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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 June 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(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
    
    
    3Item 1.
    
    Financial Statements
    
    
    3Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 4.
    
    Controls and Procedures
    
    
    26PART II.
    
    OTHER INFORMATION
    
    
    27Item 1.
    
    Legal Proceedings
    
    
    27Item 1A.
    
    Risk Factors
    
    
    30Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    30Item 3.
    
    Defaults Upon Senior Securities
    
    
    30Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    30Item 5.
    
    Other Information
    
    
    30Item 6.
    
    Exhibits
    
    
    30Transcription Services AgreementAlan Gold Employment AgreementKevin Piltz Employment AgreementSettlement and License AgreementCertification of Chief Executive OfficerCertification of Chief Financial OfficerCertification of Chief Executive OfficerCertification of Chief Financial Officer
  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
    
    
    Six months endedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net revenues
    
    $
    77,471
    
    
    $
    82,454
    
    
    $
    156,415
    
    
    $
    166,179Operating costs and expenses:Cost of revenues
    
    
    51,357
    
    
    
    58,015
    
    
    
    105,225
    
    
    
    119,273Selling, general and administrative
    
    
    8,451
    
    
    
    12,066
    
    
    
    17,889
    
    
    
    24,950Research and development
    
    
    2,380
    
    
    
    3,735
    
    
    
    4,796
    
    
    
    7,854Depreciation
    
    
    2,669
    
    
    
    2,996
    
    
    
    5,221
    
    
    
    5,924Amortization of intangible assets
    
    
    1,504
    
    
    
    1,373
    
    
    
    3,015
    
    
    
    2,734Cost of legal proceedings and settlements, net
    
    
    10,134
    
    
    
    2,466
    
    
    
    12,058
    
    
    
    9,075Restructuring charges
    
    
    
    
    
    
    (45
    )
    
    
    
    
    
    
    (45
    )Total operating costs and expenses
    
    
    76,495
    
    
    
    80,606
    
    
    
    148,204
    
    
    
    169,765Operating income (loss)
    
    
    976
    
    
    
    1,848
    
    
    
    8,211
    
    
    
    (3,586
    )Equity in income of affiliated company
    
    
    356
    
    
    
    25
    
    
    
    428
    
    
    
    41Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    438Interest income, net
    
    
    19
    
    
    
    895
    
    
    
    65
    
    
    
    2,183Income (loss) before income taxes
    
    
    1,351
    
    
    
    2,768
    
    
    
    8,704
    
    
    
    (924
    )Income tax provision
    
    
    515
    
    
    
    933
    
    
    
    1,014
    
    
    
    1,658Net income (loss)
    
    $
    836
    
    
    $
    1,835
    
    
    $
    7,690
    
    
    $
    (2,582
    )Net income (loss) per share:Basic
    
    $
    0.02
    
    
    $
    0.05
    
    
    $
    0.20
    
    
    $
    (0.07
    )Diluted
    
    $
    0.02
    
    
    $
    0.05
    
    
    $
    0.20
    
    
    $
    (0.07
    )Weighted average shares outstanding:Basic
    
    
    37,556
    
    
    
    37,544
    
    
    
    37,556
    
    
    
    37,544Diluted
    
    
    37,556
    
    
    
    37,553
    
    
    
    37,556
    
    
    
    37,544
 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
 June 30,
    
    
    December 31,2009
    
    
    2008AssetsCurrent assets:Cash and cash equivalents
    
    $
    54,165
    
    
    $
    39,918Accounts receivable, net of allowance of $3,879 and $4,802, respectively
    
    
    44,996
    
    
    
    50,374Income tax receivable
    
    
    183
    
    
    
    154Other current assets
    
    
    7,322
    
    
    
    8,053Total current assets
    
    
    106,666
    
    
    
    98,499Property and equipment, net
    
    
    13,428
    
    
    
    15,785Goodwill
    
    
    40,731
    
    
    
    40,545Other intangible assets, net
    
    
    38,161
    
    
    
    39,877Deferred income taxes
    
    
    1,355
    
    
    
    1,204Other assets
    
    
    7,609
    
    
    
    6,295Total assets
    
    $
    207,950
    
    
    $
    202,205Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    7,274
    
    
    $
    7,487Accrued expenses
    
    
    9,020
    
    
    
    11,994Accrued compensation
    
    
    12,982
    
    
    
    11,204Customer accommodation
    
    
    11,973
    
    
    
    12,055Deferred income tax liability  current
    
    
    651
    
    
    
    651Deferred revenue
    
    
    13,700
    
    
    
    15,630Total current liabilities
    
    
    55,600
    
    
    
    59,021Deferred income taxes
    
    
    1,240
    
    
    
    799Other non-current liabilities
    
    
    2,295
    
    
    
    2,033Commitments and contingencies (Note 9)Shareholders equity:Common stock  no par value; authorized 60,000 shares;37,556 and 37,556 shares issued and outstanding, respectively
    
    
    238,003
    
    
    
    237,907Accumulated deficit
    
    
    (91,506
    )
    
    
    (99,198
    )Accumulated other comprehensive income
    
    
    2,318
    
    
    
    1,643Total shareholders equity
    
    
    148,815
    
    
    
    140,352Total liabilities and shareholders equity
    
    $
    207,950
    
    
    $
    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
 Six months endedJune 30,2009
    
    
    2008Operating activities:Net income (loss)
    
    $
    7,690
    
    
    $
    (2,582
    )Adjustments
to reconcile net income (loss) to cash provided by (used in) operating activities:Depreciation and amortization
    
    
    8,236
    
    
    
    8,658Equity in income of affiliated company
    
    
    (428
    )
    
    
    (41
    )Deferred income tax provision
    
    
    435
    
    
    
    1,491Stock option expense
    
    
    96
    
    
    
    162Provision for doubtful accounts
    
    
    89
    
    
    
    1,205Loss on disposal of property and equipment
    
    
    26
    
    
    
    38Changes in operating assets and liabilitiesAccounts receivable
    
    
    5,287
    
    
    
    (1,334
    )Income tax receivable
    
    
    (29
    )
    
    
    99Other current assets
    
    
    743
    
    
    
    (837
    )Other non-current assets
    
    
    (34
    )
    
    
    116Accounts payable
    
    
    361
    
    
    
    (2,065
    )Accrued expenses
    
    
    (3,872
    )
    
    
    (5,405
    )Accrued compensation
    
    
    1,765
    
    
    
    (309
    )Customer accommodation
    
    
    
    
    
    
    (5,593
    )Deferred revenue
    
    
    (2,045
    )
    
    
    172Other non-current liabilities
    
    
    112
    
    
    
    8Net cash provided by (used in) operating activities
    
    $
    18,432
    
    
    $
    (6,217
    )Investing activities:Purchase of property and equipment
    
    
    (2,135
    )
    
    
    (3,078
    )Capitalized software
    
    
    (1,283
    )
    
    
    (1,862
    )Proceeds from sale of investments
    
    
    
    
    
    
    692Investment in A-Life Medical, Inc.
    
    
    (852
    )
    
    
    Net cash used in investing activities
    
    
    (4,270
    )
    
    
    (4,248
    )Financing activities:Net cash provided by financing activities
    
    
    
    
    
    
    Effect of exchange rate changes
    
    
    85
    
    
    
    (22
    )Net increase (decrease) in cash and cash equivalents
    
    
    14,247
    
    
    
    (10,487
    )Cash and cash equivalents  beginning of period
    
    
    39,918
    
    
    
    161,582Cash and cash equivalents  end of period
    
    $
    54,165
    
    
    $
    151,095Supplemental cash flow information:Cash paid for income taxes
    
    $
    197
    
    
    $
    263Accommodation payments paid with credits
    
    $
    82
    
    
    $
    611
 The accompanying notes are an integral part of these consolidated financial statements.
 5




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MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
 1. Basis of Presentation
     Amendments to FASB Interpretation No. 46(R)
 TM
  2. Stock-Based Compensation
 Share Based Payment
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MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
 Three months ended June 30,
    
    
    Six months ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Selling, general and administrative
    
    $
    48
    
    
    $
    49
    
    
    $
    96
    
    
    $
    105Research and development
    
    
    
    
    
    
    21
    
    
    
    
    
    
    
    45Cost of revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12Total
    
    $
    48
    
    
    $
    70
    
    
    $
    96
    
    
    $
    162
   WeightedWeighted
    
    
    AverageShares
    
    
    Average
    
    
    Remaining
    
    
    AggregateSubject to
    
    
    Exercise
    
    
    Contractual
    
    
    IntrinsicOptions
    
    
    Price
    
    
    Life in Years
    
    
    ValueOutstanding, December 31, 2008
    
    
    1,816
    
    
    $
    23.34Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Canceled
    
    
    (285
    )
    
    
    21.61Outstanding, June 30, 2009
    
    
    1,531
    
    
    
    24.32
    
    
    
    3.6
    
    
    $
    Exercisable, June 30, 2009
    
    
    1,235
    
    
    
    28.17
    
    
    
    2.3
    
    
    $
    Options vested and expected to vest as of June 30, 2009
    
    
    1,531
    
    
    $
    24.32
    
    
    
    3.6
    
    
    $
    
   Expected term (years)
    
    
    5.92Expected volatility
    
    
    54.46
    %Dividend yield
    
    
    0
    %Expected risk free interest rate
    
    
    3.25
    %
  7




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MedQuist Inc. and 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
    
    
    
    8.7
    
    
    $
    8.10
    
    
    
    18
    
    
    $
    5.71$10.01  $20.00
    
    
    382
    
    
    
    3.5
    
    
    $
    15.85
    
    
    
    382
    
    
    $
    15.85$20.01  $30.00
    
    
    565
    
    
    
    2.1
    
    
    $
    26.41
    
    
    
    565
    
    
    $
    26.41$30.01  $40.00
    
    
    81
    
    
    
    0.9
    
    
    $
    32.70
    
    
    
    81
    
    
    $
    32.70$40.01  $70.00
    
    
    189
    
    
    
    1.0
    
    
    $
    58.63
    
    
    
    189
    
    
    $
    58.631,531
    
    
    
    3.6
    
    
    $
    24.32
    
    
    
    1,235
    
    
    $
    28.17
  3. Other Comprehensive Income (Loss)
  Three months ended June 30,
    
    
    Six months ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income (loss)
    
    $
    836
    
    
    $
    1,835
    
    
    $
    7,690
    
    
    $
    (2,582
    )Foreign currency translation adjustment
    
    
    942
    
    
    
    65
    
    
    
    677
    
    
    
    (39
    )Other Comprehensive income (loss)
    
    $
    1,778
    
    
    $
    1,900
    
    
    $
    8,367
    
    
    $
    (2,621
    )
 4. Net Income (Loss) per Share
   Three months ended June 30,
    
    
    Six months ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income (loss)
    
    $
    836
    
    
    $
    1,835
    
    
    $
    7,690
    
    
    $
    (2,582
    )Weighted average shares outstanding:Basic
    
    
    37,556
    
    
    
    37,544
    
    
    
    37,556
    
    
    
    37,544Effect of dilutive shares
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    Diluted
    
    
    37,556
    
    
    
    37,553
    
    
    
    37,556
    
    
    
    37,544Net income (loss) per share:Basic
    
    $
    0.02
    
    
    $
    0.05
    
    
    $
    0.20
    
    
    $
    (0.07
    )Diluted
    
    $
    0.02
    
    
    $
    0.05
    
    
    $
    0.20
    
    
    $
    (0.07
    )
  5. Customer Accommodation
  8




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MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
   Six months ended
    
    
    Year endedJune 30, 2009
    
    
    December 31, 2008Beginning balance
    
    $
    12,055
    
    
    $
    18,459Payments and other adjustments
    
    
    
    
    
    
    (5,664
    )Credits
    
    
    (82
    )
    
    
    (740
    )Ending balance
    
    $
    11,973
    
    
    $
    12,055
 6. Cost of Legal Proceedings and Settlements, Net
  Three months ended June 30,
    
    
    Six months ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Legal fees
    
    $
    4,384
    
    
    $
    2,344
    
    
    $
    6,278
    
    
    $
    7,216Other professional fees
    
    
    
    
    
    
    122
    
    
    
    30
    
    
    
    359Settlements
    
    
    5,750
    
    
    
    
    
    
    
    5,750
    
    
    
    1,500Total
    
    $
    10,134
    
    
    $
    2,466
    
    
    $
    12,058
    
    
    $
    9,075
  7. Restructuring Plans
 2008 Restructuring Plans
  Six Months Ended
    
    
    Year EndedJune 30, 2009
    
    
    December 31, 2008Beginning balance
    
    $
    1,323
    
    
    $
    Charge
    
    
    
    
    
    
    2,135Cash paid
    
    
    (1,143
    )
    
    
    (812
    )Ending balance
    
    $
    180
    
    
    $
    1,323
 9




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MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
 8. Income Taxes
  Accounting for Uncertainty in Income Taxes  an
interpretation of FASB Statement 109
 9. Commitments and Contingencies
 Customer Litigation
 Kaiser Litigation
    The Consolidated Medical Transcriptionist Litigation
  10




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MedQuist Inc. and 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. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
     Anthurium Patent Litigation
 Anthurium
Solutions, Inc. v. MedQuist Inc., et al.,
 12




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MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
  SEC Investigations of Former Officers
  Other Matters
     10. Related Party Transactions
   13




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




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MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
 OEM Supply Agreement
    Equipment Purchases
  Insurance Coverage
  Other
   15




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MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
 Three Months Ended
    
    
    Six Months EndedJune 30, 2008
    
    
    June 30, 2008Licensing agreement
    
    $
    910
    
    
    $
    1,715OEM supply agreement
    
    
    625
    
    
    
    1,500Equipment purchases
    
    
    188
    
    
    
    489Insurance coverage
    
    
    167
    
    
    
    334Cbay Transaction
    
    
    (119
    )
    
    
    (119
    )Other
    
    
    
    
    
    
    (39
    )Ending balance
    
    $
    1,771
    
    
    $
    3,880
    11. Investment in A-Life Medical, Inc. (A-Life)
   12. Financial Instruments
  16




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MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
  Quoted Prices InActive Markets for
    
    
    Significant Other
    
    
    SignificantJune 30,
    
    
    Identical
    
    
    Observable
    
    
    Unobservable2009
    
    
    Assets (Level 1)
    
    
    Inputs (Level 2)
    
    
    Inputs (Level 3)AssetsExecutive
Deferred
Compensation
Plan assets
    
    $
    759
    
    
    $
    
    
    
    $
    759
    
    
    $
    
 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
    
    
    $
    
 17




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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;
    
    difficulties relating to our significant management turnover; and
    
    general conditions in the economy and capital markets.
    Executive Overview
  18




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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;
    
    access to skilled MTs; and
 19




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##### Table of Contents




    
    support for compliance with governmental and industry mandated privacy and security requirements and electronic
health record (EHR) initiatives.
   
    
    revenues;
    
    operating income;
    
    net income per share;
    
    net cash provided by operating activities; and
    
    days sales outstanding.
  Critical Accounting Policies, Judgments and Estimates
   Amendments to FASB Interpretation No. 46(R)
 TM
 20




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##### Table of Contents



Basis of Presentation
 Sources of Revenues
  Cost of Revenues
  Selling, General and Administrative (SG&A)
  Research and Development (R&D)
  Depreciation and amortization
  Cost of legal proceedings and settlements, net
  Consolidated Results of Operations
  21




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Comparison of Three Months Ended June 30, 2009 and 2008
 Three Months Ended June 30,2009
    
    
    2008% of Net
    
    
    
    
    
    
    % of Net($ in thousands)
    
    Amount
    
    
    Revenues
    
    
    Amount
    
    
    Revenues
    
    
    $ Change
    
    
    % ChangeNet revenues
    
    $
    77,471
    
    
    
    100.0
    %
    
    $
    82,454
    
    
    
    100.0
    %
    
    $
    (4,983
    )
    
    
    (6.0
    %)Operating costs and expenses:Cost of revenues
    
    
    51,357
    
    
    
    66.3
    %
    
    
    58,015
    
    
    
    70.4
    %
    
    
    (6,658
    )
    
    
    (11.5
    %)Selling, general and administrative
    
    
    8,451
    
    
    
    10.9
    %
    
    
    12,066
    
    
    
    14.6
    %
    
    
    (3,615
    )
    
    
    (30.0
    %)Research and development
    
    
    2,380
    
    
    
    3.1
    %
    
    
    3,735
    
    
    
    4.5
    %
    
    
    (1,355
    )
    
    
    (36.3
    %)Depreciation
    
    
    2,669
    
    
    
    3.4
    %
    
    
    2,996
    
    
    
    3.6
    %
    
    
    (327
    )
    
    
    (10.9
    %)Amortization of intangible assets
    
    
    1,504
    
    
    
    1.9
    %
    
    
    1,373
    
    
    
    1.7
    %
    
    
    131
    
    
    
    9.5
    %Cost of legal proceedings and settlements, net
    
    
    10,134
    
    
    
    13.1
    %
    
    
    2,466
    
    
    
    3.0
    %
    
    
    7,668
    
    
    
    310.9
    %Restructuring charges
    
    
    
    
    
    
    
    
    
    
    (45
    )
    
    
    (0.1
    %)
    
    
    45
    
    
    
    (100.0
    %)Total operating costs and expenses
    
    
    76,495
    
    
    
    98.7
    %
    
    
    80,606
    
    
    
    97.8
    %
    
    
    (4,111
    )
    
    
    (5.1
    %)Operating income
    
    
    976
    
    
    
    1.3
    %
    
    
    1,848
    
    
    
    2.2
    %
    
    
    (872
    )
    
    
    (47.2
    %)Equity in income of affiliated company
    
    
    356
    
    
    
    0.5
    %
    
    
    25
    
    
    
    0.0
    %
    
    
    331
    
    
    
    1,324.0
    %Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    n.a.Interest income, net
    
    
    19
    
    
    
    0.0
    %
    
    
    895
    
    
    
    1.1
    %
    
    
    (876
    )
    
    
    (97.9
    %)Income before income taxes
    
    
    1,351
    
    
    
    1.7
    %
    
    
    2,768
    
    
    
    3.4
    %
    
    
    (1,417
    )
    
    
    (51.2
    %)Income tax provision
    
    
    515
    
    
    
    0.7
    %
    
    
    933
    
    
    
    1.1
    %
    
    
    (418
    )
    
    
    (44.8
    %)Net income
    
    $
    836
    
    
    
    1.1
    %
    
    $
    1,835
    
    
    
    2.2
    %
    
    $
    (999
    )
    
    
    (54.4
    %)
 Net revenues
  Cost of revenues
  
    
    Reduced medical transcription payroll costs of $1.9 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 $0.3 million;
    
    Reduced medical transcription costs of $1.6 million related to the increase in our outsourced medical
transcription volumes to our international labor partners;
    
    Reduced costs of $1.7 million resulting from headcount reductions taken in 2008 to better align our
overhead costs with our lower revenues levels;
    
    a one time benefit of $1.2 million related to the release of a reserve for prior period medical claims; and
  Selling, general and administrative
  22




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Research & development
  Depreciation
  Amortization
  Cost of legal proceedings and settlements, net
  Interest income, net
  Income tax provision
  23




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##### Table of Contents



Comparison of Six Months Ended June 30, 2009 and 2008
 Six Months Ended June 30,2009
    
    
    2008% of Net
    
    
    
    
    
    
    % of Net($ in thousands)
    
    Amount
    
    
    Revenues
    
    
    Amount
    
    
    Revenues
    
    
    $ Change
    
    
    % ChangeNet revenues
    
    $
    156,415
    
    
    
    100.0
    %
    
    $
    166,179
    
    
    
    100.0
    %
    
    $
    (9,764
    )
    
    
    (5.9
    %)Operating costs and expenses:Cost of revenues
    
    
    105,225
    
    
    
    67.3
    %
    
    
    119,273
    
    
    
    71.8
    %
    
    
    (14,048
    )
    
    
    (11.8
    %)Selling, general and administrative
    
    
    17,889
    
    
    
    11.4
    %
    
    
    24,950
    
    
    
    15.0
    %
    
    
    (7,061
    )
    
    
    (28.3
    %)Research and development
    
    
    4,796
    
    
    
    3.1
    %
    
    
    7,854
    
    
    
    4.7
    %
    
    
    (3,058
    )
    
    
    (38.9
    %)Depreciation
    
    
    5,221
    
    
    
    3.3
    %
    
    
    5,924
    
    
    
    3.6
    %
    
    
    (703
    )
    
    
    (11.9
    %)Amortization of intangible assets
    
    
    3,015
    
    
    
    1.9
    %
    
    
    2,734
    
    
    
    1.6
    %
    
    
    281
    
    
    
    10.3
    %Cost of legal proceedings and settlements, net
    
    
    12,058
    
    
    
    7.7
    %
    
    
    9,075
    
    
    
    5.5
    %
    
    
    2,983
    
    
    
    32.9
    %Restructuring charges
    
    
    
    
    
    
    
    
    
    
    (45
    )
    
    
    (0.0
    %)
    
    
    45
    
    
    
    (100.0
    %)Total operating costs and expenses
    
    
    148,204
    
    
    
    94.8
    %
    
    
    169,765
    
    
    
    102.2
    %
    
    
    (21,561
    )
    
    
    (12.7
    %)Operating income (loss)
    
    
    8,211
    
    
    
    5.2
    %
    
    
    (3,586
    )
    
    
    (2.2
    %)
    
    
    11,797
    
    
    
    (329.0
    %)Equity in income of affiliated company
    
    
    428
    
    
    
    0.3
    %
    
    
    41
    
    
    
    0.0
    %
    
    
    387
    
    
    
    943.9
    %Other income
    
    
    
    
    
    
    
    
    
    
    438
    
    
    
    0.3
    %
    
    
    (438
    )
    
    
    (100.0
    %)Interest income, net
    
    
    65
    
    
    
    0.0
    %
    
    
    2,183
    
    
    
    1.3
    %
    
    
    (2,118
    )
    
    
    (97.0
    %)Income (loss) before income taxes
    
    
    8,704
    
    
    
    5.6
    %
    
    
    (924
    )
    
    
    (0.6
    %)
    
    
    9,628
    
    
    
    (1,042.0
    %)Income tax provision
    
    
    1,014
    
    
    
    0.6
    %
    
    
    1,658
    
    
    
    1.0
    %
    
    
    (644
    )
    
    
    (38.8
    %)Net income (loss)
    
    $
    7,690
    
    
    
    4.9
    %
    
    $
    (2,582
    )
    
    
    (1.6
    %)
    
    $
    10,272
    
    
    
    (397.8
    %)
 Net revenues
  Cost of revenues
  
    
    Reduced medical transcription payroll costs of $5.0 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 $1.2 million;
    
    Reduced medical transcription costs of $2.3 million related to the increase in our outsourced medical
transcription volumes to our international labor partners;
    
    Reduced medical transcription payroll costs of $1.1 million related to the decrease in our outsourced
medical transcription volumes and cost controls;
    
    Reduced costs of $3.4 million resulting from headcount reductions taken in 2008 to better align our
overhead costs with our lower revenues levels;
    
    a one time benefit of $1.2 million related to the release of a reserve for prior period medical claims;
  24




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##### Table of Contents



Selling, general and administrative
  Research & development
  Depreciation
  Amortization
  Cost of legal proceedings and settlements, net
  Interest income, net
  Income tax provision
  25




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##### Table of Contents



Liquidity and Capital Resources
   Off-Balance Sheet Arrangements
  
 Item 4.
    
    Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  26




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1.
    
    Legal Proceedings
 Customer Litigation
 Kaiser Litigation
    The Consolidated Medical Transcriptionist Litigation
   Shareholder Litigation
 Kahn Putative Class Action
  27




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##### Table of Contents



Reseller Arbitration Demand
   28




---



##### Table of Contents



Anthurium Patent Litigation
 Anthurium
Solutions, Inc. v. MedQuist Inc., et al.,
  SEC Investigations of Former Officers
  Other Matters
   29




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##### Table of Contents



Item 1A.
    
    Risk Factors
  
 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
    
    Transcription Services Agreement by and between MedQuist Transcriptions, Ltd. and CBay Systems & Services,
Inc. dated April 3, 2009 (*)10.2
    
    Employment Agreement by and between Alan Gold and MedQuist Inc. dated February 26, 200910.3(1)
    
    Employment Agreement by and between Dominick Golio and MedQuist Inc. dated April 9, 200910.4
    
    Employment Agreement by and between Kevin Piltz and MedQuist Inc. dated May 18, 200910.5
    
    Settlement and License Agreement by and between Anthurium Solutions, Inc. and MedQuist Inc. dated June 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 2002
 30




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##### Table of Contents



No.
    
    Description32.1
    
    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 April 15, 2009(*)
    
    Portions of this Exhibit were omitted and filed separately with the Secretary of the SEC
pursuant to a request for confidential treatment that has been filed with the SEC. 31




---



##### Table of Contents



SIGNATURES
  MEDQUIST INC.Date: July 30, 2009
    /s/ Peter MasanottiPeter MasanottiPresident and Chief Executive Officer
(Principal Executive Officer)Date: July 30, 2009
    /s/ Dominick GolioDominick GolioChief Financial Officer
(Principal Financial Officer) 32




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##### Table of Contents



Exhibit Index
 No.
    
    Description10.1
    
    Transcription Services Agreement by and between MedQuist Transcriptions, Ltd. and CBay Systems & Services,
Inc. dated April 3, 2009 (*)10.2
    
    Employment Agreement by and between Alan Gold and MedQuist Inc. dated February 26, 200910.4
    
    Employment Agreement by and between Kevin Piltz and MedQuist Inc. dated May 18, 2009
 33




---



##### Table of Contents



No.
    
    Description10.5
    
    Settlement and License Agreement by and between Anthurium Solutions, Inc. and MedQuist Inc. dated June 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
 
 (*)
    
    Portions of this Exhibit were omitted and filed separately with
the Secretary of the SEC pursuant to a request for confidential
treatment that has been filed with the SEC. 34