General

 

We are the leading provider of medical transcription technology and services, which are integral to the clinical documentation workflow. We service health systems, hospitals and large group medical practices throughout the U.S., and we employ approximately 6,300 skilled medical transcriptionists (MTs), making us the largest employer of MTs in the U.S. In the clinical documentation workflow, we provide, in addition to medical transcription technology and services, digital dictation, speech recognition, electronic signature and medical coding technology and services. We are a member of the Philips Group of Companies and collaborate with Philips Medical Systems in marketing and product development to leverage Philips’ technology and professional expertise to deliver industry-leading solutions for our customers.

 

We perform a substantial majority of our medical transcription services utilizing the DocQment^tm Enterprise Platform (DEP), our proprietary, web-based dictation and medical transcription management system. Our proprietary technologies enable our customers to efficiently manage the clinical documentation workflow from dictation through coding.

 

Clinical Documentation Workflow

 

 

The clinical documentation workflow begins when physicians or other medical professionals dictate findings and plans of care into one of several input devices, including standard telephones, handheld devices, or PC-based dictation stations. Once dictated, the voice files securely route through our DEP to either an MT or our speech recognition engine for conversion to text. The resulting draft report may then proceed to the editing and quality assurance process prior to being routed back to the physician or other medical professional for review, finalization, execution and incorporation into a patient’s medical record. Throughout this process, our DEP utilizes security measures that assist our customers with their compliance with privacy and security standards and regulations, including those adopted under the Health Insurance Portability and Accountability Act of 1996 (HIPAA), and the

protection of the confidentiality of medical records. We also provide document retention services and manual and automated coding services that facilitate reimbursement to our customers.

 

Significant Events Over The Past Few Years

 

As a result of the significant events discussed below, we did not file our Annual Report on Form 10-K for the year ended December 31, 2005 (2005 Form 10-K) until July 5, 2007.

 

Over the past few years, a number of significant events have impacted us. The following is a summary of these significant events. This summary should be read together with additional disclosures concerning us contained in this report.

 

In November 2003, one of our employees raised allegations that we had engaged in improper billing practices. In response, our board of directors undertook an independent review of these allegations and engaged the law firm of Debevoise and Plimpton LLP, who in turn retained PricewaterhouseCoopers LLP, to assist in the review (Review). On March 16, 2004, we announced that we had delayed the filing of our 2003 annual report on Form 10-K pending completion of the Review. Subsequently, on March 25, 2004, we filed a Form 8-K detailing our determination that the Review would not be completed by the March 30, 2004 filing deadline for our 2003 Form 10-K. As a result of our noncompliance with the U.S. Securities and Exchange Commission’s (SEC) periodic disclosure requirements, our common stock was delisted from the NASDAQ National Market on June 16, 2004.

 

On July 30, 2004, we issued a press release entitled “MedQuist Announces Key Findings Of Independent Review Of Client Billing,” which announced certain findings in the Review regarding our billing practices (July 2004 Press Release). The Review found, among other things, that with respect to our medical transcription services contracts that called for billing based on the “AAMT line” billing unit of measure, we used ratios and formulae to help calculate the number of AAMT medical transcription lines for which our customers (AAMT Customers) were billed rather than counting each of the relevant characters to determine a billable line as provided for in the contracts. With respect to these contracts, our use of ratios and formulae to arrive at AAMT line counts was generally not disclosed to our AAMT Customers.

 

The AAMT line unit of measure was developed in 1993 by three medical transcription industry groups, including the American Association for Medical Transcription (AAMT), in an attempt to standardize industry billing practices for medical transcription services. Following the development of the AAMT line unit of measure, customers increasingly began to request AAMT line billing. Accordingly, we, along with other vendors in the medical transcription industry, began to incorporate the AAMT line unit of measure into certain customer contracts. The AAMT line definition provides that a “line” consists of 65 characters and defined the term “character” to include such things as macros and function keys as well as other information necessary for the final appearance and content of a document. However, these definitions turned out to be inherently ambiguous and difficult to apply in practice. As a result, the AAMT line was applied inconsistently throughout the medical transcription industry. In fact, no single set of AAMT characters was ever defined or agreed upon for this unit of measure, and it was eventually renounced by the groups responsible for its development.

 

The Review concluded that our rationale for using ratios and formulae to determine the number of AAMT transcription lines for billing was premised on a good faith attempt to adopt a consistent and commercially reasonable billing method given the lack of common standards in the industry and ambiguities inherent in the AAMT line definition. The Review concluded that the use of ratios and formulae within the medical transcription platform setups may have resulted in over billing and under billing of some customers. In addition, in some instances, customers’ ratios and formulae were adjusted without disclosure to the AAMT Customers. However, the Review found no evidence that the amounts we billed AAMT Customers were, in general, commercially unfair or inconsistent with what competitors would have charged. Moreover, it was noted in the Review that we have been able to attract and retain customers in a competitive market.

 

Following the issuance of the July 2004 Press Release, we began an extensive review of our historical AAMT line billing (Management’s Billing Assessment) and in August 2004 informed our current and former customers that we would be contacting them to discuss how they might have been impacted. In response, several former and current customers, including some of our largest customers, contacted us requesting, among other things, (i) an

explanation of the billing methods employed by us for the customer’s account; (ii) an individualized review of the customer’s past billings, and/or (iii) a meeting with a member of our management team to discuss the July 2004 Press Release as it pertained to the customer’s particular account. Some customers demanded an immediate refund or credit to their account; others threatened to withhold payment on invoices and/or take their business elsewhere unless we timely responded to their information and/or audit requests.

 

In response to our customers’ concern over the July 2004 Press Release, we made the decision to take action to try to avoid litigation and preserve and solidify our customer business relationships by offering a financial accommodation to our AAMT Customers. In connection with this decision, we analyzed our historical billing information and the available report-level data to develop individualized accommodation offers to be made to our AAMT Customers (Accommodation Analysis). This analysis took approximately one year to complete. The methodology utilized to develop the individual accommodation offers was designed to generate positive accommodation outcomes for our AAMT Customers. As such, the methodology was not a calculation of potential over billing or damages nor was the performance of the Accommodation Analysis intended to reflect any admission of liability due and owed to our AAMT Customers. Instead, the Accommodation Analysis was a methodology that was developed to arrive at commercially reasonable and fair accommodation offers that would be acceptable to our AAMT Customers without negotiation.

 

In the fourth quarter of 2005, based on the Accommodation Analysis, our board of directors authorized management to make cash accommodation offers totaling $65 million. This amount was subsequently adjusted in 2005 to $65.4 million and in 2006 to $66.6 million. By accepting our accommodation offer, an AAMT Customer must agree, among other things, to release us from any and all claims and liability regarding AAMT line and other billing related issues.

 

The goal of our accommodation program was to reach a settlement with our AAMT Customers. However, the Accommodation Analysis for certain AAMT Customers did not result in positive accommodation outcomes. For certain other customers, the Accommodation Analysis resulted in calculated cash accommodation offers that we believed were insufficient as a percentage of their historical AAMT line billing to motivate such customers to resolve their billing disputes with us. Therefore, in 2006, we modified our accommodation program to enable us to offer this group of AAMT Customers credits for the purchase of future products and/or services from us over a defined period of time. On July 21, 2006, our board of directors authorized management to make credit accommodation offers up to an additional $8.7 million beyond amounts previously authorized. During 2006, this amount was adjusted by a net additional amount of $0.5 million based on a refinement of the Accommodation Analysis, resulting in an aggregate amount of $9.2 million.

 

As part of this process, we also conducted an analysis in an attempt to quantify the economic consequence of potentially unauthorized adjustments to AAMT Customers’ ratios and formulae within the transcription platform setups (Quantification). This Quantification was calculated to be approximately $9.8 million.

 

Of the authorized cash accommodation amount of $66.6 million, $1.2 million and $57.7 million was treated as consideration given by a vendor to a customer and accordingly recorded as a reduction of revenues in 2006 and 2005, respectively. The balance of $9.8 million was accounted for as a billing error associated with the Quantification resulting in a reduction of revenues in various reporting periods from 1999 to 2005.

 

On July 5, 2007, we filed our 2005 Form 10-K. The 2005 Form 10-K was our first periodic report covering periods after September 30, 2003. Several aspects of the 2005 Form 10-K differed from other annual reports. The 2005 Form 10-K contained, among other things:

 

 

 

Immediately preceding the filing of this report on Form 10-K for the fiscal year ended December 31, 2006, we filed our Forms 10-Q for the first three fiscal quarters of 2006.

 

Customer Accommodations

 

As discussed above, based on the Accommodation Analysis, our board of directors authorized management to make cash accommodation offers to AAMT Customers in the aggregate amount of $66.6 million and credit accommodation offers in the aggregate amount of $9.2 million. A large number of customers have accepted our offers under the accommodation program and, in return, released us from any and all claims and liability regarding AAMT line billing and other billing related issues that they may have had against us. As of July 31, 2007, we have entered into agreements with certain customers who have accepted cash accommodation offers and paid or credited to their account an aggregate amount of $53.6 million. In addition, as of July 31, 2007, we have made cash accommodation offers to certain other customers in the aggregate amount of $1.8 million. Further, as of July 31, 2007, we have entered into agreements with certain customers who have accepted credit accommodation offers with a total credit value of $4.4 million and have extended credit accommodation offers to certain other customers with a total credit value of $0.7 million.

 

We intend to continue making cash and credit accommodation offers in the future, although the timing and amount of such offers have not yet been determined and our plans may change. The accommodation offers made to date, and those offers which may be made in the future, are not an admission of liability by us of any wrongdoing or an admission or acknowledgement that our billing practices with respect to such customers were or are incorrect.

 

Governmental Investigations and Civil Litigation

 

Disclosure of the findings of the Review, along with the delisting of our common stock, precipitated a number of governmental investigations and civil lawsuits. These events are discussed in summary below. A fuller description of these events can be found in Item 3, Legal Proceedings.

 

Governmental Investigations

 

The SEC is currently conducting a formal investigation of us relating to our billing practices. We have been fully cooperating with the SEC since it opened its investigation in 2004. We have complied and are continuing to comply with information and document requests by the SEC.

 

We received an administrative HIPAA subpoena from the U.S. Department of Justice (DOJ) on December 17, 2004. The subpoena sought information primarily about our provision of medical transcription services to governmental and non-governmental customers. The information was requested in connection with a dual civil and criminal government investigation into whether we and others violated federal laws in connection with the provision of medical transcription services. We have been fully cooperating with the DOJ since it began its

investigation in 2004. We have complied, and are continuing to comply, with information and document requests by the DOJ.

 

The U.S. Department of Labor (DOL) is currently conducting a formal investigation into the administration of our 401(k) plan. We have been fully cooperating with the DOL since it opened its investigation in 2004. We have complied and are continuing to comply with information and document requests by the DOL.

 

Developments relating to the SEC, DOJ and/or DOL investigations will continue to create various risks and uncertainties that could materially and adversely affect our business and our historical and future financial condition, results of operations and cash flows.

 

Civil Litigation

 

 

 

Developments relating to third party litigation and governmental investigations will continue to create various risks and uncertainties that could materially and adversely affect our business, financial condition, results of operations and cash flows.

 

Industry Overview

 

As a provider of medical transcription technology and services, our revenues and growth are affected in part by certain trends in healthcare.

 

Increased Spending and Demographic Factors in Healthcare Industry

 

Spending for healthcare in the U.S. has grown rapidly over the past few decades. According to estimates published by the Centers for Medicare & Medicaid Services (CMS) Office of the Actuary, the healthcare sector is growing faster than the overall economy. Healthcare spending increased as a share of U.S. gross domestic product from 13.3% in 2000 to 16% in 2005, as growth in healthcare spending outpaced economy-wide growth.

 

In 2005, healthcare spending in the U.S. was approximately $2 trillion. CMS estimates that by 2016 healthcare spending will have increased to $4.1 trillion, which will represent 19.6% of the projected U.S. gross domestic product. Demographic factors contribute to long-term growth projections in healthcare spending. According to the U.S. Census Bureau’s 2005 interim projections, there were approximately 35 million Americans aged 65 or older. The number of Americans aged 65 or older is expected to increase to approximately 40 million by 2010 and approximately 70 million by 2030, or 20% of the U.S. population. We believe that the aging of the U.S. population and the continuing growth in healthcare spending will increase demand for our products and services. Older age groups receive proportionately greater numbers of procedures, medical tests and treatments that require clinical documentation. We believe that the high demand for medical transcription services will also be sustained by the need of providers, third-party payors, consumers, regulators and health information networks to share electronic health information.

 

Competitive Environment

 

The healthcare industry is increasingly choosing to outsource services such as medical transcription to reduce personnel and administrative burdens and fixed costs as information needs and volume of dictated reports expand. The medical transcription industry itself is highly fragmented and difficult to size based on a general lack of public market data and analysis. As such, we estimate that the U.S. medical transcription market is between $9 and $12 billion on an annual basis, including both outsourced services and medical transcription performed internally by healthcare providers. We believe that the top 10 medical transcription outsource providers based on revenues, of which we are the largest, account for less than 15% of the industry including in-house operations.

 

Although we are the leading provider of medical transcription services in the U.S., we experience competition from local, regional, national and international businesses. We believe that there are hundreds of companies in the U.S. and India currently performing medical transcription services for the U.S. market. There are currently two large service providers, one of which is us and the other of which is Spheris Inc., several mid-sized service providers with annual revenues of between $15 million and $100 million and hundreds of smaller, independent businesses

with annual revenues of less than $15 million. We believe that a substantial portion of the medical transcription market is serviced internally by MTs directly employed by the healthcare providers.

 

We believe the outsourced portion of the medical transcription services market will increase due in part to healthcare providers seeking the following:

 

 

Our competitive position in the market is characterized primarily by the following factors:

 

 

Business Strategy

 

We intend to maintain our position as the leading provider of medical transcription technology and services while transforming into a leading provider of complete clinical documentation workflow. We plan to achieve this objective through the following strategies:

 

Retain and Expand Customer Relationships.  We constantly seek to improve turnaround time, medical transcription quality and customer communications. We believe that advances in these areas improve retention of existing customers and increase our ability to secure new customers. In addition, in the past we grew our revenue base through acquisitions, and we did not have a centralized sales force for medical transcription services. Today, we have a centralized sales function and have strengthened our marketing team to better focus on customer executive level decision-makers to enhance sales opportunities for new and existing customers.

Enhance Efficiencies.  In response to competitive price pressures driven by increasing market acceptance of speech recognition and offshore labor options, we have improved our operations through the following initiatives:

 

 

Leveraging our DEP.  For medical transcription services that we perform on our platform, we have completed the migration of our outsourced medical transcription customers from disparate and older technology platforms to our DEP. We believe that the combination of standardization, advanced functionality and transparency with respect to service metrics provided by this platform will significantly increase our customers’ satisfaction and retention. Our commitment to our DEP allows us to accelerate the rate at which we can offer new functionalities to our customers. In addition, we currently offer and plan to expand the offering of our DEP to healthcare providers and other companies in the medical transcription industry for use as their medical dictation and transcription platform.

 

Expansion Into New Markets.  We believe our breadth of products and services, spanning from dictation through coding, positions us to bridge the gap between traditional medical transcription and the EHR. The U.S. government has developed plans that call for all Americans to have an EHR by 2014. The EHR is directly tied to the national Health Information Technology (HIT) initiative — the creation of a transparent, interoperable and digital system designed to improve patient care and reduce healthcare costs. The EHR concept, which has been endorsed by the current presidential administration and a host of national healthcare associations, is a longitudinal electronic record of patient health information generated by one or more patient encounters in any care delivery setting. The EHR includes patient demographics, past medical history, progress notes, medications, vital signs, health problems, immunizations, laboratory data and radiology reports. The EHR streamlines the providers’ workflow and, in addition to having the ability to generate a complete clinical record of a patient encounter, can also support other care-related activities, including evidence-based decision support, outcomes reporting and quality management.

 

We intend to leverage our market leading position and proprietary technologies to provide comprehensive solutions to our customers related to the management of health records. Historically, we have provided a combination of traditional medical transcription services, stand-alone products and other professional services to healthcare providers. We anticipate aggregating these existing services and products and new services and products into a comprehensive clinical documentation workflow solution.

 

Pursue Strategic Transactions.  We may pursue strategic transactions or other relationships that expand our customer base or increase our network of labor pools. We may also explore opportunities to acquire technologies which could enhance our product or service offerings and improve efficiencies.

 

Customer Base

 

We have a large and prestigious customer base. We believe that over 30% of non-federal acute care U.S. hospitals use at least one of our products or services. Additionally, we have the largest customer base of any medical transcription company in the U.S., currently serving over 1,500 hospital systems, clinics and large physician practices, including approximately 40% of hospitals with more than 500 licensed beds. We believe we are the medical transcription company of choice for large, complex hospitals and health systems in the U.S. due to our size, scale and scope. We provide services to entire healthcare systems as well as discrete departments within hospitals, such as health information management, emergency, radiology, pathology and cardiology departments and all types of clinic settings. None of our customers accounted for more than 10% of our annual net revenues in 2006.

Products and Services

 

For the year ended December 31, 2006, approximately 84% of our net revenues were derived from our medical transcription technology and services. In addition, we also derive net revenues from, among other things, maintenance services, medical records coding, SpeechQ for Radiology^tm and DocQment Ovation.

 

Medical Transcription Services

 

We provide health systems, hospitals and large group medical practices with comprehensive solutions to meet their medical transcription needs. As the largest medical transcription services provider, we employ approximately 6,300 skilled MTs. This scale allows us to continually offer our customers effective, tailored medical transcription services that meet organization-wide or departmental needs. We perform a substantial majority of our medical transcription services utilizing our DEP. In addition, we also service a specialized area of the medical transcription market — specifically, radiology — whereby we retrieve voice files from, and transcribe directly into, customer-hosted transcription platforms.

 

In the clinical documentation workflow, we provide, in addition to medical transcription technology and services, digital dictation, speech recognition, electronic signature and medical coding technology and services.

 

Our DEP and flexible dictation solutions provide our customers with easy access to advanced technology and the confidence that medical reports will be completed quickly and accurately. Our DEP, which is a web-based dictation and transcription management system, integrates dictation capture, workflow management, speech recognition, medical transcription, and document distribution through multiple distinct yet integrated modules as follows:

 

 

Features and benefits of our DEP include the following:

 

Security and Scalability

 

 

Cost Effectiveness

 

 

 

Workflow

 

 

Auditing and Reporting

 

 

Maintenance Services

 

We provide onsite maintenance, remote “break-fix” services, and application, hardware and software technical support for our products. We also provide product management functions for released solutions, including service support guides, maintenance contract pricing, parts planning and service policies.

 

Medical Records Coding

 

Our health information management coding solutions involve the translation of written narratives of diseases, injuries and procedures into numeric or alphanumeric descriptions to identify the diagnosis, treatment and severity of illness of a patient’s medical episode for reporting and reimbursement purposes. We offer professional coding services for both inpatient and outpatient settings, including same day surgery, emergency and ancillary departments and clinics within the hospital environment as well as physician offices and ambulatory surgery centers. Our coding solutions provide the coded data required to support the reporting and billing requirements of healthcare organizations and professional practices and allow for some of the services to be provided remotely through CodeRunner^tm, our proprietary, secure, internet-based computer-assisted coding and workflow management application, by our staff of credentialed coders and/or our customers’ coders. CodeRunner accepts electronic text documents, whether generated by dictation, speech recognition, transcription and/or structured templates, as well as electronic imaged documents, generated by scanning. Additionally, CodeRunner automatically generates comprehensive audit trails and reporting of access to the medical records as well as of the coding activity. Its coding management tools provide customers with real-time coder activity monitoring, visibility into medical record coding workflow (including automated quality assurance and auditing capabilities), and the ability to workload balance, all contributing to a more efficient coding process and thus enhancing coder productivity.

 

SpeechQ for Radiology

 

SpeechQ for Radiology is a flexible front-end speech recognition software application. It allows radiologists to dictate, edit and sign their reports in a single session or send them to an editor following dictation. SpeechQ for Radiology continuously learns from changes to a specific radiologist’s dictation made by either the radiologist or an editor, increasing the speech recognition accuracy for such radiologist with every edit. Powered by the Philips SpeechMagic^tm speech engine, SpeechQ for Radiology is designed specifically for radiology, and integrates with most radiology specific information systems providing a workflow that maximizes radiologists’ efficiency and significantly improves report turnaround time.

DocQment Ovation

 

Our newest offering in the digital dictation system market is DocQment Ovation, a web-based, enterprise digital voice capture and transport solution. DocQment Ovation creates opportunities to improve productivity by providing an enterprise view that allows medical transcription supervisors to easily manage MTs and voice files from a single dashboard instead of using multiple systems. Specifically engineered to be compatible with our previous generation dictation stations, physicians should have a seamless transition, with little to no training required. An integral component of our growing technology portfolio, DocQment Ovation supports our end-to-end solution from dictation to billing. DocQment Ovation’s enterprise configuration options allow administrators to easily track work and share resources to get the right voice file to the right MTs at the right time.

 

Technological Capabilities

 

Research and Development

 

We invest in our capabilities to ensure we meet current and future customer requirements. Our proprietary software and hardware technologies support our medical transcription and coding outsourced services. Our software capabilities enable us to operate a national service delivery model that includes nationwide multi-modal voice capture. Our expertise in the use of speech recognition enables us and our customers to achieve productivity gains and cost savings. We continue to work to enhance our speech recognition and editing technologies to achieve productivity gains in the medical documentation process. Our DEP and technological expertise in the areas of work routing and work management support a nationwide, scalable model of medical transcription delivery. Our ability to focus on a single dictation and transcription management system, our DEP, based on an application service provider model enables us to efficiently and effectively utilize our research and development resources.

 

We employ over 100 developers to conduct our research and development in four locations: Joplin, Missouri, Morgantown, West Virginia, Norcross, Georgia, and Malvern, UK. Although we license a portion of our technology from third party vendors, a majority of our technological expertise resides in our development organization. Our development personnel have expertise across the breadth of our solutions, including voice capture management, speech recognition and editing, medical transcription, electronic signature and distribution and coding. All of our development teams follow the same rigorous development methodology which ensures repeatable, high quality and timely delivery of solutions.

 

Speech Recognition

 

Our speech recognition technology is provided by Philips Speech Processing GmbH, an affiliate of Philips which is now known as Philips Speech Recognition Systems GmbH (PSRS). For additional information regarding this relationship, see Item 13 — Certain Relationships and Related Transactions, and Director Independence. We have integrated this technology into our DEP which has provided us with productivity gains, streamlined workflow and, through continuous learning from the corrections made by editors, improved quality. Since the beginning of 2003, we have significantly increased our use of automated speech recognition.

 

Sales and Marketing

 

We focus a significant portion of our sales and marketing resources on retaining and expanding the business within our existing customer base. In addition, we target healthcare facilities currently performing medical transcription in-house and those facilities that have already outsourced their medical transcription function, but are using a competitor.

 

Historically, we grew our customer base primarily through acquisitions of regional medical transcription outsource companies. Since 2002, we have been developing a dedicated sales force. Today, we use a direct sales force model of over 100 sales and account management associates, including specialists for national accounts, front-end speech technology, coding and digital dictation. In addition, we have an inside sales department that specializes in telesales and lead generation primarily for ancillary products to our existing customers and our DEP to other medical transcription outsource companies.

To support our sales initiatives, we utilize various marketing programs to maintain and expand our brand. We promote our offerings regularly through:

 

 

Service Delivery and Customer Support

 

Understanding the need for person-to-person responsiveness within our industry, we reorganized and centralized our service and support organization in 2005. We continue to offer a wide range of customer support services through an expansive staff of over 300 customer-facing service personnel. The customer-facing relationship teams work with, and are supported by, our centrally managed customer service organization.

 

Centralized service delivery and customer support eliminates the need for local independently managed service centers. This structure enhances workflow management, resulting in improved levels of service and quality for our customers. This has been implemented through the following:

 

 

Our service and support organization is comprised of several smaller organizations, or teams, focused on delivering specific aspects of services. In addition to technical and product support, we offer implementation professional services, which provide our customers with complete implementation planning and services beginning with the initial scoping of system requirements through the customer acceptance phase of an implementation.

 

Medical Transcriptionists

 

As the leading provider of medical transcription technology and services, we employ approximately 6,300 skilled U.S.-based MTs, making us the largest employer of MTs in the U.S. In addition, we contract with approximately 340 MTs in Canada and have access to offshore MTs through our relationship with several subcontractors. The size of our MT pool allows us to quickly and efficiently provide our customers with the labor resources necessary to implement comprehensive, scalable solutions.

 

Historically, we conducted our operations through, and a small percentage of our MTs worked out of, local service centers utilizing a number of disparate technology platforms to convert dictation to transcribed reports. In connection with the reorganization and centralization of our service and support organization, we phased out these local service centers and completed the migration of our disparate non-customer hosted medical transcription platforms onto our DEP. As a result, all of our MTs now work from home, largely using computer hardware and telecommunications equipment that we provide, to access dictation files and transcribe reports utilizing the internet.

Recruitment

 

Working with a team of professional recruiters, we utilize multiple avenues to ensure that qualified MTs apply for employment opportunities with us. Regular advertisements and articles appear in trade journals and industry publications, and banner ads are placed on industry and trade websites. In addition, we participate in prominent local and national trade shows and work with premier medical transcription schools to offer top graduates an opportunity for employment with us.

 

Training

 

Substantially all of our new MTs participate in an on-line training program that includes both a company orientation, as well as training on our DEP. In addition, those MTs that service specialized areas of the medical transcription market involving the direct transcription into customer-hosted medical transcription platforms receive platform-specific training. Prior to performing medical transcription services for our customers, each MT must demonstrate proficiency in the use of our DEP or the applicable customer-hosted platform.

 

With the emergence of speech recognition technology to produce draft transcribed reports, our MTs have an opportunity to become medical editors (MEs). Before they are eligible to edit the draft transcribed reports, MEs must be formally certified on DocQspeech^tm, our DEP’s speech recognition module. Currently over 40% of our MTs have been cross trained as MEs.

 

Quality Assurance

 

Our automated technology routes reports with flagged quality issues to our quality assurance personnel for review prior to delivery to the customer. In addition, formal quality reviews are performed on a regular basis at both the individual MT and customer levels. We provide continuous feedback to the MT staff to increase learning and improve up-front quality through QASAR^tm, our quality assurance scoring and reporting tool. Our MTs participate in an on-going, comprehensive training program in order to maintain a high level of quality assurance.

 

Intellectual Property

 

We rely on a combination of copyright, trademark, trade secret, and other intellectual property laws, nondisclosure agreements, license agreements, contractual provisions and other measures to protect our proprietary rights. We have a number of registered trademarks, including MedQuist^®, and have current registrations of several domain names, including “www.medquist.com.”

 

Regulatory Matters

 

The provision of healthcare services, including the practice of medicine, is heavily regulated by federal and state statutes and regulations, by rules and regulations of state medical boards and state and local boards of health, and by codes established by various medical associations. Although many such laws, regulations and requirements do not directly apply to our operations, future laws and regulations related to the provision of medical transcription services may require us to restructure our operations in order to comply with such requirements.

 

Although many healthcare laws and regulations do not directly apply to our operations, our hospital and other healthcare provider customers must comply with a variety of requirements related to the handling of patient information, including HIPAA, which protects the privacy, confidentiality and security of protected health information (PHI). As part of the operation of our business, our customers provide us with certain PHI. The provisions of HIPAA require our customers to have agreements in place with us under which we are required to appropriately safeguard the PHI we create or receive on their behalf.

 

We have structured our operations to comply with these contractual requirements. We have designated a Chief Compliance Officer, as well as a HIPAA compliance officer, and have implemented appropriate safeguards related to the access, use and/or disclosure of PHI to help ensure the privacy and security of PHI consistent with our contractual requirements. We also are required to train personnel regarding HIPAA requirements. If we, or any of our MTs, are unable to maintain the privacy, confidentiality and security of the PHI that is entrusted to us, our customers could be subject to civil and criminal fines and sanctions and we could be found to have breached our

contracts with our customers. Additionally, because all HIPAA standards are subject to interpretation and change, we cannot predict the future impact of HIPAA on our business and operations. Although it is not possible to anticipate the total effect of these regulations, we have made and continue to make investments in systems to support customer operations that are regulated by HIPAA.

 

Further, our customers are required to comply with HIPAA security regulations that require them to implement certain administrative, physical and technical safeguards to ensure the confidentiality, integrity and availability of electronic protected health information (EPHI). We are required by contract to protect the security of EPHI that we create, receive, maintain or transmit for our customers consistent with these regulations, including implementing administrative, physical and technical safeguards that reasonably and appropriately protect the confidentiality, integrity and availability of such EPHI. To comply with our contractual obligations, we may have to reorganize processes and invest in new technologies.

 

To the extent that the laws of the states in which we or our customers operate are more restrictive than HIPAA, we may have to incur additional costs to maintain compliance with any such applicable requirements.

 

Employees

 

As of July 31, 2007, we employed 8,200 people. Of these, 6,327 were MTs. Of our total work force, 4,520 were full-time employees and 3,680 were part-time employees.

 

Available Information

 

All periodic and current reports, registration statements, and other filings that we are required to file with the SEC, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 (Exchange Act), are available free of charge from the SEC’s website (www.sec.gov) or public reference room at 100 F Street N.E., Washington, DC 20549 (1-800-SEC-0330) or through our website at www.medquist.com. Such documents are available as soon as reasonably practicable after electronic filing of the material with the SEC. Copies of these reports (excluding exhibits) may also be obtained free of charge, upon written request to: Investor Relations, MedQuist Inc., 1000 Bishops Gate Boulevard, Suite 300, Mount Laurel, New Jersey 08054-4632. The website addresses included in this report are for identification purposes. The information contained therein or connected thereto are not intended to be incorporated into this report.

 

Availability of Board of Director Committee Charters

 

Our board of directors has adopted a charter for its Audit Committee. A copy of this charter is available free of charge through our website at www.medquist.com or to any shareholder who requests it in writing by contacting our Chief Compliance Officer at 1000 Bishops Gate Boulevard, Suite 300, Mount Laurel, New Jersey 08054-4632.

 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This report contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about us, the industry in which we operate and other matters, as well as management’s beliefs and assumptions and other statements regarding matters that are not historical facts. These statements include, in particular, statements about our plans, strategies and prospects. For example, when we use words such as “projects,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “should,” “would,” “could,” “will,” “opportunity,” “potential” or “may,” variations of such words or other words that convey uncertainty of future events or outcomes, we are making forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (Securities Act) and Section 21E of the Exchange Act. Our forward-looking statements are subject to risks and uncertainties. Actual events or results may differ materially from the results anticipated in these forward-looking statements as a result of a variety of factors. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include:

 

 

 

Many of these factors are beyond our ability to predict or control. In addition, as a result of these and other factors, our past financial performance should not be relied on as an indication of future performance. The cautionary statements referred to in this section also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this report might not occur. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements.

 

Set forth below are certain important risks and uncertainties that could adversely affect our results of operations or financial condition and cause our actual results to differ materially from those expressed in forward-looking statements made by us. Although we believe that we have identified and discussed below the key risk factors affecting our business, there may be additional risks and uncertainties that are not presently known or that are not currently believed to be significant that may adversely affect our performance or financial condition. More detailed information regarding certain risk factors described below is contained in other sections of this report.

 

We are subject to ongoing investigations, which could require us to pay substantial fines or other penalties or subject us to sanctions and we cannot predict the timing of developments in these matters.

 

Prior to our July 2004 Press Release, we notified the staff of the SEC that our board of directors had commenced the Review. Following that notification, the SEC began an enforcement proceeding, including an investigation into the facts and circumstances giving rise to the Review. We have been and intend to continue cooperating fully with the SEC.

 

The Review overseen by our board of directors led to a delay in the filings of this and other required reports with the SEC. Because of this delay, we were not in compliance with the listing standards of NASDAQ and NASDAQ delisted our common stock on June 16, 2004.

 

On December 17, 2004, we received an administrative HIPAA subpoena for documents from the DOJ. The subpoena seeks information primarily about our provision of medical transcription services to governmental and non-governmental customers. The information was requested in connection with a dual civil and criminal government investigation into whether we and others violated federal laws in connection with the provision of medical transcription services. We have been and intend to continue cooperating fully with the DOJ.

On November 23, 2004 we received notice from the DOL of its commencement of a formal investigation into the administration of our 401(k) plan. We have been