##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2009.
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from          to
 Commission file number: 001-13326
 MEDQUIST INC.
 (Exact name of registrant as specified in its charter)
 New Jersey(State or other jurisdiction of 
incorporation or organization)
    
    22-2531298(I.R.S. Employer
Identification No.)1000 BISHOPS GATE BOULEVARD 
SUITE 300
MOUNT LAUREL, NEW JERSEY(Address of principal executive offices)
    
    08054-4632(Zip Code)
 (856) 206-4000  (Registrants telephone number, including area code)
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



MEDQUIST INC.
INDEX
 PagePART I. FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements
    
    
    3Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 4. Controls and Procedures
    
    
    25PART II. OTHER INFORMATION
    
    
    26Item 1. Legal Proceedings
    
    
    26Item 1A. Risk Factors
    
    
    28Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    29Item 3. Defaults Upon Senior Securities
    
    
    29Item 4. Submission of Matters to a Vote of Security Holders
    
    
    29Item 5. Other Information
    
    
    29Item 6. Exhibits
    
    
    29
  2




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Item 1.
    
    Financial Statements
 MedQuist Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share amounts)
Unaudited
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net revenues
    
    $
    76,836
    
    
    $
    81,287
    
    
    $
    233,251
    
    
    $
    247,466Operating costs and expenses:Cost of revenues
    
    
    52,768
    
    
    
    57,235
    
    
    
    157,993
    
    
    
    176,508Selling, general and administrative
    
    
    7,930
    
    
    
    11,496
    
    
    
    25,819
    
    
    
    36,446Research and development
    
    
    2,439
    
    
    
    4,648
    
    
    
    7,235
    
    
    
    12,502Depreciation
    
    
    2,197
    
    
    
    2,977
    
    
    
    7,418
    
    
    
    8,901Amortization of intangible assets
    
    
    1,518
    
    
    
    1,411
    
    
    
    4,533
    
    
    
    4,145Cost of legal proceedings and settlements, net
    
    
    1,382
    
    
    
    8,833
    
    
    
    13,440
    
    
    
    17,908Restructuring charges
    
    
    481
    
    
    
    (37
    )
    
    
    481
    
    
    
    (82
    )Total operating costs and expenses
    
    
    68,715
    
    
    
    86,563
    
    
    
    216,919
    
    
    
    256,328Operating income (loss)
    
    
    8,121
    
    
    
    (5,276
    )
    
    
    16,332
    
    
    
    (8,862
    )Equity in income of affiliated company
    
    
    2,154
    
    
    
    159
    
    
    
    2,582
    
    
    
    200Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    438Interest income (expense), net
    
    
    (29
    )
    
    
    418
    
    
    
    36
    
    
    
    2,601Income (loss) before income taxes
    
    
    10,246
    
    
    
    (4,699
    )
    
    
    18,950
    
    
    
    (5,623
    )Income tax provision
    
    
    542
    
    
    
    1,063
    
    
    
    1,556
    
    
    
    2,721Net income (loss)
    
    $
    9,704
    
    
    $
    (5,762
    )
    
    $
    17,394
    
    
    $
    (8,344
    )Net income (loss) per share:Basic
    
    $
    0.26
    
    
    $
    (0.15
    )
    
    $
    0.46
    
    
    $
    (0.22
    )Diluted
    
    $
    0.26
    
    
    $
    (0.15
    )
    
    $
    0.46
    
    
    $
    (0.22
    )Weighted average shares outstanding:Basic
    
    
    37,556
    
    
    
    37,554
    
    
    
    37,556
    
    
    
    37,547Diluted
    
    
    37,560
    
    
    
    37,554
    
    
    
    37,556
    
    
    
    37,547
 The accompanying notes are an integral part of these consolidated financial statements.
 3




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MedQuist Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands)
Unaudited
 September 30,
    
    
    December 31,2009
    
    
    2008AssetsCurrent assets:Cash and cash equivalents
    
    $
    15,677
    
    
    $
    39,918Accounts receivable, net of allowance of $3,927 and $4,802, respectively
    
    
    43,352
    
    
    
    50,374Income tax receivable
    
    
    204
    
    
    
    154Other current assets
    
    
    4,849
    
    
    
    8,053Total current assets
    
    
    64,082
    
    
    
    98,499Property and equipment, net
    
    
    11,860
    
    
    
    15,785Goodwill
    
    
    40,763
    
    
    
    40,545Other intangible assets, net
    
    
    37,357
    
    
    
    39,877Deferred income taxes
    
    
    1,298
    
    
    
    1,204Other assets
    
    
    10,430
    
    
    
    6,295Total assets
    
    $
    165,790
    
    
    $
    202,205Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    6,549
    
    
    $
    7,487Accrued expenses
    
    
    8,799
    
    
    
    11,994Accrued compensation
    
    
    14,192
    
    
    
    11,204Customer accommodation
    
    
    11,634
    
    
    
    12,055Deferred income taxes
    
    
    652
    
    
    
    651Deferred revenue
    
    
    11,679
    
    
    
    15,630Total current liabilities
    
    
    53,505
    
    
    
    59,021Deferred income taxes
    
    
    1,458
    
    
    
    799Other non-current liabilities
    
    
    2,322
    
    
    
    2,033Commitments and contingenciesShareholders equity:Common stock  no par value; authorized 60,000 shares;
37,556 and 37,556 shares issued and outstanding, respectively
    
    
    237,800
    
    
    
    237,907Accumulated deficit
    
    
    (131,751
    )
    
    
    (99,198
    )Accumulated other comprehensive income
    
    
    2,456
    
    
    
    1,643Total shareholders equity
    
    
    108,505
    
    
    
    140,352Total liabilities and shareholders equity
    
    $
    165,790
    
    
    $
    202,205
 The accompanying notes are an integral part of these consolidated financial statements.
 4




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MedQuist Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Unaudited
 Nine months endedSeptember 30,2009
    
    
    2008Operating activities:Net income (loss)
    
    $
    17,394
    
    
    $
    (8,344
    )Adjustments to reconcile net income (loss) to cash provided
by (used in) operating activities:Depreciation and amortization
    
    
    11,951
    
    
    
    13,046Equity in income of affiliated company
    
    
    (2,582
    )
    
    
    (200
    )Deferred income taxes
    
    
    662
    
    
    
    2,425Stock option expense
    
    
    144
    
    
    
    1,361Provision for doubtful accounts
    
    
    230
    
    
    
    2,065Loss on disposal of property and equipment
    
    
    27
    
    
    
    47Changes in operating assets and liabilities:Accounts receivable
    
    
    6,847
    
    
    
    (1,917
    )Income tax receivable
    
    
    (50
    )
    
    
    184Other current assets
    
    
    3,467
    
    
    
    (1,437
    )Other non-current assets
    
    
    (34
    )
    
    
    117Accounts payable
    
    
    (351
    )
    
    
    (4,393
    )Accrued expenses
    
    
    (3,427
    )
    
    
    (984
    )Accrued compensation
    
    
    2,959
    
    
    
    (53
    )Customer accommodation
    
    
    (317
    )
    
    
    (5,651
    )Deferred revenue
    
    
    (4,107
    )
    
    
    (57
    )Other non-current liabilities
    
    
    168
    
    
    
    (92
    )Net cash provided by (used in) operating activities
    
    $
    32,981
    
    
    $
    (3,883
    )Investing activities:Purchase of property and equipment
    
    
    (3,603
    )
    
    
    (5,015
    )Capitalized software
    
    
    (1,846
    )
    
    
    (2,712
    )Proceeds from sale of investments
    
    
    
    
    
    
    692Investment in affiliated company
    
    
    (852
    )
    
    
    Net cash used in investing activities
    
    
    (6,301
    )
    
    
    (7,035
    )Financing activities:Dividends paid
    
    
    (49,949
    )
    
    
    (103,279
    )Debt issuance costs
    
    
    (1,171
    )
    
    
    Proceeds from exercise of stock options
    
    
    
    
    
    
    68Net cash used in financing activities
    
    
    (51,120
    )
    
    
    (103,211
    )Effect of exchange rate changes
    
    
    199
    
    
    
    (156
    )Net decrease in cash and cash equivalents
    
    
    (24,241
    )
    
    
    (114,285
    )Cash and cash equivalents  beginning of period
    
    
    39,918
    
    
    
    161,582Cash and cash equivalents  end of period
    
    $
    15,677
    
    
    $
    47,297Supplemental cash flow information:Cash paid for income taxes
    
    $
    241
    
    
    $
    249Accommodation payments paid with credits
    
    $
    103
    
    
    $
    659
 The accompanying notes are an integral part of these consolidated financial statements
 5




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MedQuist Inc. & Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
 1. Basis of Presentation
     TM
  Revenue RecognitionMultiple-Element Arrangements
  Software-Revenue Recognition,
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MedQuist Inc. & Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
   2. Stock-Based Compensation and Long-Term Incentive Plan
  Three months ended September 30,
    
    
    Nine months ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Selling, general and administrative
    
    $
    48
    
    
    $
    840
    
    
    $
    144
    
    
    $
    944Research and development
    
    
    
    
    
    
    359
    
    
    
    
    
    
    
    405Cost of revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12Total
    
    $
    48
    
    
    $
    1,199
    
    
    $
    144
    
    
    $
    1,361
   WeightedWeighted
    
    
    AverageShares
    
    
    Average
    
    
    Remaining
    
    
    AggregateSubject to
    
    
    Exercise
    
    
    Contractual
    
    
    IntrinsicOptions
    
    
    Price
    
    
    Life in Years
    
    
    ValueOutstanding, December 31, 2008
    
    
    1,816
    
    
    $
    23.34Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Canceled
    
    
    (303
    )
    
    
    22.01Outstanding, September 30, 2009
    
    
    1,513
    
    
    
    24.27
    
    
    
    3.0
    
    
    $
    Exercisable, September 30, 2009
    
    
    1,315
    
    
    
    26.67
    
    
    
    2.1
    
    
    $
    Options vested and expected to vest
as of September 30, 2009
    
    
    1,513
    
    
    $
    24.27
    
    
    
    3.0
    
    
    $
    
   Expected term (years)
    
    
    5.92Expected volatility
    
    
    54.46
    %Dividend yield
    
    
    0
    %Expected risk free interest rate
    
    
    3.25
    %
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MedQuist Inc. & Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
  Options outstanding
    
    
    
    
    
    
    Options exercisableWeightedAverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedRemaining
    
    
    Average
    
    
    
    
    
    
    AverageNumber
    
    
    Contractual Life
    
    
    Exercise
    
    
    Number
    
    
    ExerciseRange of Exercise Prices
    
    of Shares
    
    
    (in years)
    
    
    Price
    
    
    of Shares
    
    
    Price$2.71  $10.00
    
    
    314
    
    
    
    8.5
    
    
    $
    8.10
    
    
    
    117
    
    
    $
    7.85$10.01  $20.00
    
    
    376
    
    
    
    2.0
    
    
    $
    15.83
    
    
    
    376
    
    
    $
    15.83$20.01  $30.00
    
    
    556
    
    
    
    1.8
    
    
    $
    26.39
    
    
    
    556
    
    
    $
    26.39$30.01  $40.00
    
    
    80
    
    
    
    0.6
    
    
    $
    32.71
    
    
    
    80
    
    
    $
    32.71$40.01  $70.00
    
    
    187
    
    
    
    0.7
    
    
    $
    58.61
    
    
    
    186
    
    
    $
    58.611,513
    
    
    
    3.0
    
    
    $
    24.27
    
    
    
    1,315
    
    
    $
    26.67
    3. Comprehensive income (loss)
  Three months ended September 30,
        

Nine months ended September 30,2009
    
    2008
    
    2009
    
    2008Net income (loss)
    
    $
    9,704
    
    
    $
    (5,762
    )
    
    $
    17,394
    
    
    $
    (8,344
    )Foreign currency translation adjustment
    
    
    138
    
    
    
    (1,266
    )
    
    
    813
    
    
    
    (1,305
    )Comprehensive income (loss)
    
    $
    9,842
    
    
    $
    (7,028
    )
    
    $
    18,207
    
    
    $
    (9,649
    )
 4. Net Income (Loss) per Share
   Three months ended September 30,
    
    
    Nine months ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income (loss)
    
    $
    9,704
    
    
    $
    (5,762
    )
    
    $
    17,394
    
    
    $
    (8,344
    )Weighted average shares outstanding:Basic
    
    
    37,556
    
    
    
    37,544
    
    
    
    37,556
    
    
    
    37,547Effect of dilutive shares
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    Diluted
    
    
    37,560
    
    
    
    37,554
    
    
    
    37,556
    
    
    
    37,547Net income (loss) per share:Basic
    
    $
    0.26
    
    
    $
    (0.15
    )
    
    $
    0.46
    
    
    $
    (0.22
    )Diluted
    
    $
    0.26
    
    
    $
    (0.15
    )
    
    $
    0.46
    
    
    $
    (0.22
    )
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MedQuist Inc. & Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
 5. Customer Accommodation
    Nine months ended
    
    
    Year endedSeptember 30, 2009
    
    
    December 31, 2008Beginning balance
    
    $
    12,055
    
    
    $
    18,459Payments and other adjustments
    
    
    (318
    )
    
    
    (5,664
    )Credits
    
    
    (103
    )
    
    
    (740
    )Ending balance
    
    $
    11,634
    
    
    $
    12,055
 6. Cost of Legal Proceedings and Settlements, Net
  Three months ended September 30,
    
    
    Nine months ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Legal fees
    
    $
    1,352
    
    
    $
    2,777
    
    
    $
    7,630
    
    
    $
    9,993Other professional fees
    
    
    30
    
    
    
    131
    
    
    
    60
    
    
    
    490Settlements
    
    
    
    
    
    
    5,925
    
    
    
    5,750
    
    
    
    7,425Total
    
    $
    1,382
    
    
    $
    8,833
    
    
    $
    13,440
    
    
    $
    17,908
  7. Restructuring Plans
 2009 Restructuring Plans
  Nine Months EndedSeptember 30, 2009Beginning balance
    
    $
    Charge
    
    
    497Cash paid
    
    
    (229
    )Ending balance
    
    $
    268
 9




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MedQuist Inc. & Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
 2008 Restructuring Plans
  Nine Months Ended
    
    
    Year EndedSeptember 30, 2009
    
    
    December 31, 2008Beginning balance
    
    $
    1,323
    
    
    $
    Charge
    
    
    (16
    )
    
    
    2,135Cash paid
    
    
    (1,222
    )
    
    
    (812
    )Ending balance
    
    $
    85
    
    
    $
    1,323
 8. Income Taxes
   9. Credit Agreement
  10. Commitments and Contingencies
 Customer Litigation
 Kaiser Litigation
   10




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MedQuist Inc. & Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
  Shareholder Litigation
 Kahn Putative Class Action
      Reseller Arbitration Demand
  11




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MedQuist Inc. & Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
         SEC Investigations of Former Officers
  Other Matters
   12




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MedQuist Inc. & Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
    11. Related Party Transactions
      13




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MedQuist Inc. & Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
    Licensing Agreement
     OEM Supply Agreement
    14




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MedQuist Inc. & Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
 Equipment Purchases
  Insurance Coverage
  Other
   Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2008
    
    
    September 30, 2008Licensing agreement
    
    $
    355
    
    
    $
    2,070OEM supply agreement
    
    
    36
    
    
    
    1,645Equipment purchases
    
    
    97
    
    
    
    586Insurance coverage
    
    
    65
    
    
    
    399CBay Transaction
    
    
    
    
    
    
    (172
    )Other
    
    
    
    
    
    
    (39
    )Ending balance
    
    $
    553
    
    
    $
    4,489
    12. Investment in A-Life Medical, Inc. (A-Life)
  13. Financial Instruments
  15




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MedQuist Inc. & Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
   Quoted Prices InActive Markets for
    
    
    Significant Other
    
    
    SignificantDecember 31,
    
    
    Identical
    
    
    Observable
    
    
    Unobservable2008
    
    
    Assets (Level 1)
    
    
    Inputs (Level 2)
    
    
    Inputs (Level 3)AssetsExecutive Deferred Compensation Plan assets
    
    $
    787
    
    
    $
    
    
    
    $
    787
    
    
    $
    
 16




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Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
  
    
    each of the factors discussed in Item 1A, Risk Factors, of this report as well as risks discussed elsewhere in this report;
    
    each of the matters discussed in Part II, Item 1, Legal Proceedings;
    
    our ability to recruit and retain qualified medical transcriptionists (MTs) and other employees;
    
    changes in law, including, without limitation, the impact HIPAA will have on our business;
    
    the impact of our new services and products on the demand for our existing services and products;
    
    our increased dependence on speech recognition technology, which we license, but do not own;
    
    our current dependence on medical transcription for substantially all of our business;
    
    our ability to expand our customer base;
    
    infringement on the proprietary rights of others;
    
    our ability to diversify into other businesses;
    
    our increased dependence on offshore medical transcription subcontractors;
    
    our ability to effectively integrate newly-acquired operations, if any;
    
    competitive pricing and service feature pressures in the medical transcription industry and our response to those
pressures;
    
    Our ability to operate the business given our restrictions under the Credit Agreement;
    
    difficulties relating to our significant management turnover; and
    
    general conditions in the economy and capital markets.
    Executive Overview
  17




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##### Table of Contents




    
    A shortage of qualified domestic MTs has increased the
demand for outsourced medical transcription services by
U.S.-based healthcare providers. This demand for qualified
MTs, as well as budgetary pressures experienced by
healthcare providers, has also caused many more U.S.-based
healthcare providers to evaluate and consider the use of
offshore medical transcription labor;
    
    Several low cost providers have emerged and aggressively
moved into our market offering medical transcription
services (performed both domestically and offshore) at
prices significantly below our traditional price point.
One of these low cost providers is owned by CBaySystems
Holdings. While we believe the market for outsourced
medical transcription continues to expand, the growing
acceptance by customers of the use of offshore labor has
further increased the competitive environment in the
medical transcription industry;
    
    Technological advances by us and our competitors which
have reduced the length of time required to transcribe
medical reports, in turn reducing the overall cost of
medical transcription services; and
    
    Increasing requirements for electronic medical records,
driving up demand for transcription services in some cases
where records used to be paper based, and driving down
demand in other cases as customers attempt to implement
electronic medical records.
   
    
    reduction in overhead and other administrative costs, driven by current and projected U.S. economic conditions;
    
    improvement in the quality and speed of delivery of transcribed medical reports;
    
    access to leading technologies, such as speech recognition technology, without any development and investment risk;
    
    expertise in implementing and managing a medical transcription system tailored to the providers specific
requirements;
 18




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##### Table of Contents




    
    access to skilled MTs; and
    
    support for compliance with governmental and industry mandated privacy and security requirements and electronic
health record (EHR) initiatives.
   
    
    revenues;
    
    operating income;
    
    adjusted EBITDA;
    
    net cash provided by operating activities; and
    
    days sales outstanding.
  Critical Accounting Policies, Judgments and Estimates
     TM
  Revenue RecognitionMultiple-Element Arrangements
 19




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##### Table of Contents



Software-Revenue Recognition
     Basis of Presentation
 Sources of Revenues
  Cost of Revenues
  Selling, General and Administrative (SG&A)
  Research and Development (R&D)
  20




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##### Table of Contents



Depreciation and amortization
  Cost of legal proceedings and settlements, net
  Consolidated Results of Operations
  Comparison of Three Months Ended September 30, 2009 and 2008
 Three Months Ended September 30,2009
    
    
    2008% of Net
    
    
    
    
    
    
    % of Net($ in thousands)
    
    Amount
    
    
    Revenues
    
    
    Amount
    
    
    Revenues
    
    
    $ Change
    
    
    % ChangeNet revenues
    
    $
    76,836
    
    
    
    100.0
    %
    
    $
    81,287
    
    
    
    100.0
    %
    
    $
    (4,451
    )
    
    
    (5.5
    %)Operating costs and expenses:Cost of revenues
    
    
    52,768
    
    
    
    68.7
    %
    
    
    57,235
    
    
    
    70.4
    %
    
    
    (4,467
    )
    
    
    (7.8
    %)Selling, general and administrative
    
    
    7,930
    
    
    
    10.3
    %
    
    
    11,496
    
    
    
    14.1
    %
    
    
    (3,566
    )
    
    
    (31.0
    %)Research and development
    
    
    2,439
    
    
    
    3.2
    %
    
    
    4,648
    
    
    
    5.7
    %
    
    
    (2,209
    )
    
    
    (47.5
    %)Depreciation
    
    
    2,197
    
    
    
    2.9
    %
    
    
    2,977
    
    
    
    3.7
    %
    
    
    (780
    )
    
    
    (26.2
    %)Amortization of intangible assets
    
    
    1,518
    
    
    
    2.0
    %
    
    
    1,411
    
    
    
    1.7
    %
    
    
    107
    
    
    
    7.6
    %Cost of legal proceedings and settlements, net
    
    
    1,382
    
    
    
    1.8
    %
    
    
    8,833
    
    
    
    10.9
    %
    
    
    (7,451
    )
    
    
    (84.4
    %)Restructuring charges
    
    
    481
    
    
    
    0.6
    %
    
    
    37
    
    
    
    0.0
    %
    
    
    518
    
    
    
    1,400.0
    %Total operating costs and expenses
    
    
    68,715
    
    
    
    89.4
    %
    
    
    86,563
    
    
    
    106.5
    %
    
    
    (17,848
    )
    
    
    (20.6
    %)Operating income (loss)
    
    
    8,121
    
    
    
    10.6
    %
    
    
    (5,276
    )
    
    
    (6.5
    %)
    
    
    13,397
    
    
    
    253.9
    %Equity in income of affiliated company
    
    
    2,154
    
    
    
    2.8
    %
    
    
    159
    
    
    
    0.2
    %
    
    
    1,995
    
    
    
    1,254.7
    %Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    n.a.Interest income (expense), net
    
    
    (29
    )
    
    
    (0.0
    %)
    
    
    418
    
    
    
    0.5
    %
    
    
    (447
    )
    
    
    (106.9
    %)Income (loss) before income taxes
    
    
    10,246
    
    
    
    13.3
    %
    
    
    (4,699
    )
    
    
    (5.8
    %)
    
    
    14,945
    
    
    
    318.0
    %Income tax provision (benefit)
    
    
    542
    
    
    
    0.7
    %
    
    
    1,063
    
    
    
    1.3
    %
    
    
    (521
    )
    
    
    (49.0
    %)Net income (loss)
    
    $
    9,704
    
    
    
    12.6
    %
    
    $
    (5,762
    )
    
    
    (7.1
    %)
    
    $
    15,466
    
    
    
    268.4
    %
 Net revenues
  Cost of revenues
  
    
    reduced medical transcription payroll costs of $1.5 million related to our increased use of speech recognition
technology, which reduces the payroll costs associated with the production of revenues;
    
    reduced medical transcription costs of $1.5 million related to the increase in our outsourced medical
transcription volumes to our international labor partners;
 21




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##### Table of Contents




    
    reduced costs of $1.5 million resulting from headcount reductions taken in 2008 to better align our overhead
costs with our lower revenues levels and;
    
    reduced employee retention costs of $0.2 million resulting from the change in control of our majority shareholder:
    
    a decrease in other costs of $0.2 million; offset by
    
    an increase in technology product costs of $0.4 million:
  Selling, general and administrative
  Research & development
  Depreciation
  Amortization
  Cost of legal proceedings and settlements, net
  Equity in income of affiliated company
  22




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##### Table of Contents



Income tax provision
 T
 Comparison of Nine Months Ended September 30, 2009 and 2008
 Nine Months Ended September 30,2009
    
    
    2008% of Net
    
    
    
    
    
    
    % of Net($ in thousands)
    
    Amount
    
    
    Revenues
    
    
    Amount
    
    
    Revenues
    
    
    $ Change
    
    
    % ChangeNet revenues
    
    $
    233,251
    
    
    
    100.0
    %
    
    $
    247,466
    
    
    
    100.0
    %
    
    $
    (14,215
    )
    
    
    (5.7
    %)Operating costs and expenses:Cost of revenues
    
    
    157,993
    
    
    
    67.7
    %
    
    
    176,508
    
    
    
    71.3
    %
    
    
    (18,515
    )
    
    
    (10.5
    %)Selling, general and administrative
    
    
    25,819
    
    
    
    11.1
    %
    
    
    36,446
    
    
    
    14.7
    %
    
    
    (10,627
    )
    
    
    (29.2
    %)Research and development
    
    
    7,235
    
    
    
    3.1
    %
    
    
    12,502
    
    
    
    5.1
    %
    
    
    (5,267
    )
    
    
    (42.1
    %)Depreciation
    
    
    7,418
    
    
    
    3.2
    %
    
    
    8,901
    
    
    
    3.6
    %
    
    
    (1,483
    )
    
    
    (16.7
    %)Amortization of intangible assets
    
    
    4,533
    
    
    
    1.9
    %
    
    
    4,145
    
    
    
    1.7
    %
    
    
    388
    
    
    
    9.4
    %Cost of legal proceedings and
settlements, net
    
    
    13,440
    
    
    
    5.8
    %
    
    
    17,908
    
    
    
    7.2
    %
    
    
    (4,468
    )
    
    
    (24.9
    %)Restructuring charges
    
    
    481
    
    
    
    0.2
    %
    
    
    82
    
    
    
    0.0
    %
    
    
    563
    
    
    
    686.6
    %Total operating costs and expenses
    
    
    216,919
    
    
    
    93.0
    %
    
    
    256,328
    
    
    
    103.6
    %
    
    
    (39,409
    )
    
    
    (15.4
    %)Operating income (loss)
    
    
    16,332
    
    
    
    7.0
    %
    
    
    (8,862
    )
    
    
    (3.6
    %)
    
    
    25,194
    
    
    
    284.3
    %Equity in income of affiliated company
    
    
    2,582
    
    
    
    1.1
    %
    
    
    200
    
    
    
    0.1
    %
    
    
    2,382
    
    
    
    1,191.0
    %Other income
    
    
    
    
    
    
    
    
    
    
    438
    
    
    
    0.2
    %
    
    
    (438
    )
    
    
    (100.0
    %)Interest income (expense), net
    
    
    36
    
    
    
    0.0
    %
    
    
    2,601
    
    
    
    1.1
    %
    
    
    (2,565
    )
    
    
    (98.6
    %)Income (loss) before income taxes
    
    
    18,950
    
    
    
    8.1
    %
    
    
    (5,623
    )
    
    
    (2.3
    %)
    
    
    24,573
    
    
    
    437.0
    %Income tax provision (benefit)
    
    
    1,556
    
    
    
    0.7
    %
    
    
    2,721
    
    
    
    1.1
    %
    
    
    (1,165
    )
    
    
    (42.8
    %)Net income (loss)
    
    $
    17,394
    
    
    
    7.5
    %
    
    $
    (8,344
    )
    
    
    (3.4
    %)
    
    $
    25,738
    
    
    
    308.5
    %
 Net revenues
  Cost of revenues
  
    
    reduced medical transcription payroll costs of $6.6 million related directly to our increased use of
speech recognition technology, which reduces the payroll costs associated with the production of
revenues;
    
    reduced technology product costs of $0.8 million;
    
    reduced medical transcription costs of $3.0 million related to the increase in our outsourced medical
transcription volumes to our international labor partners;
 23




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##### Table of Contents




    
    reduced medical transcription payroll costs of $1.8 million related to the increase in our outsourced
medical transcription cost controls;
    
    reduced costs of $4.9 million resulting from headcount reductions taken in 2008;
    
    a one time benefit of $1.2 million related to the release of a reserve for prior period medical claims.
  Selling, general and administrative
  Research & development
  Depreciation
  Amortization
  Cost of legal proceedings and settlements, net
  Equity in income of affiliated company
  24




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##### Table of Contents



Income tax provision
  Liquidity and Capital Resources
    Off-Balance Sheet Arrangements
  
 Item 4.
    
    Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  25




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##### Table of Contents



Changes in Internal Control Over Financial Reporting
  
 PART II. OTHER INFORMATION
 
 Item 1.
    
    Legal Proceedings
 Customer Litigation
 Kaiser Litigation
    Shareholder Litigation
 Kahn Putative Class Action
  26




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##### Table of Contents



Reseller Arbitration Demand
    27




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##### Table of Contents



SEC Investigations of Former Officers
  Other Matters
     
 Item 1A.
    
    Risk Factors
   28




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##### Table of Contents



Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3.
    
    Defaults Upon Senior Securities
  
 Item 4.
    
    Submission of Matters to a Vote of Security Holders
  
 Item 5.
    
    Other Information
   
 Item 6.
    
    Exhibits
 Exhibits
 No.
    
    Description10.1
    
    MedQuist Inc. Long-Term Incentive Plan adopted on August 27, 200910.2
    
    Credit Agreement dated August 31, 2009 by and among MedQuist Inc. and its subsidiaries, and Wells Fargo Foothill,

LLC as the arranger and administrative agent and lender.10.3(1)
    
    Services Agreement by and between MedQuist Inc. and CBay Inc. dated September 19, 200931.1
    
    Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange
Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange
Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 
 (1)
    
    Incorporated by reference to our Current Report on Form 8-K filed with the SEC on September 24, 2009 29




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##### Table of Contents



SIGNATURES
  MEDQUIST INC.Date: November 9, 2009
    /s/ Peter MasanottiPeter MasanottiPresident and Chief Executive Officer
(Principal Executive Officer)Date: November 9, 2009
    /s/ Dominick GolioDominick GolioChief Financial Officer
(Principal Financial Officer) 30




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##### Table of Contents



Exhibit Index
 No.
    
    Description10.1
    
    MedQuist Inc. Long-Term Incentive Plan adopted on August 27, 200910.2
    
    Credit Agreement dated August 31, 2009 by and among MedQuist Inc. and
its subsidiaries, and Wells Fargo Foothill,
LLC as the arranger and
administrative agent and lender.31.1
    
    Certification of Chief Executive Officer required by Rule 13a-14(a)
or Rule 15d-14(a) of the Securities Exchange Act of
1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer required by Rule 13a-14(a)
or Rule 15d-14(a) of the Securities Exchange Act of
1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 31