
full-time employees through the use of both Company and employee
contributions to third-party insurance providers. The Company is
significantly self-insured for certain losses related to medical
claims. The Companys expense for these benefits totaled
$4.1 million, $4.4 million and $4.4 million for
the years ended December 31, 2007, 2008 and 2009,
respectively.
|
|
19.
|
Commitments and
Contingencies
|
Litigation
In addition to the litigation described in Note 5, the
Company is also subject to various other claims and legal
actions that arise in the ordinary course of business. In the
opinion of management, any amounts for probable exposures are
adequately reserved for in the accompanying consolidated
financial statements, and the ultimate resolution of such
matters is not expected to have a material adverse effect on the
Companys financial position or results of operations.
F-135
Spheris Inc.
Notes to
Consolidated Financial Statements(Continued)
Employment
Agreements
The Company has employment agreements with certain members of
senior management that provide for the payment to these persons
of amounts equal to their applicable base salary, unpaid annual
bonus and health insurance premiums over the applicable periods
specified in their individual employment agreements in the event
the employees employment is terminated without cause or
certain other specified reasons. The maximum contingent
liabilities, excluding any earned but unpaid amounts accrued in
the accompanying consolidated financial statements, under these
agreements were $1.6 million and $1.0 million at
December 31, 2008 and 2009, respectively.
Tax
Assessment
SIPL received notification of a tax assessment resulting from a
transfer pricing tax audit by Indian income tax authorities
amounting to 52.2 million Rupees (approximately
$1.1 million), including penalties and interest, for the
fiscal tax period ended March 31, 2004 (the 2004
Assessment). In January 2007, the Company filed a formal
appeal with the India Commissioner of Income Tax. Prior to
resolution of the Companys appeals process, the Indian
income tax authorities have required the Company to make advance
payments toward the 2004 Assessment amounting to
43.1 million Rupees (approximately $0.9 million). Any
amounts paid by the Company related to the 2004 Assessment are
subject to a claim by the Company for reimbursement against
escrow funds related to the Companys December 2004
acquisition of HealthScribe and its subsidiaries (the
HealthScribe Escrow). Accordingly, the Company has
recorded the advance payments as receivables from the escrow
funds, which are reflected as a component of prepaid expenses
and other current assets in the accompanying consolidated
balance sheet as of December 31, 2009.
During the fourth quarter of 2008, SIPL received notification of
a tax assessment from a transfer pricing tax audit by Indian
income tax authorities amounting to 40.6 million Rupees
(approximately $0.8 million), including penalties and
interest, for the fiscal tax period ended March 31, 2005
(the 2005 Assessment). In December 2008, the Company
filed a formal appeal with the India Commissioner of Income Tax.
Prior to resolution of the Companys appeals process, the
Company was required to provide a bank guarantee in January 2009
for the full amount of the 2005 Assessment. The guarantee amount
is included in restricted cash in the accompanying consolidated
balance sheet as of December 31, 2009. Approximately
$0.6 million of the 2005 Assessment is subject to a claim
for reimbursement against the HealthScribe Escrow.
In May, 2010 the Company was informed that the competent
authorities of India and the United States (the Competent
Authorities) had met regarding the assessments for the two
years above. The Company was informed that the Competent
Authorities had reached an agreement regarding the transfer
pricing that should have been used for transactions between SIPL
and its related U.S. entities for the two years mentioned
above. Based on this agreement, the tax assessment for the
fiscal tax periods ended March 31, 2004 and March 31,
2005 would be reduced to approximately 36.6 million Rupees
(approximately $781,000) and 17.2 million Rupees
(approximately $366,000), respectively. An agreement reached by
the Competent Authorities under the U.S./India Income Tax Treaty
is not binding on the parties involved. The Company is currently
assessing the impact of the proposed settlement and has not
recorded a liability under the provision of
ASC 740-10
in the accompanying consolidated financial statements ending
December 31, 2009.
If the assessments were brought forward from March 31, 2005
through December 31, 2009, a reasonable estimate of
additional liability could range from zero to $6.2 million,
contingent upon the final outcome of the claim. Payment of such
amounts would also result in potential credit adjustments to the
Companys U.S. federal tax returns. The Company
currently believes that it is more likely than not that it will
be successful in supporting its position relating to these
assessments. Accordingly, the Company has not recorded any
accrual for contingent liabilities associated with the tax
assessments as of December 31, 2008 or December 31,
2009.
F-136
Spheris Inc.
Notes to
Consolidated Financial Statements(Continued)
During the second quarter of 2009, SIPL received an assessment
order from Indian income tax authorities pertaining to an
inquiry regarding prior years usage of net operating
losses originating in 1999. The final assessment could
potentially amount to 5.6 million Rupees (approximately
$0.1 million).
|
|
20.
|
Related Party
Transactions
|
On October 3, 2008 (amended December 23, 2009),
Operations entered into an agreement for health information
processing services with Community Health Systems Professional
Services Corporation, an affiliate of Community Health Systems,
Inc. (CHS), to provide clinical documentation
technology and services to certain of its affiliated hospitals
(CHS Services Agreement). The Bankruptcy Court
approved the assumption of the CHS Services Agreement, as
amended, on March 17, 2010.
Contemporaneously with entering into the CHS Services Agreement,
CHS became a minority owner in Spheris Holding III, the
Companys indirect parent. The Company provided clinical
documentation technology and services to CHS in the ordinary
course of business at prices and on terms and conditions that
the Company believes are the same as those that would result
from arms length negotiations between unrelated parties.
The Company recognized net revenues from this customer of
$1.4 million and $4.0 million during the three months
ended March 31, 2009 and 2010, respectively, in the
accompanying condensed consolidated statements of operations.
In March 2010, Spheris Holding III transferred
$9.2 million to the Debtors.
|
|
21.
|
Restructuring
Charges
|
During October 2008, the Company commenced an operational
restructuring plan to effect changes in both the Companys
management structure and the nature and focus of its operations.
The Company initially recognized $0.5 million of
operational restructuring charges, including one-time
termination benefits and other restructuring related charges,
pursuant to this operational restructuring plan during the
fourth quarter of 2008. As a continuation of the plan during
2009, the Company eliminated a significant portion of its
U.S. based administrative and corporate workforce,
recognizing an additional $0.8 million of operational
restructuring charges, including one-time termination benefits
and other operational restructuring related charges.
The following table sets forth the activity for accrued
operational restructuring charges, included in other current
liabilities in the accompanying consolidated balance sheets:
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
484
|
|
Operational restructuring charges
|
|
|
775
|
|
Cash payments
|
|
|
(1,232
|
)
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
27
|
|
|
|
|
|
|
Bankruptcy
Proceedings
Chapter 11
Bankruptcy Filings
On February 3, 2010 (the Petition Date), the
100% owner of Spheris Inc., Spheris Holding, II, Inc.,
filed a voluntary petition for relief under Chapter 11 of
Title 11 of the United States Code (the Bankruptcy
Code) in the Bankruptcy Court. Simultaneously, Spheris,
Operations, and its subsidiaries: Spheris Canada Inc., Spheris
F-137
Spheris Inc.
Notes to
Consolidated Financial Statements(Continued)
Leasing LLC, and Vianeta (collectively, the Debtors)
also filed voluntary petitions for relief under Chapter 11
of the Bankruptcy Code in the Bankruptcy Court. SIPL did not
file for relief under the Bankruptcy Code.
As of the issuance date of these financial statements, the
Debtors are currently operating as
debtors-in-possession
under the jurisdiction of the Bankruptcy Court and in accordance
with the applicable provisions of the Bankruptcy Code. In
general, the Debtors are authorized to continue to operate as
ongoing businesses, but may not engage in transactions outside
the ordinary course of business without the approval of the
Bankruptcy Court.
Stock and Asset
Purchase Agreement
On February 2, 2010, the Debtors entered into a Stock and
Asset Purchase Agreement, as amended April 15, 2010 (the
APA), with the Purchasers. The APA outlines the
arrangement whereby the Debtors agreed to sell substantially all
of their assets to Medquist, and the stock of SIPL to CBay. In
addition, the Purchasers agreed to assume certain liabilities in
connection with such sale, all subject to the approval of the
Bankruptcy Court.
On April 15, 2010, the Bankruptcy Court approved the sale
of substantially all of Spheris assets to the Purchasers,
and the related assumption of certain liabilities of the Debtors
by the Purchasers. The transaction was effected on
April 22, 2010. Under the terms of the sale, MedQuist
acquired significantly all of the Companys
U.S. assets and assumed certain liabilities and CBay
acquired the stock of SIPL. The purchase price was
$98.8 million in cash and an unsecured subordinated
promissory note issued by MedQuist Transcriptions, Ltd. in an
aggregate principal amount of $17.5 million. As a result of
the sale of substantially all of the Debtors assets, it is
likely that the Debtors Chapter 11 cases will result
in a liquidation of the Companys businesses and assets,
such that the Company will cease to operate as a going concern.
As a requirement of the APA, each of the Debtors changed their
names. Effective April 28, 2010, Spheris Holding II, Inc.
changed its name to SP Wind Down Holding II, Inc.; Spheris Inc.
became SP Wind Down Inc.; and Vianeta Communications, LLC became
VN Wind Down Communications. Effective April 30, 2010,
Spheris Operations LLC changed its name to SP Wind Down
Operations LLC; Spheris Leasing LLC became SP Wind Down Leasing
LLC; and Spheris Canada Inc. became SP Wind Down Canada Inc.
Debtor-In-Possession
(DIP) Financing
On the Petition Date, the Debtors filed a motion with the
Bankruptcy Court seeking approval of their Senior Secured
Super-Priority
Debtor-In-Possession
Financing Agreement with certain lenders (as amended, the
DIP Credit Agreement). Interim approval of the DIP
Credit Agreement was granted by the Bankruptcy Court on
February 4, 2010. Final approval was granted on
February 23, 2010.
The DIP Credit Agreement provided post-petition loans and
advances consisting of a revolving credit facility up to an
aggregate principal amount of $15 million.
Under the DIP Credit Agreement, on February 3, 2010, the
Debtors borrowed $6.4 million. In accordance with the terms
of the DIP Credit Agreement, the Debtors used proceeds of
$6.4 million, net of lenders fees of approximately
$309,000, to pay past due principal and interest of
approximately $5.7 million on the revolver portion of the
2007 Senior Credit Facility and to pay other expenses of
approximately $381,000.
The outstanding principal amount of the loans under the DIP
Credit Agreement, plus interest accrued and unpaid, were due and
payable in full at the disposition of the APA, which was
April 22, 2010. All borrowings under the DIP Credit
Agreement were paid in full as of such date.
F-138
Spheris Inc.
Notes to
Consolidated Financial Statements(Continued)
Reorganization
Process
The Bankruptcy Court approved payment of certain of the
Debtors pre-petition obligations, including employee
wages, salaries and benefits, and the payment of vendors and
other providers for goods received and services and other
business-related payments necessary to maintain the operation of
the Debtors business. The Debtors retained legal and
financial professionals to advise them in connection with the
bankruptcy proceedings.
Immediately after filing for relief under Chapter 11 of the
Bankruptcy Code in the Bankruptcy Court, the Debtors notified
known current or potential creditors of the bankruptcy filings.
Subject to certain exceptions under the Bankruptcy Code, upon
the Petition Date, creditors were automatically enjoined, or
stayed, from continuing any judicial or administrative
proceedings or other actions against the Debtors or their
property to recover, collect or secure a claim arising prior to
the Petition Date. Thus, for example, most creditor actions to
obtain possession of property from the Debtors, or to create,
perfect or enforce any lien against their property, or to
collect on monies owed or otherwise exercise rights or remedies
with respect to pre-petition claims are enjoined unless and
until the Bankruptcy Court lifts the automatic stay with respect
to such actions.
As contemplated by the Bankruptcy Code, the United States
Trustee for the District of Delaware (the
U.S. Trustee) appointed an official committee
of unsecured creditors (the Creditors
Committee). The Creditors Committee and its legal
representatives have a right to be heard on matters that come
before the Bankruptcy Court with respect to the Debtors.
Under the Bankruptcy Code, the Debtors generally must assume or
reject pre-petition executory contracts, including but not
limited to real property leases, subject to the approval of the
Bankruptcy Courts and certain other conditions. In this context,
assumption means that the Debtors agree to perform
their obligations and cure all existing defaults under the
contract or lease, and rejection means that they are
relieved from their obligations to perform further under the
contract or lease, but are subject to a pre-petition claim for
damages for the breach thereof subject to certain limitations.
In connection with the Debtors sale of substantially all
of their assets, numerous of the Debtors executory
contracts and unexpired leases were assumed and assigned to the
Purchasers. In addition, the Debtors have rejected certain
executory contracts and unexpired leases. Any damages resulting
from rejection of executory contracts that are permitted to be
recovered under the Bankruptcy Code will be treated as
liabilities subject to compromise unless such claims were
secured prior to the Petition Date.
Since the Petition Date, the Debtors received approval from the
Bankruptcy Court to reject certain unexpired leases and
executory contracts of various types. Due to the uncertain
nature of many of the unresolved claims and rejection damages,
the Debtors cannot project the magnitude of such claims and
rejection damages with certainty.
On May 13, 2010, the Bankruptcy Court entered an order
establishing June 18, 2010, as the bar date for potential
creditors to file prepetition claims and postpetition claims
arising on or prior to April 30, 2010. The bar date is the
date by which certain claims against the Debtors must be filed
if the claimants wish to receive any distribution in the
bankruptcy cases. Creditors were notified of the bar date and
the requirement to file a proof of claim with the Bankruptcy
Court. Differences between liability amounts estimated by the
Debtors and claims filed by creditors are will be analyzed and,
if necessary, the Bankruptcy Court will make a final
determination of the allowable amount of a claim. The
determination of how liabilities will ultimately be treated
cannot be made until the Bankruptcy Court approves a plan of
reorganization. Accordingly, the ultimate amount or treatment of
such liabilities is not determinable at this time.
F-139
(In thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
(Unaudited)
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Unrestricted cash and cash equivalents
|
|
$
|
8,817
|
|
|
$
|
5,138
|
|
Restricted cash
|
|
|
1,399
|
|
|
|
1,622
|
|
Accounts receivable, net of allowance of $632 and $646,
respectively
|
|
|
20,787
|
|
|
|
21,793
|
|
Deferred taxes
|
|
|
11,995
|
|
|
|
14,749
|
|
Prepaid expenses and other current assets
|
|
|
8,015
|
|
|
|
5,146
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
51,013
|
|
|
|
48,448
|
|
Property and equipment, net
|
|
|
9,782
|
|
|
|
8,502
|
|
Internal-use software, net
|
|
|
1,021
|
|
|
|
904
|
|
Goodwill
|
|
|
19,969
|
|
|
|
19,969
|
|
Deferred taxes
|
|
|
4,338
|
|
|
|
4,031
|
|
Other noncurrent assets
|
|
|
3,288
|
|
|
|
3,308
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
89,411
|
|
|
$
|
85,162
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIT
|
Liabilities not subject to compromise
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,215
|
|
|
$
|
2,367
|
|
Accrued wages and benefits
|
|
|
6,945
|
|
|
|
8,509
|
|
Current portion of long-term debt and lease obligations
|
|
|
198,440
|
|
|
|
67,198
|
|
Other current liabilities
|
|
|
11,943
|
|
|
|
5,675
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
218,543
|
|
|
|
83,749
|
|
Long-term debt and lease obligations, net of current portion
|
|
|
80
|
|
|
|
|
|
Other long-term liabilities
|
|
|
3,370
|
|
|
|
967
|
|
|
|
|
|
|
|
|
|
|
Total liabilities not subject to compromise
|
|
|
221,993
|
|
|
|
84,716
|
|
Liabilities subject to compromise
|
|
|
|
|
|
|
136,468
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
221,993
|
|
|
|
221,184
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 100 shares authorized,
10 shares issued and outstanding
|
|
|
|
|
|
|
|
|
Other comprehensive loss, net of tax of $1,500 and $1,539
|
|
|
(2,332
|
)
|
|
|
(2,274
|
)
|
Contributed capital
|
|
|
111,874
|
|
|
|
111,876
|
|
Accumulated deficit
|
|
|
(242,124
|
)
|
|
|
(245,624
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit
|
|
|
(132,582
|
)
|
|
|
(136,022
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders deficit
|
|
$
|
89,411
|
|
|
$
|
85,162
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-140
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
Net revenues
|
|
$
|
41,849
|
|
|
$
|
35,178
|
|
Direct costs of revenues (exclusive of depreciation and
amortization below)
|
|
|
28,574
|
|
|
|
25,600
|
|
Marketing and selling expenses
|
|
|
611
|
|
|
|
870
|
|
General and administrative expenses
|
|
|
5,628
|
|
|
|
4,692
|
|
Depreciation and amortization
|
|
|
1,772
|
|
|
|
1,528
|
|
Transaction charges
|
|
|
|
|
|
|
1,730
|
|
Operational restructuring charges
|
|
|
689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs
|
|
|
37,274
|
|
|
|
34,420
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
4,575
|
|
|
|
758
|
|
Interest expense
|
|
|
4,370
|
|
|
|
3,086
|
|
Other expense (income)
|
|
|
(1,056
|
)
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income before reorganization items and income taxes
|
|
|
1,261
|
|
|
|
(2,413
|
)
|
Reorganization items
|
|
|
|
|
|
|
(3,427
|
)
|
|
|
|
|
|
|
|
|
|
Net (loss) income before income taxes
|
|
|
1,261
|
|
|
|
(5,840
|
)
|
|
|
|
|
|
|
|
|
|
(Benefit from) provision for income taxes
|
|
|
354
|
|
|
|
(2,340
|
)
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
907
|
|
|
$
|
(3,500
|
)
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-141
(Unaudited and amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
907
|
|
|
$
|
(3,500
|
)
|
Adjustments to reconcile net (loss) income to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,772
|
|
|
|
1,528
|
|
Deferred taxes
|
|
|
75
|
|
|
|
(2,486
|
)
|
Change in fair value of derivative financial instruments
|
|
|
(527
|
)
|
|
|
81
|
|
Amortization of debt discounts and issuance costs
|
|
|
228
|
|
|
|
554
|
|
Other non-cash items
|
|
|
69
|
|
|
|
2
|
|
Changes in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
45
|
|
|
|
(1,006
|
)
|
Prepaid expenses and other current
|
|
|
|
|
|
|
|
|
assets
|
|
|
(1,014
|
)
|
|
|
1,768
|
|
Accounts payable
|
|
|
141
|
|
|
|
1,661
|
|
Accrued wages and benefits
|
|
|
1,887
|
|
|
|
1,563
|
|
Other current liabilities
|
|
|
3,467
|
|
|
|
4,473
|
|
Other noncurrent assets and liabilities
|
|
|
(111
|
)
|
|
|
(481
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
6,939
|
|
|
|
4,157
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(868
|
)
|
|
|
(74
|
)
|
Purchase and development of internal-use software
|
|
|
(156
|
)
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(1,024
|
)
|
|
|
(129
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from DIP Credit Agreement
|
|
|
|
|
|
|
6,400
|
|
Payments on DIP Credit Agreement
|
|
|
|
|
|
|
(6,400
|
)
|
Proceeds from 2007 Senior Credit Facility
|
|
|
2,500
|
|
|
|
|
|
Payments on 2007 Senior Credit Facility
|
|
|
|
|
|
|
(7,728
|
)
|
Payments on lease obligations
|
|
|
(529
|
)
|
|
|
(75
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
1,971
|
|
|
|
(7,803
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate change on cash and cash equivalents
|
|
|
(1,219
|
)
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in unrestricted cash and cash equivalents
|
|
|
6,667
|
|
|
|
(3,679
|
)
|
Unrestricted cash and cash equivalents, at beginning of period
|
|
|
3,262
|
|
|
|
8,817
|
|
|
|
|
|
|
|
|
|
|
Unrestricted cash and cash equivalents, at end of period
|
|
$
|
9,929
|
|
|
$
|
5,138
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-142
|
|
1.
|
Description of
Business and Bankruptcy Proceedings
|
Description of
Business
Spheris Inc. (Spheris) is a Delaware corporation.
Subsequent to its acquisition by certain institutional investors
in November 2004 (the November 2004
Recapitalization), Spheris became a wholly-owned
subsidiary of Spheris Holding II, Inc. (Spheris Holding
II), and an indirect wholly-owned subsidiary of Spheris
Holding III, Inc. (Spheris Holding III), an entity
owned by affiliates of Warburg Pincus LLC and TowerBrook Capital
Partners LLC, CHS/Community Health Systems, Inc.
(CHS), and indirectly by certain members of
Spheris current and past management team.
Spheris and its direct or indirect wholly-owned subsidiaries:
Spheris Operations LLC (Operations), Spheris Leasing
LLC, Spheris Canada Inc., Spheris, India Private Limited
(SIPL) and Vianeta Communications
(Vianeta) (sometimes referred to collectively as the
Company), provide clinical documentation technology
and services to health systems, hospitals and group medical
practices located throughout the United States. The Company
receives medical dictation in digital format from subscribing
physicians, converts the dictation into text format, stores
specific data elements from the records, then transmits the
completed medical record to the originating physician in the
prescribed format.
Chapter 11
Bankruptcy Proceedings
On February 3, 2010, (the Petition Date), the
100% owner of Spheris Inc., Spheris Holding, II, Inc.,
filed a voluntary petition (Chapter 11
Petition) for relief under Chapter 11 of
Title 11 of the United States Code (the Bankruptcy
Code) in the United States Bankruptcy Court in Wilmington,
Delaware (the Bankruptcy Court). Simultaneously,
Spheris, Operations, and its subsidiaries: Spheris Canada Inc.,
Spheris Leasing LLC, and Vianeta (collectively, the
Debtors) also filed voluntary petitions for relief
under the Bankruptcy Code in the Bankruptcy Court. SIPL did not
file for relief under the Bankruptcy Code.
During 2009, the Company did not comply with the covenant
requirements of its 2007 Senior Credit Facility and its Senior
Subordinated Notes (each as defined in Note 5). The
Companys failure to comply with these requirements and the
filing of the Chapter 11 Petition constituted an event of
default under the Companys debt obligations. Since the
Petition Date, the Company discontinued accruing interest
expense on its Senior Subordinated Notes.
The Company is currently operating as
debtor-in-possession
under the jurisdiction of the Bankruptcy Court and in accordance
with the applicable provisions of the Bankruptcy Code. In
general, the Company is authorized to continue to operate as
ongoing businesses, but may not engage in transactions outside
the ordinary course of business without the approval of the
Bankruptcy Court.
Going Concern
Matters
The consolidated financial statements and related notes have
been prepared assuming that the Company will continue as a going
concern as of March 31, 2010, although its bankruptcy
filings raised substantial doubt about its ability to continue
as a going concern. Except as otherwise expressly stated herein,
the consolidated financial statements do not include any
adjustments related to the recoverability of assets and the
amounts, classification and satisfaction of liabilities that
resulted from the uncertainty regarding the Companys
ability to continue as a going concern and its subsequent sale
of assets as described below.
F-143
Spheris Inc. and
Subsidiaries
(Debtor-In-Possession)
Notes to Condensed Consolidated Financial
Statements(Continued)
Stock and
Asset Purchase Agreement
On February 2, 2010, the Debtors entered into a Stock and
Asset Purchase Agreement (the APA) as amended
April 15, 2010 with MedQuist Inc. (MedQuist)
and CBay Inc. (CBay and collectively referred to as
the Purchasers), portfolio companies of CBaySystems
Holdings Ltd.. The APA outlines the arrangement whereas the
Debtors agreed to sell substantially all of their assets to
MedQuist, and the stock of SIPL to CBay. In addition, the
Purchasers agreed to assume certain liabilities in connection
with such sale, all subject to approval of the Bankruptcy Court.
On April 15, 2010, the Bankruptcy Court approved the sale
of substantially all of Spheris assets to the Purchasers
and the related assumption of certain liabilities of the Debtors
by the Purchasers. The transaction was effected on
April 22, 2010. Under the terms of the sale, MedQuist
acquired significantly all of the Companys
U.S. assets and assumed certain liabilities. CBay acquired
the stock of SIPL. The purchase price was $98.8 million in
cash and an unsecured subordinated promissory note issued by
MedQuist Transcriptions, Ltd. in an aggregate principal amount
of $17.5 million. As a result of the sale of substantially
all of the Debtors assets, it is likely that the
Debtors Chapter 11 cases will result in a liquidation
of the Companys businesses and assets, such that the
Company will cease to operate as a going concern.
As a requirement of the APA, each of the Debtors changed their
names. Effective April 28, 2010, Spheris Holding II, Inc.
changed its name to SP Wind Down Holding II, Inc.; Spheris
became SP Wind Down Inc.; and Vianeta became VN Wind Down
Communications. Effective April 30, 2010, Operations
changed its name to SP Wind Down Operations LLC; Spheris Leasing
LLC became SP Wind Down Leasing LLC; and Spheris Canada Inc.
became SP Wind Down Canada Inc.
Debtor-In-Possession
(DIP) Financing
On the Petition Date, the Debtors filed a motion with the
Bankruptcy Court seeking approval to enter into a Senior Secured
Super-Priority
Debtor-In-Possession
Financing Agreement with certain lenders (as amended, the
DIP Credit Agreement). Interim approval of the DIP
Credit Agreement was granted by the Bankruptcy Court on
February 4, 2010. Final approval was granted on
February 23, 2010.
The DIP Credit Agreement provided post-petition loans and
advances consisting of a revolving credit facility up to an
aggregate principal amount of $15 million.
Under the DIP Credit Agreement, on February 3, 2010, the
Debtors borrowed $6.4 million. In accordance with the terms
of the DIP Credit Agreement, the Debtors used proceeds of
$6.4 million, net of lenders fees of approximately
$309,000, to pay past due principal and interest of
approximately $5.7 million on the revolver portion of the
2007 Senior Credit Facility and to pay other expenses of
approximately $381,000. There was no outstanding balance on the
DIP Credit Agreement at March 31, 2010.
The outstanding principal amount of the loans under the DIP
Credit Agreement, plus interest accrued and unpaid, were due and
payable in full at the disposition of the APA, which was
April 22, 2010. All borrowings under the DIP Credit
Agreement were paid in full as of this date.
Reorganization
Process
The Bankruptcy Court approved payment of certain of the
Debtors pre-petition obligations, including employee
wages, salaries and benefits, and the payment of vendors and
other providers in the ordinary course for goods received and
services and other business-related payments necessary to
maintain the operation of the Debtors business. The
Debtors retained legal and financial professionals to advise
them on the bankruptcy proceedings.
F-144
Spheris Inc. and
Subsidiaries
(Debtor-In-Possession)
Notes to Condensed Consolidated Financial
Statements(Continued)
Immediately after filing the Chapter 11 Petition, the
Debtors notified all known current or potential creditors of the
bankruptcy filings. Subject to certain exceptions under the
Bankruptcy Code, upon the Petition Date, creditors were
automatically enjoined, or stayed, from continuing any judicial
or administrative proceedings or other actions against the
Debtors or their property to recover, collect or secure a claim
arising prior to the Petition Date. Thus, for example, most
creditor actions to obtain possession of property from the
Debtors, or to create, perfect or enforce any lien against their
property, or to collect on monies owed or otherwise exercise
rights or remedies with respect to a pre-petition claim are
enjoined unless and until the Bankruptcy Court lifts the
automatic stay.
As required by the Bankruptcy Code, the United States Trustee
for the District of Delaware (the U.S. Trustee)
appointed an official committee of unsecured creditors (the
Creditors Committee). The Creditors
Committee and its legal representatives have a right to be heard
on all matters that come before the Bankruptcy Court with
respect to the Debtors.
Under the Bankruptcy Code, the Debtors generally must assume or
reject pre-petition executory contracts, including but not
limited to real property leases, subject to the approval of the
Bankruptcy Court and certain other conditions. In this context,
assumption means that the Debtors agree to perform
their obligations and cure all existing defaults under the
contract or lease, and rejection means that they are
relieved from their obligations to perform further under the
contract or lease, but is subject to a pre-petition claim for
damages for the breach thereof subject to certain limitations.
In connection with the Debtors sale of substantially all
of their assets, numerous of the Debtors executory
contracts and unexpired leases were assumed and assigned to the
Purchasers. In addition, the Debtors have rejected certain
executory contracts and unexpired leases. Any damages resulting
from rejection of executory contracts that are permitted to be
recovered under the Bankruptcy Code will be treated as
liabilities subject to compromise unless such claims were
secured prior to the Petition Date.
Since the Petition Date, the Debtors received approval from the
Bankruptcy Court to reject unexpired leases and executory
contracts of various types. Liabilities subject to compromise
have been recorded related to the rejection of unexpired leases;
rejection of certain executory contracts; the claims related to
the outstanding unpaid Senior Subordinated Notes; and from the
determination of the Bankruptcy Court (or agreement by parties
in interest) of allowed claims for contingencies and other
disputed amounts. Due to the uncertain nature of many of the
unresolved claims and rejection damages, the Debtors cannot
project the magnitude of such claims and rejection damages with
certainty.
On May 13, 2010, the Bankruptcy Court entered an order
establishing June 18, 2010, as the bar date for potential
creditors to file prepetition claims and postpetition claims
arising on or prior to April 30, 2010. The bar date is the
date by which certain claims against the Debtors must be filed
if the claimants wish to receive any distribution in the
bankruptcy cases. Creditors were notified of the bar date and
the requirement to file a proof of claim with the Bankruptcy
Court. Differences between liability amounts estimated by the
Debtors and claims filed by creditors are being investigated
and, if necessary, the Bankruptcy Court will make a final
determination of the allowable amount of a claim. The
determination of how liabilities will ultimately be treated
cannot be made until the Bankruptcy Court approves a plan of
reorganization. Accordingly, the ultimate amount or treatment of
such liabilities is not determinable at this time.
Proposed Plan
of Reorganization
In order to successfully emerge from or liquidate pursuant to
Chapter 11 of Title 11 of the Bankruptcy Code, the
Debtors must propose and obtain confirmation by the Bankruptcy
Court of a plan of reorganization that satisfies the
requirements of the Bankruptcy Code. The Debtors and the
official committee of unsecured creditors appointed in the
Chapter 11 cases have jointly proposed the Joint
Liquidating Plan of SP Wind Down Inc., f/k/a Spheris Inc., and
its Affiliated Debtors (the Plan). The Plan was
filed on June 11, 2010. On such date, the Plan proponents
also filed the Disclosure Statement with Respect to the Joint
Liquidating Plan of SP Wind Down Inc.,
F-145
Spheris Inc. and
Subsidiaries
(Debtor-In-Possession)
Notes to Condensed Consolidated Financial
Statements(Continued)
f/k/a Spheris Inc., and its Affiliated Debtors (the
Disclosure Statement). A hearing to consider
approval of the Disclosure Statement is scheduled for
July 13, 2010, and the Debtors have requested that a
hearing to consider confirmation of the Plan be scheduled for
August 26, 2010.
Under the priority scheme established by the Bankruptcy Code,
unless creditors agree otherwise, pre-petition liabilities and
post-petition liabilities must be satisfied in full before the
Debtors stockholders are entitled to receive any
distribution or retain any property under a plan of
reorganization on account of their equity interests. Given the
estimated liabilities of the Debtors, it is not anticipated that
the Debtors stockholders will receive any distribution
from the Debtors assets. The ultimate recovery to the
Debtors creditors, if any, will not be determined until
confirmation of a plan or plans of reorganization. No assurance
can be given as to what values, if any, will be ascribed to each
of these constituencies or what types or amounts of
distributions, if any, they would receive. Because of such
possibilities, the value of the Debtors liabilities and
securities is highly speculative. Appropriate caution should be
exercised with respect to existing and future investments, if
any, of the Debtors liabilities and/or securities.
Section 1121(b) of the Bankruptcy Code provides for an
initial period of 120 days after the commencement of a
Chapter 11 case to file a proposed plan of reorganization
(the Exclusive Filing Period) and an additional 180 days
after the commencement of the Chapter 11 case to solicit
acceptances of the plan of reorganization (the Exclusive
Solicitation Period). The Exclusive Filing Period and the
Exclusive Solicitation Period were set to expire on June 3,
2010 and August 2, 2010, respectively. Motions were filed
with the Bankruptcy Court to extend the Exclusive Filing Period
through and including September 1, 2010 and the Exclusive
Solicitation Period through and including November 1, 2010.
By order dated June 14, 2010, the Bankruptcy Court approved
such extensions of the Debtors exclusive periods to file a
plan of reorganization and to solicit votes with respect thereto.
Financial
Reporting Considerations
For periods subsequent to the bankruptcy filings, the Debtors
have applied the Financial Accounting Standards Board
(FASB) Accounting Standards Codification
(ASC) 852, Reorganizations (ASC
852), in preparing the accompanying interim condensed
consolidated financial statements. ASC 852 requires that
the financial statements distinguish transactions and events
that are directly associated with the reorganization from the
ongoing operations of the business. Accordingly, certain
expenses (including professional fees) that were incurred in the
Chapter 11 Petition have been recorded in reorganization
items in the accompanying condensed consolidated statements of
operations. In addition, pre-petition obligations that may have
been impacted by the bankruptcy reorganization process have been
classified on the accompanying condensed consolidated balance
sheets in liabilities subject to compromise. These liabilities
are reported at the amounts allowed or expected to be allowed by
the Bankruptcy Court, even if they may be settled for lesser or
greater amounts.
Transaction Costs
and Reorganization Items
During 2009, the Company evaluated multiple strategic
opportunities to continue as a going concern including a
technology license agreement, a sale of the Company or its
assets, or a restructuring of its capital structure. The Company
ultimately chose to pursue a sale of its assets pursuant to the
Chapter 11 Petition. In connection with evaluating and
pursuing its options, the Company retained financial and other
advisors, including restructuring professionals. These fees
included (a) costs paid to professionals and others in
connection with evaluating, preparing for, and pursuing filing
for Chapter 11 relief, (b) costs paid to professionals
and others related to evaluating, preparing for, and pursuing
sales and licensing options, (c) costs paid to creditors
and creditor committee advisors, including costs incurred to
obtain interim financing facilities, and (d) costs to
retain key employees. Some of the professionals engaged to
assist the Company in these efforts were utilized to perform
multiple functions.
F-146
Spheris Inc. and
Subsidiaries
(Debtor-In-Possession)
Notes to Condensed Consolidated Financial
Statements(Continued)
The total of all of transaction costs to the Company for
services performed from January 1, 2010 through the
Petition Date, were $1.7 million, and are reflected as
transaction charges in the accompanying condensed consolidated
statements of operations. There were $1.6 million of
retainers representing prepayments for transactional services
reflected as a component of prepaid expenses and other current
assets in the accompanying condensed consolidated balance sheet
as of December 31, 2009. Additionally, there were
$0.3 million of prepaid retention bonus amounts related to
employee obligations reflected as a component of prepaid
expenses and other current assets in the accompanying condensed
consolidated balance sheet as of December 31, 2009.
The Debtors reorganization items directly related to the
process of reorganizing the Debtors under Chapter 11 from
the Petition Date through March 31, 2010, are recorded in
the accompanying condensed consolidated statements of operations
as reorganization items and consist of professional fees
totaling $3.4 million. Professional fees directly related
to the reorganization include fees associated with advisors to
the Debtors after the Petition Date. There were
$1.5 million of retainers representing prepayments for
reorganizational services reflected as a component of prepaid
expenses and other current assets in the accompanying condensed
consolidated balance sheets as of March 31, 2010.
Liabilities
Subject to Compromise
Liabilities subject to compromise at March 31, 2010 consist
of the following:
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
509
|
|
11.0% Senior Subordinated Notes, net
|
|
|
122,799
|
|
Accrued interest
|
|
|
8,670
|
|
Interest rate management agreements
|
|
|
1,768
|
|
Leases
|
|
|
2,616
|
|
Other
|
|
|
106
|
|
|
|
|
|
|
Total liabilities subject to compromise
|
|
$
|
136,468
|
|
|
|
|
|
|
Liabilities subject to compromise represent pre-petition
unsecured obligations to be settled under a proposed plan of
reorganization. Generally, actions to enforce or otherwise
effect payments of pre-Chapter 11 liabilities are stayed.
Pre-petition liabilities that are subject to compromise are
reported at the amounts expected to be allowed, even if they may
be settled for lesser or greater amounts. These liabilities
represent the amounts expected to be allowed on known or
potential claims to be resolved through the Chapter 11
process, and remain subject to future adjustments arising from
negotiated settlements, actions of the Bankruptcy Court,
rejection of executor contracts and leases, the determination as
to the value of collateral securing the claims, proof of claim,
or other events.
The Bankruptcy Court approved payment of certain pre-petition
obligations, including employee wages, salaries and benefits,
and the payment of vendors and other providers in the ordinary
course for goods and services received after the filing of the
Chapter 11 Petition and other business-related payments
necessary to maintain the operation of the Debtors
business. Obligations associated with these matters are not
classified as liabilities subject to compromise.
The Debtors rejected certain executory contracts and unexpired
leases with respect to the Debtors operations with
approval of the Bankruptcy Court. Damages resulting from
rejection of executory contracts and unexpired leases are
generally treated as general unsecured claims and are classified
as liabilities subject to compromise.
Amounts subject to compromise include the Senior Subordinated
Notes. The Senior Subordinated Notes are shown net of discount
as described in Note 5. Debt issuance costs of
$0.9 million were also netted against this
F-147
Spheris Inc. and
Subsidiaries
(Debtor-In-Possession)
Notes to Condensed Consolidated Financial
Statements(Continued)
balance in accordance with the fair value measurement
requirements described in ASC 852. Accrued interest related
to these Notes is also included in the liabilities subject to
compromise.
Debtor
Financial Statements
The accompanying condensed consolidated balance sheets,
statements of operations, and cash flows present the
consolidated financial position of the Company and consolidated
results of its operations and its cash flows for the periods
presented. This information does not reflect the activity of
Spheris Holding II, Inc. which was included in the
Chapter 11 Petition.
The following schedules present the financial information for
the Debtors as of March 31, 2010 and the three months then
ended. In these schedules, the financial position and activity
of Spheris Holding II, Inc. (SH II, Inc.) is added
to the accompanying condensed consolidated financial statements
of the Company. SH II, Inc. had no assets, liabilities, equity
or financial activity for all periods covered on these financial
statements.
As SIPL did not file for relief under the Bankruptcy Code,
SIPLs assets, liabilities, equity and financial activity
for the periods presented are subtracted from the accompanying
interim condensed consolidated financial statements of the
Company. The subtraction of this activity from the accompanying
interim condensed consolidated financial statements results in a
payable to SIPL of $8.7 million. In addition, all revenue
of SIPL is derived from subcontracting services provided to the
Company. Accordingly, $4.7 million in sales were eliminated
from the statements of operations. The addition of the payable
to SIPL and the elimination of the sales and related direct
costs reflect the operations and cash flows of the Debtors for
the three months ended March 31, 2010. These schedules are
presented as follows:
F-148
Spheris Inc. and
Subsidiaries
(Debtor-In-Possession)
Notes to Condensed Consolidated Financial
Statements(Continued)
Debtor Condensed
Consolidating Balance Sheet Schedule
March 31,
2010
(Unaudited and amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
|
Including
|
|
|
Less:
|
|
|
Reclassifications/
|
|
|
|
|
|
|
SH II, Inc.
|
|
|
SIPL
|
|
|
Eliminations
|
|
|
Debtors
|
|
|
ASSETS
|
Current Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrestricted cash and cash equivalents
|
|
$
|
5,138
|
|
|
$
|
(2,078
|
)
|
|
$
|
|
|
|
$
|
3,060
|
|
Restricted Cash
|
|
|
1,622
|
|
|
|
(1,146
|
)
|
|
|
|
|
|
|
476
|
|
Accounts receivable, net of allowance
|
|
|
21,793
|
|
|
|
|
|
|
|
|
|
|
|
21,793
|
|
Intercompany receivables
|
|
|
|
|
|
|
(8,732
|
)
|
|
|
8,732
|
|
|
|
|
|
Deferred taxes
|
|
|
14,749
|
|
|
|
(356
|
)
|
|
|
|
|
|
|
14,393
|
|
Prepaid expenses and other current assets
|
|
|
5,146
|
|
|
|
(1,316
|
)
|
|
|
|
|
|
|
3,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
48,448
|
|
|
|
(13,628
|
)
|
|
|
8,732
|
|
|
|
43,552
|
|
Property and equipment, net
|
|
|
8,502
|
|
|
|
(1,632
|
)
|
|
|
|
|
|
|
6,870
|
|
Internal-use software, net
|
|
|
904
|
|
|
|
|
|
|
|
|
|
|
|
904
|
|
Goodwill
|
|
|
19,969
|
|
|
|
|
|
|
|
|
|
|
|
19,969
|
|
Deferred taxes
|
|
|
4,031
|
|
|
|
(263
|
)
|
|
|
|
|
|
|
3,768
|
|
Other noncurrent assets
|
|
|
3,308
|
|
|
|
(1,024
|
)
|
|
|
|
|
|
|
2,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
85,162
|
|
|
$
|
(16,547
|
)
|
|
$
|
8,732
|
|
|
$
|
77,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIT
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,367
|
|
|
$
|
(130
|
)
|
|
$
|
|
|
|
$
|
2,237
|
|
Accrued wages and benefits
|
|
|
8,509
|
|
|
|
(2,842
|
)
|
|
|
|
|
|
|
5,667
|
|
Intercompany payables
|
|
|
|
|
|
|
|
|
|
|
8,732
|
|
|
|
8,732
|
|
Current portion of long-term debt and lease obligations
|
|
|
67,198
|
|
|
|
|
|
|
|
|
|
|
|
67,198
|
|
Other current liabilities
|
|
|
5,675
|
|
|
|
(218
|
)
|
|
|
|
|
|
|
5,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
83,749
|
|
|
|
(3,190
|
)
|
|
|
8,732
|
|
|
|
89,291
|
|
Other long-term liabilities
|
|
|
967
|
|
|
|
(387
|
)
|
|
|
|
|
|
|
580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities not subject to compromise
|
|
|
84,716
|
|
|
|
(3,577
|
)
|
|
|
8,732
|
|
|
|
89,871
|
|
Liabilities subject to compromise
|
|
|
136,468
|
|
|
|
|
|
|
|
|
|
|
|
136,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
221,184
|
|
|
|
(3,577
|
)
|
|
|
8,732
|
|
|
|
226,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
(2,274
|
)
|
|
|
2,274
|
|
|
|
|
|
|
|
|
|
Contributed capital
|
|
|
111,876
|
|
|
|
(5,694
|
)
|
|
|
|
|
|
|
106,182
|
|
Accumulated deficit
|
|
|
(245,624
|
)
|
|
|
(9,550
|
)
|
|
|
|
|
|
|
(255,174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit
|
|
|
(136,022
|
)
|
|
|
(12,970
|
)
|
|
|
|
|
|
|
(148,992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders deficit
|
|
$
|
85,162
|
|
|
$
|
(16,547
|
)
|
|
$
|
8,732
|
|
|
$
|
77,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-149
Spheris Inc. and
Subsidiaries
(Debtor-In-Possession)
Notes to Condensed Consolidated Financial
Statements(Continued)
Debtor Condensed
Consolidating Statement of Operations Schedule
For the Three Months ended
March 31, 2010
(Unaudited and amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
|
Including
|
|
|
Less:
|
|
|
Reclassifications/
|
|
|
|
|
|
|
SH II, Inc.
|
|
|
SIPL
|
|
|
Eliminations
|
|
|
Debtors
|
|
|
Net revenues
|
|
$
|
35,178
|
|
|
$
|
(4,714
|
)
|
|
$
|
4,714
|
|
|
$
|
35,178
|
|
Direct costs of revenues
|
|
|
25,600
|
|
|
|
(3,963
|
)
|
|
|
4,714
|
|
|
|
26,351
|
|
Marketing and selling expenses
|
|
|
870
|
|
|
|
|
|
|
|
|
|
|
|
870
|
|
General and administrative expenses
|
|
|
4,692
|
|
|
|
(140
|
)
|
|
|
|
|
|
|
4,552
|
|
Depreciation and amortization
|
|
|
1,528
|
|
|
|
(174
|
)
|
|
|
|
|
|
|
1,354
|
|
Transaction charges
|
|
|
1,730
|
|
|
|
|
|
|
|
|
|
|
|
1,730
|
|
Operational restructuring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs
|
|
|
34,420
|
|
|
|
(4,277
|
)
|
|
|
4,714
|
|
|
|
34,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
758
|
|
|
|
(437
|
)
|
|
|
|
|
|
|
321
|
|
Interest expense, net of income
|
|
|
3,086
|
|
|
|
7
|
|
|
|
|
|
|
|
3,093
|
|
Other expense
|
|
|
85
|
|
|
|
(27
|
)
|
|
|
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before reorganizational items and income taxes
|
|
|
(2,413
|
)
|
|
|
(417
|
)
|
|
|
|
|
|
|
(2,830
|
)
|
Reorganization items
|
|
|
(3,427
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,427
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before income taxes
|
|
|
(5,840
|
)
|
|
|
(417
|
)
|
|
|
|
|
|
|
(6,257
|
)
|
Benefit from income taxes
|
|
|
(2,340
|
)
|
|
|
(17
|
)
|
|
|
|
|
|
|
(2,357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,500
|
)
|
|
$
|
(400
|
)
|
|
$
|
|
|
|
$
|
(3,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-150
Spheris Inc. and
Subsidiaries
(Debtor-In-Possession)
Notes to Condensed Consolidated Financial
Statements(Continued)
Debtor Condensed
Consolidating Statement of Cash Flows Schedule
For the Three Months Ended
March 31, 2010
(Unaudited and amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
|
including
|
|
|
Less:
|
|
|
Reclassifications/
|
|
|
|
|
|
|
SH II, Inc.
|
|
|
SIPL
|
|
|
Eliminations
|
|
|
Debtors
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,500
|
)
|
|
$
|
(400
|
)
|
|
$
|
|
|
|
$
|
(3,900
|
)
|
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,528
|
|
|
|
(174
|
)
|
|
|
|
|
|
|
1,354
|
|
Deferred taxes
|
|
|
(2,486
|
)
|
|
|
(892
|
)
|
|
|
|
|
|
|
(3,378
|
)
|
Change in fair value of derivative financial instruments
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
81
|
|
Amortization of debt discounts and issuance costs
|
|
|
554
|
|
|
|
|
|
|
|
|
|
|
|
554
|
|
Other non-cash items
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Changes in operating assets and liabilities,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(1,006
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,006
|
)
|
Intercompany receivables
|
|
|
|
|
|
|
1,874
|
|
|
|
(852
|
)
|
|
|
1,022
|
|
Prepaid expenses and other current assets
|
|
|
1,768
|
|
|
|
(86
|
)
|
|
|
|
|
|
|
1,682
|
|
Accounts payable
|
|
|
1,661
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
1,658
|
|
Accrued wages and benefits
|
|
|
1,563
|
|
|
|
(145
|
)
|
|
|
|
|
|
|
1,418
|
|
Intercompany payables
|
|
|
|
|
|
|
|
|
|
|
852
|
|
|
|
852
|
|
Other current liabilities
|
|
|
4,473
|
|
|
|
19
|
|
|
|
|
|
|
|
4,492
|
|
Other noncurrent assets and liabilities
|
|
|
(481
|
)
|
|
|
(25
|
)
|
|
|
|
|
|
|
(506
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
4,157
|
|
|
|
168
|
|
|
|
|
|
|
|
4,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(74
|
)
|
|
|
31
|
|
|
|
|
|
|
|
(43
|
)
|
Purchase and development of internal-use software
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(129
|
)
|
|
|
31
|
|
|
|
|
|
|
|
(98
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from DIP Credit Agreement
|
|
|
6,400
|
|
|
|
|
|
|
|
|
|
|
|
6,400
|
|
Payments on DIP Credit Agreement
|
|
|
(6,400
|
)
|
|
|
|
|
|
|
|
|
|
|
(6,400
|
)
|
Proceeds from 2007 Senior Credit Facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on 2007 Senior Credit Facility
|
|
|
(7,728
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,728
|
)
|
Payments on lease obligations
|
|
|
(75
|
)
|
|
|
|
|
|
|
|
|
|
|
(75
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(7,803
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,803
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate change on cash and cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equivalents
|
|
|
96
|
|
|
|
(96
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in unrestricted cash and cash equivalents
|
|
|
(3,679
|
)
|
|
|
103
|
|
|
|
|
|
|
|
(3,576
|
)
|
Unrestricted cash and cash equivalents, at beginning of period
|
|
|
8,817
|
|
|
|
(2,181
|
)
|
|
|
|
|
|
|
6,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrestricted cash and cash equivalents, at end of period
|
|
$
|
5,138
|
|
|
$
|
(2,078
|
)
|
|
$
|
|
|
|
$
|
3,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-151
Spheris Inc. and
Subsidiaries
(Debtor-In-Possession)
Notes to Condensed Consolidated Financial
Statements(Continued)
|
|
2.
|
Summary of
Significant Accounting Policies
|
Basis of
Presentation
For all periods presented in the accompanying interim condensed
consolidated financial statements and footnotes, Spheris is the
reporting unit. All dollar amounts shown in the accompanying
interim condensed consolidated financial statements and tables
in the notes are in thousands unless otherwise noted. The
accompanying interim condensed consolidated financial statements
include the financial statements of Spheris, including its
direct or indirect wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
The accompanying interim condensed consolidated financial
statements have been prepared by the Company without audit and,
in the opinion of management, reflect all normal recurring
adjustments necessary for a fair presentation of results for the
unaudited interim periods presented. Certain information and
footnote disclosures normally included in year-end financial
statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. The
results of operations for the interim period are not necessarily
indicative of the results to be obtained for the full fiscal
year.
For periods subsequent to the Chapter 11 Petition, the
Debtors have applied ASC 852, in preparing the accompanying
interim consolidated financial statements as further discussed
in Note 1.
Additionally, the accompanying interim condensed consolidated
financial statements have been prepared on a going concern basis
which contemplates the realization of assets and the
satisfaction of liabilities in the ordinary course of business.
The accompanying interim condensed consolidated financial
statements do not include any adjustments relating to the
recoverability of assets and the amounts, classification, and
satisfaction of liabilities that resulted from uncertainty
regarding the Companys ability to continue as a going
concern as of March 31, 2010, and its subsequent sale of
assets. See further discussion in Note 1.
In preparing the accompanying interim condensed consolidated
financial statements, the Company evaluated events and
transactions that occurred subsequent to March 31, 2010,
through the date that the accompanying interim condensed
consolidated financial statements were issued, June 29,
2010.
Recently
Adopted Accounting Pronouncements
In January 2010, the FASB issued
ASC 820-10,
Fair Value Measurements and Disclosures (ASC
820-10)
as an amendment to earlier authoritative guidance concerning
fair value measurements and disclosures.
ASC 820-10
requires an entity to: (i) disclose separately the amounts
of significant transfers in and out of Level 1 and
Level 2 fair value measurements and describe the reasons
for the transfers and (ii) present separate information for
Level 3 activity pertaining to gross purchases, sales,
issuances, and settlements.
ASC 820-10,
which became effective for the Company beginning January 1,
2010, did not have a material impact on its financial statements.
Recently
Issued Accounting Pronouncements Not Yet Adopted
In October 2009, the FASB issued
ASC 985-605,
Revenue Recognition Software (ASC
985-605)
that will become effective for the Company beginning
January 1, 2011, with earlier adoption permitted. Under
ASC 985-605
on arrangements that include software elements, tangible
products that have software components that are essential to the
functionality of the tangible product will no longer be within
the scope of
ASC 985-605,
and software-enabled products will now be subject to other
relevant revenue recognition guidance. Additionally, the FASB
issued authoritative guidance on revenue arrangements with
multiple deliverables that are outside the scope of
ASC 985-605.
Under
ASC 985-605,
when vendor specific objective evidence or third party evidence
for deliverables in an arrangement cannot be determined, a best
estimate of the selling price is required to separate
F-152
Spheris Inc. and
Subsidiaries
(Debtor-In-Possession)
Notes to Condensed Consolidated Financial
Statements(Continued)
deliverables and allocate consideration received using the
relative selling price method.
ASC 985-605
includes new disclosure requirements on how the application of
the relative selling price method affects the timing and amount
of revenue recognition. The Company has not yet fully evaluated
the impact that
ASC 985-605
will have on its financial statements.
On September 23, 2009, the FASB ratified
ASC 605-25,
Revenue Recognition with Multiple Element
Arrangements (ASC
605-25).
ASC 605-25
requires the allocation of consideration among separately
identified deliverables contained within an arrangement, based
on their related selling prices. The Company utilizes current
accounting guidance, also titled Revenue Arrangements with
Multiple Deliverables, in the recognition of revenue
associated with the Companys customer contracts that
contain multiple elements of services.
ASC 605-25
will become effective for the Company beginning January 1,
2011. The Company has not yet fully evaluated the impact that
ASC 605-25
will have on its financial statements.
|
|
3.
|
Fair Value of
Financial Instruments
|
Derivative
Financial Instruments
The Company holds certain derivative financial instruments that
are required to be measured at fair value on a recurring basis.
These derivative financial instruments are utilized by the
Company to mitigate risks related to interest rates and foreign
currency exchange rates. The derivatives are measured at fair
value in accordance with the established fair value hierarchy,
which prioritizes the inputs used in measuring fair value into
the following three levels:
|
|
|
|
|
Level 1observable inputs such as quoted prices in
active markets.
|
|
|
|
Level 2inputs other than quoted prices in active
markets that are either directly or indirectly observable.
|
|
|
|
Level 3unobservable inputs in which little or no
market data exists, therefore requiring an entity to develop its
own assumptions.
|
The Company entered into certain interest rate management
agreements with a single counterparty to reduce its exposure to
fluctuations in market interest rates under the 2007 Senior
Credit Facility (as defined in Note 5). An event of default
under the 2007 Senior Credit Facility would create an event of
default under these interest rate management agreements, which
may cause amounts due under these agreements to become due and
payable. The Companys accounting for these derivative
financial instruments did not meet hedge accounting criteria.
Accordingly, changes in fair value were included as a component
of other expense (income) in the accompanying condensed
consolidated statements of operations.
The fair value of these interest rate management agreements was
determined using valuation techniques including discounted cash
flow analysis on the expected cash flows of each derivative.
This analysis considered the contractual terms of the
derivatives, including the period to maturity, and used
observable market-based inputs, including interest rate curves
and implied volatilities. The interest rates used in the
calculation of projected cash flows were based on an expectation
of future interest rates derived from observable market interest
rate curves and volatilities. Additionally, the Company
incorporated credit valuation adjustments to appropriately
reflect nonperformance risk in the fair value measurements.
Although the Company determined that the majority of the inputs
used to value its interest derivatives fell within Level 2
of the fair value hierarchy, the credit valuation adjustments
associated with its interest derivatives utilized Level 3
inputs, such as estimates of current credit spreads to evaluate
the likelihood of default by its counterparties. The Company
assessed the significance of the impact of the credit valuation
adjustments on the overall valuation of its interest derivative
positions and determined that the credit valuation adjustments
were not significant to the overall valuation of its interest
derivatives. As a result, the Company determined that its
valuations for the interest
F-153
Spheris Inc. and
Subsidiaries
(Debtor-In-Possession)
Notes to Condensed Consolidated Financial
Statements(Continued)
derivatives in their entirety were classified in Level 2 of
the fair value hierarchy. This contract was scheduled to expire
during 2010. During February 2010, the Company did not make
payments due on its interest derivatives and received notice of
termination from the counterparty to the agreements stating that
all amounts were currently due. As a result, the full amount of
the liability at December 31, 2009 of $1.7 million is
reflected as a component of other current liabilities in the
accompanying condensed consolidated balance sheets. As discussed
in Note 1, the full amount of this liability at
March 31, 2010 of $1.8 million is reflected in
liabilities subject to compromise at March 31, 2010.
Payments to SIPL are denominated in U.S. dollars. In order
to hedge against fluctuations in exchange rates, SIPL
historically maintained a portfolio of forward currency exchange
contracts, which were transacted with a single counterparty. The
Companys accounting for these derivative financial
instruments, all of which expired during the third quarter of
2009, did not meet the hedge accounting criteria. Accordingly,
changes in fair value were included as a component of other
expense (income) in the accompanying condensed consolidated
statements of operations.
The Company determined the fair value of its foreign currency
exchange contracts utilizing inputs for similar or identical
assets or liabilities that were either readily available in
public markets, derived from information available in publicly
quoted markets or quoted by counterparties to these contracts.
The future value of each contract out to its maturity was
calculated using observable market data, such as the foreign
currency exchange rate forward curve. The present value of each
contract was then determined by using discount factors based on
the forward curve for the more liquid currency. Additionally,
the Company incorporated credit valuation adjustments to
appropriately reflect nonperformance risk in the fair value
measurements.
Although the Company determined that the majority of the inputs
used to value its foreign currency exchange contracts fell
within Level 2 of the fair value hierarchy, the credit
valuation adjustments associated with these derivatives utilized
Level 3 inputs, such as estimates of current credit spreads
to evaluate the likelihood of default by its counterparties. The
Company assessed the significance of the impact of the credit
valuation adjustments on the overall valuation of its derivative
positions and determined that the credit valuation adjustments
were not significant to the overall valuation of the
derivatives. As a result, the Company determined that its
valuations for the foreign currency exchange contracts in their
entirety were classified in Level 2 of the fair value
hierarchy.
The Companys derivative financial instruments measured at
fair value on a recurring basis and recorded in the accompanying
condensed consolidated balance sheets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification in the Accompanying
|
|
December 31,
|
|
|
March 31,
|
|
|
|
Condensed Consolidated Balance Sheets
|
|
2009
|
|
|
2010
|
|
|
Interest rate management agreements
|
|
Other current liabilities
|
|
$
|
1,687
|
|
|
$
|
1,768
|
|
|
|
Other noncurrent liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,687
|
|
|
$
|
1,768
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
|
|
Other current liabilities
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-154
Spheris Inc. and
Subsidiaries
(Debtor-In-Possession)
Notes to Condensed Consolidated Financial
Statements(Continued)
The (gains) losses from changes in fair value of the
Companys derivative financial instruments, as recorded in
the accompanying condensed consolidated statements of
operations, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
Location of (Gain) Loss Recognized
|
|
2009
|
|
|
2010
|
|
|
Interest rate management agreements
|
|
Other expense (income)
|
|
$
|
(209
|
)
|
|
$
|
81
|
|
Foreign currency exchange contracts
|
|
Other expense (income)
|
|
|
(318
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
(527
|
)
|
|
$
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
Subordinated Notes
The Companys Senior Subordinated Notes had a quoted market
value of $63.8 million and $21.9 million at
December 31, 2009 and March 31, 2010 respectively. The
Company determined that its valuation of its Senior Subordinated
Notes was classified in Level 1 of the fair value hierarchy
as the fair value was determined through quoted prices in active
markets. The carrying value of the Senior Subordinated Notes
$123.6 million (net of discount) at December 31, 2009
was included in current portion of long-term debt and lease
obligations in the accompanying condensed consolidated balance
sheets.
The carrying value of the Senior Subordinated Notes
$122.8 million (net of both discount and debt issuance
costs) at March 31, 2010 included debt issuance costs of
$0.9 million and is recorded in liabilities subject to
compromise as discussed in Note 1.
|
|
4.
|
Other
Comprehensive Loss
|
Other comprehensive loss was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
Net (loss) income
|
|
$
|
907
|
|
|
$
|
(3,500
|
)
|
Foreign currency translation gain (loss), net of tax of $0 and
$39, respectively
|
|
|
(1,219
|
)
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
$
|
(312
|
)
|
|
$
|
(3,442
|
)
|
|
|
|
|
|
|
|
|
|
F-155
Spheris Inc. and
Subsidiaries
(Debtor-In-Possession)
Notes to Condensed Consolidated Financial
Statements(Continued)
Outstanding debt obligations of the Company at December 31,
2009 and March 31, 2010 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
2007 Senior Credit Facility, net of discount, with principal due
at maturity on July 17, 2012; interest payable periodically
at variable rates. The weighted average interest rate was 5.75%
at March 31, 2010
|
|
$
|
74,552
|
|
|
$
|
66,883
|
|
11.0% Senior Subordinated Notes, net of discount, with
principal due at maturity in December 2012; interest payable
semi-annually in June and December
|
|
|
123,578
|
|
|
|
|
|
Financed lease obligations
|
|
|
390
|
|
|
|
315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
198,520
|
|
|
|
67,198
|
|
Less: Current portion of long-term debt and financed lease
obligations
|
|
|
(198,440
|
)
|
|
|
(67,198
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt and financed lease obligations, net of current
portion
|
|
$
|
80
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
2007 Senior
Credit Facility
The Companys senior secured credit facility consisted of a
term loan in the amount of $67.5 million and a revolving
credit facility in an aggregate principal amount not to exceed
$25.0 million at any time outstanding (the 2007
Senior Credit Facility). The revolving loans and the term
loan bore interest at LIBOR plus an applicable margin or a
reference banks base rate plus an applicable margin, at
the Companys option. Under the revolving credit facility,
the Company was permitted to borrow up to the lesser of
$25 million or a loan limiter amount, as defined in the
2007 Senior Credit Facility, less amounts outstanding under
letters of credit. On February 1, 2010, the Company paid
$2 million in principal and $0.5 million in interest
on the term loan and approximately $40,000 in accrued interest
on the revolving credit facility. A principal payment of
$5.7 million on the revolving credit facility was made on
February 3, 2010 as discussed in Note 1. As of
March 31, 2010, the Company had no amounts outstanding
under the revolver portion of the 2007 Senior Credit Facility.
Based on 2009 results of operations, the Company would not have
complied with the covenant requirements under the 2007 Senior
Credit Facility. The Company elected not to report its financial
results pursuant to year-end covenant requirements under the
2007 Senior Credit Facility, and filed voluntary petitions for
relief under Chapter 11 of the United States Bankruptcy
Code in February 2010. As a result, all amounts due under the
2007 Senior Credit Facility as of both December 31, 2009
and March 31, 2010 are reflected as current obligations in
the accompanying condensed consolidated balance sheet. All
amounts due under this facility were paid in full on
April 22, 2010 in connection with the Companys sale
of substantially all of its assets to the Purchasers as further
described in Note 1.
Under the 2007 Senior Credit Facility, Operations was the
borrower. The 2007 Senior Credit Facility was secured by
substantially all of Operations assets and is guaranteed
by Spheris, Spheris Holding II and all of Operations
subsidiaries, except SIPL. The 2007 Senior Credit Facility
contained certain covenants which, among other things, limited
the incurrence of additional indebtedness, investments,
dividends, transactions with affiliates, asset sales,
acquisitions, mergers and consolidations, liens and encumbrances
and other matters customarily restricted in such agreements. The
2007 Senior Credit Facility also contained customary events of
default, including breach of financial covenants, the occurrence
of which could allow the collateral agent to declare any
outstanding amounts to be due and payable. The financial
covenants contained in the 2007 Senior Credit Facility included
(a) a maximum leverage test, (b) a minimum fixed
charge coverage test and (c) a minimum earnings before
interest, taxes,
F-156
Spheris Inc. and
Subsidiaries
(Debtor-In-Possession)
Notes to Condensed Consolidated Financial
Statements(Continued)
depreciation and amortization (Consolidated EBITDA,
as defined under the 2007 Senior Credit Facility) requirement,
among others.
In connection with the borrowings under the 2007 Senior Credit
Facility, the Company incurred $0.6 million and
$1.1 million in debt issuance costs and debt discounts,
respectively. These costs were being amortized as additional
interest expense over the term of the debt. The balance of the
issuance costs at March 31, 2010 of $0.3 million, net
of accumulated amortization, was reflected in prepaid expenses
and other current assets in the accompanying condensed
consolidated balance sheet. The debt discount at March 31,
2010 of $0.6 million was reflected as a reduction in the
carrying amount of the debt under the 2007 Senior Credit
Facility.
Senior
Subordinated Notes
In December 2004, the Company issued its Senior Subordinated
Notes, which mature on December 15, 2012 (the Senior
Subordinated Notes). The Senior Subordinated Notes bear
interest at a fixed rate of 11.0% per annum. Interest is payable
in semi-annual installments through maturity on
December 15, 2012. The Company did not file a
Form 10-Q
with the SEC in the third quarter of 2009 which violated certain
covenants in the indenture governing the Senior Subordinated
Notes (the Indenture). In addition, the Company
elected not to make its scheduled payment on the Senior
Subordinated Notes on December 15, 2009. As a result, the
Company received a notice in from the trustee on
December 16, 2009 that an Event of Default had occurred, as
defined in the Indenture. As further described in Note 1,
the Company elected to file bankruptcy protection under
Chapter 11 of the United States Bankruptcy Code on
February 3, 2010. Resolution of final payments due under
the Senior Subordinated Notes is pending outcome of these
matters.
The Senior Subordinated Notes are junior to the obligations of
the 2007 Senior Credit Facility. The Senior Subordinated Notes
are guaranteed by the Companys domestic operating
subsidiaries. The Senior Subordinated Notes contain certain
restrictive covenants that place limitations on the Company
regarding incurrence of additional debt, payment of dividends
and other items as specified in the indenture governing the
Senior Subordinated Notes. An acceleration of outstanding
indebtedness under the 2007 Senior Credit Facility would create
an event of default under the Senior Subordinated Notes, which
would allow the trustee or requisite holders of Senior
Subordinated Notes to declare the Senior Subordinated Notes to
be due and payable. As a result of the default under the 2007
Senior Credit Facility, the Company has reflected all amounts
due under the Senior Subordinated Notes as a current obligation
in the accompanying condensed consolidated balance sheets as of
December 31, 2009. The Company reflected all amounts due
under these notes as liabilities subject to compromise as of
March 31, 2010.
The Company incurred $1.9 million and $2.9 million in
debt issuance costs and debt discounts, respectively, in
connection with the Senior Subordinated Notes. These costs are
being amortized as additional interest expense over the term of
the Senior Subordinated Notes. The remaining balance of the
issuance costs at March 31, 2010 of $0.9 million, net
of accumulated amortization, was reflected as a part of the
amounts due under the Senior Subordinated Notes and included in
liabilities subject to compromise in the accompanying condensed
consolidated balance sheet as discussed in Note 1. The
remaining debt discount at March 31, 2010 of
$1.4 million was reflected as a reduction in the carrying
amount of the Senior Subordinated Notes and is also included in
liabilities subject to compromise.
As stated above, the Company did not accrue interest of
$2.2 million in the accompanying interim condensed
consolidated financial statements related to the Senior
Subordinated Notes from the Petition Date (February 3,
2010) through March 31, 2010 in accordance with
ASC 852. Accrued interest as of the Petition Date is
recorded in liabilities subject to compromise in the
accompanying condensed consolidated balance sheet.
F-157
Spheris Inc. and
Subsidiaries
(Debtor-In-Possession)
Notes to Condensed Consolidated Financial
Statements(Continued)
Subsequent to the November 2004 Recapitalization, Spheris
Holding III approved the establishment of the Spheris
Holding III, Inc. Stock Incentive Plan (as amended to date, the
Plan) for issuance of common stock to employees,
non-employee directors and other designated persons providing
substantial services to the Company. As of March 31, 2010,
15.6 million shares have been authorized for issuance under
the Plan. Shares are subject to restricted stock and stock
option agreements and typically vest over a three or four-year
period. As of March 31, 2010, an aggregate of
12.1 million shares of restricted stock and
1.8 million stock options were issued and outstanding under
the Plan. As these shares and stock options were issued for
services to be provided to the Company, compensation expense of
$0.1 million was reflected in general and administrative
expenses in the accompanying condensed consolidated statements
of operations for the three months ended March 31, 2009. No
amounts were recorded as compensation expense for the three
months ended March 31, 2010.
Under provisions of the Plan, all unvested shares and options
shall immediately vest and become exercisable upon an event of a
change in control. The sale of the Companys
assets as a result of the APA discussed in Note 1
constituted a change in control under these
provisions. Accordingly, all unvested options and shares were
immediately vested and exercisable on April 22, 2010.
During October 2008, Spheris Holding III issued warrants to
CHS to purchase 14.3 million shares of common stock of
Spheris Holding III upon the attainment of certain revenue
milestones set forth in the warrants. The costs of the warrants
subject to vesting are recognized over the period in which the
revenue is earned and are reflected as a reduction of revenue.
Accordingly, $8,000 and $2,000 of such costs are reflected as a
reduction to net revenues in the accompanying condensed
consolidated statement of operations for the three months ended
March 31, 2009 and 2010, respectively.
The Company records deferred income taxes for the tax effect of
differences between book and tax bases of its assets and
liabilities. The Company records a valuation allowance to reduce
its net deferred tax assets to the amount that is more likely
than not to be realized. The valuation allowance decreased by
approximately $0.2 million and $20,000 during the three
months ended March 31, 2009 and 2010, respectively. As of
March 31, 2010, the Companys valuation allowance that
is reflected as a reduction to the carrying value of its net
deferred tax balances was $35.1 million.
In the United States, the Company currently benefits from
federal and state net operating loss carryforwards. The
Companys consolidated federal net operating loss
carryforwards available to reduce future taxable income totaled
$107.9 million and $109.4 million at December 31,
2009 and March 31, 2010, respectively, and began to expire
in 2007. State net operating loss carryforwards at
December 31, 2009 and March 31, 2010 were
$71.5 million and $71.7 million, respectively, and
began to expire in 2005. The majority of these federal and state
net operating loss carryforwards is restricted due to
limitations associated with ownership change, and to the extent
these carryforwards are restricted, is reserved to reduce the
amount that is more likely than not to be realized. In addition,
the Company has alternative minimum tax credits which do not
have an expiration date and certain other federal tax credits
that will begin to expire in 2014.
The Company recognized income tax (benefit) expense of
$0.4 million and $(2.3) million during the three
months ended March 31, 2009 and 2010, respectively.
The Company accounts for income taxes associated with SIPL in
accordance with ASC 740, Income Taxes, following
Indian tax guidelines. Prior to 2009, because the Company was
considered permanently reinvested in SIPL, no taxes were
provided on accumulated translation adjustments recorded in
other comprehensive loss. Due to the subsequent event of the
sale of SIPL stock (as discussed in Note 1), the net income
tax effect of the
F-158
Spheris Inc. and
Subsidiaries
(Debtor-In-Possession)
Notes to Condensed Consolidated Financial
Statements(Continued)
currency translation adjustments related to SIPL is reflected in
other comprehensive loss for the three months ended
March 31, 2010 (as provided in Note 4).
Spheris Holding III and related subsidiaries (the
filing group members) file their U.S. federal
and certain state income tax returns on a consolidated, unitary,
combined or similar basis. To accurately reflect each filing
group members share of consolidated tax liabilities on
separate company books and records, on November 5, 2004,
Spheris Holding III and each of its subsidiaries entered
into a tax sharing agreement. Under the terms of the tax sharing
agreement, each subsidiary of Spheris Holding III is
obligated to make payments to Spheris Holding III equal to
the amount of the federal and state income taxes that its
subsidiaries would have owed if such subsidiaries did not file
federal and state income tax returns on a consolidated, unitary,
combined or similar basis. Likewise, Spheris Holding III
may make payments to subsidiaries if it benefits from the use of
a subsidiary loss or other tax benefit. The tax sharing
agreement allows each subsidiary to bear its respective tax
burden (or enjoy use of a tax benefit, such as a net operating
loss) as if its return was prepared on a stand-alone basis. To
date, no amounts have been paid under this agreement.
The Company has analyzed filing positions for all federal, state
and international jurisdictions for all open tax years where it
is required to file income tax returns. Although the Company
files tax returns in every jurisdiction in which it has a legal
obligation to do so, it has identified the following as
major tax jurisdictions: Tennessee and Texas, as
well as India. Within these major jurisdictions, the Company has
tax examinations in progress related to transfer pricing rates
for its Indian facilities, as discussed in Note 8, as well
as significant federal and state net operating loss carryovers,
for which the earliest open tax year is 1997. Based on the facts
and circumstances of these examinations at March 31, 2010,
the Company believes that it is more likely than not that it
will be successful in supporting its current positions related
to the applicable filings. The Company believes that all income
tax filing positions and deductions will be sustained upon audit
and does not anticipate any adjustments resulting in a material
adverse impact on the Companys financial condition,
results of operations or cash flow. Therefore, no reserves for
uncertain income tax positions have been recorded.
|
|
8.
|
Commitments and
Contingencies
|
Litigation
The Company is subject to various other claims and legal actions
that arise in the ordinary course of business. In the opinion of
management, any amounts for probable exposures are adequately
reserved for in the Companys interim condensed
consolidated financial statements, and the ultimate resolution
of such matters is not expected to have a material adverse
effect on the Companys financial position or results of
operations.
Employment
Agreements
The Company has employment agreements with certain members of
senior management that provide for the payment to these persons
of amounts equal to the applicable base salary, unpaid annual
bonus and health insurance premiums over the applicable periods
specified in their individual employment agreements in the event
the employees employment is terminated without cause or
for certain other specified reasons. The maximum contingent
liabilities, excluding any earned but unpaid bonuses accrued in
the accompanying interim condensed consolidated financial
statements; under these agreements were $1.0 million at
December 31, 2009 and March 31, 2010.
These employment agreements were not included in the liabilities
assumed under the APA between the Purchasers and the Debtors.
Management anticipates that any amounts, if any, that may be
accrued in the future will be recorded as liabilities subject to
compromise in the condensed consolidated balance sheets of
subsequent periods.
F-159
Spheris Inc. and
Subsidiaries
(Debtor-In-Possession)
Notes to Condensed Consolidated Financial
Statements(Continued)
Tax
Assessment
SIPL received notification of a tax assessment resulting from a
transfer pricing tax audit by Indian income tax authorities
amounting to 52.2 million Rupees (approximately
$1.1 million), including penalties and interest, for the
fiscal tax period ended March 31, 2004 (the 2004
Assessment). In January 2007, the Company filed a formal
appeal with the India Commissioner of Income Tax. Prior to
resolution of the Companys appeals process, the Indian
income tax authorities have required the Company to make advance
payments toward the 2004 Assessment amounting to
43.1 million Rupees (approximately $0.9 million). Any
amounts paid by the Company related to the 2004 Assessment are
subject to a claim by the Company for reimbursement against
escrow funds related to the Companys December 2004
acquisition of HealthScribe, Inc. and its subsidiaries (the
HealthScribe Escrow). Accordingly, the Company has
recorded the advance payments as receivables from the escrow
funds, which are reflected as a component of prepaid expenses
and other current assets in the accompanying condensed
consolidated balance sheets as of December 31, 2009 and
March 31, 2010.
During the fourth quarter of 2008, SIPL received notification of
a tax assessment from a transfer pricing tax audit by Indian
income tax authorities amounting to 40.6 million Rupees
(approximately $0.8 million), including penalties and
interest, for the fiscal tax period ended March 31, 2005
(the 2005 Assessment). In December 2008, the Company
filed a formal appeal with the India Commissioner of Income Tax.
Prior to resolution of the Companys appeals process, the
Company was required to provide a bank guarantee in January 2009
for the full amount of the 2005 Assessment. The guarantee amount
is included in restricted cash in the accompanying condensed
consolidated balance sheets as of December 31, 2009 and
March 31, 2010. Approximately $0.6 million of the 2005
Assessment is subject to a claim for reimbursement against the
HealthScribe Escrow.
In May 2010, the Company was informed that the competent
authorities of India and the United States (the Competent
Authorities) had met regarding the assessments for the two
years above. The Company was informed that the Competent
Authorities had reached an agreement regarding the transfer
pricing that should have been used for transactions between SIPL
and its related U.S. entities for the two years mentioned
above. Based on this agreement, the tax assessment for the
fiscal tax periods ended March 31, 2004 and March 31,
2005 would be reduced to approximately 36.6 million Rupees
(approximately $813,000) and 17.2 million Rupees
(approximately $381,000), respectively. An agreement reached by
the Competent Authorities under the U.S./India Income Tax Treaty
is not binding on the parties involved. The Company is currently
assessing the impact of the proposed settlement and has not
recorded a liability under the provision of
ASC 740-10,
Income TaxesOther (ASC
740-10)
in the accompanying condensed consolidated financial statements
ending December 31, 2009 or March 31, 2010.
If the assessments were brought forward from March 31, 2005
through March 31, 2010, a reasonable estimate of additional
liability could range from zero to $6.8 million, contingent
upon the final outcome of the claim. Payment of such amounts
would also result in potential credit adjustments to the
Companys U.S. federal tax returns. The Company
currently believes that it is more likely than not that it will
be successful in supporting its position relating to these
assessments. Accordingly, the Company has not recorded any
accrual for contingent liabilities associated with the tax
assessments as of December 31, 2009 or March 31, 2010 .
During the second quarter of 2009, SIPL received an assessment
order from Indian income tax authorities pertaining to an
inquiry regarding prior years usage of net operating
losses originating in 1999. The final assessment could
potentially amount to 5.6 million Rupees (approximately
$0.1 million).
|
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9.
|
Related Party
Transactions
|
On October 3, 2008 (amended December 23, 2009),
Operations entered into an agreement for health information
processing services with Community Health Systems Professional
Services Corporation, an affiliate of Community Health Systems,
Inc. (CHS), to provide clinical documentation
technology and services to certain of its affiliated
F-160
Spheris Inc. and
Subsidiaries
(Debtor-In-Possession)
Notes to Condensed Consolidated Financial
Statements(Continued)
hospitals (CHS Services Agreement). The Bankruptcy
Court approved the assumption of the CHS Services Agreement, as
amended, on March 17, 2010.
Contemporaneously with entering into the CHS Services Agreement,
CHS became a minority owner in Spheris Holding III, the
Companys indirect parent. The Company provided clinical
documentation technology and services to CHS in the ordinary
course of business at prices and on terms and conditions that
the Company believes are the same as those that would result
from arms length negotiations between unrelated parties.
The Company recognized net revenues from this customer of
$1.4 million and $4.0 million during the three months
ended March 31, 2009 and 2010, respectively, in the
accompanying condensed consolidated statements of operations.
In March 2010, Spheris Holding III transferred
$9.2 million to the Debtors.
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|
10.
|
Restructuring
Charges
|
During October 2008, the Company commenced an operational
restructuring plan to effect changes in both the Companys
management structure and the nature and focus of its operations.
The Company initially recognized $0.5 million of
operational restructuring charges, including one-time
termination benefits and other restructuring related charges,
pursuant to this operational restructuring plan during the
fourth quarter of 2008. As a continuation of the plan during
2009, the Company eliminated a significant portion of its
U.S. based administrative and corporate workforce,
recognizing an additional $0.8 million of operational
restructuring charges, including one-time termination benefits
and other operational restructuring related charges. The Company
incurred $0.7 million in restructuring charges for the
three months ended March 31, 2009.
The Companys operational restructuring plan was
substantially complete as of December 31, 2009. No
additional amounts were incurred in 2010. No additional charges
are anticipated due to the Chapter 11 Petition filed on the
Petition Date.
On May 14, 2010, the Debtors received a letter from
MedQuist in which MedQuist asserted that the Debtors owe SIPL,
now a subsidiary of CBay, approximately $0.9 million for
the Debtors alleged failure to make certain payments to
SIPL prior to the closing of the APA (the SIPL
Claim). In addition, in an email dated April 30,
2010, representatives of MedQuist asserted that the Debtors are
required to reimburse MedQuist for the cost of providing COBRA
continuation coverage to terminated Spheris employees and their
dependents who are COBRA-eligible (the COBRA Claim
and, together with the SIPL Claim, the MedQuist
Claims). The Debtors dispute the MedQuist Claims.
F-161
CBAYSYSTEMS
HOLDINGS LIMITED
Common
Stock
Prospectus
Jefferies &
Company
Lazard
Capital Markets
Macquarie
Capital
RBC
Capital Markets
,
2010
Until ,
2010 (25 days after the commencement of this offering), all
dealers that effect transactions in our shares, whether or not
participating in this offering, may be required to deliver a
prospectus. This delivery requirement is in addition to the
obligation of dealers to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or
subscriptions.
PART II
Information Not Required in the
Prospectus
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|
Item 13.
|
Other
Expenses of Issuance and Distribution
|
The following table sets forth the fees and expenses to be paid
by us in connection with the issuance and distribution of the
securities being registered hereby. Except for the SEC
registration fee, the Financial Industry Regulatory Authority,
Inc., or FINRA, filing fee and The NASDAQ Global Market listing
fee, all amounts are estimates.
|
|
|
|
|
Description
|
|
Amount
|
|
|
SEC registration fee
|
|
$
|
8,199.50
|
|
FINRA filing fee
|
|
|
12,000.00
|
|
NASDAQ listing fee
|
|
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Accounting fees and expenses
|
|
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|
*
|
Legal fees and expenses
|
|
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*
|
Printing and engraving fees and expenses
|
|
|
|
*
|
Blue Sky fees and expenses
|
|
|
|
*
|
Transfer agent fees and expenses
|
|
|
|
*
|
Miscellaneous expenses
|
|
|
|
*
|
|
|
|
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|
Total
|
|
$
|
|
*
|
|
|
|
|
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|
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* |
|
To be filed by amendment |
|
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Item 14.
|
Indemnification
of Directors and Officers.
|
Section 145 of the Delaware General Corporation Law
authorizes a corporations board of directors to grant
indemnity to directors and officers in terms sufficiently broad
to permit such indemnification under certain circumstances for
liabilities (including reimbursement for expenses incurred)
arising under the Securities Act of 1933, as amended.
As permitted by the Delaware General Corporation Law, the
registrants bylaws include provisions that
(i) eliminate, to the fullest extent permitted by the
Delaware General Corporation Law, the personal liability of its
directors for monetary damages for breach of fiduciary duty as a
director, and (ii) require the registrant to advance
expenses, as incurred, to its directors and officers in
connection with a legal proceeding to the fullest extent
permitted by the Delaware General Corporation Law, subject to
certain very limited exceptions.
As permitted by the Delaware General Corporation Law, the bylaws
of the registrant provide that (i) the registrant is
required to indemnify its directors and officers to the fullest
extent permitted by the Delaware General Corporation Law,
(ii) the registrant may indemnify any other person as set
forth in the Delaware General Corporation Law, and
(iii) the rights conferred in the bylaws are not exclusive.
The registrant has also obtained officers and
directors liability insurance that insures against
liabilities that officers and directors of the registrant, in
such capacities, may incur.
Reference is made to the form of underwriting agreement filed as
Exhibit 1.1 hereto for provisions providing that the
underwriters are obligated under certain circumstances, to
indemnify the registrants directors, officers and
controlling persons against certain liabilities under the
Securities Act of 1933, as amended.
We also have agreements with each director and officer to
provide indemnification to the extent permitted under Delaware
law.
We carry directors and officers liability insurance
covering acts and omissions of our directors and officers and
those of our controlled subsidiaries. The policy has a covering
limit of $25.0 million in each policy year.
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Item 15.
|
Recent
Sales of Unregistered Securities.
|
During the three years preceding the filing of this registration
statement, the registrant issued the following securities which
were not registered under the Securities Act of 1933, as amended:
In August 2008, we issued $90.94 million of 6% Convertible
Senior PIK notes due in 2015 to Koninklijke Philips Electronics
N.V. as part of the consideration for the acquisition of
MedQuist Inc. This note was sold under Section 4(2) of the
Securities Act. No underwriters were involved in the transaction.
In March 2009, we issued a warrant to purchase
366,695 shares of our common stock to Oosterveld
International BV, exercisable until March 19, 2012 at a
price per share of £0.70 in connection with the MedQuist
Exchange. This warrant was issued under Section 4(2) of the
Securities Act. No underwriters were involved in the transaction.
In July 2009, we issued 2,566,195 shares of common stock to
S.A.C. PEI CB Investment II, LLC under the terms of the
Consulting Services Agreement with S.A.C. PEI CB Investment II,
LLC and Lehman Brothers Commercial Corporation Asia. These
shares were issued under Section 4(2) of the Securities
Act. No underwriters were involved in the transaction.
In May 2010, 651,881 shares of common stock were issued to
S.A.C. PEI CB Investment II, LLC under the terms of
the Consulting Services Agreement with S.A.C. PEI CB
Investment II, LLC and Lehman Brothers Commercial
Corporation Asia. These shares were issued under
Section 4(2) of the Securities Act. No underwriters were
involved in the transaction.
In October 2010, MedQuist Inc. entered into a note purchase
agreement with BlackRock Kelso Capital Corporation, PennantPark
Investment Corporation, Citibank, N.A., and THL Credit, Inc. for
the issuance of $85.0 million aggregate principal amount of
13% Senior Subordinated Notes due 2016. We are a guarantor
of MedQuist Inc.s obligations under these senior
subordinated notes. These notes were sold under
Section 4(2) of the Securities Act. No underwriters were
involved in the transaction.
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Item 16.
|
Exhibits
and Financial Statement Schedules.
|
(a) Exhibits.
See the Exhibit Index immediately following the signature
page hereto, which is incorporated by reference as if fully set
forth herein.
(b) Financial Statement Schedules
No financial statement schedules are provided because the
information called for is not required or is shown either in the
consolidated financial statements or notes thereto.
(a) The undersigned registrant hereby undertakes:
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1.
|
To provide to the underwriter at the closing specified in the
underwriting agreements certificates in such denominations and
registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
|
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|
2.
|
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 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 Act and will be governed by the final adjudication of such
issue.
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3.
|
That for purposes of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)
(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time
it was declared effective.
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4.
|
That for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a
form of prospectus 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.
|
Signatures
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant has duly caused this registration
statement on
Form S-1
to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Franklin, State of Tennessee, on
October 18, 2010.
CBAYSYSTEMS HOLDINGS LIMITED
Name: Clyde Swoger
Title: Chief Financial Officer
Power Of
Attorney
KNOWN ALL MEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Robert Aquilina
and Clyde Swoger, and each of them, with full power to act
without the other, 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 or all amendments (including post-effective
amendments) and supplements to this registration statement and
any registration statement related to the same offering as this
registration statement filed pursuant to Rule 462(b) under
the Securities Act of 1933, as amended, and to file the same
with all exhibits thereto and all documents in connection
therewith with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents of each of them, full
power and authority to do and perform each and every act and
thing requisite and 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 substitute or substitutes, may lawfully do or cause to be
done by virtue hereof. This power of attorney may be executed in
counterparts.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this registration statement has been signed below by
the following persons in the capacities indicated on
October 18, 2010.
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Signature
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Title
|
|
|
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/s/ Robert
M. Aquilina
Robert
M. Aquilina
|
|
Chairman and Chief Executive Officer (Principal Executive
Officer)
|
|
|
|
/s/ V.
Raman Kumar
V.
Raman Kumar
|
|
Vice Chairman and Director
|
|
|
|
/s/ Michael
Seedman
Michael
Seedman
|
|
Chief Technology Officer and Director
|
|
|
|
/s/ Clyde
Swoger
Clyde
Swoger
|
|
Chief Financial Officer (Principal Financial Officer and
Principal Accounting Officer)
|
|
|
|
/s/ Frank
Baker
Frank
Baker
|
|
Director
|
|
|
|
/s/ Peter
Berger
Peter
Berger
|
|
Director
|
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
/s/ Merle
Gilmore
Merle
Gilmore
|
|
Director
|
|
|
|
/s/ Jeffrey
Hendren
Jeffrey
Hendren
|
|
Director
|
|
|
|
/s/ Kenneth
John McLachlan
Kenneth
John McLachlan
|
|
Director
|
|
|
|
/s/ James
Patrick Nolan
James
Patrick Nolan
|
|
Director
|
EXHIBIT INDEX
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
1
|
.1*
|
|
Form of Underwriting Agreement.
|
|
3
|
.1*
|
|
Certificate of Incorporation.
|
|
3
|
.2*
|
|
By-Laws.
|
|
4
|
.1*
|
|
Form of common stock certificate.
|
|
4
|
.2*
|
|
Senior Subordinated Note Purchase Agreement, dated as of
September 30, 2010, among CBay Inc., MedQuist Inc. and
MedQuist Transcriptions Ltd., CBaySystems Holdings Limited,
BlackRock Kelso Capital Corporation, PennantPark Investment
Corporation, Citibank, N.A. and THL Credit Inc.
|
|
4
|
.3*
|
|
Form of 13% Senior Subordinated Note due 2016 (included as
part of Exhibit 4.2 and incorporated herein by reference).
|
|
4
|
.4*
|
|
Exchange Agreement, dated as of September 30, 2010, by and
between CBaySystems Holdings Limited and the Investors
Signatories thereto.
|
|
4
|
.5*
|
|
Warrant issued to Oosterveld International BV on March 19,
2009.
|
|
5
|
.1*
|
|
Opinion of Simpson Thacher & Bartlett LLP.
|
|
9
|
.1*
|
|
Voting Agreement, dated September 30, 2010, by and between
CBaySystems Holdings Limited, S.A.C. PEI CB Investment, L.P.,
S.A.C. PEI CB Investment II, LLC and International Equities
(S.A.C. Asia) Limited.
|
|
10
|
.1*
|
|
Stock and Asset Purchase Agreement, dated April 15, 2010,
between Spheris Holding II, Inc., Spheris Inc., Spheris
Operations LLC, Vianeta Communications, Spheris Leasing LLC,
Spheris Canada Inc., CBay Inc. and MedQuist Inc.
|
|
10
|
.2*
|
|
Credit Agreement, dated as of October 1, 2010, among CBay
Inc., MedQuist Inc. and MedQuist Transcriptions, Limited, as
Borrowers, CBaySystems Holdings Limited, as Holdings, the
Lenders and L/C Issuers party thereto, General Electric Capital
Corporation, as Administrative Agent and Collateral Agent,
SunTrust Bank, as Syndication Agent, and ING Capital LLC and
Regions Bank, as Co-Documentation Agents.
|
|
10
|
.3*
|
|
Guaranty and Security Agreement, dated as of October 1,
2010, among CBay Inc., MedQuist Inc., MedQuist Transcriptions,
Limited, General Electric Capital Corporation, as Administrative
Agent and Collateral Agent, and Each Other Guarantor party
thereto.
|
|
10
|
.6*
|
|
Guaranty Agreement, dated as of September 30, 2010, among
CBaySystems Holdings Limited, MedQuist IP LLC, MedQuist CM LLC,
MedQuist Delaware, Inc. and Each Other Guarantor From Time to
Time Party Hereto, BlackRock Kelso Capital Corporation,
PennantPark Investment Corporation, Citibank, N.A. and THL
Credit Inc.
|
|
10
|
.7*
|
|
Credit Agreement among ICICI Bank, Mumbai and CBaySystems
Holdings Limited.
|
|
10
|
.8*
|
|
Credit Agreement among IndusInd Bank, Mumbai, India and
CBaySystems Holdings Limited.
|
|
10
|
.9*
|
|
Agreement, dated August 19, 2008, between CBaySystems
Holdings Limited, S.A.C. PEI CB Investment II, LLC and Lehman
Brothers Commercial Corporation Asia.
|
|
10
|
.10*
|
|
Transaction Fee Agreement, dated August 6, 2008, between
CBaySystems Holdings Limited, S.A.C. Private Equity GP, L.P.,
S.A.C. Capital Advisors, LLC and Lehman Brothers Commercial
Corporation Asia.
|
|
10
|
.11*
|
|
Subscription Agreement, dated as of May 21, 2008, by and
among CBaySystems Holdings Limited, S.A.C. PEI CB Investment,
L.P. and S.A.C. Private Capital Group, LLC.
|
|
10
|
.12*
|
|
Form of Registration Rights Agreement between S.A.C. PEI CB
Investment, L.P., S.A.C. PEI CB Investment II, LLC and
International Equities (S.A.C. Asia) Limited.
|
|
10
|
.13*
|
|
Form of Stockholders Agreement entered into in connection
with the MedQuist Exchange.
|
|
10
|
.14*
|
|
Form of Stockholders Agreement entered into in connection
with the initial public offering.
|
|
10
|
.15*
|
|
Form of Management Stockholders Agreement.
|
|
10
|
.16*
|
|
CBaySystems Holdings Limited 2007 Equity Incentive Plan, dated
as of June 12, 2007, as amended.
|
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.17*
|
|
Form of CBaySystems Holdings Limited Individual Stock Option
Plan.
|
|
10
|
.18*
|
|
Form of CBaySystems Holdings Limited Share Option Agreement.
|
|
10
|
.19*
|
|
MedQuist Inc. 2002 Stock Option Plan.
|
|
10
|
.20*
|
|
Form of Stock Option Agreement under the MedQuist Inc. 2002
Stock Option Plan.
|
|
10
|
.21*
|
|
MedQuist Inc. Long-Term Incentive Plan adopted on
August 27, 2009.
|
|
10
|
.22*
|
|
MedQuist Inc. Executive Deferred Compensation Plan.
|
|
10
|
.23*
|
|
MedQuist Transcriptions, Ltd. 2010 Management Incentive Plan
|
|
10
|
.24*
|
|
CBaySystems Holdings Ltd. 2010 Management Incentive Plan.
|
|
10
|
.25*
|
|
Amended and Restated Stock Option Agreement by and between Peter
Masanotti and MedQuist Inc., dated March 2, 2009
|
|
10
|
.26*
|
|
Employment agreement by and between CBaySystems Holdings
Limited, CBay Inc. and V. Raman Kumar, dated as of
August 2, 2008.
|
|
10
|
.27*
|
|
Employment agreement by and between CBaySystems Holdings
Limited, CBay Inc. and Robert Aquilina, dated as of August 2008.
|
|
10
|
.28*
|
|
Employment agreement by and between CBaySystems Holdings
Limited, CBay Inc. and Michael Seedman, dated as of
August 8, 2008.
|
|
10
|
.29*
|
|
Employment agreement by and between CBaySystems Holdings
Limited, CBay Inc. and Clyde Swoger, dated as of August 2008.
|
|
10
|
.30*
|
|
Letter agreement by and between Frank Baker and CBaySystems
Holdings Limited, dated July 18, 2008.
|
|
10
|
.31*
|
|
Letter agreement by and between Jeffrey Hendren and CBaySystems
Holdings Limited, dated July 18, 2008.
|
|
10
|
.32*
|
|
Letter agreement by and between Kenneth John McLachlan and
CBaySystems Holdings Limited, dated July 18, 2008.
|
|
10
|
.33*
|
|
Letter agreement by and between Merle Gilmore and CBaySystems
Holdings Limited, dated July 18, 2008.
|
|
10
|
.34*
|
|
Letter agreement by and between Peter Berger and CBaySystems
Holdings Limited, dated July 18, 2008.
|
|
10
|
.35*
|
|
Employment Agreement by and between Peter Masanotti and MedQuist
Inc., dated September 3, 2008.
|
|
10
|
.36*
|
|
Employment Agreement between Anthony D. James and MedQuist Inc.
for the position of Co-Chief Operating Officer dated
June 24, 2010.
|
|
10
|
.37*
|
|
Form of letter of appointment with each non-executive director.
|
|
10
|
.38*
|
|
Form of Management Indemnification Agreement by and between
MedQuist Inc. and Certain Officers.
|
|
10
|
.39*
|
|
First Amendment to the Form of Management Indemnification
Agreement by and between MedQuist Inc. and Certain Officers.
|
|
10
|
.40*
|
|
Form of Amendment of Indemnification Agreement for Executive
Officers, dated August 19, 2008.
|
|
10
|
.41*
|
|
Indemnification Agreement dated November 21, 2008 between
MedQuist Inc. and Peter Masanotti.
|
|
10
|
.42*
|
|
Lease of CBaySystems Holdings Limited Administrative
headquarters in Franklin, Tennessee
|
|
21
|
.1*
|
|
List of subsidiaries.
|
|
23
|
.1*
|
|
Consent of Simpson Thacher & Bartlett LLP (included as
part of Exhibit 5.1 and incorporated herein by reference).
|
|
23
|
.2
|
|
Consent of KPMG LLP as to consolidated financial statements for
CBaySystems Holdings Limited.
|
|
23
|
.3
|
|
Consent of KPMG LLP as to consolidated financial statements for
MedQuist Inc.
|
|
23
|
.4
|
|
Consent of Grant Thornton India.
|
|
23
|
.5
|
|
Consent of Ernst & Young LLP.
|
|
24
|
.1
|
|
Powers of attorney (included on the signature page to this
registration statement).
|
|
|
|
*
|
|
To be filed by amendment.
|
|
|
|
|
|
Indicates management contract or
compensatory plan or arrangement.
|