MedQuist second-quarter net revenues increase 25.9% to $97.5 million

MedQuist Inc., (Nasdaq: MEDQ), a leading provider of medical transcription services and in the technology-enabled clinical documentation workflow, announced its financial results for the second quarter ended June 30, 2010.

On April 22, 2010, MedQuist and its majority shareholder, CBay Inc. ("CBay"), completed the acquisition of substantially all of the assets of Spheris, Inc. ("Spheris") out of bankruptcy.  MedQuist acquired all the U.S. assets and the client base of Spheris. CBay acquired the India-based workforce and facilities of Spheris, so as to avail MedQuist with additional offshore capacity.  The benefits of this acquisition are not expected to be fully reflected in results until the fourth quarter of 2010 and into first quarter 2011.

The purchase price for the Spheris assets acquired by the Company was approximately $112.4 million, consisting of approximately $98.8 million in cash, plus a promissory note with a fair value of $13.6 million.

The following results for both the three months and six months ended June 30, 2010 include the Spheris results from the acquisition date.

Net revenues for the three months ended June 30, 2010 increased $20.1 million or 25.9% to $97.5 million compared to $77.5 million for the three months ended June 30, 2009.  The acquisition of Spheris contributed $26.4 million in incremental revenue for both the three-months and six-months, offset by value-based price reductions and lower product and field service revenues.

Prior to its acquisition, Spheris had been experiencing significant client defections, in large part, due to the adverse impact of its deteriorating financial condition. The revamped senior executive team has begun to integrate MedQuist methodologies and processes into the Spheris service delivery model to better address client needs and stabilize the risk of future client defections. However, the lag effect of client terminations may negatively impact our post-acquisition revenue through at least the fourth quarter 2010.

Operating income for the second quarter of 2010 improved to $4.6 million when compared to $1.0 million reported for the second quarter of 2009.

Total operating costs and expenses increased by 21.5% to $93.0 million from $76.5 million reported in the prior year second quarter primarily due to the inclusion of Spheris operating costs, and acquisition related costs of $4.8 million. Also included in second quarter costs and expenses were legal proceedings and settlement expenses and restructuring charges in the amount of $1.1 and $0.9 million, respectively.

Net income for the second quarter of 2010 was $0.9 million or $0.02 per diluted share compared to $0.8 million and $0.02 per diluted share reported in the prior year comparable period.

Net revenues for the six months ended June 30, 2010 increased by $15.1 million to $171.5 million compared to $156.4 million for the six months ended June 30, 2009. The $26.4 million of incremental revenue from Spheris since its acquisition was offset by value-based price reductions and lower product and field service revenues.  Operating income increased $3.7 million, up 45% over prior year results.

Net income for the six-months was $8.2 million or $0.22 per diluted share compared to $7.7 million and $0.20 per diluted share reported in the prior year comparable period.

Adjusted EBITDA increased $3.1 million to $17.1 million for the second quarter of 2010, compared to $14.0 million for the second quarter of 2009. For the six-month period, Adjusted EBITDA increased $3.9 million to $30.2 million compared to $26.3 million in the comparable period. (For more information regarding the Adjusted EBITDA and our use of this non-GAAP financial measure, see below under the heading "Use of non-GAAP Financial Information")

"We are pleased with our operating performance for the second quarter of 2010; reflecting our ability to provide a value proposition to our clients and our progress to date in the integration of Spheris," said CEO Peter Masanotti.

"We increased Adjusted EBITDA by 22.3% over the prior year same quarter, despite an increasingly competitive market environment, as the Spheris acquisition helped expand our client base and provides us continuing opportunities to realize operating efficiencies through the increased use of technology and an expanded use of offshore labor.

"Integration savings of approximately $7 million, resulting from the scale made available through the Spheris acquisition, are expected to be realized in the fourth quarter of 2010.  The Company anticipates that its integration activities will be substantially completed during the first quarter of 2011."

Since CBay became our majority owner in August 2008, we have focused our efforts on stabilizing our existing client base and creating a value proposition for our clients through:

• increasing use of technology applications in both our processes and those of our clients - including, tailoring our proprietary clinical documentation workflow management system for client specific solutions and increased integration of speech recognition technology
• increasing use of offshore transcription and editing work
• delivering unparalleled, high quality services and opportunities to drive down price for our clients

The size of our global medical transcriptionist and editor pool allows us to quickly and efficiently provide our clients with the labor resources necessary to implement comprehensive, scalable solutions.

We expect that the impact of the above actions and the increased scale from the Spheris acquisition will continue to be reflected in lower operating costs and improved margins; as we continue to share the benefits of a shrinking cost base and enhanced technologies with our clients through profitable, competitive pricing.