TIDMCBAY
RNS Number : 0809W
CBaySystems Holdings Ltd.
12 November 2010
NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION IN WHOLE OR IN PART, DIRECTLY OR
INDIRECTLY, IN, INTO OR FROM ANY JURISDICTION WHERE TO DO SO WOULD CONSTITUTE A
VIOLATION OF THE RELEVANT LAWS IN THAT JURISDICTION.
+-----------------------------------+-----------------------------------+
| For Immediate Release | November 12, 2010 |
+-----------------------------------+-----------------------------------+
CBaySystems Holdings Limited
("CBaySystems", "CBay", "the Company")
CBay Reports Third Quarter and Nine Month Results
CBaySystems (AIM: CBAY), a leading provider of integrated clinical documentation
solutions for the U.S. healthcare industry, announced today its results for the
third quarter and nine months ended September 30, 2010.
All amounts included in this announcement are expressed in U.S. dollars unless
otherwise stated.
Third Quarter results
Highlights:
· Net revenues increased by 24.8% to $116.4 million
· Adjusted EBITDA increased 70.1% to $25.3 million
· Adjusted EBITDA margin expanded to 21.7% of net revenues compared to
15.9% during the prior year period
· Realized third quarter cost savings from Spheris acquisition of $4.0
million; on track to achieve $7 million for the fourth quarter of 2010
· This is the first quarter reflecting the full impact of the results of
Spheris, acquired April 22, 2010
Net revenues for the three months ended September 30, 2010 increased $23.1
million or 24.8% to $116.4 million, compared with $93.3 million for the three
months ended September 30, 2009. The acquisition of Spheris ("Spheris
Acquisition") contributed $32.8 million in revenue for the three month period,
which was partially offset by a decrease in legacy maintenance service revenues
and lower average pricing realized for CBay's transcription services. It
deserves note that Spheris volumes had been declining prior to our acquisition
and although we believe we have stabilized these volumes, the carryover impact
of historical losses may impact us in future periods.
Gross profit for the three months ended September 30, 2010 increased by $12.7
million or 39.5% to $44.8 million, compared with $32.1 million for the three
months ended September 30, 2009. The gross profit margin increased to 38.5% for
the three months ended September 30, 2010, compared with 34.4% for the three
months ended September 30, 2009. The improvement in gross margin was achieved
by leveraging speech recognition technologies and increased offshore production,
as well as overhead savings realized as a result of the Spheris integration
efforts. CBay's use of speech recognition technology increased from 49% of
volume in the third quarter of 2009 to 67% of volume during the third quarter of
2010. Additionally, the Company's expanding footprint in India enabled CBay
to increase its offshore production from 37% of volume to 41% of volume over
this same period.
Adjusted EBITDA for the third quarter of 2010 increased by 70.1% to $25.3
million, compared with $14.9 million for the third quarter of 2009. The
Company's improved operating performance during the third quarter of 2010
reflects the Company's progress in successfully integrating the Spheris
Acquisition. The full impact of cost savings and synergies which we have
implemented since the Spheris Acquisition is expected to yield $7.0 million of
cost savings in the fourth quarter of 2010. Of these savings, $4.0 million were
realized during the three months ended September 30, 2010. (For more information
regarding Adjusted EBITDA and our use of this non-GAAP financial measure, please
refer to the section titled "Use of non-GAAP Financial Information").
Interest expense for the three months ended September 30, 2010 increased by $2.4
million to $4.7 million, primarily due to the debt incurred to finance the
Spheris Acquisition.
Net Income attributable to CBaySystems for the third quarter of 2010 was $5.9
million, compared with $2.5 million for the prior year period.
"We are pleased with our operating performance for the third quarter of 2010,"
said Bob Aquilina, Chairman and Chief Executive Officer of CBaySystems. "We
increased Adjusted EBITDA by 70.1% over the same quarter of last year despite an
increasingly competitive market environment. We continue to see improvements to
our operating margins as a result of efficiencies gained through use of our
speech recognition technologies, expanded use of offshore operations and the
benefits of the integration of Spheris. We expect that the majority of the
synergies associated with the Spheris acquisition will be realized by mid-year
2011."
Year-to-Date Results
Net revenues for the nine months ended September 30, 2010 increased by $35.2
million to $317.0 million, compared with $281.8 million for the nine months
ended September 30, 2009. The $58.2 million of incremental revenue resulting
from the Spheris Acquisition was partially offset by a decrease in legacy
maintenance service revenues and lower average pricing realized for
transcription services. The gross profit margin increased to 36.8% for the nine
months ended September 30, 2010, compared with 35.1% for the nine months ended
September 30, 2009. Adjusted EBITDA increased $16.2 million to $59.0 million,
compared with $42.8 million in the comparable period. Net income attributable to
CBaySystems Holdings Limited for the nine months ended September 30, 2010 was
$6.4 million, compared with a net loss attributable to CBaySystems Holdings
Limited of $0.2 million reported in the first nine months of 2009.
Subsequent Events
As previously announced, on October 14, 2010, the Company completed a
refinancing program whereby MedQuist, its 69.5% owned subsidiary, secured $310.0
million of financing, consisting of a $225.0 million senior secured credit
facility, which included a $200 million term loan and an undrawn $25.0 million
revolving credit facility, and an $85.0 million aggregate principal amount of
senior subordinated notes. The proceeds were used by MedQuist to repay debt
incurred for prior acquisitions and to pay a special dividend of $4.70 per share
to MedQuist's shareholders. CBay used its dividend proceeds to repay
outstanding CBay indebtedness, including $104.1 million to redeem its
convertible senior notes due 2015 held by Royal Philips Electronics.
In October 2010, the Company sold its ownership of A-Life in return for cash
consideration of $23.8 million, of which $4.7 million will be held in escrow
until March 2012. The Company will recognize a gain on the sale and will
receive approximately $19.1 million in cash from the sale during November of
2010 and the residual during 2012. The investment in A-Life has been accounted
for under the equity method and therefore the sale does not impact revenues or
EBITDA. Upon receipt of our cash from the A-Life sale, the Company expects to
have over $40.0 million in cash and approximately $292.6 million in debt.
On October 18, 2010, the Company filed a registration statement on Form S-1 with
the U.S. Securities and Exchange Commission ("SEC") relating to a proposed
public offering of its common stock in the United States. The Company also filed
a registration statement on Form S-4 with the SEC relating to a proposed
exchange offer pursuant to which the Company expects to offer to exchange shares
of the Company's common stock for outstanding shares of its subsidiary, MedQuist
Inc. On September 30, 2010, the Company entered into a definitive agreement with
holders of approximately 13% of MedQuist's outstanding common stock pursuant to
which the Company expects to exchange shares of its common stock for such
holders' MedQuist shares. The consummation of the agreement is subject to
various conditions including the completion of the proposed U.S. public
offering, listing of Company's shares on NASDAQ and the reincorporation of the
Company in Delaware.
Use of non-GAAP Financial Information
Adjusted EBITDA is net income (loss) attributable to CBaySystems plus net income
(loss) attributable to noncontrolling interests, income taxes, interest expense,
equity in (income) of affiliated companies, depreciation, amortization, cost of
legal proceedings and settlements, acquisition related charges, restructuring
charges accrual reversals, and other unusual or nonrecurring items. See below
for a reconciliation of GAAP financial measures to Adjusted EBITDA.
For further information please visit www.cbaysystems.com or contact:
+--------------------------------------+---------------------------+
| CBaySystems Holdings Limited | |
+--------------------------------------+---------------------------+
| Clyde Swoger, Chief Financial | Tel: 1-866-295-4600 ext: |
| Officer | 3355 |
| ir@cbaysystems.com | |
+--------------------------------------+---------------------------+
| | |
+--------------------------------------+---------------------------+
| Strand Hanson Limited - Nominated | Tel: +44 (0) 20 7409 3494 |
| Adviser | |
| Rory Murphy | |
| Liam Buswell | |
+--------------------------------------+---------------------------+
| | |
+--------------------------------------+---------------------------+
| Buchanan Communications | |
+--------------------------------------+---------------------------+
| Mark Court / Suzanne Brocks | Tel: +44 (0) 20 7466 |
| markc@buchanan.uk.com | 5000 |
| suzanneb@buchanan.uk.com | |
+--------------------------------------+---------------------------+
| | |
+--------------------------------------+---------------------------+
The information contained herein is not for publication or distribution in the
United States of America. These materials do not contain or constitute an offer
of securities for sale in the United States. The outstanding ordinary shares of
the Company have not been registered under the US Securities Act or under the
securities laws of any state of the United States. Pursuant to the Company's
memorandum and articles of association, the Company is required to refuse to
register any transfer of its securities not made in accordance with the
provisions of Regulation S of the U.S. Securities Act or the registration
requirements under the US Securities Act or an available exemption there from.
This communication shall not constitute an offer to sell or a solicitation of an
offer to buy, nor shall there be any sale of CBay's common stock in any state or
jurisdiction in which such an offer, solicitation or sale would be unlawful
prior to registration or qualification under the securities laws of any such
state or jurisdiction. Registration statements relating to CBay's proposed
public offering of common stock and proposed public exchange offer have been
filed with the SEC but have not yet become effective. The securities described
in these registration statements may not be sold nor may offers to buy be
accepted prior to the time the registration statements become effective. When
available, copies of the preliminary prospectus relating to the offerings may be
obtained for free, by visiting the SEC website at http://www.sec.gov.
The offer to exchange CBay shares for MedQuist shares, if made, will only be
made pursuant to a Registration Statement on Form S-4, a letter of transmittal
and related offer documents to be filed with the SEC. Investors and security
holders of MedQuist are urged to read such registration statement on Form S-4
and other documents filed with the SEC carefully in their entirety as they
become available, because they will contain important information about the
contemplated exchange offer. Holders of MedQuist's shares will need to make
their own decision whether to tender shares in the contemplated exchange offer.
Neither CBay nor any other person is making any recommendation as to whether or
not holders of MedQuist's shares should tender their shares for exchange in the
contemplated exchange offer.
+----------+-------------------+----------+--------+----------+-----------+----------+--------+----------+----------------+
| | CBaySystems Holdings Limited and Subsidiaries |
| | Reconciliation of GAAP financial measures to the Non-GAAP measures |
| | |
+----------+--------------------------------------------------------------------------------------------------------------+
| | Adjusted EBITDA |
+----------+--------------------------------------------------------------------------------------------------------------+
| | (in thousands) |
+----------+--------------------------------------------------------------------------------------------------------------+
| | Unaudited |
+----------+--------------------------------------------------------------------------------------------------------------+
| | |
+----------+--------------------------------------------------------------------------------------------------------------+
| | | Three months ended | | Nine months ended |
+------------------------------+----------+-------------------------------+----------+------------------------------------+
| | | September 30, | | September 30, |
+------------------------------+----------+-------------------------------+----------+------------------------------------+
| | | 2010 | | 2009 | | 2010 | | 2009 |
+------------------------------+----------+--------+----------+-----------+----------+--------+----------+----------------+
| | | | | | | | | |
+------------------------------+----------+--------+----------+-----------+----------+--------+----------+----------------+
| Net income(loss) | | $ | | $ | | $ | | $ (230) |
| attributable to CBaySystems | | 5,872 | | 2,539 | | 6,425 | | |
| Holdings Limited | | | | | | | | |
+------------------------------+----------+--------+----------+-----------+----------+--------+----------+----------------+
| | | | | | | | | |
+------------------------------+----------+--------+----------+-----------+----------+--------+----------+----------------+
| Net income attributable to | | 2,737 | | 2,957 | | 5,234 | | 5,291 |
| noncontrolling interests | | | | | | | | |
+------------------------------+----------+--------+----------+-----------+----------+--------+----------+----------------+
| | | | | | | | | |
+------------------------------+----------+--------+----------+-----------+----------+--------+----------+----------------+
| Income tax | | 257 | | 613 | | (69) | | 1,253 |
| provision(benefit) | | | | | | | | |
+------------------------------+----------+--------+----------+-----------+----------+--------+----------+----------------+
| | | | | | | | | |
+------------------------------+----------+--------+----------+-----------+----------+--------+----------+----------------+
| Interest expense, net | | 4,680 | | 2,286 | | 12,031 | | 6,945 |
+------------------------------+----------+--------+----------+-----------+----------+--------+----------+----------------+
| | | | | | | | | |
+------------------------------+----------+--------+----------+-----------+----------+--------+----------+----------------+
| Depreciation and | | 9,309 | | 6,719 | | 24,377 | | 20,329 |
| amortization | | | | | | | | |
+------------------------------+----------+--------+----------+-----------+----------+--------+----------+----------------+
| | | | | | | | | |
+------------------------------+----------+--------+----------+-----------+----------+--------+----------+----------------+
| Cost of legal proceedings | | 633 | | 1,382 | | 2,785 | | 13,540 |
| and settlements | | | | | | | | |
+------------------------------+----------+--------+----------+-----------+----------+--------+----------+----------------+
| | | | | | | | | |
+------------------------------+----------+--------+----------+-----------+----------+--------+----------+----------------+
| Acquisition related charges | | 850 | | - | | 6.895 | | - |
+------------------------------+----------+--------+----------+-----------+----------+--------+----------+----------------+
| | | | | | | | | |
+------------------------------+----------+--------+----------+-----------+----------+--------+----------+----------------+
| Restructuring charges | | 985 | | 481 | | 1,951 | | 481 |
+------------------------------+----------+--------+----------+-----------+----------+--------+----------+----------------+
| | | | | | | | | |
+------------------------------+----------+--------+----------+-----------+----------+--------+----------+----------------+
| Equity in income of | | (70) | | (2,127) | | (616) | | (2,534) |
| affiliated companies | | | | | | | | |
+------------------------------+----------+--------+----------+-----------+----------+--------+----------+----------------+
| | | | | | | | | |
+------------------------------+----------+--------+----------+-----------+----------+--------+----------+----------------+
| Accrual reversals (a) | | - | | - | | - | | (2,254) |
+------------------------------+----------+--------+----------+-----------+----------+--------+----------+----------------+
| | | | | | | | | |
+------------------------------+----------+--------+----------+-----------+----------+--------+----------+----------------+
| Adjusted EBITDA | | $ | | $ | | $ | | $ 42,821 |
| | | 25,253 | | 14,850 | | 59,013 | | |
+------------------------------+----------+--------+----------+-----------+----------+--------+----------+----------------+
| | | | | | | | | | |
+----------+-------------------+----------+--------+----------+-----------+----------+--------+----------+----------------+
(a) Relates to the reversal of certain accruals, related to litigation claims,
as a result of the expiration of the applicable statute of limitations.
The full impact of cost savings and synergies resulting from the Spheris
Acquisition, which we have implemented since the Spheris Acquisition is expected
to yield $7.0 million of cost savings in the fourth quarter. Of these savings
$4.0 million were realized during the three months ended September 30, 2010 and
$4.9 million were realized in the nine months ended September 30, 2010.
Adjusted EBITDA is a financial measure not computed in accordance with United
States generally accepted accounting principles, or GAAP. The Company believes
that this non-GAAP measure, when presented in conjunction with comparable GAAP
measures, is useful to both management and investors in analyzing the Company's
ongoing business and operating performance. The Company believes that providing
the non-GAAP information to investors, in addition to the GAAP presentation,
allows investors to view the Company's financial results in the way that
management views financial results. Management believes Adjusted EBITDA is
useful as supplemental measures of the Company's financial results because it
removes costs not related to the Company's operating performance. Management
believes that Adjusted EBITDA should be considered in addition to, but not as a
substitute for items presented in accordance with GAAP that are presented in
this press release. A reconciliation to Net income (loss) attributable to
CBaySystems Holdings Limited to Adjusted EBITDA is provided above.
+--------------+------------------------+----------+-----------------------+---+-----------------------+----+------------------------+
| CBaySystems Holdings Limited and Subsidiaries |
+------------------------------------------------------------------------------------------------------------------------------------+
| Non-GAAP Supplemental Disclosure |
+------------------------------------------------------------------------------------------------------------------------------------+
| (US Dollars, in thousands) |
+------------------------------------------------------------------------------------------------------------------------------------+
| Unaudited |
+------------------------------------------------------------------------------------------------------------------------------------+
| |
+------------------------------------------------------------------------------------------------------------------------------------+
| | Three months ended | | Nine months ended |
+--------------+-----------------------------------------------------------+---+-----------------------------------------------------+
| | September 30, | | September 30, |
+--------------+-----------------------------------------------------------+---+-----------------------------------------------------+
| | 2010 | | 2009 | | 2010 | | 2009 |
+--------------+------------------------+----------+-----------------------+---+-----------------------+----+------------------------+
| Revenues | | | | | | | |
+--------------+------------------------+----------+-----------------------+---+-----------------------+----+------------------------+
| MedQuist | $ | | $ | | $ | | $ |
| | 102,933 | | 76,836 | | 274,442 | | 233,251 |
+--------------+------------------------+----------+-----------------------+---+-----------------------+----+------------------------+
| CBay | 25,566 | | 19,286 | | 68,631 | | 56,291 |
+--------------+------------------------+----------+-----------------------+---+-----------------------+----+------------------------+
| Eliminations | (12,114) | | (2,833) | | (26,096) | | (7,714) |
+--------------+------------------------+----------+-----------------------+---+-----------------------+----+------------------------+
| Consolidated | $ | | $ | | $ | | $ |
| | 116,385 | | 93,289 | | 316,977 | | 281,828 |
+--------------+------------------------+----------+-----------------------+---+-----------------------+----+------------------------+
| | | | | | | | |
+--------------+------------------------+----------+-----------------------+---+-----------------------+----+------------------------+
| Adjusted | | | | | | | |
| EBITDA | | | | | | | |
+--------------+------------------------+----------+-----------------------+---+-----------------------+----+------------------------+
| MedQuist | $ | | $ | | $ | | $ |
| | 21,473 | | 13,699 | | 51,649 | | 39,950 |
+--------------+------------------------+----------+-----------------------+---+-----------------------+----+------------------------+
| CBay(1) | 5,615 | | 2,648 | | 12,083 | | 8,513 |
+--------------+------------------------+----------+-----------------------+---+-----------------------+----+------------------------+
| Eliminations | (129) | | (535) | | (456) | | (2,446) |
+--------------+------------------------+----------+-----------------------+---+-----------------------+----+------------------------+
| Corporate | (1,706) | | (962) | | (4,263) | | (3,196) |
| expenses(2) | | | | | | | |
+--------------+------------------------+----------+-----------------------+---+-----------------------+----+------------------------+
| Consolidated | $ | | $ | | $ | | $ |
| | 25,253 | | 14,850 | | 59,013 | | 42,821 |
+--------------+------------------------+----------+-----------------------+---+-----------------------+----+------------------------+
Basis of presentation
The non-GAAP presentation above shows the results of operations for CBay
(excluding MedQuist) and MedQuist for the quarter ended September 30, 2010 and
2009 and for the nine months ended September 30, 2010 and 2009. These results
include the operations of the acquired Spheris assets since the Spheris
Acquisition date.
Notes to non-GAAP Supplemental Disclosure
(1) CBay performs transcription services for its subsidiary, MedQuist,
pursuant to an intercompany agreement. The transcription volumes involved are
significant and CBay has expanded its production capacity in India to respond to
the increased MedQuist demand. The rapid increase in India capacity has resulted
in inefficiencies as new facilities were opened and transcriptionists were hired
and trained. The Company estimates that the financial impact of the start up
inefficiencies was $390 and $900 for the three months ended September 30, 2010
and 2009, respectively, and $500 and $1,300 for the nine months ended September
30, 2010 and 2009, respectively.
(2) Corporate expenses consist of personnel costs, legal, audit, and other
costs incurred by the corporate holding companies and primarily relate to the
oversight of the MedQuist and CBay operating entities.
CBaySystems Holdings Limited and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
+------------------------------------+--------+---------+--------+---------+----------+--+----------+------+-+----------+---+-----+--------+
| | | Three months ended | | Nine months ended | |
| | | September 30, | | September 30, | |
+------------------------------------+--------+----------------------------+----------+-------------------------------------------+--------+
| | | 2010 | | 2009 | | 2010 | | 2009 | |
+------------------------------------+--------+---------+--------+---------+-------------+-----------------+------------+---------+--------+
| | | 116,385 | | 93,289 | | 316,977 | | 281,828 | |
| Net revenues | $ | | $ | | $ | | $ | | |
+------------------------------------+--------+---------+--------+---------+-------------+-----------------+------------+---------+--------+
| Cost of revenues | | 71,593 | | 61,170 | | 200,234 | | 182,924 | |
+------------------------------------+--------+---------+--------+---------+-------------+-----------------+------------+---------+--------+
| Gross profit | | 44,792 | | 32,119 | | 116,743 | | 98,904 | |
+------------------------------------+--------+---------+--------+---------+-------------+-----------------+------------+---------+--------+
| | | | | | | | | | |
+------------------------------------+--------+---------+--------+---------+-------------+-----------------+------------+---------+--------+
| Operating expenses | | | | | | | | | |
+------------------------------------+--------+---------+--------+---------+-------------+-----------------+------------+---------+--------+
| Selling, general and | | 16,669 | | 14,830 | | 49,374 | | 46,594 | |
| administrative | | | | | | | | | |
+------------------------------------+--------+---------+--------+---------+-------------+-----------------+------------+---------+--------+
| Research and development | | 3,351 | | 2,439 | | 8,945 | | 7,235 | |
+------------------------------------+--------+---------+--------+---------+-------------+-----------------+------------+---------+--------+
| Depreciation and amortization | | 9,309 | | 6,719 | | 24,377 | | 20,329 | |
+------------------------------------+--------+---------+--------+---------+-------------+-----------------+------------+---------+--------+
| Cost of legal proceedings and | | 633 | | 1,382 | | 2,785 | | 13,540 | |
| settlements | | | | | | | | | |
+------------------------------------+--------+---------+--------+---------+-------------+-----------------+------------+---------+--------+
| Acquisition related charges | | 850 | | - | | 6,895 | | - | |
+------------------------------------+--------+---------+--------+---------+-------------+-----------------+------------+---------+--------+
| Restructuring charges | | 985 | | 481 | | 1,951 | | 481 | |
+------------------------------------+--------+---------+--------+---------+-------------+-----------------+------------+---------+--------+
| Total operating expenses | | 31,797 | | 25,851 | | 94,327 | | 88,179 | |
+------------------------------------+--------+---------+--------+---------+-------------+-----------------+------------+---------+--------+
| | | | | | | | | | |
+------------------------------------+--------+---------+--------+---------+-------------+-----------------+------------+---------+--------+
| Operating income | | 12,995 | | 6,268 | | 22,416 | | 10,725 | |
+------------------------------------+--------+---------+--------+---------+-------------+-----------------+------------+---------+--------+
| | | | | | | | | | |
+------------------------------------+--------+---------+--------+---------+-------------+-----------------+------------+---------+--------+
| Interest expense, net | | (4,680) | | (2,286) | | (12,031) | | (6,945) | |
+------------------------------------+--------+---------+--------+---------+-------------+-----------------+------------+---------+--------+
| Equity in income of affiliated | | 70 | | 2,127 | | 616 | | 2,534 | |
| companies | | | | | | | | | |
+------------------------------------+--------+---------+--------+---------+-------------+-----------------+------------+---------+--------+
| Other income | | 481 | | - | | 589 | | - | |
+------------------------------------+--------+---------+--------+---------+-------------+-----------------+------------+---------+--------+
| Income before income taxes and | | 8,866 | | 6,109 | | 11,590 | | 6,314 | |
| noncontrolling interests | | | | | | | | | |
+------------------------------------+--------+---------+--------+---------+-------------+-----------------+------------+---------+--------+
| | | | | | | | | | |
+------------------------------------+--------+---------+--------+---------+-------------+-----------------+------------+---------+--------+
| Income tax provision (benefit) | | 257 | | 613 | | (69) | | 1,253 | |
+------------------------------------+--------+---------+--------+---------+-------------+-----------------+------------+---------+--------+
| Net income | | 8,609 | | 5,496 | | 11,659 | | 5,061 | |
+------------------------------------+--------+---------+--------+---------+-------------+-----------------+------------+---------+--------+
| Less: Net income attributable to | | 2,737 | | 2,957 | | 5,234 | | 5,291 | |
| noncontrolling interests | | | | | | | | | |
+------------------------------------+--------+---------+--------+---------+-------------+-----------------+------------+---------+--------+
| | | | | | | | | | |
+------------------------------------+--------+---------+--------+---------+-------------+-----------------+------------+---------+--------+
| Net income (loss) attributable to | $ | 5,872 | $ | 2,539 | $ | 6,425 | $ | (230) | |
| CBaySystems Holdings Limited | | | | | | | | | |
+------------------------------------+--------+---------+--------+---------+-------------+-----------------+------------+---------+--------+
| Net income (loss) per common share | | | | | | | | | |
| attributable to CBaySystems | | | | | | | | | |
| Holdings Limited: | | | | | | | | | |
+------------------------------------+--------+---------+--------+---------+-------------+-----------------+------------+---------+--------+
| Basic | $ | 0.03 | $ | 0.01 | $ | 0.03 | $ | (0.01) | |
+------------------------------------+--------+---------+--------+---------+-------------+-----------------+------------+---------+--------+
| Diluted | $ | 0.03 | $ | 0.01 | $ | 0.03 | $ | (0.01) | |
+------------------------------------+--------+---------+--------+---------+-------------+-----------------+------------+---------+--------+
| | | | | | | | | | |
+------------------------------------+--------+---------+--------+---------+-------------+-----------------+------------+---------+--------+
| Weighted average shares | | | | | | | | | |
| outstanding: | | | | | | | | | |
+------------------------------------+--------+---------+--------+---------+-------------+-----------------+------------+---------+--------+
| | | | | | | | | | |
+------------------------------------+--------+---------+--------+---------+-------------+-----------------+------------+---------+--------+
| Basic | | 158,209 | | 156,930 | | 157,875 | | 155,637 | |
+------------------------------------+--------+---------+--------+---------+-------------+-----------------+------------+---------+--------+
| Diluted | | 221,044 | | 156,930 | | 161,518 | | 155,637 | |
+------------------------------------+--------+---------+--------+---------+-------------+-----------------+------------+---------+--------+
| | | | | | | | | | |
+------------------------------------+--------+---------+--------+---------+-------------+----------+--------+--------------+--------------+
| | | | | | | | | | | | | | |
+------------------------------------+--------+---------+--------+---------+----------+--+----------+------+-+----------+---+-----+--------+
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
CBaySystems Holdings Limited and Subsidiaries
Consolidated Balance Sheets
(In thousands, except per share amounts)
(Unaudited)
+----------------------------------------------+-+-----------+-+------------+
| | | | | |
+----------------------------------------------+-+-----------+-+------------+
| | | September | | December |
| | | 30, 2010 | | 31, 2009 |
+----------------------------------------------+-+-----------+-+------------+
| ASSETS | | | | |
+----------------------------------------------+-+-----------+-+------------+
| | | | | |
+----------------------------------------------+-+-----------+-+------------+
| Current Assets: | | | | |
+----------------------------------------------+-+-----------+-+------------+
| Cash and cash equivalents |$| 24,025 |$ | 29,633 |
+----------------------------------------------+-+-----------+-+------------+
| Accounts receivable, net of allowance of | | 74,612 | | 53,099 |
| $2,322 and $1,753, respectively | | | | |
+----------------------------------------------+-+-----------+-+------------+
| Other current assets | | 19,798 | | 8,739 |
+----------------------------------------------+-+-----------+-+------------+
| Total current assets | | 118,435 | | 91,471 |
+----------------------------------------------+-+-----------+-+------------+
| Property and equipment, net | | 23,826 | | 19,511 |
+----------------------------------------------+-+-----------+-+------------+
| Goodwill | | 99,030 | | 53,187 |
+----------------------------------------------+-+-----------+-+------------+
| Other intangible assets, net | | 114,195 | | 72,838 |
+----------------------------------------------+-+-----------+-+------------+
| Deferred income taxes | | 3,873 | | 2,495 |
+----------------------------------------------+-+-----------+-+------------+
| Other assets | | 19,945 | | 13,566 |
+----------------------------------------------+-+-----------+-+------------+
| Total assets |$| 379,304 |$ | 253,068 |
+----------------------------------------------+-+-----------+-+------------+
| | | | | |
+----------------------------------------------+-+-----------+-+------------+
| LIABILITIES AND EQUITY | | | | |
+----------------------------------------------+-+-----------+-+------------+
| Current liabilities | | | | |
+----------------------------------------------+-+-----------+-+------------+
| Current portion of debt (subsequently |$| 36,224 |$ | 6,207 |
| refinanced, see Note 4) | | | | |
+----------------------------------------------+-+-----------+-+------------+
| Accounts payable | | 12,033 | | 11,191 |
+----------------------------------------------+-+-----------+-+------------+
| Accrued expenses and other current | | 36,437 | | 29,803 |
| liabilities | | | | |
+----------------------------------------------+-+-----------+-+------------+
| Accrued compensation | | 24,035 | | 16,034 |
+----------------------------------------------+-+-----------+-+------------+
| Deferred revenue | | 10,287 | | 9,924 |
+----------------------------------------------+-+-----------+-+------------+
| Total current liabilities | | 119,016 | | 73,159 |
+----------------------------------------------+-+-----------+-+------------+
| | | | | |
+----------------------------------------------+-+-----------+-+------------+
| Due to related parties | | 2,850 | | 2,185 |
+----------------------------------------------+-+-----------+-+------------+
| Long term debt (subsequently refinanced, see | | 167,948 | | 101,133 |
| Note 4) | | | | |
+----------------------------------------------+-+-----------+-+------------+
| Deferred income taxes | | 4,120 | | 2,166 |
+----------------------------------------------+-+-----------+-+------------+
| Other non-current liabilities | | 1,795 | | 2,124 |
+----------------------------------------------+-+-----------+-+------------+
| Total liabilities |$| 295,729 |$ | 180,767 |
+----------------------------------------------+-+-----------+-+------------+
| | | | | |
+----------------------------------------------+-+-----------+-+------------+
| Commitments and contingencies (Note 10) | | | | |
+----------------------------------------------+-+-----------+-+------------+
| | | | | |
+----------------------------------------------+-+-----------+-+------------+
| Equity | | | | |
+----------------------------------------------+-+-----------+-+------------+
| CBaySystems Holdings Limited stockholders' | | | | |
| equity: | | | | |
+----------------------------------------------+-+-----------+-+------------+
| Common stock - $ 0.10 par value; authorized | | 15,820 | | 15,756 |
| 1,000,000 shares; 158,209 and 157,557 shares | | | | |
| issued and outstanding, respectively | | | | |
+----------------------------------------------+-+-----------+-+------------+
| Additional paid in capital | | 136,797 | | 137,084 |
+----------------------------------------------+-+-----------+-+------------+
| Accumulated deficit | | (109,255) | | (115,686) |
+----------------------------------------------+-+-----------+-+------------+
| Accumulated other comprehensive loss | | (385) | | (174) |
+----------------------------------------------+-+-----------+-+------------+
| Total CBaySystems Holdings Limited | | 42,977 | | 36,980 |
| stockholders' equity | | | | |
+----------------------------------------------+-+-----------+-+------------+
| Noncontrolling interests | | 40,598 | | 35,321 |
+----------------------------------------------+-+-----------+-+------------+
| Total equity | | 83,575 | | 72,301 |
+----------------------------------------------+-+-----------+-+------------+
| Total liabilities and equity |$| 379,304 |$ | 253,068 |
+----------------------------------------------+-+-----------+-+------------+
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
CBaySystems Holdings Limited and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
+----------------------------------------+-+----------+----------------------+----+----------+
| | | Nine months ended |
| | | September 30, |
+----------------------------------------+------------+--------------------------------------+
| | | 2010 | | 2009 |
+----------------------------------------+------------+----------------------+----+----------+
| Operating activities | | | | |
+----------------------------------------+------------+----------------------+----+----------+
| Net income | $ | 11,659 | $ | 5,061 |
+----------------------------------------+------------+----------------------+----+----------+
| Adjustments to reconcile net income to | | | | |
| net cash provided by operating | | | | |
| activities: | | | | |
+----------------------------------------+------------+----------------------+----+----------+
| Depreciation and amortization | | 24,377 | | 20,329 |
+----------------------------------------+------------+----------------------+----+----------+
| Deferred income taxes | | 1,170 | | (14) |
+----------------------------------------+------------+----------------------+----+----------+
| Share based compensation | | 486 | | 678 |
+----------------------------------------+------------+----------------------+----+----------+
| Provision for doubtful accounts | | 1,571 | | 230 |
+----------------------------------------+------------+----------------------+----+----------+
| Equity in income of affiliated | | (616) | | (2,534) |
| companies | | | | |
+----------------------------------------+------------+----------------------+----+----------+
| Other | | (242) | | 3,360 |
+----------------------------------------+------------+----------------------+----+----------+
| Changes in operating assets and | | | | |
| liabilities: | | | | |
+----------------------------------------+------------+----------------------+----+----------+
| Accounts receivable | | (1,267) | | 5,783 |
+----------------------------------------+------------+----------------------+----+----------+
| Other current assets | | (4,532) | | 2,849 |
+----------------------------------------+------------+----------------------+----+----------+
| Other assets | | 1,072 | | (595) |
+----------------------------------------+------------+----------------------+----+----------+
| Accounts payable | | 2,113 | | 394 |
+----------------------------------------+------------+----------------------+----+----------+
| Deferred revenue | | 286 | | (1,661) |
+----------------------------------------+------------+----------------------+----+----------+
| Accrued expenses and other current | | (9,058) | | (6,700) |
| liabilities | | | | |
+----------------------------------------+------------+----------------------+----+----------+
| Accrued compensation | | 2,535 | | 4,648 |
+----------------------------------------+------------+----------------------+----+----------+
| Other non-current liabilities | | (898) | | 288 |
+----------------------------------------+------------+----------------------+----+----------+
| Net cash provided by operating | | 28,656 | | 32,116 |
| activities | | | | |
+----------------------------------------+------------+----------------------+----+----------+
| Investing activities | | | | |
+----------------------------------------+------------+----------------------+----+----------+
| Purchase of property and equipment | | (4,345) | | (4,992) |
+----------------------------------------+------------+----------------------+----+----------+
| Purchases of and capitalized | | (5,275) | | (2,147) |
| intangible assets | | | | |
+----------------------------------------+------------+----------------------+----+----------+
| Payments for acquisition and interests | | (97,710) | | (1,025) |
| in affiliates, net of cash acquired | | | | |
+----------------------------------------+------------+----------------------+----+----------+
| Net cash used in investing activities | | (107,330) | | (8,164) |
+----------------------------------------+------------+----------------------+----+----------+
| | | | | |
+----------------------------------------+------------+----------------------+----+----------+
| Financing activities | | | | |
+----------------------------------------+------------+----------------------+----+----------+
| Debt issuance costs | | (7,031) | | (1,171) |
+----------------------------------------+------------+----------------------+----+----------+
| Borrowings from term loans, credit | | 110,095 | | 881 |
| facilities, notes payable and capital | | | | |
| leases | | | | |
+----------------------------------------+------------+----------------------+----+----------+
| Dividend paid to noncontrolling interest | - | | (15,256) |
+-----------------------------------------------------+----------------------+----+----------+
| Repayments for term loans, credit | | (29,866) | | (28,359) |
| facilities, notes payable and capital | | | | |
| leases | | | | |
+------------------------------------------+----------+----------------------+----+----------+
| Net cash provided by (used in) financing | | 73,198 | | (43,905) |
| activities | | | | |
+------------------------------------------+----------+----------------------+----+----------+
| Effect of exchange rate on cash | | (132) | | 290 |
+------------------------------------------+----------+----------------------+----+----------+
| Net decrease in cash and cash | | (5,608) | | (19,663) |
| equivalents | | | | |
+------------------------------------------+----------+----------------------+----+----------+
| Cash and cash equivalents - beginning of | | 29,633 | | 42,868 |
| period | | | | |
+------------------------------------------+----------+----------------------+----+----------+
| Cash and cash equivalents - end of | $ | 24,025 | $ | 23,205 |
| period | | | | |
+------------------------------------------+----------+----------------------+----+----------+
| | | | | |
+------------------------------------------+----------+----------------------+----+----------+
| Supplemental cash flow information | | | | |
+------------------------------------------+----------+----------------------+----+----------+
| Cash paid for income taxes | $ | 30 | $ | 667 |
+------------------------------------------+----------+----------------------+----+----------+
| Accommodation payments paid with credits | | - | | 103 |
+------------------------------------------+----------+----------------------+----+----------+
| Non cash debt incurred in connection | | 13,570 | | - |
| with the Spheris acquisition | | | | |
+------------------------------------------+----------+----------------------+----+----------+
| Cash paid for interest | | 10,525 | | 2,574 |
+------------------------------------------+----------+----------------------+----+----------+
| | | | | | |
+----------------------------------------+-+----------+----------------------+----+----------+
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
CBaySystems Holdings Limited and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
1. Basis of Presentation
The consolidated financial statements and footnotes thereto are unaudited.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with U.S. generally accepted accounting
principles (GAAP) have been omitted pursuant to such rules and regulations
although the Company believes that the disclosures are adequate to make the
information presented not misleading. The consolidated financial statements
include the Company's accounts and the accounts of all of its wholly-owned
subsidiaries. All significant inter-company accounts and transactions have been
eliminated in consolidation.
These statements reflect all normal recurring adjustments that, in the opinion
of management, are necessary for the fair presentation of the Company's results
of operations, financial position and cash flows. Interim results are not
necessarily indicative of results for a full year. The information in this
report should be read in conjunction with the Company's 2009 Annual Report.
2. Acquisition of Spheris
On April 22, 2010, the Company, through its subsidiaries MedQuist Inc.
(MedQuist) and CBay Inc. (the Purchasers), completed the acquisition of
substantially all of the assets of Spheris Inc. (Spheris) and certain of its
affiliates including Spheris India Private Limited (SIPL).This acquisition
provided substantial customer base and also provided opportunities for operating
efficiencies and operating margin expansion. See Note 7, Accrued expenses and
other current liabilities for further discussion of the Company's 2010
restructuring plan approved by management to realize some of these savings.
Costs incurred for the acquisition and direct integration costs are included in
the line item Acquisition related charges on the accompanying consolidated
statements of operations. The acquisition was funded from the proceeds of the
Company's credit facilities entered into in connection with the acquisition. See
Note 3 for a description of the acquisition financing. The third quarter of 2010
was the first full quarter of inclusion of the impact from the acquired Spheris
business in the Company's consolidated results of operations.
The following unaudited pro forma summary presents the consolidated information
of the Company as if the business combination had occurred at the beginning of
each period.
+-----------------------------------------+-+---------+-+--------------+
| | | Pro Forma Three |
| | | Months Ended |
| | | September 30, |
+-----------------------------------------+-+--------------------------+
| | | | | 2009 |
+-----------------------------------------+-+---------+-+--------------+
| Net revenues | | |$ | 131,834 |
+-----------------------------------------+-+---------+-+--------------+
| Net income attributable to CBaySystems | | | | 2,868 |
| Holdings Limited | | | | |
+-----------------------------------------+-+---------+-+--------------+
| Net income per share attributable to | | | | 0.01 |
| CBaySystems Holdings Limited (Basic) | | | | |
+-----------------------------------------+-+---------+-+--------------+
| Net income per share attributable to | | |$ | 0.01 |
| CBaySystems Holdings Limited (Diluted) | | | | |
+-----------------------------------------+-+---------+-+--------------+
| | | |
+-----------------------------------------+-+--------------------------+
| | | |
+-----------------------------------------+-+--------------------------+
| | | Pro Forma Nine Months |
| | | Ended September 30, |
+-----------------------------------------+-+--------------------------+
| | | 2010 | | 2009 |
+-----------------------------------------+-+---------+-+--------------+
| Net revenues |$ | 360,348 |$ | 402,215 |
+-----------------------------------------+-+---------+-+--------------+
| Net income attributable to CBaySystems | | 10,672 | | 1,722 |
| Holdings Limited | | | | |
+-----------------------------------------+-+---------+-+--------------+
| Net income per share attributable to | | 0.05 | | 0.00 |
| CBaySystems Holdings Limited (Basic) | | | | |
+-----------------------------------------+-+---------+-+--------------+
| Net income per share attributable to |$ | 0.05 |$ | 0.00 |
| CBaySystems Holdings Limited (Diluted) | | | | |
+-----------------------------------------+-+---------+-+--------------+
These amounts have been calculated after applying the Company's accounting
policies and adjusting the results of Spheris and SIPL to reflect the additional
amortization of intangibles that would have been charged assuming the fair value
adjustments to tangible and intangible assets had been applied from the
beginning of the period being reported on, and the additional interest expense
assuming the acquisition related debt had been incurred at the beginning of the
period being reported on, excluding the acquisition costs and including the
related tax effects. The acquired business contributed net revenues of $58,200
for the period April 22, 2010 to September 30, 2010.
The net income for the purpose of the basic net income per share is adjusted for
the amounts payable to the Company's majority shareholder.
The following table summarizes the consideration transferred by the Company to
acquire the assets of Spheris and stock of SIPL, and the amounts of identified
assets acquired and liabilities assumed at the acquisition date. The amounts
recorded are subject to finalization of assumed liabilities.
+-------------------------------------------------------+--+--------------------+
| Cash consideration paid |$ | 98,834 |
+-------------------------------------------------------+--+--------------------+
| Fair value of unsecured Subordinated Promissory Note | | 13,570 |
+-------------------------------------------------------+--+--------------------+
| Total consideration transferred |$ | 112,404 |
+-------------------------------------------------------+--+--------------------+
| | | |
+-------------------------------------------------------+--+--------------------+
| Recognized amounts of identifiable assets acquired | | |
| and liabilities assumed: | | |
+-------------------------------------------------------+--+--------------------+
| Fair value of Spheris net assets acquired | | |
+-------------------------------------------------------+--+--------------------+
| Working capital |$ | 7,078 |
+-------------------------------------------------------+--+--------------------+
| Property and equipment | | 9,133 |
+-------------------------------------------------------+--+--------------------+
| Deposits | | 1,036 |
+-------------------------------------------------------+--+--------------------+
| Developed technology (included in intangibles) | | 11,390 |
+-------------------------------------------------------+--+--------------------+
| Customer relationships (included in intangibles) | | 37,210 |
+-------------------------------------------------------+--+--------------------+
| Trademarks and trade names (included in intangibles) | | 1,640 |
+-------------------------------------------------------+--+--------------------+
| Goodwill | | 44,917 |
+-------------------------------------------------------+--+--------------------+
| Identifiable assets acquired and liabilities assumed |$ | 112,404 |
+-------------------------------------------------------+--+--------------------+
The related amortization period is shown below:
+----------------------------------------+----------+------------+--+--------------+
| | | | | Amortization |
| | | | | Period |
+----------------------------------------+----------+------------+--+--------------+
| Developed technology | | |$ | 9 years |
+----------------------------------------+----------+------------+--+--------------+
| Customer relationships | | | | 7 - 9 |
| | | | | years |
+----------------------------------------+----------+------------+--+--------------+
| Trademarks and trade names | | | | 4 years |
+----------------------------------------+----------+------------+--+--------------+
| Goodwill | | |$ | Indefinite |
+----------------------------------------+----------+------------+--+--------------+
The amounts and lives of the identified intangibles other than goodwill were
valued at fair value by the Company. In preparing fair value the Company
considered the report of an independent valuation firm. The goodwill is
attributable to the workforce of the acquired business and the significant
synergies expected to arise after the Company's acquisition of Spheris. The
goodwill and intangible assets are deductible for tax purposes.
Fair value is defined as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. There is a hierarchy of valuation
techniques based on the nature of the inputs used to develop the fair value
measures. This is an exit price concept for the valuation of the asset or
liability. In addition, market participants are assumed to be unrelated buyers
and sellers in the principal or the most advantageous market for the asset or
liability. Fair value measurements for an asset assume the highest and best use
by these market participants. Many of these fair value measurements can be
highly subjective and it is also possible that other professionals, applying
reasonable judgment to the same facts and circumstances, could develop and
support a range of alternative estimated amounts.
Total acquisition-related transaction costs incurred by the Company are expensed
in the periods in which the costs are incurred. Acquisition-related transaction
costs (such as advisory, legal, valuation and other professional fees) are not
included as components of consideration transferred but are accounted for as
expenses in the periods in which the costs are incurred. External cost incurred
to acquire the business, and incremental direct integration costs, have been
included in the line item Acquisition related charges on the Company's
consolidated statement of operations.
3. Debt
Current portion of debt consisted of the following:
+-----------------------------+-+-------------+--+--------------+
| | | September | | December |
| | | 30, 2010 | | 31, 2009 |
+-----------------------------+-+-------------+--+--------------+
| Short term credit |$ | 6,522 |$ | 4,769 |
| facilities | | | | |
+-----------------------------+-+-------------+--+--------------+
| Current portion of long | | 26,724 | | 621 |
| term borrowings | | | | |
+-----------------------------+-+-------------+--+--------------+
| Current portion of capital | | 2,978 | | 817 |
| lease obligations | | | | |
+-----------------------------+-+-------------+--+--------------+
| Current portion of debt |$ | 36,224 |$ | 6,207 |
+-----------------------------+-+-------------+--+--------------+
Debt consisted of the following as of:
+-----------------------------+-+-------------+--+--------------+
| | | | | |
+-----------------------------+-+-------------+--+--------------+
| | | September | | December |
| | | 30, 2010 | | 31, 2009 |
+-----------------------------+-+-------------+--+--------------+
| Capital lease obligations |$ | 4,534 |$ | 3,134 |
+-----------------------------+-+-------------+--+--------------+
| Term loans from banks | | 2,799 | | 3,018 |
+-----------------------------+-+-------------+--+--------------+
| 6% Convertible note | | 96,419 | | 96,419 |
+-----------------------------+-+-------------+--+--------------+
| Term loan due from 2010 to | | | | - |
| 2012, with interest at | | 45,000 | | |
| Prime plus 3.25% (Spheris | | | | |
| acquisition debt) | | | | |
+-----------------------------+-+-------------+--+--------------+
| Revolving loan with | | | | - |
| interest at Prime plus 3% | | | | |
| with a scheduled | | 35,000 | | |
| termination date of April | | | | |
| 22, 2014. (Spheris | | | | |
| acquisition debt) | | | | |
+-----------------------------+-+-------------+--+--------------+
| Subordinated promissory | | 13,898 | | - |
| note, due in 2015 with | | | | |
| varying interest rates and | | | | |
| provisions for early | | | | |
| repayment (Spheris | | | | |
| acquisition debt) | | | | |
+-----------------------------+-+-------------+--+--------------+
| Short term credit | | 6,522 | | 4,769 |
| facilities | | | | |
+-----------------------------+-+-------------+--+--------------+
| Total debt | | 204,172 | | 107,340 |
+-----------------------------+-+-------------+--+--------------+
| Less: current portion | | 36,224 | | 6,207 |
+-----------------------------+-+-------------+--+--------------+
| Long term debt, net of |$ | 167,948 |$ | 101,133 |
| current portion | | | | |
+-----------------------------+-+-------------+--+--------------+
The entire amount of Spheris acquisition debt and 6% convertible note were
refinanced in October 2010; see Note 4, Subsequent Events.
Credit Facilities
Line of Credit - K Bank
The Company has revolving lines of credit from K Bank. Subject to certain terms
and conditions of the agreement with K Bank, the agreement provides revolving
lines of credit of a maximum of $5,750. The amount available for borrowing is
based on eligible accounts receivable. The rate of interest on this note is
Prime + 1% with a floor of 6%. The note is payable on demand and is renewed
annually. Under the agreement, certain subsidiaries of the Company assigned all
their accounts receivable to K Bank with full recourse. For the nine months
ended September 30, 2010 and 2009 interest expense of $217 and $198,
respectively was recorded in the accompanying consolidated statements of
operations. The amount outstanding as of September 30, 2010 and December 31,
2009 was $2,998 and $3,343, respectively. The remaining available amount under
the lines of credit was $2,752 and $2,407 as of September 30, 2010 and December
31, 2009, respectively. These lines of credit were repaid subsequent to
September 30, 2010.
Credit Agreement - ICICI Bank
The Company has a Credit Arrangement with ICICI Bank, Mumbai, India of $2,772,
at interest rate of LIBOR+ 2.5% and 15.5%, which is secured by current assets
and fixed assets of CBay Systems (India) Private Limited (CBay India) a 100%
owned subsidiary of the Company. The amount outstanding as of September 30, 2010
and December 31, 2009 was $341 and $1,426, respectively. For the nine months
ended September 30, 2010 and 2009 interest expense of $81 and $121,
respectively, was recorded in Interest expense in the consolidated statements of
operations.
Credit Agreement - IndusInd Bank
The Company has a Credit Arrangement with IndusInd Bank, Mumbai, India of
$3,227, at an interest rate of LIBOR+ 3%, which is secured by current assets
and fixed assets of CBay India. The amount outstanding as of September 30, 2010
and December 31, 2009 was $3,160 and $0, respectively. For the nine months ended
September 30, 2010 and 2009 interest expense of $38 and $0, respectively, was
recorded in interest expense, net in the consolidated statements of operations.
6% Convertible Note
The Company issued a 6% convertible note (Convertible Note) of $90,935 in
connection with the acquisition of MedQuist which had a scheduled due date of
August 5, 2015. Any portion of the note could have been converted at the option
of Royal Philips Electronics (the holder) into common stock of the Company,
anytime after November 4, 2008.
In March and August 2009, the Company exercised its right to convert the
interest on this convertible note from August 6, 2008 to August 5, 2009 into
additional convertible notes aggregating to $5,484 with the same terms and
conditions as the original note. As of September 30, 2010 and December 31, 2009
the total amount payable of $96,419 is included in long term debt in the
accompanying consolidated balance sheets.
For the nine months ended September 30, 2010 and 2009, interest expense of
$4,339 and $4,215, respectively, was recorded in Interest expense, net in the
accompanying consolidated statements of operations.
On September 8, 2010, the Company and the holder entered into an amendment
agreement (amendment) of the Convertible Note. Under the amendment the parties
agreed that the Company may redeem the Convertible Note on or prior to December
20, 2010 at a redemption price of 108% of the outstanding principal conditional
upon the receipt by the Company of the proceeds from any financing or
refinancing being undertaken in connection with the redemption. On October 14,
2010, the Company repaid the Convertible Note along with accrued interest at a
redemption price of 108%.
See Note 4, Subsequent Events.
Term and Equipment Loans
The Company has term loans payable to four banks which carry interest rates
ranging from 6.5% to 16% per annum and are repayable monthly through August
2013. One loan contains certain non-financial covenants and limits borrowings
for one of the Company's subsidiaries and the Company is in compliance with
these covenants. The Company has a working capital term loan which is a Rupee
denominated loan from EXIM Bank. This loan is repayable in full in June 2011 and
carries an interest rate of 12%. This loan is secured by certain assets of one
of the Company's subsidiaries.
The Company has various equipment and vehicle loans that carry interest rates
ranging from 10% to 15% per annum and are repayable monthly through 2013. These
loans are secured by the related equipment and vehicles.
The Company recorded interest of $204 and $218 during the nine months ended
September 30, 2010 and 2009, respectively, on these borrowings.
Subsequent to September 30, 2010, the Company repaid one of the term loans with
a balance outstanding of $731 on September 30, 2010.
Acquisition Debt
In connection with the Spheris acquisition, MedQuist Transcriptions, Ltd., a
subsidiary of MedQuist Inc. (MedQuist Transcriptions), and certain other
subsidiaries of MedQuist Inc. (collectively, the Loan Parties) entered into a
credit agreement (the GE Credit Agreement) with General Electric Capital
Corporation, Capital Source Bank, and Fifth Third Bank. The GE Credit Agreement
provided for up to $100,000 in senior secured credit facilities, consisting of a
$50,000 term loan, and a revolving credit facility of up to $50,000. The credit
facilities were secured by a first priority lien on substantially all of the
property of the Loan Parties. The term loan was repayable in equal quarterly
instalments of $5,000 beginning October 1, 2010, with the balance payable 2.5
years from the date of closing. Amounts borrowed under the GE Credit Agreement
incurred interest at a rate selected by MedQuist Transcriptions equal to the
Base Rate or the Eurodollar Rate (each as defined in the GE Credit Agreement)
plus a margin, all as more fully set forth in the GE Credit Agreement. At
September 30, 2010, the revolving credit facility and the term loan had interest
rates of 6.25% and 6.75%, respectively.
MedQuist incurred $6,100 in costs with the GE Credit Agreement which are
included in Other current assets and Other assets. These costs were expensed
upon closing of the Company's new credit facilities in October 2010.
The GE Credit Agreement also contained excess cash flow repayment provisions
that required 25% of Excess Cash Flows, as defined in the agreement, to be
remitted to the lenders within 95 days after year-end. The Company estimated
that the amount of repayment that would have been due during April 2011 at
approximately $10,000. Total current maturities under the GE Credit Agreement
consisted of (a) $10,000 estimated for Excess Cash Flow sweeps in April 2011,
and (b) $15,000 of contractual maturities of the term loan obligations
As discussed in Note 4, the Company paid off all amounts outstanding plus
accrued interest under the GE Credit Agreement, thus terminating the GE Credit
Agreement.
As of September 30, 2010, the Company believes that it is in compliance with the
covenants of the GE Credit Agreement.
When MedQuist entered into the GE Credit Agreement, it terminated the five-year
$25,000 revolving credit agreement with Wells Fargo Foothill, LLC (the Wells
Credit Agreement) that it entered into on August 31, 2009. MedQuist never
borrowed under the Wells Credit Agreement. In the nine month period ended
September 30, 2010, the Company wrote off deferred financing fees of $1,100 and
incurred termination fees of $600 in connection with the termination of this
facility. Such costs are included in Interest expense, net in the accompanying
consolidated statements of operations.
In connection with the Spheris acquisition, the Company entered into a
subordinated promissory note with Spheris (the Subordinated Promissory Note).
The loan was scheduled to mature in five years from the date of the Acquisition.
The face amount of the Subordinated Promissory Note totalled $17,500 with
provisions for prepayment at discounted amounts, ranging from 77.5% of the
principal if paid within six months, 87.5% from six to nine months, 97.5% from
nine to twelve months, 102.0% by year two, 101.0% by year three and 100.0%
thereafter. For purposes of the purchase price allocation, the note was
discounted at 77.5% of the principal ($13,600). This note was a non-cash
transaction. The fair value of the note was determined through the use of a
Monte Carlo model which is Level 3 in the Fair Value hierarchy based upon
significant unobservable inputs.
The Subordinated Promissory Note had stated interest rates of 8.0% for the first
six months, 9.0% from six to nine months, and 12.5% thereafter of which 2.5% may
be paid by increasing the principal amount. Payments of interest are made
semi-annually on each six month anniversary of the acquisition. For financial
statement purposes the interest has been calculated using the average interest
rates over the term of the Subordinated Promissory Note. As discussed in Note 4,
the Company paid off all amounts outstanding, at 77.5% of the face value, plus
accrued interest under the Subordinated Promissory Note thus extinguishing the
note.
4. Subsequent Events
The Company evaluated subsequent events through November 11, 2010 and noted that
the following subsequent events are required to be disclosed.
Recapitalization Transactions and Sale of A-Life
On October 1, 2010, the Company entered into a senior secured credit facility,
or the Senior Secured Credit Facility, with certain lenders and General Electric
Capital Corporation, as Administrative Agent. The Senior Secured Credit Facility
contains a number of significant covenants and consists of $225,000 in senior
secured credit facilities comprised of:
i) a $200,000 term loan, advanced in one draw on October 14, 2010 (the
Closing Date), with a term of five years, repayable in equal quarterly
installments of $5,000, commencing on the first day of the first fiscal quarter
beginning after the Closing Date, with the balance payable at maturity; and
ii) a $25,000 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 $5,000
letter-of-credit sub-facility and a $5,000 swing line loan sub-facility.
The borrowings under the Senior Secured Credit Facility bear interest at a rate
equal to an applicable margin plus, at the co-borrowers' option, either (a) a
base rate determined by reference to the highest of (1) the rate last quoted by
the Wall Street Journal as the "Prime Rate" in the United States, (2) the
federal funds rate plus 1/2 of 1% and (3) the LIBOR rate for a one-month
interest period plus 1.00% or (b) the higher of (1) a LIBOR rate determined by
reference to the costs of funds for deposits in the currency of such borrowing
for the interest period relevant to such borrowing adjusted for certain
additional costs and (2) 1.75%. The applicable margin is 4.50% with respect to
base rate borrowings and 5.50% with respect to LIBOR borrowings.
The loans are secured by substantially all of the Company's assets and are
guaranteed by the Company. The agreements contain customary covenants, including
reporting and notification. The financial covenants include a Senior Leverage
Ratio, Total Leverage Ratio, and an Interest Coverage Ratio. As of September
30, 2010 the Company believes that it was in compliance.
In addition to the Senior Secured Credit Facility, the Company issued $85,000
aggregate principal amount of 13% senior subordinated notes due 2016, or the
Senior Subordinated Notes, pursuant to a purchase agreement. Interest on the
notes is payable in quarterly installments at the issuers' option at either (i)
13% in cash or (ii) 12% in cash payment plus 2% in the form of additional senior
subordinated notes. The Senior Subordinated Notes are non-callable for two years
after the closing date after which they are redeemable at 105.0% declining
ratably until four years after the closing date. The Senior Subordinated Notes
contain a number of significant covenants that, among other things, restrict the
Company's ability to dispose of assets, repay other indebtedness, incur
additional indebtedness, pay dividends, prepay subordinated indebtedness, incur
liens, make capital expenditures, investments or acquisitions, engage in mergers
of consolidations, engage in certain types of transactions with affiliates and
otherwise restrict the Company's activities.
Proceeds from the Senior Secured Credit Facility and the Senior Subordinated
Notes were used to repay $80,000 of the Company's indebtedness under the GE
Credit Agreement plus interest, to repay $13,900 indebtedness under the
Subordinated Promissory Note plus interest, to repay $104,100 of indebtedness
under the Convertible Note including an early redemption premium of $7,700 plus
accrued interest, and to pay a $53,913 special cash dividend to the
noncontrolling stockholders of MedQuist Inc. The Company expensed $5,705 of
previously capitalized debt issuance costs related to the GE Credit Agreement
upon the closing of the Company's new credit facilities in October 2010.
The Company, on October 14, 2010 repaid the 6% convertible note to Royal Philips
Electronics (the holder) with accrued interest at a redemption price of 108%,
see Note 3.
The effects on the Company's capital structure are estimated to impact the
Company's financial position as follows:
+------------------------------+-+------------+-+-------------+-+-----------+
| | |Historical | | Effect | | Pro |
| | | September | | Of | | Forma |
| | | 30, 2010 | |Refinancing | | As Of |
| | | | | And | |September |
| | | | | Dividend | | 30, 2010 |
+------------------------------+-+------------+-+-------------+-+-----------+
| | | | | | | |
+------------------------------+-+------------+-+-------------+-+-----------+
| | | | | | | |
+------------------------------+-+------------+-+-------------+-+-----------+
| | | | | | | |
+------------------------------+-+------------+-+-------------+-+-----------+
| Current portion of long term | | 204,172 |$ | 88,417 |$ | 292,589 |
| debt and long term debt |$ | | | | | |
+------------------------------+-+------------+-+-------------+-+-----------+
| | | | | | | |
+------------------------------+-+------------+-+-------------+-+-----------+
| Equity : | | | | | | |
+------------------------------+-+------------+-+-------------+-+-----------+
| CBaySystems Holdings Limited | | | | | | |
| stockholders' equity | | | | | | |
+------------------------------+-+------------+-+-------------+-+-----------+
| Common stock - $ 0.10 par | | 15,820 | | |$ | 15,820 |
| value; authorized 1,000,000 | | | | | | |
| shares; 158,209 shares |$ | | | | | |
| issued and outstanding | | | | | | |
+------------------------------+-+------------+-+-------------+-+-----------+
| Additional paid in capital | | 136,797 | | | | 136,797 |
+------------------------------+-+------------+-+-------------+-+-----------+
| Accumulated deficit | | (109,255) | | (13,405) | | (122,660) |
+------------------------------+-+------------+-+-------------+-+-----------+
| Accumulated other | | (385) | | | | (385) |
| comprehensive loss | | | | | | |
+------------------------------+-+------------+-+-------------+-+-----------+
| Total CBaySystems Holdings | | 42,977 | | (13,405) | | 29,572 |
| Limited stockholders' equity | | | | | | |
+------------------------------+-+------------+-+-------------+-+-----------+
| Noncontrolling interests | | 40,598 | | (53,913) | | (13,315) |
+------------------------------+-+------------+-+-------------+-+-----------+
| Total equity |$ | 83,575 |$ | (67,318) |$ | 16,257 |
+------------------------------+-+------------+-+-------------+-+-----------+
In September 2010, an Agreement and Plan of Merger was executed by A-Life to
merge A-Life with Ingenix. The sale was completed on October 27, 2010. Under
this transaction, the Company's shares in A-Life were sold to Ingenix for cash
consideration of $23,800, of which $4,700 will be held in escrow until March
2012. The Company expects to receive $19,100 of cash in November 2010 in
connection with the A-Life sale, and upon receipt, the Company expects to have
over $40,000 in cash on-hand and approximately $292,589 in debt.
Filing of United States Registration Statement and Certain Exchange Transactions
On September 30, 2010, certain noncontrolling stockholders of MedQuist entered
into an exchange agreement (the MedQuist Exchange) with the Company. Pursuant to
the exchange agreement, the noncontrolling stockholders of MedQuist will receive
4.2459 of the Company's stock for each MedQuist Inc. share exchanged, subject to
certain adjustments relating to the level of MedQuist's net debt at closing of
the exchange agreement, and will enter into a stockholders agreement with the
Company that among other things, provides them with registration rights and
contains provision regarding their voting in the election of the Company's
directors. The closing under the exchange agreement is conditioned upon the
listing of the Company's shares on the NASDAQ Stock Market (NASDAQ), the
completion of an initial public offering by the Company in the United States by
January 31, 2010, the reincorporation of the Company as a Delaware Corporation
and other conditions, and if completed will increase the Company's ownership in
MedQuist from 69.5% to 82.5%.
On October 18, 2010, the Company filed a registration statement on Form S-1 with
the United States Securities and Exchange Commission (SEC) relating to a
proposed public offering (Offering) of its common stock in the United States.
The Company intends to apply for a listing of its shares on NASDAQ in connection
with the Offering.
In addition, the Company has filed a registration statement on Form S-4 with the
SEC relating to a proposed exchange offer to those noncontrolling MedQuist
stockholders which are not parties to the MedQuist Exchange, pursuant to which
the Company expects to offer to exchange shares of the Company's common stock
for outstanding shares of MedQuist common stock. The terms of the proposed
exchange offer are described in such registration statement. Assuming the
MedQuist Exchange is consummated, a full exchange in the exchange offer would
increase the Company's ownership in MedQuist from 82.5% to 100.0%.
In light of the proposed move to NASDAQ, the Company intends to delist from the
Alternative Investment Market (AIM) simultaneous with or shortly after the
completion of the Offering and the listing of its shares on NASDAQ.
5. Comprehensive Income
Comprehensive income was as follows:
+----------------------------------------+----------+--------+----------+-------+----------+-------+----------+-------+
| | | Three Months Ended | | Nine Months Ended |
| | | September 30, | | September 30, |
+----------------------------------------+----------+---------------------------+----------+--------------------------+
| | | 2010 | | 2009 | | 2010 | | 2009 |
+----------------------------------------+----------+--------+----------+-------+----------+-------+----------+-------+
| Net income (loss) attributable to | | 5,872 | $ | 2,539 | $ | 6,425 | $ | (230) |
| CBaySystems Holdings Limited | $ | | | | | | | |
+----------------------------------------+----------+--------+----------+-------+----------+-------+----------+-------+
| Foreign currency translation | | 464 | | (8) | | (211) | | 413 |
| adjustment | | | | | | | | |
+----------------------------------------+----------+--------+----------+-------+----------+-------+----------+-------+
| | | 6,336 | | 2,531 | | 6,214 | | |
| Comprehensive income | $ | | $ | | $ | | $ | 183 |
+----------------------------------------+----------+--------+----------+-------+----------+-------+----------+-------+
6. Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss) by
the weighted average number of shares outstanding during each period. Diluted
net income (loss) per share is computed by dividing net income (loss) by the
weighted average shares outstanding, as adjusted for the dilutive effect of
common stock equivalents, which consist of stock options, convertible note and
certain obligations, which may be settled by the Company through issue of
shares, using the treasury stock method.
The following table reflects the weighted average shares outstanding used to
compute basic and diluted net income per share:
+----------------+----------+---------+----------+---------+----------+---------+----------+----------+
| | | Three Months Ended Sep 30, | | Nine Months Ended Sep 30, |
+----------------+----------+------------------------------+----------+-------------------------------+
| | | 2010 | | 2009 | | 2010 | | 2009 |
+----------------+----------+---------+----------+---------+----------+---------+----------+----------+
| Net income | | 5,872 | | 2,539 | | 6,425 | | (230) |
| (loss) | | | | | | | | |
| attributable | $ | | $ | | $ | | $ | |
| to CBaySystems | | | | | | | | |
| Holdings | | | | | | | | |
| Limited | | | | | | | | |
+----------------+----------+---------+----------+---------+----------+---------+----------+----------+
| Less: amount | | (688) | | (688) | | (2,063) | | (2,063) |
| payable to | | | | | | | | |
| principal | | | | | | | | |
| shareholders | | | | | | | | |
+----------------+----------+---------+----------+---------+----------+---------+----------+----------+
| Net income | | 5,184 | | 1,851 | | 4,362 | | (2,293) |
| (loss) | | | | | | | | |
| attributable | | | | | | | | |
| to common | | | | | | | | |
| shareholders | | | | | | | | |
+----------------+----------+---------+----------+---------+----------+---------+----------+----------+
| Add: Income | | 1,446 | | - | | - | | - |
| impact of | | | | | | | | |
| assumed | | | | | | | | |
| conversion : | | | | | | | | |
| Convertible | | | | | | | | |
| Note | | | | | | | | |
+----------------+----------+---------+----------+---------+----------+---------+----------+----------+
| Net income | | 6,630 | | 1,851 | | 4,362 | | (2,293) |
| (loss) | | | | | | | | |
| attributable | | | | | | | | |
| to common | $ | | $ | | $ | | $ | |
| shareholders | | | | | | | | |
| and assumed | | | | | | | | |
| conversion | | | | | | | | |
+----------------+----------+---------+----------+---------+----------+---------+----------+----------+
| | | | | | | | | |
+----------------+----------+---------+----------+---------+----------+---------+----------+----------+
| Weighted | | | | | | | | |
| average shares | | | | | | | | |
| outstanding: | | | | | | | | |
+----------------+----------+---------+----------+---------+----------+---------+----------+----------+
| Basic | | 158,209 | | 156,930 | | 157,875 | | 155,637 |
+----------------+----------+---------+----------+---------+----------+---------+----------+----------+
| Effect of | | 62,835 | | - | | 3,643 | | - |
| dilutive stock | | | | | | | | |
+----------------+----------+---------+----------+---------+----------+---------+----------+----------+
| Diluted | | 221,044 | | 156,930 | | 161,518 | | 155,637 |
+----------------+----------+---------+----------+---------+----------+---------+----------+----------+
| Net income | | | | | | | | |
| (loss) per | | | | | | | | |
| share | | | | | | | | |
| attributable | | | | | | | | |
| to CBaySystems | | | | | | | | |
| Holdings | | | | | | | | |
| Limited | | | | | | | | |
+----------------+----------+---------+----------+---------+----------+---------+----------+----------+
| Basic | $ | 0.03 | $ | 0.01 | $ | 0.03 | $ | (0.01) |
+----------------+----------+---------+----------+---------+----------+---------+----------+----------+
| Diluted | $ | 0.03 | $ | 0.01 | $ | 0.03 | $ | (0.01) |
+----------------+----------+---------+----------+---------+----------+---------+----------+----------+
The computation of diluted net income (loss) per share does not assume
conversion, exercise or issuance of shares that would have an anti-dilutive
effect. Potentially dilutive shares having an anti-dilutive effect and
therefore excluded from the calculation of diluted net income (loss) per share,
totalled 1,600, 33,848, 59,932 and 57,954 shares, for the three months and nine
months ended September 30, 2010 and 2009, respectively and includes potential
shares, for all periods presented except the three months ended September 30,
2010, that may have been converted pursuant to the terms of a Convertible Note
which was repaid subsequent to September 30, 2010, see Note 4. The net income
(loss) for the purpose of the basic net income (loss) per share is adjusted for
the amounts payable to the Company's majority shareholder amounting to $688 and
$2,063, respectively, for the three months and nine months ended September 30,
2010 and 2009, under the consulting services agreement, see Note 11.
For the three months ended September 30, 2010 and 2009, 950 and 10,723 options,
respectively, and for the nine months ended September 30, 2010 and 2009, 1,446
and 10,723 options, respectively, were excluded from the computation of diluted
earnings per share as the options' exercise price was greater than the average
market price of the common stock during the respective period.
During the third quarter of 2010, the Compensation Committee of MedQuist issued
awards under the Long Term Incentive Plan, the terms and conditions of which
will be determined in the future under the terms of the plan.
7. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following:
+------------------------------------+----------+-----------+--+-----------+
| | | September | | December |
| | | 30, | | 31, |
+------------------------------------+----------+-----------+--+-----------+
| | | 2010 | | 2009 |
+------------------------------------+----------+-----------+--+-----------+
| Customer accommodations | $ | 10,387 |$ | 11,635 |
+------------------------------------+----------+-----------+--+-----------+
| Other (no item exceeds 5% of | | 26,050 | | 18,168 |
| current liabilities) | | | | |
+------------------------------------+----------+-----------+--+-----------+
| Total accrued expenses and other | $ | 36,437 |$ | 29,803 |
| current liabilities | | | | |
+------------------------------------+----------+-----------+--+-----------+
In November 2003, one of the employees of MedQuist raised allegations that it
had engaged in improper billing practices. In response, the board of directors
of MedQuist undertook an independent review of these allegations (Review). In
response to MedQuist's customers' concern over the public disclosure of certain
findings from the Review, it made the decision in the fourth quarter of 2005 to
take action to try to avoid litigation and preserve and solidify its customer
business relationships by offering a financial accommodation to certain of its
customers.
In connection with MedQuist's decision to offer financial accommodations to
certain of its customers (Accommodation Customers), it analyzed its historical
billing information and the available report-level data to develop
individualized accommodation offers to be made to Accommodation Customers
(Accommodation Analysis). Based on the Accommodation Analysis, MedQuist's board
of directors authorized management to make cash or credit accommodation offers
to Accommodation Customers in the aggregate amount of $75,818. By accepting
MedQuist's accommodation offer, the customer agreed, among other things, to
release MedQuist from any and all claims and liability regarding the billing
related issues. MedQuist is unable to predict how many customers, if any, may
accept the outstanding accommodation offers on the terms proposed by MedQuist,
nor is it able to predict the timing of the acceptance of any outstanding
accommodation offers. Until any offers are accepted, MedQuist may withdraw or
modify the terms of the accommodation program or any outstanding offers at any
time. In addition, MedQuist is unable to predict how many future offers, if
made, will be accepted on the terms proposed by it. MedQuist regularly evaluates
whether to proceed with, modify or withdraw the accommodation program or any
outstanding offers.
The following is a summary of the financial statement activity related to the
customer accommodations.
+---------------------------------+----------+-------------+----------+-------------+
| | | Nine Months | | Year Ended |
| | | Ended | | |
+---------------------------------+----------+-------------+----------+-------------+
| | | September | | December |
| | | 30, 2010 | | 31,2009 |
+---------------------------------+----------+-------------+----------+-------------+
| Beginning balance | $ | 11,635 | $ | 12,055 |
+---------------------------------+----------+-------------+----------+-------------+
| Payments and other adjustments | | (1,248) | | (317) |
+---------------------------------+----------+-------------+----------+-------------+
| Credits | | - | | (103) |
+---------------------------------+----------+-------------+----------+-------------+
| Ending balance | $ | 10,387 | $ | 11,635 |
+---------------------------------+----------+-------------+----------+-------------+
2010 Restructuring Plan
Management's ongoing cost reduction initiatives, including process improvement,
combined with the acquisition of Spheris, resulted in a restructuring plan
involving staff reductions and other actions designed to maximize operating
efficiencies. The affected employees are entitled to receive severance benefits
under existing established severance policies. The employees affected were
primarily in the operations and administrative functions. Management approved
the initial actions under the plan during the second quarter of 2010. In the
third quarter of 2010, management identified additional opportunities for
synergies and approved additional restructuring involving staff reductions,
primarily in the operations and development functions. Management approved this
plan during the third quarter of 2010.
The table below reflects the financial statement activity related to the 2010
restructuring plan:
+-----------------------------------------------+---+-------------+
| | | Nine months |
| | | ended |
+-----------------------------------------------+---+-------------+
| | | September |
| | | 30, 2010 |
+-----------------------------------------------+---+-------------+
| Beginning balance | $ | - |
+-----------------------------------------------+---+-------------+
| Charge during the three months ended June 30, | | 844 |
| 2010 | | |
+-----------------------------------------------+---+-------------+
| Charge during the three months ended | | 1,723 |
| September 30, 2010 | | |
+-----------------------------------------------+---+-------------+
| Cash paid | | (951) |
+-----------------------------------------------+---+-------------+
| Ending balance | $ | 1,616 |
+-----------------------------------------------+---+-------------+
The Company expects that restructuring activities may continue in 2010 and 2011
as management identifies opportunities for synergies resulting from the
acquisition of Spheris including the elimination of redundant functions.
2009 Restructuring Plan
During the third and fourth quarters of 2009, because of management's continued
planned process improvement and technology development investments MedQuist
committed to an exit and disposal plan which includes projected employee
severance for planned reduction in headcount. Because of the plan development in
late 2009 and execution of the plan over multiple quarters in 2009 and 2010, not
all personnel affected by the plan know of the plan or its impact. The plan
includes costs of $2,500 for employee severance and $400 for vacating operating
leases. The table below reflects the financial statement activity related to the
2009 restructuring plan:
+---------------------------------+----------+-------------+----------+-------------+
| | | Nine Months | | Year Ended |
| | | Ended | | |
+---------------------------------+----------+-------------+----------+-------------+
| | | September | | December |
| | | 30, 2010 | | 31, 2009 |
+---------------------------------+----------+-------------+----------+-------------+
| Beginning balance | $ | 2,064 | $ | - |
+---------------------------------+----------+-------------+----------+-------------+
| Charge( reversal) | | (616) | | 2,810 |
+---------------------------------+----------+-------------+----------+-------------+
| Cash paid | | (1,113) | | (746) |
+---------------------------------+----------+-------------+----------+-------------+
| Ending balance | $ | 335 | $ | 2,064 |
+---------------------------------+----------+-------------+----------+-------------+
8. Cost of Legal Proceedings and Settlements
The following is a summary of the amounts recorded as Cost of legal proceedings
and settlements in the accompanying consolidated statements of operations:
+--------------------------+----------+------+-+-------+--+-------+--+--------+
| | | Three Months | | Nine Months |
| | | Ended | | Ended |
| | | September 30, | | September 30, |
+--------------------------+----------+----------------+--+-------------------+
| | |2010 | | 2009 | | 2010 | | 2009 |
+--------------------------+----------+------+-+-------+--+-------+--+--------+
| Legal fees | $ | 633 |$ | 1,382 |$ | 1,875 |$ | 7,690 |
+--------------------------+----------+------+-+-------+--+-------+--+--------+
| Settlements | | - | | - | | 910 | | 5,850 |
+--------------------------+----------+------+-+-------+--+-------+--+--------+
| Total | $ | 633 |$ | 1,382 |$ | 2,785 |$ | 13,540 |
+--------------------------+----------+------+-+-------+--+-------+--+--------+
The amounts included in settlements for the nine months ended September 30, 2010
represent an additional charge of $900 related to Company's settlement with
Kaiser Foundation Health Plan, Inc. and affiliates further discussed in Note 10.
The amounts included in Settlements for 2009 represent the settlement of a
patent litigation matter.
9. Income Taxes
The Company's consolidated income tax expense consists principally of an
increase in deferred tax liabilities related to goodwill amortization deductions
for income taxes purposes during the applicable period as well as state and
foreign income taxes. The Company recorded a valuation allowance to reduce its
net deferred tax assets to an amount that is more likely than not to be realized
in future years.
The Company regularly assesses the future realization of deferred taxes and
whether the valuation allowance against the majority of domestic deferred tax
assets is still warranted. To the extent sufficient positive evidence, including
past results and future projections, exists to benefit all or part of these
benefits, the valuation allowance will be released accordingly.
The Company classifies penalties and interest related to uncertain tax positions
as part of income tax expense. During the nine months ended September 30, 2010,
the Company reduced its accruals by $544, related to various state uncertain tax
positions as a result of filing voluntary disclosure agreements with state
jurisdictions. In addition, during the nine months ended September 30, 2010, the
Company's accrual for uncertain tax provisions increased by $5,065 as a result
of the Spheris Acquisition and consolidation of Spheris.
Under the Indian Income tax, a substantial portion of the profits of the
Company's Indian operations are exempt from the taxes under specified tax
holiday schemes.
10. Commitments and Contingencies
Customer Litigation
Kaiser Litigation
On June 6, 2008, plaintiffs Kaiser Foundation Health Plan, Inc. and affiliates
(collectively, Kaiser) filed suit against MedQuist in the Superior Court of the
State of California related to its billing practices.
In July 2010, the parties reached a settlement of the litigation whereby the
Company made a payment of $2,000 to resolve all of Kaiser's claims. Neither
MedQuist, nor Kaiser, admitted to any liability or wrongdoing in connection with
the settlement. Of this amount, $1,100 was included in Accrued expenses and
other current liabilities at December 31, 2009 and the Company expensed an
additional $900 in the nine months ended September 30, 2010.
Kahn Putative Class Action
This action was initiated on January 22, 2008, when one of MedQuist's
shareholders filed a shareholder putative class action lawsuit against MedQuist,
Royal Philips Electronics N.V. (Philips), MedQuist's former majority
shareholder, and four of its former non-independent directors. The action was
venued in the Superior court of New Jersey, Chancery Division, Burlington
County. Thereafter on June 12, 2008, plaintiff filed an amended class action
complaint against MedQuist, eight of itsformer directors, and Philips. In the
amended complaint, plaintiff alleged that its then current and former directors
breached their fiduciary duties of good faith, fair dealing, loyalty, and due
care by not providing its public shareholders with the opportunity to decide
whether they wanted to participate in a share purchase offer with non-party
CBaySystems Holdings Limited . The share purchase offer would have allowed the
public shareholders to sell their shares of MedQuist's common stock for an
amount above market price. Plaintiff further alleged that CBaySystems Holdings
Limited made the share purchase offer to Philips and that Philips breached its
fiduciary duties by accepting CBaySystems Holdings Limited offer. Based on these
allegations, plaintiff sought declaratory, injunctive, and monetary relief from
all defendants. Plaintiff claimed that MedQuist was only named as a party to the
litigation for purposes of injunctive relief.
On November 21, 2008, the Court dismissed plaintiff's amended class action
complaint with prejudice. Thereafter, on July 1, 2010, the New Jersey Appellate
Division entered an Order and Opinion that affirmed the dismissal of the claims
against MedQuist and two of the MedQuist director defendants. The Appellate
Division reversed the dismissal of the claims against the remaining defendants,
Philips and certain of its former directors, and remanded those claims back to
the Chancery Division. MedQuist is no longer a defendant in this matter, but it
is monitoring the matter since it involves claims against its former directors.
Reseller Arbitration Demand
On October 1, 2007, MedQuist received from counsel to nine current and former
resellers of MedQuist's products (Claimants), a copy of an arbitration demand
filed by the Claimants, initiating an arbitration proceeding.
On March 31, 2010, the parties entered into a Settlement Agreement and Release
pursuant to which MedQuist paid the Claimants $500 on April 1, 2010 to resolve
all claims. Under the Settlement Agreement and Release, (i) the parties
exchanged mutual releases, (ii) the arbitration and related state court
litigation were dismissed with prejudice and (iii) MedQuist did not admit to any
liability or wrongdoing. The Company accrued the entire amount of this
settlement as of December 31, 2009.
SEC Investigation of Former MedQuist Officer
With respect to MedQuist's historical billing practices, the SEC is pursuing
civil litigation against its former chief financial officer, whose employment
with MedQuist ended in July 2004. Pursuant to its bylaws, MedQuist has been
providing indemnification for the legal fees for its former chief financial
officer.
Exchange Agreement
On September 30, 2010, the Company entered into a definitive agreement with
certain noncontrolling stockholders of approximately 13% of MedQuist's common
stock. The consummation of this agreement is subject to various conditions. See
Note 4, Subsequent Events.
11. Related Party Transaction
The Company entered into an agreement (the "Consulting Services Agreement") with
S.A.C. PEI CB Investment II, LLC ("SAC CBI II"), an affiliate of its majority
shareholder, S.A.C. PEI CB Investment, L.P. ("SAC CBI"), and Lehman Brothers
Commercial Corporation Asia, in August 2008, providing for annual payments to
be made in quarterly installments of approximately $2,750 through August 2013.
The Consulting Services Agreement was entered into to, among other things,
effect the economic understanding regarding the terms upon which SAC CBI
acquired its ownership interest in the Company. The Company has the option to
make its payments in shares of its common stock at fair market value in lieu of
cash. Payments amounting to $2,063 were recorded for the nine months ended
September 30, 2010 and 2009. In May 2010, 652 shares were issued to SAC CBI II
in lieu of the fees accrued through March 2010. As of September 30, 2010 and
December 31, 2009, $2,850 and $2,185, respectively, accrued as a result of this
agreement and has been recorded in due to related parties in the accompanying
consolidated balance sheets. The Company is obligated to pay fees for the
remaining unexpired term of the Consulting Services Agreement upon its
termination or upon a change of control as defined in such agreement.
On May 4, 2010, the audit committee of MedQuist's board of directors, comprised
solely of independent directors unaffiliated with SAC CBI, approved the payment
of and the Company expensed a $1,500 success-based fee to an affiliate SAC CBI
in connection with the Acquisition.
On October 17, 2010, members of the Board unaffiliated with SAC CBI, having
evaluated the services provided and fees charged for similar transactions,
approved the payment of a $5,000 fee to an affiliate of SAC CBI for services
rendered in connection with the recapitalization transactions described in Note
4 ("SAC Payment"). The fee is payable upon the closing of the Company's U.S.
public offering of its common stock. See Note 4.
SAC CBI, as the majority shareholder of the Company with 58.9% of the issued
share capital, is considered to be a Related Party under the AIM Rules. The
directors of the Company who are deemed to be independent for the purposes of
the SAC Payment, having consulted with Strand Hanson Limited, consider the terms
of the SAC Payment to be fair and reasonable, insofar as shareholders in the
Company are concerned.
12. Segment Reporting
The Company operates in one reportable operating segment which is providing
integrated clinical documentation solutions for the healthcare industry.
Concentration of Risk, Geographic Data and Enterprise-wide Disclosures
No single customer accounted for more than 10% of the Company's net revenues in
any period. There is no single geographic area of significant concentration
other than the United States.
+--------------------------------+----------+----------+-+-----------+-+----------+
| The following summarizes the Company's net revenues and property and equipment, |
| net by geography: |
+---------------------------------------------------------------------------------+
| | | | | Nine Months Ended |
| | | | | September 30, |
+--------------------------------+----------+----------+-+------------------------+
| Revenue | | | | 2010 | | 2009 |
+--------------------------------+----------+----------+-+-----------+-+----------+
| | | | | | | |
+--------------------------------+----------+----------+-+-----------+-+----------+
| United States of America | | |$ | 312,420 |$ | 273,761 |
+--------------------------------+----------+----------+-+-----------+-+----------+
| Others | | | | 4,557 | | 8,067 |
+--------------------------------+----------+----------+-+-----------+-+----------+
| | | |$ | 316,977 |$ | 281,828 |
+--------------------------------+----------+----------+-+-----------+-+----------+
| | | | | | | |
+--------------------------------+----------+----------+-+-----------+-+----------+
| | | | | September | | December |
| | | | | 30, | | 31, |
+--------------------------------+----------+----------+-+-----------+-+----------+
| Property and equipment, net | | | | 2010 | | 2009 |
+--------------------------------+----------+----------+-+-----------+-+----------+
| | | | | | | |
+--------------------------------+----------+----------+-+-----------+-+----------+
| United States of America | | |$ | 16,964 |$ | 13,765 |
+--------------------------------+----------+----------+-+-----------+-+----------+
| Others | | | | 6,862 | | 5,746 |
+--------------------------------+----------+----------+-+-----------+-+----------+
| Total | | |$ | 23,826 |$ | 19,511 |
+--------------------------------+----------+----------+-+-----------+-+----------+
This information is provided by RNS
The company news service from the London Stock Exchange
END
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