##### Table of Contents



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 September 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
    
    22-2531298(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)1000 BISHOPS GATE BOULEVARDSUITE 300MOUNT LAUREL, NEW JERSEY
    
    08054-4632(Address of Principal Executive Offices)
    
    (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
    
    
    13Item 4. Controls and Procedures
    
    
    25PART II. OTHER INFORMATION
    
    
    26Item 1. Legal Proceedings
    
    
    26Item 1A. Risk Factors
    
    
    26Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    30Item 3. Defaults Upon Senior Securities
    
    
    30Item 5. Other Information
    
    
    30Item 6. Exhibits
    
    
    30




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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 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net revenues
    
    $
    102,933
    
    
    $
    76,836
    
    
    $
    274,442
    
    
    $
    233,251Operating costs and expenses:Cost of revenues
    
    
    68,427
    
    
    
    52,768
    
    
    
    185,350
    
    
    
    157,993Selling, general and administrative
    
    
    9,352
    
    
    
    7,930
    
    
    
    28,169
    
    
    
    25,819Research and development
    
    
    3,681
    
    
    
    2,439
    
    
    
    9,274
    
    
    
    7,235Depreciation
    
    
    2,822
    
    
    
    2,197
    
    
    
    7,518
    
    
    
    7,418Amortization of intangible assets
    
    
    3,394
    
    
    
    1,518
    
    
    
    8,229
    
    
    
    4,533Cost of legal proceedings and settlements
    
    
    631
    
    
    
    1,382
    
    
    
    2,783
    
    
    
    13,440Acquistion and integration related charges
    
    
    842
    
    
    
    
    
    
    
    6,501
    
    
    
    Restructuring charges
    
    
    495
    
    
    
    481
    
    
    
    1,425
    
    
    
    481Total operating costs and expenses
    
    
    89,644
    
    
    
    68,715
    
    
    
    249,249
    
    
    
    216,919Operating income
    
    
    13,289
    
    
    
    8,121
    
    
    
    25,193
    
    
    
    16,332Equity in income of affiliated company
    
    
    70
    
    
    
    2,154
    
    
    
    616
    
    
    
    2,582Interest income (expense)
    
    
    (2,927
    )
    
    
    (29
    )
    
    
    (6,706
    )
    
    
    36Income before income taxes
    
    
    10,432
    
    
    
    10,246
    
    
    
    19,103
    
    
    
    18,950Income tax provision
    
    
    1,461
    
    
    
    542
    
    
    
    1,908
    
    
    
    1,556Net income
    
    $
    8,971
    
    
    $
    9,704
    
    
    $
    17,195
    
    
    $
    17,394Net income per share:Basic
    
    $
    0.24
    
    
    $
    0.26
    
    
    $
    0.46
    
    
    $
    0.46Diluted
    
    $
    0.24
    
    
    $
    0.26
    
    
    $
    0.46
    
    
    $
    0.46Weighted average shares outstanding:Basic
    
    
    37,556
    
    
    
    37,556
    
    
    
    37,556
    
    
    
    37,556Diluted
    
    
    37,556
    
    
    
    37,560
    
    
    
    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
 September 30,
    
    
    December 31,2010
    
    
    2009AssetsCurrent assets:Cash and cash equivalents
    
    $
    21,894
    
    
    $
    25,216Accounts receivable, net of allowance of $3,305 and $3,159, respectively
    
    
    65,026
    
    
    
    43,627Income tax receivable
    
    
    35
    
    
    
    772Other current assets
    
    
    9,311
    
    
    
    4,940Total current assets
    
    
    96,266
    
    
    
    74,555Property and equipment, net
    
    
    14,975
    
    
    
    11,772Goodwill
    
    
    88,951
    
    
    
    40,813Other intangible assets, net
    
    
    81,984
    
    
    
    36,307Deferred income taxes
    
    
    1,525
    
    
    
    1,396Other assets
    
    
    14,788
    
    
    
    9,818Total assets
    
    $
    298,489
    
    
    $
    174,661Liabilities and Shareholders EquityCurrent liabilities:Current portion of long term debt (subsequently refinanced, see Note 4)
    
    $
    25,000
    
    
    $
    Accounts payable
    
    
    6,275
    
    
    
    8,687Accrued expenses
    
    
    24,374
    
    
    
    21,490Accrued compensation
    
    
    17,133
    
    
    
    12,432Current portion of lease obligations
    
    
    1,229
    
    
    
    Related party payable
    
    
    6,681
    
    
    
    1,362Deferred revenue
    
    
    10,762
    
    
    
    10,854Total current liabilities
    
    
    91,454
    
    
    
    54,825Long term debt (subsequently refinanced, see Note 4)
    
    
    68,898
    
    
    
    Deferred income taxes
    
    
    5,419
    
    
    
    3,240Other non-current liabilities
    
    
    874
    
    
    
    1,848Commitments and contingenciesShareholders equity:Common stock  no par value; authorized 60,000 shares;
37,556 and 37,556 shares issued and outstanding, respectively
    
    
    237,993
    
    
    
    237,848Accumulated deficit
    
    
    (108,659
    )
    
    
    (125,854
    )Accumulated other comprehensive income
    
    
    2,510
    
    
    
    2,754Total shareholders equity
    
    
    131,844
    
    
    
    114,748Total liabilities and shareholders equity
    
    $
    298,489
    
    
    $
    174,661
 The accompanying notes are an integral part of these consolidated financial statements.
 2




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MedQuist Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Unaudited
 Nine months endedSeptember 30,2010
    
    
    2009Operating activities:Net income
    
    $
    17,195
    
    
    $
    17,394Adjustments to reconcile net income to cash provided by
operating activities:Depreciation and amortization
    
    
    15,747
    
    
    
    11,951Equity in income of affiliated company
    
    
    (616
    )
    
    
    (2,582
    )Deferred income taxes
    
    
    2,021
    
    
    
    662Stock option expense
    
    
    145
    
    
    
    144Noncash interest expense
    
    
    328
    
    
    
    Provision for doubtful accounts
    
    
    1,571
    
    
    
    230Loss on disposal of property and equipment
    
    
    
    
    
    
    27Changes in operating assets and liabilities:Accounts receivable
    
    
    (554
    )
    
    
    6,847Income tax receivable
    
    
    733
    
    
    
    (50
    )Other current assets
    
    
    (1,216
    )
    
    
    3,467Other non-current assets
    
    
    869
    
    
    
    (34
    )Accounts payable
    
    
    1,129
    
    
    
    (351
    )Accrued expenses and Related party payable
    
    
    (6,910
    )
    
    
    (3,744
    )Accrued compensation
    
    
    878
    
    
    
    2,959Deferred revenue
    
    
    (170
    )
    
    
    (4,107
    )Other non-current liabilities
    
    
    (1,056
    )
    
    
    168Net cash provided by operating activities
    
    
    30,094
    
    
    
    32,981Investing activities:Purchase of property and equipment
    
    
    (3,793
    )
    
    
    (3,603
    )Proceeds from sale of investments
    
    
    
    
    
    
    Capitalized software
    
    
    (3,806
    )
    
    
    (1,846
    )Proceeds from sale of investments
    
    
    
    
    
    
    Investment in affiliated company
    
    
    
    
    
    
    (852
    )Proceeds from sale of property
    
    
    
    
    
    
    Acquisition, net of cash acquired
    
    
    (98,661
    )
    
    
    Net cash used in investing activities
    
    
    (106,260
    )
    
    
    (6,301
    )Financing activities:Borrowing on credit line
    
    
    100,000
    
    
    
    Repayment of debt
    
    
    (20,000
    )
    
    
    Dividends paid
    
    
    
    
    
    
    (49,949
    )Debt issuance costs
    
    
    (7,031
    )
    
    
    (1,171
    )Purchase and retirement of stock
    
    
    
    
    
    
    Proceeds from issuance of stock
    
    
    
    
    
    
    Payments on lease obligations
    
    
    (129
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    72,840
    
    
    
    (51,120
    )Effect of exchange rate changes
    
    
    4
    
    
    
    199Net decrease in cash and cash equivalents
    
    
    (3,322
    )
    
    
    (24,241
    )Cash and cash equivalents  beginning of period
    
    
    25,216
    
    
    
    39,918Cash and cash equivalents  end of period
    
    $
    21,894
    
    
    $
    15,677Supplemental cash flow information:Cash paid (refunded) for income taxes
    
    $
    (318
    )
    
    $
    241Accommodation payments paid with credits
    
    $
    
    
    
    $
    103Noncash 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. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
 1. Basis of Presentation
   4




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MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
 2. Acquisition of Spheris Assets in the United States
  5




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MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
  Pro Forma Three MonthsEnded September 30, 2009Net revenues
    
    $
    115,381Net income
    
    $
    9,147Net income per share (Basic)
    
    $
    0.24Net income per share (Diluted)
    
    $
    0.24
 Pro Forma Nine MonthsEnded September 30,2010
    
    2009Net revenues
    
    $
    317,813
    
    
    $
    353,638Net income
    
    $
    20,909
    
    
    $
    16,428Net income per share (Basic)
    
    $
    0.56
    
    
    $
    0.44Net income per share (Diluted)
    
    $
    0.56
    
    
    $
    0.44
   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 acquiredWorking capital
    
    $
    7,373Property, 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
    
    
    48,165Identifiable assets acquired and liabilities assumed
    
    $
    112,404
  AmortizationPeriodDeveloped technology
    
    9 yearsCustomer relationships
    
    7-9 yearsTrademarks and trade names
    
    4 yearsGoodwill
    
    indefinite
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MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
   3. Debt
  September 30, 2010Term loan due from 2010 to 2012, with interest at Prime plus 3.25%
    
    $
    45,000Revolving loan with interest at Prime plus 3% with a scheduled termination date of April 22, 2014
    
    
    35,000Subordinated Promissory Note due in 2015 with varying interest rates and provisions for early repayment
    
    
    13,89893,898Less: Current maturities
    
    
    (25,000
    )Total long term debt
    
    $
    68,898
        7




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MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
    4. Subsequent Events
 Recapitalization Transactions and Sale of A-Life
  
    
    a $200.0 million term loan, advanced in one drawing on October 14, 2010 (the Closing
Date), with a term of five years, repayable in equal quarterly installments of $5.0
million, commencing on the first day of the first fiscal quarter beginning after the
Closing Date, with the balance payable at maturity; and
    
    a $25.0 million revolving credit facility under which borrowings may be made from time
to time during the period from the Closing Date until the fifth anniversary of the Closing
Date. The revolving facility includes a $5.0 million letter-of-credit sub-facility and a $5
million swing line loan sub-facility.
      Historical
    
    Effect of
    
    Pro formaSeptember 30,
    
    Refinancing and
    
    September2010
    
    Dividend
    
    30, 2010Current portion of long-term debt and long term debt
    
    $
    93,898
    
    
    $
    191,102
    
    
    $
    285,000Shareholders equity (deficit)Common stock
    
    $
    237,993
    
    
    $
    
    
    
    $
    237,993Accumulated deficit
    
    
    (108,659
    )
    
    
    (176,500
    )
    
    
    (285,159
    )Accumulated other comprehensive income
    
    
    2,510
    
    
    
    
    
    
    
    2,510
  Exchange Transactions
   5. Comprehensive Income
  Three months ended September 30,
    
    
    Nine months ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net income
    
    $
    8,971
    
    
    $
    9,704
    
    
    $
    17,195
    
    
    $
    17,394Foreign currency translation adjustment
    
    
    269
    
    
    
    138
    
    
    
    (244
    )
    
    
    813Comprehensive income
    
    $
    9,240
    
    
    $
    9,842
    
    
    $
    16,951
    
    
    $
    18,207
 6. Net Income per Share
   Three months ended September 30,
    
    
    Nine months ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net income
    
    $
    8,971
    
    
    $
    9,704
    
    
    $
    17,195
    
    
    $
    17,394Weighted average shares outstanding:Basic
    
    
    37,556
    
    
    
    37,556
    
    
    
    37,556
    
    
    
    37,556Effect of dilutive shares
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    Diluted
    
    
    37,556
    
    
    
    37,560
    
    
    
    37,556
    
    
    
    37,556Net income per share:Basic
    
    $
    0.24
    
    
    $
    0.26
    
    
    $
    0.46
    
    
    $
    0.46Diluted
    
    $
    0.24
    
    
    $
    0.26
    
    
    $
    0.46
    
    
    $
    0.46
   7. Accrued Expenses
  8




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MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
 September 30, 2010
    
    
    December 31, 2009Customer accommodations
    
    $
    10,387
    
    
    $
    11,635Other (no item exceeds 5% of current liabilities)
    
    
    13,987
    
    
    
    9,855Total accrued expenses
    
    $
    24,374
    
    
    $
    21,490
    Nine months ended
    
    
    Year endedSeptember 30, 2010
    
    
    December 31, 2009Beginning balance
    
    $
    11,635
    
    
    $
    12,055Payments and other adjustments
    
    
    (1,248
    )
    
    
    (317
    )Credits
    
    
    
    
    
    
    (103
    )Ending balance
    
    $
    10,387
    
    
    $
    11,635
 2010 Restructuring Plan
   Nine Months EndedSeptember 30, 2010Beginning balance
    
    $
    Charge during the three months ended June 30, 2010
    
    
    809Charge during the three months ended September 30, 2010
    
    
    1,232Cash paid
    
    
    (634
    )Ending balance
    
    $
    1,407
  2009 Restructuring Plan
 9




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MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
  Nine Months Ended
    
    
    Year EndedSeptember 30, 2010
    
    
    December 31, 2009Beginning balance
    
    $
    2,064
    
    
    $
    Charge (reversal)
    
    
    (616
    )
    
    
    2,810Cash paid
    
    
    (1,113
    )
    
    
    (746
    )Ending balance
    
    $
    335
    
    
    $
    2,064
 8. Cost of Legal Proceedings and Settlements
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Legal fees
    
    $
    631
    
    
    $
    1,382
    
    
    $
    1,873
    
    
    $
    7,690Settlements
    
    
    
    
    
    
    
    
    
    
    910
    
    
    
    5,750Total
    
    $
    631
    
    
    $
    1,382
    
    
    $
    2,783
    
    
    $
    13,440
  9. Income Taxes
    10. Commitments and Contingencies
 Kaiser Litigation
   10




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MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
 Kahn Putative Class Action
   Reseller Arbitration Demand
   SEC Investigation of Former Officer
  11. Related Party Transactions
     11




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MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for per share amounts)
Unaudited
   12




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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;
    
    potential synergies from the acquisition of Spheris;
    
    our ability to adopt and integrate new technologies;
    
    our expectation as to the future growth of the healthcare industry and continued demand for
transcription services;
    
    increases in the productivity of medical transcriptionists (MTs) and medical editors (MEs) in
order to outpace the decline in prices for medical transcription;
    
    customer retention;
    
    potential benefits of our size and scale;
    
    our ability to develop and adopt new technologies;
    
    our ability to gain new customers;
    
    our ability to increase sales; and
    
    our ability to diversify into other businesses.
    
    our 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; and
    
    our ability to operate the business given our restrictions under the Senior Secured Credit
Facility and Senior Subordinated Notes;
    13




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Executive Overview
  Recent Developments
    Historical
    
    Effect of
    
    Pro formaSeptember 30,
    
    Refinancing
    
    September 30,2010
    
    and Dividend
    
    2010(in thousands)Current portion of long-term debt and long term debt
    
    $
    93,898
    
    
    $
    191,102
    
    
    $
    285,000Shareholders equity (deficit)Common stock
    
    $
    237,993
    
    
    $
    
    
    
    $
    237,993Accumulated deficit
    
    
    (108,659
    )
    
    
    (176,500
    )
    
    
    (285,159
    )Accumulated other comprehensive income
    
    
    2,510
    
    
    
    
    
    
    
    2,510Total shareholders equity (deficit)
    
    $
    131,844
    
    
    $
    (176,500
    )
    
    $
    (44,656
    )
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Volume and Pricing Trends
     Operating Improvements
  15




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Selling, General and Administrative Expense Savings
   Critical Accounting Policies, Judgments and Estimates
   Valuation of Long-Lived and Other Intangible Assets and Goodwill:
   
    
    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;
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
    
    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.
 Revenue recognition.
   Commitments and contingencies.
 Accounts receivable and allowance for doubtful accounts.
   Customer Accommodation Program
  Acquisition of Spheris Inc. Assets and Related Debt Incurred
  17




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##### Table of Contents



Pro Forma Three MonthsEnded September 30, 2009(in thousands, except per share amount)Net revenues
    
    $
    115,381Net income
    
    $
    9,147Net income per share (Basic)
    
    $
    0.24Net income per share (Diluted)
    
    $
    0.24
 Pro Forma Nine MonthsEnded September 30,2010
    
    2009(in thousands, except per share amount)Revenue
    
    $
    317,813
    
    
    $
    353,638Net income
    
    $
    20,909
    
    
    $
    16,428EPS Basic
    
    $
    0.56
    
    
    $
    0.44EPS Diluted
    
    $
    0.56
    
    
    $
    0.44
   Debt Incurred
 September 30, 2010(in thousands)Term loan due from 2010 to 2012, with interest at Prime plus 3.25%
    
    $
    45,000Revolving loan with interest at Prime plus 3% with a scheduled termination date of April 22, 2014
    
    
    35,000Subordinated Promissory Note due in 2015 with varying interest rates and provisions for early repayment
    
    
    13,89893,898Less: Current maturities
    
    
    (25,000
    )Total long term debt
    
    $
    68,898
   Basis of Presentation
 Sources of Net Revenues
  Cost of Revenues
  18




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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
  Acquisition and integration related charges
  Restructuring charges
  Consolidated Results of Operations
  Comparison of Three Months Ended September 30, 2010 and 2009
 19




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##### Table of Contents



MedQuist Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
 Unaudited
 Three Months Ended September 30,2010
    
    
    2009
    
    
    
    
    
    
    Change in% of Net
    
    
    
    
    
    
    % of Net
    
    
    
    
    
    
    % of Net($ in thousands)
    
    Amount
    
    
    Revenues
    
    
    Amount
    
    
    Revenues
    
    
    $ Change
    
    
    RevenuesNet revenues
    
    $
    102,933
    
    
    
    100.0
    %
    
    $
    76,836
    
    
    
    100.0
    %
    
    $
    26,097
    
    
    
    Operating costs and expenses:Cost of revenues
    
    
    68,427
    
    
    
    66.5
    %
    
    
    52,768
    
    
    
    68.7
    %
    
    
    15,659
    
    
    
    (2.2
    %)Selling, general and administrative
    
    
    9,352
    
    
    
    9.1
    %
    
    
    7,930
    
    
    
    10.3
    %
    
    
    1,422
    
    
    
    (1.2
    %)Research and development
    
    
    3,681
    
    
    
    3.6
    %
    
    
    2,439
    
    
    
    3.2
    %
    
    
    1,242
    
    
    
    0.4
    %Depreciation
    
    
    2,822
    
    
    
    2.7
    %
    
    
    2,197
    
    
    
    2.9
    %
    
    
    625
    
    
    
    (0.1
    %)Amortization of intangible assets
    
    
    3,394
    
    
    
    3.3
    %
    
    
    1,518
    
    
    
    2.0
    %
    
    
    1,876
    
    
    
    1.3
    %Cost of legal proceedings and settlements
    
    
    631
    
    
    
    0.6
    %
    
    
    1,382
    
    
    
    1.8
    %
    
    
    (751
    )
    
    
    (1.2
    %)Acquisition and integration related charges
    
    
    842
    
    
    
    0.8
    %
    
    
    
    
    
    
    
    
    
    
    842
    
    
    
    0.8
    %Restructuring charges
    
    
    495
    
    
    
    0.5
    %
    
    
    481
    
    
    
    0.6
    %
    
    
    14
    
    
    
    (0.1
    %)Total operating costs and expenses
    
    
    89,644
    
    
    
    87.1
    %
    
    
    68,715
    
    
    
    89.4
    %
    
    
    20,929
    
    
    
    (2.3
    %)Operating income
    
    
    13,289
    
    
    
    12.9
    %
    
    
    8,121
    
    
    
    10.6
    %
    
    
    5,168
    
    
    
    2.3
    %Equity in income of affiliated company
    
    
    70
    
    
    
    0.1
    %
    
    
    2,154
    
    
    
    2.8
    %
    
    
    (2,084
    )
    
    
    (2.7
    %)Interest expense
    
    
    (2,927
    )
    
    
    (2.8
    %)
    
    
    (29
    )
    
    
    (0.0
    %)
    
    
    (2,898
    )
    
    
    (2.8
    %)Income before income taxes
    
    
    10,432
    
    
    
    10.1
    %
    
    
    10,246
    
    
    
    13.3
    %
    
    
    186
    
    
    
    (3.2
    %)Income tax provision
    
    
    1,461
    
    
    
    1.4
    %
    
    
    542
    
    
    
    0.7
    %
    
    
    919
    
    
    
    0.7
    %Net income
    
    $
    8,971
    
    
    
    8.7
    %
    
    $
    9,704
    
    
    
    12.6
    %
    
    $
    (733
    )
    
    
    (3.9
    %)
 Net revenues
  Cost of revenues
  Selling, general and administrative
  Research & development
 20




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##### Table of Contents



Depreciation
  Amortization
  Cost of legal proceedings and settlements
  Acquisition and integration related charges
  Restructuring charges
  Interest expense
  Income tax provision
  Comparison of Nine Months Ended September 30, 2010 and 2009
 21




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##### Table of Contents



MedQuist Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
Unaudited
 Nine Months Ended September 30,2010
    
    
    2009Change in% of Net
    
    
    
    
    
    
    % of Net
    
    
    
    
    
    
    % of Net($ in thousands)
    
    Amount
    
    
    Revenues
    
    
    Amount
    
    
    Revenues
    
    
    $ Change
    
    
    RevenuesNet revenues
    
    $
    274,442
    
    
    
    100.0
    %
    
    $
    233,251
    
    
    
    100.0
    %
    
    $
    41,191
    
    
    
    Operating costs and expenses:Cost of revenues
    
    
    185,350
    
    
    
    67.5
    %
    
    
    157,993
    
    
    
    67.7
    %
    
    
    27,357
    
    
    
    (0.2
    %)Selling, general and administrative
    
    
    28,169
    
    
    
    10.3
    %
    
    
    25,819
    
    
    
    11.1
    %
    
    
    2,350
    
    
    
    (0.8
    %)Research and development
    
    
    9,274
    
    
    
    3.4
    %
    
    
    7,235
    
    
    
    3.1
    %
    
    
    2,039
    
    
    
    0.3
    %Depreciation
    
    
    7,518
    
    
    
    2.7
    %
    
    
    7,418
    
    
    
    3.2
    %
    
    
    100
    
    
    
    (0.4
    %)Amortization of intangible assets
    
    
    8,229
    
    
    
    3.0
    %
    
    
    4,533
    
    
    
    1.9
    %
    
    
    3,696
    
    
    
    1.1
    %Cost of legal proceedings and settlements
    
    
    2,783
    
    
    
    1.0
    %
    
    
    13,440
    
    
    
    5.8
    %
    
    
    (10,657
    )
    
    
    (4.7
    %)Acquisition and integration related charges
    
    
    6,501
    
    
    
    2.4
    %
    
    
    
    
    
    
    
    
    
    
    6,501
    
    
    
    2.4
    %Restructuring charges
    
    
    1,425
    
    
    
    0.5
    %
    
    
    481
    
    
    
    0.2
    %
    
    
    944
    
    
    
    0.3
    %Total operating costs and expenses
    
    
    249,249
    
    
    
    90.8
    %
    
    
    216,919
    
    
    
    93.0
    %
    
    
    32,330
    
    
    
    (2.2
    %)Operating income
    
    
    25,193
    
    
    
    9.2
    %
    
    
    16,332
    
    
    
    7.0
    %
    
    
    8,861
    
    
    
    2.2
    %Equity in income of affiliated company
    
    
    616
    
    
    
    0.2
    %
    
    
    2,582
    
    
    
    1.1
    %
    
    
    (1,966
    )
    
    
    (0.9
    %)Interest income (expense)
    
    
    (6,706
    )
    
    
    (2.4
    %)
    
    
    36
    
    
    
    0.0
    %
    
    
    (6,742
    )
    
    
    (2.5
    %)Income before income taxes
    
    
    19,103
    
    
    
    7.0
    %
    
    
    18,950
    
    
    
    8.1
    %
    
    
    153
    
    
    
    (1.2
    %)Income tax provision
    
    
    1,908
    
    
    
    0.7
    %
    
    
    1,556
    
    
    
    0.7
    %
    
    
    352
    
    
    
    0.0
    %Net income
    
    $
    17,195
    
    
    
    6.3
    %
    
    $
    17,394
    
    
    
    7.5
    %
    
    $
    (199
    )
    
    
    (1.2
    %)
 Net revenues
  Cost of revenues
  Selling, general and administrative
 22




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##### Table of Contents



Research & development
  Depreciation
  Amortization
  Cost of legal proceedings and settlements
  Acquisition and integration related charges
  Restructuring charges
  Interest expense
  Income tax provision
  Liquidity and Capital Resources
 23




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##### Table of Contents




    
    Improvements in operating income, including the addition provided by the Spheris
acquisition
    
    Cash paid for acquisition and integration related charges of $6.1 million
    
    Restructuring payments of $1.7 million
    
    Accrued expenses reflected a use of $6.9 million made up primarily of a payment of $4.6
million for a related party liability assumed in connection with the acquisition of Spheris,
and a $2.0 million payment to settle the Kaiser litigation
   Recapitalization Transactions
    24




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##### Table of Contents



Off-Balance Sheet Arrangements
  
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Control Over Financial Reporting
  25




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Kaiser Litigation
   Kahn Putative Class Action
   Reseller Arbitration Demand
   SEC Investigation of Former Officer
  
 Item 1A. Risk Factors
  26




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##### Table of Contents



Our business is dependent upon the continued demand for transcription services. If EHR companies
produce alternatives to medical transcription that reduce the need for transcription, the demand
for our solutions could be reduced.
  Our business, particularly our DocQment( tm) Enterprise Platform (DEP) and our speech
recognition software, depends on the continuous, effective, reliable, and secure operation of our
computer hardware, software, and Internet applications and related tools and functions.
   Proposed legislation and possible negative publicity may impede our ability to utilize global
service capabilities.
  27




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##### Table of Contents



Our ability to operate the business given our restrictions under our new indebtedness
agreements.
   Our growth is dependent on the willingness of new customers to outsource and adopt our technology
platforms.
  Our success will depend on our ability to support existing technologies as well as to adopt and
integrate new technology into our workflow platforms.
  Technology innovations in the markets that we serve may create alternatives to our products and
result in reduced sales.
  Our common stock may be materially impacted by the exchange offering by CBay Holdings regardless
of whether the exchange offering is completed
 28




---



##### Table of Contents



Many of our customer contracts are terminable at will by our customers, and our ability to
sustain and grow profitable operations is dependent upon the ability to retain customers.
   Our use of open source and third-party software could impose unanticipated conditions or
restrictions on our ability to commercialize our solutions.
   Security and privacy breaches in our systems may damage customer relations and inhibit our
growth.
 29




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##### Table of Contents



Any change in legislation, regulation, or market practices in the United States affecting
healthcare or healthcare insurance may materially adversely affect our business and results if
operations.
  
 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 #
    
    Amendment No. 1 to the Sales and Services Agreement, dated
July 26, 2010 between MedQuist, Inc. and CBay Systems &
Services, Inc.10.2 #
    
    Amendment No. 1 to the Subcontracting Agreement dated July 26,
2010, between MedQuist, Inc. and CBay Systems & Services, Inc.10.3 (1)
    
    Settlement Agreement and Release dated August 12, 2010 by and
among MedQuist Inc. and MedQuist Transcriptions, Ltd., on the
one hand, and Kaiser Foundation Health Plan, Inc., Kaiser
Foundation Hospitals, The Permanente Medical Group, Inc.,
Southern California Permanente Medical Group, Kaiser
Foundation Health Plan of the Mid-Atlantic States, Inc., and
Kaiser Foundation Health Plan of Colorado, on the other hand.10.4
    
    First Amendment to Norcross, Georgia Office Lease Agreement dated as of March 1, 2009.10.5
    
    Second Amendment to Norcross, Georgia Office Lease Agreement dated as of August 1, 2009.
 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.
 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 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.
 
 #
    
    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.(1)
    
    Incorporated by reference to our Current Report on Form 8-K filed with the SEC on August 18,
2010. 31




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##### Table of Contents



SIGNATURES
  MEDQUIST INC.Date: November 9, 2010
    /s/ Peter MasanottiPeter MasanottiPresident and Chief Executive Officer
(Principal Executive Officer)Date: November 9, 2010
    /s/ Dominick GolioDominick GolioChief Financial Officer
(Principal Financial Officer) 32




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##### Table of Contents



Exhibit Index
 No.
    
    Description10.1 #
    
    Amendment No. 1 to the Sales & Services Agreement, dated July
26, 2010, between MedQuist, Inc. and CBay Systems & Services,
Inc.10.2 #
    
    Amendment No. 1 to the Subcontracting Agreement , dated July
26, 2010, between MedQuist, Inc. and CBay Systems & Services,
Inc.10.4
    
    First Amendment to Norcross, Georgia Office Lease Agreement dated as of March 1, 2009.10.5
    
    Second Amendment to Norcross, Georgia Office Lease Agreement dated as of August 1, 2009.31.1
    
    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
 
 #
    
    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. 33