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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2010.
 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
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ




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##### 



MEDQUIST INC.
INDEX
 PagePART I. FINANCIAL INFORMATION
    
    
    1Item 1. Financial Statements
    
    
    1Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 4. Controls and Procedures
    
    
    28PART II. OTHER INFORMATION
    
    
    30Item 1. Legal Proceedings
    
    
    30Item 1A. Risk Factors
    
    
    32Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    33Item 3. Defaults Upon Senior Securities
    
    
    33Item 5. Other Information
    
    
    33Item 6. Exhibits
    
    
    33




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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
    
    
    Six months endedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net revenues
    
    $
    97,528
    
    
    $
    77,471
    
    
    $
    171,509
    
    
    $
    156,415Operating costs and expenses:Cost of revenues
    
    
    67,090
    
    
    
    51,357
    
    
    
    116,923
    
    
    
    105,225Selling, general and administrative
    
    
    10,020
    
    
    
    8,451
    
    
    
    18,817
    
    
    
    17,889Research and development
    
    
    3,312
    
    
    
    2,380
    
    
    
    5,593
    
    
    
    4,796Depreciation
    
    
    2,786
    
    
    
    2,669
    
    
    
    4,696
    
    
    
    5,221Amortization of intangible assets
    
    
    3,015
    
    
    
    1,504
    
    
    
    4,835
    
    
    
    3,015Cost of legal proceedings and settlements
    
    
    1,109
    
    
    
    10,134
    
    
    
    2,152
    
    
    
    12,058Acquistion and integration related charges
    
    
    4,765
    
    
    
    
    
    
    
    5,659
    
    
    
    Restructuring charges
    
    
    870
    
    
    
    
    
    
    
    930
    
    
    
    Total operating costs and expenses
    
    
    92,967
    
    
    
    76,495
    
    
    
    159,605
    
    
    
    148,204Operating income
    
    
    4,561
    
    
    
    976
    
    
    
    11,904
    
    
    
    8,211Equity in income of affiliated company
    
    
    32
    
    
    
    356
    
    
    
    546
    
    
    
    428Interest income (expense)
    
    
    (3,633
    )
    
    
    19
    
    
    
    (3,779
    )
    
    
    65Income before income taxes
    
    
    960
    
    
    
    1,351
    
    
    
    8,671
    
    
    
    8,704Income tax provision
    
    
    80
    
    
    
    515
    
    
    
    447
    
    
    
    1,014Net income
    
    $
    880
    
    
    $
    836
    
    
    $
    8,224
    
    
    $
    7,690Net income per share:Basic
    
    $
    0.02
    
    
    $
    0.02
    
    
    $
    0.22
    
    
    $
    0.20Diluted
    
    $
    0.02
    
    
    $
    0.02
    
    
    $
    0.22
    
    
    $
    0.20Weighted average shares outstanding:Basic
    
    
    37,556
    
    
    
    37,556
    
    
    
    37,556
    
    
    
    37,556Diluted
    
    
    37,556
    
    
    
    37,556
    
    
    
    37,556
    
    
    
    37,556
 The accompanying notes are an integral part of these consolidated financial statements.
 1




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MedQuist Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands)
Unaudited
 June 30,
    
    
    December 31,2010
    
    
    2009AssetsCurrent assets:Cash and cash equivalents
    
    $
    17,246
    
    
    $
    25,216Accounts receivable, net of allowance of $3,495 and $3,159, respectively
    
    
    62,908
    
    
    
    43,627Income tax receivable
    
    
    213
    
    
    
    772Other current assets
    
    
    11,414
    
    
    
    4,940Total current assets
    
    
    91,781
    
    
    
    74,555Property and equipment, net
    
    
    16,947
    
    
    
    11,772Goodwill
    
    
    88,991
    
    
    
    40,813Other intangible assets, net
    
    
    84,391
    
    
    
    36,307Deferred income taxes
    
    
    1,295
    
    
    
    1,396Other assets
    
    
    14,502
    
    
    
    9,818Total assets
    
    $
    297,907
    
    
    $
    174,661Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    7,425
    
    
    $
    8,687Accrued expenses
    
    
    25,507
    
    
    
    21,490Accrued compensation
    
    
    17,663
    
    
    
    12,432Current portion of lease obligations
    
    
    1,624
    
    
    
    Current portion of long term debt
    
    
    30,000
    
    
    
    Related party payable
    
    
    5,162
    
    
    
    1,362Deferred revenue
    
    
    9,584
    
    
    
    10,854Total current liabilities
    
    
    96,965
    
    
    
    54,825Long term debt
    
    
    73,570
    
    
    
    Deferred income taxes
    
    
    3,906
    
    
    
    3,240Other non-current liabilities
    
    
    910
    
    
    
    1,848Commitments and contingencies (Note 7)Shareholders equity:Common stock  no par value; authorized 60,000 shares;37,556 and 37,556 shares issued and outstanding, respectively
    
    
    237,945
    
    
    
    237,848Accumulated deficit
    
    
    (117,630
    )
    
    
    (125,854
    )Accumulated other comprehensive income
    
    
    2,241
    
    
    
    2,754Total shareholders equity
    
    
    122,556
    
    
    
    114,748Total liabilities and shareholders equity
    
    $
    297,907
    
    
    $
    174,661
 The accompanying notes are an integral part of these consolidated financial statements.
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MedQuist Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Unaudited
 Six months endedJune 30,2010
    
    
    2009Operating activities:Net income
    
    $
    8,224
    
    
    $
    7,690Adjustments
to reconcile net income to cash provided by operating activities:Depreciation and amortization
    
    
    9,531
    
    
    
    8,236Equity in income of affiliated company
    
    
    (546
    )
    
    
    (428
    )Deferred income tax provision
    
    
    669
    
    
    
    435Stock option expense
    
    
    96
    
    
    
    96Provision for doubtful accounts
    
    
    1,085
    
    
    
    89Loss on disposal of property and equipment
    
    
    
    
    
    
    26Changes in operating assets and liabilities:Accounts receivable
    
    
    2,027
    
    
    
    5,287Income tax receivable
    
    
    553
    
    
    
    (29
    )Other current assets
    
    
    (3,552
    )
    
    
    743Other non-current assets
    
    
    854
    
    
    
    (34
    )Accounts payable
    
    
    (1,494
    )
    
    
    361Accrued expenses
    
    
    (1,086
    )
    
    
    (3,872
    )Accrued compensation
    
    
    (1,504
    )
    
    
    1,765Deferred revenue
    
    
    (1,321
    )
    
    
    (2,045
    )Other non-current liabilities
    
    
    (1,044
    )
    
    
    112Net cash provided by operating activities
    
    
    12,492
    
    
    
    18,432Investing activities:Purchase of property and equipment
    
    
    (2,868
    )
    
    
    (2,135
    )Capitalized software
    
    
    (2,613
    )
    
    
    (1,283
    )Investment in A-Life Medical, Inc.
    
    
    
    
    
    
    (852
    )Acquisition
    
    
    (98,834
    )
    
    
    Net cash used in investing activities
    
    
    (104,315
    )
    
    
    (4,270
    )Financing activities:Proceeds from debt
    
    
    100,000
    
    
    
    Repayment of long term debt
    
    
    (10,000
    )
    
    
    Debt issuance costs
    
    
    (6,070
    )
    
    
    Payments of lease obligations
    
    
    (50
    )
    
    
    Net cash provided by financing activities
    
    
    83,880
    
    
    
    Effect of exchange rate changes
    
    
    (27
    )
    
    
    85Net increase (decrease) in cash and cash equivalents
    
    
    (7,970
    )
    
    
    14,247Cash and cash equivalents  beginning of period
    
    
    25,216
    
    
    
    39,918Cash and cash equivalents  end of period
    
    $
    17,246
    
    
    $
    54,165Supplemental cash flow information:Cash (refunded) paid for income taxes
    
    $
    (604
    )
    
    $
    197Accommodation payments paid with credits
    
    $
    
    
    
    $
    82Noncash debt incurred in connection with the Spheris
acquisition
    
    $
    13,570
    
    
    $
    
 The accompanying notes are an integral part of these consolidated financial statements.
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MedQuist Inc. & Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
 1. Basis of Presentation
   Recent Developments
  Recent Accounting Pronouncements
      2. Comprehensive Income
  4




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MedQuist Inc. & Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
 Three months ended June 30,
    
    
    Six months ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net income
    
    $
    880
    
    
    $
    836
    
    
    $
    8,224
    
    
    $
    7,690Foreign currency translation adjustment
    
    
    (214
    )
    
    
    942
    
    
    
    (513
    )
    
    
    677Comprehensive income
    
    $
    666
    
    
    $
    1,778
    
    
    $
    7,711
    
    
    $
    8,367
 3. Net Income per Share
   Three months ended June 30,
    
    
    Six months ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net income
    
    $
    880
    
    
    $
    836
    
    
    $
    8,224
    
    
    $
    7,690Weighted average shares
outstanding:Basic
    
    
    37,556
    
    
    
    37,556
    
    
    
    37,556
    
    
    
    37,556Effect of dilutive shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted
    
    
    37,556
    
    
    
    37,556
    
    
    
    37,556
    
    
    
    37,556Net income per share:Basic
    
    $
    0.02
    
    
    $
    0.02
    
    
    $
    0.22
    
    
    $
    0.20Diluted
    
    $
    0.02
    
    
    $
    0.02
    
    
    $
    0.22
    
    
    $
    0.20
  4. Accrued Expenses
  June 30, 2010
    
    
    December 31, 2009Customer accommodations
    
    $
    11,477
    
    
    $
    11,635Other (no item exceeds 5% of current liabilities)
    
    
    14,030
    
    
    
    9,855Total accrued expenses
    
    $
    25,507
    
    
    $
    21,490
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MedQuist Inc. & Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
   Six months ended
    
    
    Year endedJune 30, 2010
    
    
    December 31, 2009Beginning balance
    
    $
    11,635
    
    
    $
    12,055Payments and other adjustments
    
    
    (158
    )
    
    
    (317
    )Credits
    
    
    
    
    
    
    (103
    )Ending balance
    
    $
    11,477
    
    
    $
    11,635
  2010 Restructuring Plan
   Six Months EndedJune 30, 2010Beginning balance
    
    $
    Charge
    
    
    809Cash paid
    
    
    (157
    )Ending balance
    
    $
    652
  2009 Restructuring Plan
  Six Months Ended
    
    
    Year EndedJune 30, 2010
    
    
    December 31, 2009Beginning balance
    
    $
    2,064
    
    
    $
    Charge
    
    
    121
    
    
    
    2,810Cash paid
    
    
    (834
    )
    
    
    (746
    )Ending balance
    
    $
    1,351
    
    
    $
    2,064
  5. Cost of Legal Proceedings and Settlements
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MedQuist Inc. & Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
  Three months ended June 30,
    
    
    Six months ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Legal fees
    
    $
    199
    
    
    $
    4,384
    
    
    $
    1,242
    
    
    $
    6,278Other professional fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30Settlements
    
    
    910
    
    
    
    5,750
    
    
    
    910
    
    
    
    5,750Total
    
    $
    1,109
    
    
    $
    10,134
    
    
    $
    2,152
    
    
    $
    12,058
  6. Income Taxes
    7. Commitments and Contingencies
 Kaiser Litigation
   Kahn Putative Class Action
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MedQuist Inc. & Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
      Reseller Arbitration Demand
  8




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MedQuist Inc. & Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
     SEC Investigations of Former Officer
  8. Related Party Transactions
   9




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MedQuist Inc. & Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
    10




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MedQuist Inc. & Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
   9. Investment in A-Life Medical, Inc. (A-Life)
  10. Acquisition of Spheris Assets in the United States
   Pro Forma Three MonthsEnded June 30,2010
    
    2009Net revenues
    
    $
    105,721
    
    
    $
    117,464Net income
    
    $
    3,321
    
    
    $
    606Net income per share (Basic)
    
    $
    0.09
    
    
    $
    0.02Net income per share (Diluted)
    
    $
    0.09
    
    
    $
    0.02Pro Forma Six MonthsEnded June 30,2010
    
    2009Net revenues
    
    $
    214,880
    
    
    $
    238,257Net income
    
    $
    8,890
    
    
    $
    7,280Net income per share (Basic)
    
    $
    0.24
    
    
    $
    0.19Net income per share (Diluted)
    
    $
    0.24
    
    
    $
    0.19
  11




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MedQuist Inc. & Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
    Cash consideration paid
    
    $
    98,834Fair value of unsecured Subordinated Promissory Note
    
    
    13,570Total consideration transferred
    
    $
    112,404Recognized amounts of identifiable assets acquired and liabilities assumed:Fair value of Spheris net assets acquiredTrade receivables
    
    $
    22,407Other current assets
    
    
    952Property, plant and equipment
    
    
    6,626Developed technology (included in intangibles)
    
    
    11,390Customer relationships (included in intangibles)
    
    
    37,210Trademarks and trade names (included in intangibles)
    
    
    1,640Goodwill
    
    
    48,339Trade, accrued liabilities and other payables
    
    
    (11,601
    )Payable to related party
    
    
    (4,559
    )Identifiable assets acquired and liabilities assumed
    
    $
    112,404
  AmortizationFair Value
    
    
    PeriodDeveloped technology
    
    $
    11,390
    
    
    9 yearsCustomer relationships
    
    $
    37,210
    
    
    7-9 yearsTrademarks and tradenames
    
    $
    1,640
    
    
    4 yearsGoodwill
    
    $
    48,339
    
    
    indefinite
     11. Debt
  12




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MedQuist Inc. & Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
 June 30, 2010Term loan due from 2010 to 2012, with interest at Prime plus 3.25%
    
    $
    50,000Revolving loan with interest at Prime plus 3% with a scheduled termination
date of April 22, 2014
    
    
    40,000Subordinated Promissory Note due in 2015 with varying interest rates and
provisions for early repayment
    
    
    13,570103,570Less: Current maturities
    
    
    (30,000
    )Total long term debt
    
    $
    73,570
        13




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




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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 a significant portion of our technology-enabled clinical documentation
services;
    
    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 CBay Systems & Services, Inc. as the exclusive provider of medical transcription performed in
Asia, the current location of all our medical transcription and medical editing work performed outside of North America;
    
    our ability to effectively integrate the newly-acquired business and operations of Spheris;
    
    the effectiveness of Spheris internal controls, which we are in the process of evaluating;
    
    competitive pricing and service feature pressures in the clinical documentation industry and our response to those
pressures;
    
    our ability to operate the business given our restrictions under the GE Credit Agreement;
    
    difficulties relating to our significant management turnover; and
    
    general conditions in the economy and capital markets.
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Executive Overview
 tm
 Recent Developments
   
    
    A shortage of qualified domestic MTs and MEs has increased
the demand for offshore medical transcription services by
healthcare providers. This demand for qualified MTs and
MEs, combined with budgetary pressures experienced by
healthcare providers nationwide, has also caused many more
healthcare providers to evaluate and consider the use of
offshore medical transcription services.
    
    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.
While we believe the market for outsourced medical
transcription continues to expand, the growing acceptance
of utilizing offshore labor by healthcare providers has
further increased the competitive environment in the
medical transcription industry.
    
    Technological advances including speech recognition
products reduce the length of time required to transcribe
medical reports, in turn reducing the overall cost of
medical transcription services.
    
    Growing market penetration of EHR and certain other
technologies have eliminated or shortened the length of
certain work types produced through transcription.
   
    
    Reductions in overhead and other administrative costs;
    
    Improvements in the quality and delivery speed of transcribed medical reports;
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
    
    Access to leading technologies, such as speech recognition technology, without development and investment risk;
    
    Implementation and management of a medical transcription system tailored to the providers specific
requirements;
    
    Access to skilled MTs and MEs;
    
    Solutions for compliance with governmental and industry mandated privacy and security requirements; and
    
    Product offerings that interface with EHR initiatives.
  
    
    Net revenues;
    
    Operating income;
    
    Net income per share;
    
    Adjusted earnings before interest, taxes, depreciation and amortization;
    
    Net cash provided by operating activities; and
    
    Days sales outstanding.
   Critical Accounting Policies, Judgments and Estimates
   Valuation of Long-Lived and Other Intangible Assets and Goodwill:
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
    
    our net book value compared to our fair value;
    
    significant adverse economic and industry trends;
    
    significant decrease in the market value of the asset;
    
    the extent that we use an asset or changes in the manner that we use it;
    
    significant changes to the asset since we acquired it; and
    
    other changes in circumstances that potentially indicate all or a portion of the company will be sold.
 Deferred income taxes.
 Commitments and contingencies.
 Revenue recognition.
   Accounts receivable and allowance for doubtful accounts.
   18




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Customer Accommodation Program
  Classification of Debt.
 Acquisition of Spheris Inc. Assets and Related Debt Incurred
   Pro Forma Three MonthsEnded June 30,2010
    
    
    2009Revenue
    
    $
    105,721
    
    
    $
    117,464Net income
    
    $
    3,321
    
    
    $
    606EPS Basic
    
    $
    0.09
    
    
    $
    0.02EPS Diluted
    
    $
    0.09
    
    
    $
    0.02
 Pro Forma Six MonthsEnded June 30,2010
    
    
    2009Revenue
    
    $
    214,880
    
    
    $
    238,257Net income
    
    $
    8,890
    
    
    $
    7,280EPS Basic
    
    $
    0.24
    
    
    $
    0.19EPS Diluted
    
    $
    0.24
    
    
    $
    0.19
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Cash consideration paid
    
    $
    98,834Fair value of unsecured Subordinated Promissory Note
    
    
    13,570Total consideration transferred
    
    $
    112,404Recognized amounts of identifiable assets acquired and liabilities assumed:Fair value of Spheris net assets acquiredTrade receivables
    
    $
    22,407Other current assets
    
    
    952Property, plant and equipment
    
    
    6,626Developed technology (included in intangibles)
    
    
    11,390Customer relationships (included in intangibles)
    
    
    37,210Trademarks and trade names (included in intangibles)
    
    
    1,640Goodwill
    
    
    48,339Trade, accrued liabilities and other payables
    
    
    (11,601
    )Payable to related party
    
    
    (4,559
    )Identifiable assets acquired and liabilities assumed
    
    $
    112,404
  AmortizationFair Value
    
    
    PeriodDeveloped technology
    
    $
    11,390
    
    
    9 yearsCustomer relationships
    
    $
    37,210
    
    
    7-9 yearsTrademarks and tradenames
    
    $
    1,640
    
    
    4 yearsGoodwill
    
    $
    48,339
    
    
    in definite
    20




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##### Table of Contents



Debt Incurred
 June 30, 2010Term loan due from 2010 to 2012, with interest at Prime plus 3.25%
    
    $
    50,000Revolving
loan with interest at Prime plus 3% with a scheduled termination date of April 22, 2014
    
    
    40,000Subordinated
Promissory Note due in 2015 with varying interest rates and provisions for early repayment
    
    
    13,570103,570Less: Current maturities
    
    
    (30,000
    )Total long term debt
    
    $
    73,570
    21




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##### Table of Contents



Basis of Presentation
 Sources of Revenues
  Cost of Revenues
  22




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##### Table of Contents



Selling, General and Administrative (SG&A)
  Research and Development (R&D)
  Depreciation and Amortization
  Cost
of legal proceedings and settlements
  Consolidated Results of Operations
  Comparison of Three Months Ended June 30, 2010 and 2009
 Three Months Ended June 30,2010
    
    
    2009% of Net
    
    
    
    
    
    
    % of Net($ in thousands)
    
    Amount
    
    
    Revenues
    
    
    Amount
    
    
    Revenues
    
    
    $ Change
    
    
    % ChangeNet revenues
    
    $
    97,528
    
    
    
    100.0
    %
    
    $
    77,471
    
    
    
    100.0
    %
    
    $
    20,057
    
    
    
    25.9
    %Operating costs and expenses:Cost of revenues
    
    
    67,090
    
    
    
    68.8
    %
    
    
    51,357
    
    
    
    66.3
    %
    
    
    15,733
    
    
    
    30.6
    %Selling, general and administrative
    
    
    10,020
    
    
    
    10.3
    %
    
    
    8,451
    
    
    
    10.9
    %
    
    
    1,569
    
    
    
    18.6
    %Research and development
    
    
    3,312
    
    
    
    3.4
    %
    
    
    2,380
    
    
    
    3.1
    %
    
    
    932
    
    
    
    39.2
    %Depreciation
    
    
    2,786
    
    
    
    2.9
    %
    
    
    2,669
    
    
    
    3.4
    %
    
    
    117
    
    
    
    4.4
    %Amortization of intangible assets
    
    
    3,015
    
    
    
    3.1
    %
    
    
    1,504
    
    
    
    1.9
    %
    
    
    1,511
    
    
    
    100.5
    %Cost of legal proceedings and settlements
    
    
    1,109
    
    
    
    1.1
    %
    
    
    10,134
    
    
    
    13.1
    %
    
    
    (9,025
    )
    
    
    (89.1
    %)Acquisition and integration related charges
    
    
    4,765
    
    
    
    4.9
    %
    
    
    
    
    
    
    
    
    
    
    4,765
    
    
    
    n.a.Restructuring charges
    
    
    870
    
    
    
    0.9
    %
    
    
    
    
    
    
    
    
    
    
    870
    
    
    
    n.a.Total operating costs and expenses
    
    
    92,967
    
    
    
    95.3
    %
    
    
    76,495
    
    
    
    98.7
    %
    
    
    16,472
    
    
    
    21.5
    %Operating income
    
    
    4,561
    
    
    
    4.7
    %
    
    
    976
    
    
    
    1.3
    %
    
    
    3,585
    
    
    
    367.3
    %Equity in income of affiliated company
    
    
    32
    
    
    
    0.0
    %
    
    
    356
    
    
    
    0.5
    %
    
    
    (324
    )
    
    
    (91.0
    %)Interest income (expense), net
    
    
    (3,633
    )
    
    
    (3.7
    %)
    
    
    19
    
    
    
    0.0
    %
    
    
    (3,652
    )
    
    
    (19,221.1
    %)Income before income taxes
    
    
    960
    
    
    
    1.0
    %
    
    
    1,351
    
    
    
    1.7
    %
    
    
    (391
    )
    
    
    (28.9
    %)Income tax provision
    
    
    80
    
    
    
    0.1
    %
    
    
    515
    
    
    
    0.7
    %
    
    
    (435
    )
    
    
    (84.5
    %)Net income
    
    $
    880
    
    
    
    0.9
    %
    
    $
    836
    
    
    
    1.1
    %
    
    $
    44
    
    
    
    5.3
    %
 23




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##### Table of Contents



Net revenues
  Cost of revenues
  
    
    The acquisition of Spheris which added $19.8 million in costs
    
    The impact of cost savings of $5.3 million from increased use of off shore labor,
increased usage of speech recognition, and reduced staffing levels, offset by
    
    The 2009 onetime benefit from the reversal of a reserve for $1.2 million related to
prior period medical claims.
  Selling, general and administrative
  Research & development
  Depreciation
  Amortization
  Cost of legal proceedings and settlements
  24




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##### Table of Contents



Acquisition and integration related charges
  Restructuring charges
  Interest income (expense), net
  Income tax provision
   Comparison of Six Months Ended June 30, 2010 and 2009
 Six Months Ended June 30,2010
    
    
    2009% of Net
    
    
    
    
    
    
    % of Net($ in thousands)
    
    Amount
    
    
    Revenues
    
    
    Amount
    
    
    Revenues
    
    
    $ Change
    
    
    % ChangeNet revenues
    
    $
    171,509
    
    
    
    100.0
    %
    
    $
    156,415
    
    
    
    100.0
    %
    
    $
    15,094
    
    
    
    9.6
    %Operating costs and expenses:Cost of revenues
    
    
    116,923
    
    
    
    68.2
    %
    
    
    105,225
    
    
    
    67.3
    %
    
    
    11,698
    
    
    
    11.1
    %Selling, general and administrative
    
    
    18,817
    
    
    
    11.0
    %
    
    
    17,889
    
    
    
    11.4
    %
    
    
    928
    
    
    
    5.2
    %Research and development
    
    
    5,593
    
    
    
    3.3
    %
    
    
    4,796
    
    
    
    3.1
    %
    
    
    797
    
    
    
    16.6
    %Depreciation
    
    
    4,696
    
    
    
    2.7
    %
    
    
    5,221
    
    
    
    3.3
    %
    
    
    (525
    )
    
    
    (10.1
    %)Amortization of intangible assets
    
    
    4,835
    
    
    
    2.8
    %
    
    
    3,015
    
    
    
    1.9
    %
    
    
    1,820
    
    
    
    60.4
    %Cost of legal proceedings and settlements
    
    
    2,152
    
    
    
    1.3
    %
    
    
    12,058
    
    
    
    7.7
    %
    
    
    (9,906
    )
    
    
    (82.2
    %)Acquisition and integration related charges
    
    
    5,659
    
    
    
    3.3
    %
    
    
    
    
    
    
    
    
    
    
    5,659
    
    
    
    n.a.Restructuring charges
    
    
    930
    
    
    
    0.5
    %
    
    
    
    
    
    
    
    
    
    
    930
    
    
    
    n.a.Total operating costs and expenses
    
    
    159,605
    
    
    
    93.1
    %
    
    
    148,204
    
    
    
    94.8
    %
    
    
    11,401
    
    
    
    7.7
    %Operating income
    
    
    11,904
    
    
    
    6.9
    %
    
    
    8,211
    
    
    
    5.2
    %
    
    
    3,693
    
    
    
    45.0
    %Equity in income of affiliated company
    
    
    546
    
    
    
    0.3
    %
    
    
    428
    
    
    
    0.3
    %
    
    
    118
    
    
    
    27.6
    %Interest income (expense), net
    
    
    (3,779
    )
    
    
    (2.2
    %)
    
    
    65
    
    
    
    0.0
    %
    
    
    (3,844
    )
    
    
    (5,913.8
    %)Income before income taxes
    
    
    8,671
    
    
    
    5.1
    %
    
    
    8,704
    
    
    
    5.6
    %
    
    
    (33
    )
    
    
    (0.4
    %)Income tax provision
    
    
    447
    
    
    
    0.3
    %
    
    
    1,014
    
    
    
    0.6
    %
    
    
    (567
    )
    
    
    (55.9
    %)Net income
    
    $
    8,224
    
    
    
    4.8
    %
    
    $
    7,690
    
    
    
    4.9
    %
    
    $
    534
    
    
    
    6.9
    %
 25




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##### Table of Contents



Net revenues
  Cost of revenues
  
    
    The acquisition of Spheris which added $19.8 million in costs
    
    The impact of cost savings of $6.9 million from increased use of off shore labor,
increased usage of speech recognition, and reduced staffing levels, offset by
    
    The 2009 onetime benefit from the reversal of a reserve for $1.2 million related to
prior period medical claims.
  Selling, general and administrative
  Research & development
  Depreciation
  Amortization
  Cost of legal proceedings and settlements
  26




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##### Table of Contents



Acquisition and integration related charges
  Restructuring charges
  Interest income (expense), net
  Income tax provision
   Liquidity and Capital Resources
  
    
    Addition of cash flows provided by Spheris operations
    
    Cash used to pay financing costs associated with the new GE credit facility
    
    $10.0 million in payments on the new GE credit facility
    
    Acquisition and integration-related charges associated with the Spheris acquisition
    
    Restructuring payments
    
    Other working capital changes
   27




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##### Table of Contents



Off-Balance Sheet Arrangements
  
 Item 4. Controls and Procedures
 28




---



##### Table of Contents



Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  29




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Kaiser Litigation
   Kahn Putative Class Action
     30




---



##### Table of Contents



Reseller Arbitration Demand
     31




---



##### Table of Contents



SEC Investigations of Former Officer
  
 Item 1A. Risk Factors
    We may pursue future transactions, which could require us to incur debt and assume contingent
liabilities and expenses, and we may not be able to effectively integrate new operations.
    We may not be able to effectively integrate the operations of Spheris Inc. and the internal
controls of Spheris Inc. may not be effective.
  Our ability to operate the business given our restrictions under the GE Credit Agreement.
  32




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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 5. Other Information
  
 Item 6. Exhibits
 Exhibits
 No.
    
    Description10.1(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(2)
    
    Credit Agreement dated as April 22, 2010 among MedQuist Transcriptions, Ltd. as
Borrower, MedQuist Inc. as Holdings, the Lenders and L/C Issuers party thereto, and
General Electric Capital Corporation as Administrative Agent and Collateral Agent,
CapitalSource Bank as Syndication Agent, Fifth Third Bank as Documentation Agent
and GE Capital Markets, Inc. as Sole Lead Arranger and Book Runner.10.3(3)
    
    MedQuist Transcriptions, Ltd. Subordinated Promissory Note dated April 22, 2010.10.4(4)
    
    Employment Agreement between Anthony D. James and MedQuist, Inc. for the position of
Co-Chief Operating Officer dated June 24, 2010.
 No.
    
    Description31.1
    
    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 2002.31.2
    
    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 2002.32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    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.
 33




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##### Table of Contents



(1)
    
    Incorporated by reference to our Current Report on Form 8-K filed with the SEC on April 21, 2010.(2)
    
    Incorporated by reference to our
Current Report on Form 8-K filed with
the SEC on April 28, 2010.(3)
    
    Incorporated by reference to our Current Report on Form 10-Q filed with the SEC on May 10, 2010.(4)
    
    Incorporated by reference to our Current Report on Form 8-K filed with the SEC on June 30, 2010. 34




---



##### Table of Contents



SIGNATURES
  MEDQUIST INC.Date: August 9, 2010
    /s/ Peter MasanottiPeter MasanottiPresident and Chief Executive Officer
(Principal Executive Officer)Date: August 9, 2010
    /s/ Dominick GolioDominick GolioChief Financial Officer
(Principal Financial Officer) 35




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##### Table of Contents



Exhibit Index
 No.
    
    Description31.1
    
    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
 
 #
    
    Portions of this Exhibit are omitted and filed separately with the
Secretary of the SEC pursuant to a request for confidential
treatment that has been filed with the SEC. 36