SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, For Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
MEDQUIST INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies.
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials:
- --------------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount previously paid: __________________________________________________
(2) Form, Schedule or Registration Statement no.: ____________________________
(3) Filing Party: ____________________________________________________________
(4) Date Filed: ______________________________________________________________
<PAGE>
MEDQUIST INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
MAY 27, 1998
TO OUR SHAREHOLDERS:
The Annual Meeting of Shareholders of MedQuist Inc. will be held on
Wednesday, May 27, 1998 at 11:00 A.M., E.S.T., at The Mansion at Main Street,
Plaza 1000, Voorhees, New Jersey 08043 for the following purposes:
1. To elect four directors for a three year term.
2. To consider and act upon a proposal to increase the number of
shares of Common Stock for issuance under the Company's 1992 Stock
Option Plan by 300,000.
3. To consider and act upon such other matters as may properly come
before the meeting and any adjournment thereof.
The Board of Directors has fixed April 10, 1998 as the record date for the
determination of shareholders entitled to vote at the Annual Meeting. Only
shareholders of record at the close of business on that date will be entitled to
notice of, and to vote at, the Annual Meeting.
YOU ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING IN PERSON. WHETHER
OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING IN PERSON, YOU ARE URGED TO SIGN,
DATE AND PROMPTLY RETURN THE ENCLOSED PROXY. A SELF-ADDRESSED, STAMPED ENVELOPE
IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED
STATES.
By Order of the Board of Directors,
John M. Suender, Vice President,
General Counsel and Secretary
April 24, 1998
<PAGE>
MEDQUIST INC.
FIVE GREENTREE CENTRE, SUITE 311
MARLTON, NEW JERSEY 08053
------------------------
PROXY STATEMENT
------------------------
The enclosed proxy is solicited by and on behalf of MedQuist Inc., a New
Jersey corporation (the "Company"), for use at the Annual Meeting of
Shareholders to be held on Wednesday, May 27, 1998 at 11:00 A.M., E.S.T., at The
Mansion at Main Street, Plaza 1000, Voorhees, New Jersey 08043, and at any
postponement or adjournment thereof. The approximate date on which this Proxy
Statement and the accompanying form of proxy will first be sent or given to
shareholders is April 24, 1998. Sending a signed proxy will not affect the
shareholder's right to attend the Annual Meeting and vote in person since the
proxy is revocable. The grant of a later proxy revokes this proxy. The presence
at the meeting of a shareholder who has given a proxy does not revoke the proxy
unless the shareholder files written notice of the revocation with the secretary
of the meeting prior to the voting of proxy or votes the shares subject to the
proxy by written ballot.
The expense of the proxy solicitation will be borne by the Company. In
addition to solicitation by mail, proxies may be solicited in person or by
telephone, or telecopy by directors, officers or employees of the Company
without additional compensation. The Company is required to pay the reasonable
expenses incurred by record holders of the common stock, no par value per share,
of the Company ("Common Stock") who are brokers, dealers, banks or voting
trustees, or other nominees, for mailing proxy material and annual shareholder
reports to any beneficial owners of Common Stock they hold of record, upon
request of such record holders.
A form of proxy is enclosed. If properly executed and received in time for
voting, and not revoked, the enclosed proxy will be voted as indicated in
accordance with the instructions thereon. If no directions to the contrary are
indicated, the persons named in the enclosed proxy will vote all shares of
Common Stock in favor of the proposals specified in the notice attached hereto.
The enclosed proxy confers discretionary authority to vote with respect to
any and all of the following matters that may come before the meeting: (i)
matters which the Company does not know about a reasonable time before the proxy
solicitation, and are properly presented at the meeting; (ii) approval of the
minutes of a prior meeting of shareholders, if such approval does not amount to
ratification of the action taken at the meeting; (iii) the election of any
person to any office for which a bona fide nominee is unable to serve or for
good cause will not serve; and (iv) matters incident to the conduct of the
meeting. In connection with such matters, the persons named in the enclosed form
of proxy will vote in accordance with their best judgment.
The Company had 10,996,790 shares of Common Stock outstanding at the close
of business on April 10, 1998, the record date. The presence, in person or by
proxy, of shareholders entitled to cast a majority of the votes at the meeting
shall constitute a quorum at such meeting. Each share of Common Stock
outstanding is entitled to one vote on each matter which may be brought before
the Annual Meeting. The approval of the proposals specified in the notice
attached hereto, require a majority of the votes cast by the shareholders of the
Company with respect to each proposal. Broker nonvotes or abstentions are not
counted as votes cast. Shareholders do not have appraisal or dissenter rights
with respect to the election of Directors, or with respect to the approval of
the proposals specified in the notice attached hereto.
<PAGE>
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
YEAR OF TERM
NAME AGE POSITION EXPIRATION
- ---- --- -------- ------------
<S> <C> <C> <C>
David A. Cohen................... 57 President, Chief Executive 1999
Officer and Chairman of the Board
John A. Donohoe, Jr.............. 43 Executive Vice President and --
Chief Operating Officer and Board
Nominee
John R. Emery.................... 41 Vice President, Treasurer and --
Chief Financial Officer
Ronald F. Scarpone............... 53 Vice President and Chief --
Information Officer
John M. Suender.................. 37 Vice President, General Counsel --
and Secretary
James R. Emshoff(1).............. 55 Director 2000
William T. Carson, Jr.(1)(3)..... 65 Director 1998
John T. Casey.................... 52 Director 1998
Richard J. Censits(1)............ 60 Director 1998
James F. Conway(2)............... 70 Director 1998
Terrence J. Mulligan(2).......... 52 Director 1999
A. Fred Ruttenberg(3)............ 55 Director 2000
R. Timothy Stack(3).............. 46 Director 2000
John H. Underwood(2)............. 39 Director 1999
</TABLE>
- ------------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Nominating Committee
2
<PAGE>
ELECTION OF DIRECTORS
The Board of Directors of the Company is classified into three classes.
Four directors currently serving have terms expiring at the Annual Meeting.
These directors are Messrs. Carson, Casey, Conway and Censits. Mr. Conway is
retiring from his position on the Board of Directors effective as of the time of
the election of directors at the Annual Meeting. Mr. Donohoe has been nominated
to fill the Board position created by Mr. Conway's retirement.
If elected, the above mentioned Directors will hold office until the Annual
Meeting in the year indicated or until his successor has been elected and
qualified, unless prior to such a meeting a director shall resign, or his
directorship shall become vacant due to his death or removal.
NOMINATED FOR ELECTION AT THE ANNUAL MEETING WITH A TERM EXPIRING IN 2001:
William T. Carson, Jr., a director of the Company since January 1991, is
currently a business consultant and is Chairman of CIC Investment Co., a capital
investment firm. In 1988, he co-founded and became Vice President and corporate
secretary of Covenant Bank, Haddonfield, New Jersey, positions he held until
January 1998 when Covenant Bank was acquired by First Union Bank. Mr. Carson is
also a director of the Coriell Institute of Medical Research, a genetic research
firm and a former director of the Rutgers University School of Business.
John T. Casey, a director of the Company since June 1997, has been Chairman
and Chief Executive Officer of Physician Reliance Network Inc. ("PRN") since
October 1997. PRN is a Dallas-based provider of management facilities,
administration and technical support and ancillary services necessary to
establish and maintain a fully integrated network of oncology care. Mr. Casey
formerly served as President and Chief Executive Officer of American Medical
International from 1991 until 1995, when it was acquired by Tenet Healthcare.
Prior to that, Mr. Casey was Chief Executive Officer of Samaritan Health
Services in Phoenix, Arizona, Methodist Health Services in Memphis, Tennessee,
and Presbyterian/St. Luke's Medical Center in Denver, Colorado. From 1995 until
September 1997, Mr. Casey served as Chairman and Chief Executive Officer of
Intecare.
Richard J. Censits has been a director of the Company since January 1987.
Mr. Censits was Chief Executive Officer from January 1, 1987 until March 1995,
and was President of the Company until September 1994. He served as the Vice
President and Chief Financial Officer of Campbell Soup Company from 1975 to
1986. Mr. Censits currently serves as a director of Checkpoint Systems, Inc. and
Trustee of the University of Pennsylvania.
John A. Donohoe, Jr. has been nominated to serve as a member of the Board
of Directors. Mr. Donohoe joined the Company in May 1994 as Executive Vice
President of the Company's Transcriptions, Ltd. subsidiary. Mr. Donohoe became
Chief Operating Officer of the Company in November 1995. Mr. Donohoe was
employed by Transcriptions, Ltd. since 1974, serving in numerous management
capacities. Mr. Donohoe is a member of the board of directors of the Medical
Transcription Industry Alliance.
CONTINUING DIRECTORS WITH A TERM EXPIRING IN 2000:
A. Fred Ruttenberg has been a director of the Company since December 1991.
Mr. Ruttenberg has, since September 1986, been a partner in the law firm of
Blank, Rome, Comisky & McCauley, Cherry Hill, New Jersey, which has acted as
special counsel to the Company for certain matters.
R. Timothy Stack has been a director of the Company since May 1997. Since
1987, Mr. Stack has been the President and Chief Executive Officer of Borgess
Health Alliance, an integrated health delivery and finance system that includes
a 469 bed regional referral center, seven community hospitals, two long-term
care facilities, financing/risk products, a medical foundation and physician
group practices, representing over 1,000 acute care and nursing beds. Prior to
joining Borgess, Mr. Stack served as President and Chief Executive Officer of
South Side Healthcare System from 1981-1987 and as Senior Vice President and
Chief Operating Officer of Central Medical Center and Hospital from 1979-1981.
James R. Emshoff has been a director of the Company since December 1992.
Mr. Emshoff also served as acting President and Chief Executive Officer from
April 1995 through November 1995 and Chairman of the Board of Directors from
November 1995 through July 1996. Since August 1992, Mr. Emshoff has been the
Chairman and Chief Executive Officer of IndeCap Enterprises, Inc., a firm
providing consulting services on corporate restructuring issues and venture
participation in the
3
<PAGE>
outsourcing of management service functions. From February 1991 to August 1992,
Mr. Emshoff was Chairman and Chief Executive Officer of Wellesley Medical
Management Inc., an owner and operator of primary healthcare centers. From
January 1985 to February 1991, Mr. Emshoff was President and Chief Executive
Officer of Citicorp Diners Club.
CONTINUING DIRECTORS WITH A TERM EXPIRING IN 1999:
David A. Cohen joined the Company in May 1994 as President of the
Transcriptions, Ltd. subsidiary and has been an executive officer and director
of the Company since July 1994, the Company's President and Chief Executive
Officer since November 1995 and Chairman of the Board of Directors since July
1996. Mr. Cohen joined Transcriptions, Ltd. in 1973 and served as its Chief
Executive Officer for more than 15 years.
John H. Underwood has been a director of the Company since July 1994. Mr.
Underwood is currently Managing Director with Pfingsten Partners, L.L.C., a firm
which originates and manages private equity investments in middle market
companies. Prior to joining Pfingsten Partners in December 1996, Mr. Underwood
was, since 1989, a Vice President with Heller Equity Capital Corporation
("Heller") and a Senior Vice President of Heller's parent, Heller Financial,
Inc. From 1986 to 1989, Mr. Underwood served as a Vice President of Citicorp
North America, Inc. as a member of its leveraged capital group.
Terrence J. Mulligan has been a director of the Company since May 1996. Mr.
Mulligan is currently a management consultant and private investor. Mr. Mulligan
had held several senior executive positions with Baxter International, Inc.
("Baxter") from 1986 until his retirement in 1996, including Group Vice
President, Health Systems, from 1994 to 1996, Group Vice President, Multi-
Hospital Systems from 1993 to 1994, and Senior Vice President, Corporate Sales
and Marketing from 1988 to 1993. Mr. Mulligan also served on the Senior
Management Committee and the Operating Management Committee at Baxter. Baxter,
through its subsidiaries, is a leading manufacturer and marketer of healthcare
products and services worldwide concentrating its research and development
programs in biotechnology, cardiovascular medicine, renal therapy and related
medical fields. Mr. Mulligan currently serves as a member of the Board of
Visitors of the University of Iowa College of Business Administration, a member
of the Board of Directors of the Baxter Allegiance Foundation, a private
philanthropic organization, and a past President of the University of Iowa
Alumni Association and a Trustee of Lake Forest College. Mr. Mulligan is a
nominee for election to the Board of Directors of PRN at PRN's annual
shareholders meeting to be held on May 12, 1998.
OTHER EXECUTIVE OFFICERS:
John R. Emery has been Vice President, Treasurer and Chief Financial
Officer of the Company since March, 1997. Prior to joining the Company, Mr.
Emery served in various executive positions with Integra LifeSciences
Corporation beginning in 1994, most recently as Senior Vice President --
Operations and Finance. From 1987-1994, Mr. Emery served in various operational
and financial positions with Chemical Waste Management, Inc., an environmental
remediation firm.
Ronald Scarpone has been Vice President and Chief Information Officer of
the Company since January 1996. Mr. Scarpone joined the Company in May 1994 as
Vice President -- Information Services. Mr. Scarpone was employed by
Transcriptions, Ltd. since 1989 and served as its Vice President of Information
Services since September 1993.
John M. Suender has been General Counsel of the Company since September
1992 and a Vice President and the Secretary of the Company since October 1992.
Mr. Suender also serves as Vice President -- Acquisitions of the Company. Prior
to joining the Company, Mr. Suender was with the law firm of Pepper, Hamilton &
Scheetz, Philadelphia, Pennsylvania.
DIRECTOR COMPENSATION
In 1996, the Company's shareholders approved a stock based deferred
compensation plan for the Board of Directors (the "Board Deferred Stock Plan").
The Board Deferred Stock Plan is consistent with a philosophy of aligning
interests of Board members more closely with those of shareholders. Under the
existing terms of the Deferred Stock Plan, each non-employee director of the
Company is entitled to receive deferred compensation in the form of Common Stock
having a fair market value of $18,000 on the date of grant (January 1 each
year). Common Stock awarded under the Deferred Stock Plan is issued when a
director leaves the Board unless a director chooses not to defer receipt under a
particular grant. If a director chooses not to defer receipt of the award, the
Common Stock is issued as
4
<PAGE>
of the date of grant and the director may elect to receive up to $6,000 of the
award in cash for payment of taxes. A director choosing not to defer receipt of
the award will nevertheless be prohibited from selling the Common Stock issued
pursuant to the Deferred Stock Plan until leaving the Board. Fair market value
of a particular grant equals the closing price of the Common Stock on the date
of grant. In 1997 and 1998, respectively, the fair market value of a share of
Common Stock on the date of grant (January 1) under such plan was $16.50
(adjusted for a 3-for-2 split) and $34.75.
Pursuant to the terms of the Company's Nonstatutory Stock Option Plan for
Non-employee Directors, during each calendar year in which a non-employee
director serves, and so long as such director serves in such capacity on June 1
of such calendar year, such director is granted an option to purchase 3,000
shares of Common Stock at an exercise price equal to the Common Stock's fair
market value on the date of the grant of the option, which options are
exercisable for a 10-year period commencing on the one-year anniversary of the
grant date. Any Options granted on or after June 1996, to the extent not
exercised, terminate two (2) years after the individual ceases to be a director
of the Company but in no event later than the 10 year expiration date.
MEETINGS OF THE BOARD OF DIRECTORS
The Board of Directors met 4 times during 1997. Each director attended at
least 75 percent of meetings of the Board of Directors and Board Committees
which he was a member during 1997 or the period thereof during which he was a
member.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and executive officers, and persons who own more than
ten percent of the Common Stock, to file with the Securities and Exchange
Commission initial reports of ownership and reports of changes in ownership of
the Common Stock and other equity securities of the Company. Officers, directors
and greater than ten-percent shareholders are required under regulations
promulgated by the Securities and Exchange Commission ("SEC") to furnish the
Company with copies of all Section 16(a) forms which they file.
To the Company's knowledge, based solely on a review of copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 1997, all
Section 16(a) filing requirements were satisfied.
COMMITTEES OF THE BOARD
The Company's Board of Directors has a standing Audit Committee, a
Nominating Committee and Compensation Committee.
Audit Committee. The Audit Committee, which currently consists of Messrs.
Censits, Carson and Emshoff, has the authority and responsibility: to hire one
or more independent public accountants to audit MedQuist's books, records and
financial statements and to review the Company's systems of accounting
(including its systems of internal control); to discuss with such independent
public accountants the results of such audit and review; to conduct periodically
independent reviews of the systems of accounting (including systems of internal
control); and to make reports periodically to the Board of Directors with
respect to its findings. In 1997, the Audit Committee held two meetings.
Compensation Committee. The Compensation Committee, which currently
consists of Messrs. Underwood (Chairman), Conway, and Mulligan, is responsible
for fixing the compensation of the Chief Executive Officer and the Chief
Operating Officer, and making recommendations to the Board of Directors with
respect to the compensation of other executive officers and other compensation
matters such as with respect to stock option plans and approving the targets
under any bonus plans. The Compensation Committee currently administers the
Stock Option Plan. In 1997, the Compensation Committee held one meeting.
Nominating Committee. The Nominating Committee, which currently consists
of Messrs. Carson (Chairman), Ruttenberg and Stack, makes recommendations to the
Board of Directors with respect to management and other nominees to the Board,
reviews shareholder nominees to the Board of Directors and periodically reports
its findings to the Board of Directors. In 1997, the Nominating Committee held
one meeting.
5
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company for
services rendered in all capacities during the calendar years 1995, 1996 and
1997, to its chief executive officer, and to the four most highly-compensated
executive officers (other than the chief executive officer) whose annual salary
and bonus exceeded $100,000 and who were serving at December 31, 1997
(collectively, the "Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION ---------------------
----------------------------- SECURITIES UNDERLYING ALL OTHER
NAME YEAR SALARY ($) BONUS ($) OPTIONS(#)(8) COMPENSATION ($)
---- ---- ---------- --------- --------------------- ----------------
<S> <C> <C> <C> <C> <C>
David A. Cohen(1)..................... 1997 $270,000 $135,000 105,000 4,568(2)
1996 250,000 125,000 120,000 3,222(2)
1995 173,077 45,000 75,000 1,635(2)
John A. Donohoe, Jr.(3)............... 1997 $186,346 $ 63,000 30,000 634(2)
1996 165,000 57,750 33,696(4) 216
1995 159,134 22,333 75,000 0
Ronald F. Scarpone(5)................. 1997 $130,419 $ 31,750 15,000 4,498(2)
1996 120,000 30,000 18,043(4) 752(2)
1995 110,000 17,333 7,500 735
John M. Suender(6).................... 1997 $118,904 $ 28,625 15,000 $3,831(2)
1996 109,667 34,257 18,261(4) 1,177(2)
1995 105,000 16,000 25,500 200(2)
John R. Emery(7)...................... 1997 $ 97,500 $ 24,375 45,000 250(2)
1996 -- -- -- 0
1995 -- -- -- 0
</TABLE>
------------------
(1) Mr. Cohen serves as Chairman, President and Chief Executive Officer.
(2) Represents employer matching contributions under the Company's 401(k) plan
and premiums paid by the Company on term life insurance.
(3) Mr. Donohoe serves as Executive Vice President and Chief Operating Officer.
(4) Includes bonus foregone at the election of the Named Officer pursuant to a
deferred compensation program in which the officer elected to receive
options to purchase Common Stock in lieu of bonus. Under the program, in
February 1996, Mr. Donohoe received 3,696 options, Mr. Suender received
3,261 options and Mr. Scarpone received 3,043 options.
(5) Mr. Scarpone serves as Vice President and Chief Information Officer.
(6) Mr. Suender serves as Vice President, General Counsel and Secretary.
(7) Mr. Emery serves as Vice President, Treasurer and Chief Financial Officer.
Mr. Emery joined the Company on March 24, 1997.
(8) The number of securities underlying options reflects a 3-for-2 split of the
Common Stock effective September 9, 1997.
6
<PAGE>
STOCK OPTIONS GRANTED
The following table presents information with respect to grants of stock
options pursuant to the Company's option plans during 1997 to the Named
Officers. No stock appreciation rights were granted to any officer of the
Company during 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERMS(1)
-------------------------------------------------------------- -----------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING OPTIONS GRANTED TO EXERCISE OR
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION
NAME (# OF SHARES)(2) FISCAL YEAR ($ PER SHARE) DATE 5% 10%
---- ------------------ ------------ ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
David A. Cohen.......... 105,000(3) 24.98% $28.75 12/18/07 $1,898,476 $4,811,110
John A. Donohoe, Jr..... 30,000(3) 7.14 28.75 12/18/07 542,422 1,374,603
Ronald F. Scarpone...... 15,000(3) 3.57 28.75 12/18/07 271,211 687,301
John M. Suender......... 15,000(3) 3.57 28.75 12/18/07 271,211 687,301
John R. Emery........... 30,000(3) 7.14 15.33 03/24/07 289,285 733,106
15,000(3) 3.57 28.75 12/18/07 271,211 687,301
</TABLE>
------------------
(1) Amounts reported in the column represent hypothetical values that may be
realized upon exercise of the options immediately prior to the expiration
of their term, assuming the specified compounded rates of appreciation of
the Common Stock over the term of the options. These numbers are calculated
based on rules promulgated by the Commission and do not represent the
Company's estimate of future Common Stock price. Actual gains, if any, on
stock option exercises and Common Stock holdings are dependent on the
timing of such exercise and the future market price of the Common Stock.
There can be no assurance that the rates of appreciation assumed in this
table can be achieved or that the amounts reflected will be received by the
individuals. This table does not take into account any appreciation in the
price of the Common Stock from the date of grant to the present date. The
values shown are net of the exercise price, but do not include deductions
for taxes or other expenses associated with the exercise.
(2) Granted pursuant to the Stock Option Plan.
(3) Vest in 20% increments on each anniversary of the grant date for five
years.
7
<PAGE>
OPTION EXERCISES AND HOLDINGS
The following table summarizes the aggregate option exercises in the last
fiscal year by each of the Named Officers and fiscal year-end value of
unexercised options on an aggregate basis.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK VALUE OF UNEXERCISED
UNDERLYING OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR-END AT FISCAL YEAR-END
SHARES ACQUIRED VALUE ------------------- --------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David A. Cohen............ 37,500 $637,500 58,500 241,500 $1,518,068 $4,044,113
John A. Donohoe........... 0 0 59,196 94,500 1,687,968 1,890,809
John R. Emery............. 0 0 0 45,000 0 672,510
Ronald F. Scarpone........ 6,000 76,500 21,044 57,000 596,803 1,249,950
John M. Suender........... 4,500 76,680 18,261 40,500 503,811 753,590
</TABLE>
- ------------------
(1) Based on the closing price on the Nasdaq Stock Market of $34.75 per share
of Common Stock on December 31, 1997.
EMPLOYMENT CONTRACTS
David A. Cohen. In connection with the acquisition of Transcriptions,
Ltd., the Company entered into an employment agreement with Mr. Cohen, which was
amended effective January 1, 1996. Under the agreement, which expires on
December 31, 1998, Mr. Cohen is currently entitled to receive a base salary,
plus discretionary bonus compensation in an amount up to 50% of his base salary.
Upon accepting employment, Mr. Cohen also received options to purchase 37,500
(adjusted to reflect a 3-for-2 split effective September 9, 1997) shares of
Common Stock pursuant to the 1992 Option Plan. He is also entitled to other
benefits normally provided to the Company's other senior executive officers. The
agreement terminates upon Mr. Cohen's death or disability. Additionally, Mr.
Cohen may resign by giving the Company at least three months' prior notice or
the Company may terminate Mr. Cohen at any time with or without cause. If Mr.
Cohen's employment is terminated without cause, the Company is required to
continue to pay Mr. Cohen's base salary through the end of the term. Upon any
termination, Mr. Cohen has agreed to retain in confidence and not otherwise to
use any confidential or proprietary information of the Company. Additionally,
for a three-year period following any termination of the agreement, Mr. Cohen is
prohibited from competing with the Company or from soliciting clients, customers
or employees of the Company.
John A. Donohoe. In connection with the acquisition of Transcriptions,
Ltd., the Company entered into an employment agreement with Mr. Donohoe, which
was amended effective January 1, 1996. The agreement, which expires on December
31, 1998, provides that Mr. Donohoe is entitled to receive a base salary, plus
discretionary bonus compensation in an amount up to 35% of his base salary. Upon
accepting employment, Mr. Donohoe also received options to purchase 15,000
shares of Common Stock (adjusted to reflect a 3-for-2 split effective September
9, 1997) pursuant to the Stock Option Plan. He is also entitled to other
benefits normally provided to the Company's other senior executive officers. The
agreement contains the same provisions regarding termination, confidentiality,
competition and solicitation as does Mr. Cohen's agreement.
John R. Emery. In March 1997, the Company entered into an employment
agreement with Mr. Emery. The agreement provides that Mr. Emery is currently
entitled to receive a base salary, plus bonus compensation in an amount up to
25% of his base salary. Upon accepting employment, Mr. Emery also received
options to purchase 30,000 shares of Common Stock (adjusted to reflect a 3-for-2
split effective September 9, 1997) pursuant to the Stock Option Plan. He is also
entitled to other benefits normally provided to the Company's other senior
executive officers. The term of the agreement expires December 31, 1998. The
agreement contains other provisions comparable to those
8
<PAGE>
in Mr. Cohen's agreement, except that the post-termination prohibition on
competition and solicitation is one year.
SEVERANCE ARRANGEMENTS
The Company adopted a severance plan for certain executive officers. The
plan provides that if a covered executive is terminated for any reason other
than "cause" (which includes the failure to perform day-to-day duties as
assigned by the Board of Directors) within 12 months after a "change in
control," such covered executive is to receive, within 10 days of the
termination, a one time pro-rated severance payment equal to, in the case of
Messrs. Cohen and Donohoe - 24 months, and in the case of Messrs. Emery,
Scarpone and Suender - 18 months, based on all cash compensation awarded to him
or her in the fiscal year immediately prior to such termination or, if such
executive's compensation was higher or would be higher on an annualized basis,
in the fiscal year in which such termination takes place. The term "change in
control" means (a) any liquidation of the Company, (b) the sale of all or
substantially all of the assets of the Company, (c) the acquisition by any
person or group of beneficial ownership of securities representing more than 50%
of the combined voting power in the election of directors of the Company (after
giving effect to the exercise of any options, warrants or other convertible
securities held by such person or group), (d) the election of a majority of the
members of the Board of Directors as a result of one or more proxy contests
within any period of three years, (e) approval of a merger, consolidation or
other business combination by the Company's shareholders or (f) commencement of
a tender offer to purchase securities representing more than 50% of the combined
voting power in the election of directors of the Company (after giving effect to
the exercise of any options, warrants or other convertible securities held by
such person or group). The severance is pro rated such that the total amount of
severance is reduced by one month for each month employed at the same
compensation rate.
CERTAIN TRANSACTIONS
Richard J. Censits. The Company and Mr. Censits, a director and former
president and chief executive officer of the Company, entered into an employment
agreement January 1, 1993 and amended January 1, 1996. Under the Agreement, Mr.
Censits is entitled during his lifetime to life insurance, medical, dental and
long-term care coverage for himself and his wife and a retirement benefit of
$75,000 annually. If Mr. Censits dies, his wife is entitled to continue her
medical, dental and long-term care coverage during her lifetime, and the Company
has agreed to loan Mr. Censits' estate the funds necessary to exercise any
options to purchase shares of the Common Stock owned by Mr. Censits at the time
of his death, with the stock held by the Company as collateral. The loan must be
repaid three years after grant or earlier if the stock is sold. The agreement
restricts Mr. Censits from competing with the Company, hiring employees of the
Company or disclosing or using confidential information of the Company so long
as he serves as a member of the Board of Directors and during any period in
which he is receiving benefits under the agreement.
9
<PAGE>
[GRAPHIC]
In the printed version of the document, a line graph appears which depicts
the following plot points:
<TABLE>
<S> <C> <C> <C> <C> <C>
| 12/31/93 | 12/31/94 | 12/31/95 | 12/31/96 | 12/31/97 |
MedQuist | 100 | 149 | 167 | 508 | 1069 |
Nasdaq | 100 | 97 | 135 | 166 | 202 |
Medical Services Index* | 100 | 126 | 181 | 196 | 229 |
</TABLE>
* The Medical Services Index is a group of medical services companies
compiled by BancAmerica -- Robertson Stephens.
10
<PAGE>
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors submits the following
report to shareholders on the compensation policies applicable to the Company's
executive officers with respect to compensation reported for the fiscal year
ended December 31, 1997. The Compensation Committee Report shall not be deemed
incorporated by reference into any filing with the SEC, except to the extent
said report is specifically incorporated by reference.
Compensation Principles. The Compensation Committee believes that the
Company's executive compensation program is a critical part of the effective
management of its key executives. The executive compensation program should
provide incentives that will reward key executives for pursuing actively the
actions necessary to strengthen the Company's performance and enhancing
shareholder value. Additionally, if the company is to be successful, its
executive compensation programs must be geared to attract and retain superior
quality employees. To that end, the Company's compensation program for
executives is designed to:
o Promote the execution of the Company's business strategies and operating
objectives
o Link executive compensation with corporate performance
o Align performance objectives with the interest of shareholders
o Encourage a career commitment on the part of executives
Executive Compensation Program. The Company's executive compensation
program for fiscal year 1997 included base salary, short term cash incentive
compensation and option grants pursuant to the terms of the Stock Option Plan.
The Compensation Committee believes that its compensation program has been
successful in the past. Accordingly, the program for 1997 was substantially
similar to the program for 1996.
Base Salary. Base salary represents compensation for discharging job
responsibilities and reflects the executive officer's performance over time.
Base salaries may be adjusted to reflect experience, increased responsibilities
and individual performance, as well as to be competitive. Mr. Cohen's, Mr.
Donohoe's and Mr. Emery's base salaries are paid pursuant to the terms of their
respective employment contracts discussed above subject to changes as approved
by the Compensation Committee.
Short Term Incentive Compensation. The Company provides short term
incentive compensation designed to reward executives for meeting current
financial goals. The short term award for executive officers is based 50% upon
the operations of the entire Company and is 50% discretionary. The Committee
determines the discretionary portion of the bonus for Messrs. Cohen and Donohoe.
Mr. Cohen determines the discretionary portion of the bonus for all persons
other than himself and Mr. Donohoe, subject to approval by the Committee.
For fiscal year 1997, all of the executive officers earned 100% of their
respective short term award. Under the formula portion of the short term award,
an award is earned 100% if current annual earnings before interest, taxes,
depreciation and amortization (weighted two times) and revenues (weighted one
time) exceed prior year financial results by 25%. Once current results under the
formula exceed prior year by 15%, bonus begins to be earned under the formula
portion of the plan on a straight line basis (i.e., 1/10 of the maximum award is
earned for each point over 15%).
Stock Option Grants. The Company believes it is important to provide long
term incentive compensation that is closely aligned with the interests of
shareholders. Stock options are particularly well designed to achieve this goal
because executives gain over time only when shareholders gain through the
appreciation of the market price of the Company's Common Stock.
To encourage long term performance and retain its most senior management,
the Committee has designed a long term stock option bonus plan for the Named
Officers providing for performance based grants that vest over a five (5) year
period (the "Stock Option Bonus"). Under the Stock Option Bonus, the Committee
determines at the start of each fiscal year the maximum number of options a
Named Officer would be eligible to receive if the Company achieves 100% of the
performance goals established by the Committee for that year. Achievement of the
performance goals in 1997 was
11
<PAGE>
determined pursuant to the same formula described in short term incentive
compensation above. In 1997, each of the Named Officers earned 100% of the Stock
Option Bonus and the Committee approved grants to the Named Officers on December
18, 1997 that vest in 20% increments over five years. The exercise price of
options granted under the Stock Option Bonus is equal to the fair market value
as of the date of grant. Awards of stock options to Named Officers are made
under and subject in all respects to the Stock Option Plan, including, without
limitation, maximum annual grants, vesting and determination of exercise price.
Chief Executive Officer Compensation. Mr. Cohen's compensation package
was paid in accordance with his employment contract, which was negotiated at
arm's length. In 1996, the Committee engaged an independent compensation
consultant who advised the Committee that Mr. Cohen's salary and short term
incentive compensation were competitive at that time, and recommended the
implementation of a long term incentive compensation component of pay for Mr.
Cohen. As described above, the Committee implemented the Stock Option Bonus
consistent with such advice and recommendation. In 1997, Mr. Cohen earned a base
salary of $270,000, short term cash incentive compensation of $135,000 (see
description of short term incentive plan above) and 105,000 options to purchase
Common Stock. The options granted to Mr. Cohen in 1997 vest 20% per year over a
five year period and were granted under the Stock Option Bonus described under
Stock Option Grants above.
Policy with respect to Section 162(m) of the Internal Revenue Code.
Generally, Section 162(m) of the Internal Revenue Code, and the proposed
regulations promulgated thereunder (collectively, "Section 162(m)"), denies a
deduction to any publicly held corporation, such as the Company, for
compensation paid to a "covered employee" in a taxable year to the extent that
compensation exceeds $1,000,000. A covered employee includes the chief executive
officer on the last day of the taxable year and any other employee whose
compensation is required to be reported in the Summary Compensation Table by
reason of such employee being among the four highest compensated officers for
such taxable year (other than the chief executive officer). The deduction limit
of Section 162(m) applies to any compensation that could otherwise be deducted
in a taxable year, except for enumerated types of payments, including payments
that meet the requirements in Section 162(m) for performance-based compensation.
Under the requirements for performance-based compensation set forth in Section
162(m), compensation will not be subject to the deduction limit if (1) it is
payable on account of the attainment of one or more performance goals; (2) the
performance goals are established by a Compensation Committee of the Board of
Directors that is comprised solely of two or more outside directors; (3) the
material terms of the compensation and the performance goals are disclosed to
and approved by shareholders before payment; and (4) the Compensation Committee
certifies that the performance goals have been satisfied before payment.
It is the Compensation Committee's policy that, where practicable, it will
seek to comply with the requirements of Section 162(m) applicable to
performance-based compensation to the extent it determines that it is likely
that the compensation to be paid to any such executive officer will exceed
$1,000,000 per year.
The Compensation Committee consists solely of outside directors in
accordance with Section 162(m).
1997 COMPENSATION COMMITTEE
JOHN H. UNDERWOOD
JAMES F. CONWAY
TERRENCE J. MULLIGAN
COMPENSATION COMMITTEE INTERLOCKS
The Compensation Committee consists entirely of non-employee directors.
None of the Compensation Committee members has any interlocking or other
relationship with the Company that would call into question their independence
with respect to their duties.
12
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of April 10, 1998 (i) by each person
or group known to the Company to be the beneficial owner of more than 5% of
Common Stock, (ii) by each of the Company's Named Officers and directors and
(iii) by all executive officers and directors of the Company as a group. Except
as otherwise noted and subject to community property laws, where applicable,
each beneficial owner of the Common Stock listed below has sole investment and
voting power with respect to their shares of Common Stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)
--------------------------------------------
NAME AND ADDRESS(2) NUMBER OF SHARES PERCENT OF CLASS(3)
------------------- ---------------- -------------------
<S> <C> <C>
Putnam Investment, Inc. 571,600(4) 5.2%
One Post Office Square
Boston, MA 02109
Richard J. Centis 179,621(5) 1.6%
688 Annemore Lane
Naples, FL 34108
David A. Cohen........................................ 847,782(6) 7.7%
William T. Carson, Jr................................. 55,535(7) *
John T. Casey......................................... 5,615(8) *
James F. Conway....................................... 36,144(9) *
James R. Emshoff...................................... 75,535(10) *
Terrence J. Mulligan.................................. 12,108(11) *
A. Fred Ruttenberg.................................... 46,785(12) *
R. Timothy Stack...................................... 6,752(13) *
John H. Underwood..................................... 7,608(14) *
John A. Donohoe....................................... 125,663(15) 1.1%
John R. Emery......................................... 6,000(16) *
Ronald F. Scarpone.................................... 29,341(17) *
John M. Suender....................................... 14,660(18) *
All executive officers and directors as a group (19).. 1,449,149 12.7%
</TABLE>
- ------------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Commission, and includes voting or investment power with respect to the
shares beneficially owned. Shares of Common Stock subject to options or
warrants currently exercisable or exercisable within 60 days after April
10, 1998 are deemed outstanding for computing the percentage ownership of
the person holding such options or warrants, but are not deemed outstanding
for computing the percentage ownership of any other person.
(2) Except where otherwise noted, the address of all persons listed is c/o
MedQuist Inc., Five Greentree Centre, Suite 311, Marlton, New Jersey 08053.
(3) Applicable percentage of ownership as of April 10, 1998 is based upon
10,996,790 shares of Common Stock outstanding.
(4) Reflects information set forth in a Schedule 13G filed by Putnam
Investments, Inc. on behalf of itself and Marsh & McLennan Companies,
Putnam Investment Management, Inc. and the Putnam Advisory Company, Inc.
(5) Includes 63,500 shares of Common Stock issuable upon the exercise of
options granted to Mr. Censits and 100,650 shares of Common Stock owned by
Mr. Censits' spouse.
13
<PAGE>
(6) Includes 58,500 shares of Common Stock issuable upon the exercise of
options granted to Mr. Cohen. Mr. Cohen owns all such shares (excluding
shares issuable upon the exercise of options) with his wife, Barbara Cohen,
as joint tenants with right of survivorship.
(7) Includes 27,000 shares of Common Stock issuable upon the exercise of
options granted to Mr. Carson, 7,500 shares of Common Stock held for Mr.
Carson's benefit in an individual retirement account and 500 shares of
Common Stock owned by one of Mr. Carson's sons. Mr. Carson disclaims
beneficial ownership of the shares held by his son.
(8) Includes 4,500 shares of Common Stock issuable upon exercise of options
granted to Mr. Casey and 1,115 shares issuable under the Company's Deferred
Compensation Plan for Non-Employee Directors (the "Deferred Stock Plan").
(9) Includes 32,100 shares of Common Stock issuable upon the exercise of
options granted to Mr. Conway, 187 shares of Common Stock owned by Mr.
Conway's spouse and 1,090 shares issuable under the Company's Deferred
Stock Plan.
(10) Includes 54,653 shares of Common Stock issuable upon the exercise of
options granted to Mr. Emshoff and 1,615 shares issuable under the Deferred
Stock Plan.
(11) Includes 9,000 shares of Common Stock issuable upon the exercise of options
to Mr. Mulligan and 1,608 shares issuable under the Deferred Stock Plan.
(12) Includes 40,600 shares of Common Stock issuable upon the exercise of
options granted to Mr. Ruttenberg and 3,686 shares issuable under the
Deferred Stock Plan.
(13) Includes 4,500 shares of Common Stock issuable upon exercise of options
granted to Mr. Stack and 407 shares issuable under the Company's Deferred
Stock Plan.
(14) Includes 4,500 shares of Common Stock issuable upon exercise of options
granted to Mr. Underwood, 1,608 shares of Common Stock issuable under the
Deferred Stock Plan and 1,500 shares of Common Stock held for Mr.
Underwood's benefit in an individual retirement account.
(15) Includes 59,196 shares of Common Stock issuable upon the exercise of
options granted to Mr. Donohoe and 18,000 shares owned by Mr. Donohoe's
children.
(16) Includes 6,000 shares of Common Stock issuable upon exercise of options
granted to Mr. Emery.
(17) Includes 21,044 shares of Common Stock issuable upon the exercise of
options granted to Mr. Scarpone.
(18) Includes 6,261 shares of Common Stock issuable upon the exercise of options
granted to Mr. Suender.
(19) Includes 391,354 options granted to directors and executive officers.
14
<PAGE>
INDEPENDENT PUBLIC ACCOUNTANTS
The Audit Committee of the Board of Directors has selected Arthur Andersen
to be employed as the Company's independent certified public accountants to make
the annual audit and to report on, as may be required, the consolidated
financial statements which may be filed by the Company with the Securities and
Exchange Commission during the ensuing year.
A representative of Arthur Andersen is expected to be present at the Annual
Meeting of Shareholders and to have the opportunity to make a statement, if he
or she desires to do so, and is expected to be available to respond to
appropriate questions.
PROPOSALS TO APPROVE AMENDMENTS TO
COMPANY'S STOCK OPTION PLAN
The Board of Directors has also approved an increase in the maximum number
of shares issuable under the Stock Option Plan by 300,000 to a total of
2,040,000. The Board of Directors recommends a vote "For" this proposal.
INCREASE IN AUTHORIZED SHARES UNDER STOCK OPTION PLAN
Currently, options for a total of 1,740,000 shares may be issued under the
Stock Option Plan. The amendment increases the maximum number of shares issuable
under the Stock Option Plan by 300,000 to a total of 2,040,000 shares. No
options have been issued to date from said 300,000 shares.
The purpose of the proposed increase is to provide sufficient shares for
future option grants to officers and key employees of the Company. As of
December 31, 1997, the Company had approximately 231,000 shares available for
grant under the Stock Option Plan. In 1997, the Company granted 379,900 options
under the Stock Option Plan. The Board of Directors believes that the Company
and its shareholders significantly benefit from having the Company's key
management employees receive options to purchase the Company's Common Stock and
that the opportunity thus afforded these employees to acquire Common Stock is an
essential element of an effective management incentive program. The Board of
Directors also believes that stock options are very valuable in attracting and
retaining highly qualified management personnel and in providing additional
motivation to management to use their best efforts on behalf of the Company.
Set forth below is a summary of certain significant portions of the Stock
Option Plan.
Eligibility and Administration. All officers and key employees of the
Company or any current or future subsidiary (the "Subsidiary"), excluding all
directors who are not employees of the Company, are eligible to receive options
under the Stock Option Plan. The Stock Option Plan currently is administered by
the Compensation Committee (the "Committee"). The Committee determines, among
other things, which officers and key employees of the Company and any
Subsidiary, excluding all directors who are not employees of the Company, will
be granted options under the Stock Option Plan, whether options granted will be
Incentive Options or Non-Qualified Options, the number of shares subject to an
option, the time at which an option is granted, the duration of an option and
the exercise price of an option. The Committee has the exclusive right to adopt
or rescind rules for the administration of the Stock Option Plan, correct
defects and omissions in, reconcile inconsistencies in, and construe the Stock
Option Plan.
Amendment and Termination. Options may not be granted pursuant to the
Stock Option Plan after January 16, 2002. The Board of Directors reserves the
right at any time, and from time to time, to modify or amend the Stock Option
Plan in any way, or to suspend or terminate it, effective as of such date, which
date may be either before or after the taking of such action, as may be
specified by the Board of Directors; provided, however, that such action shall
not affect options granted under the Stock Option Plan prior to the actual date
on which such action occurred. If a modification or amendment of the Stock
Option Plan is required by the Code or the regulations thereunder to be approved
by the shareholders of the Company in order to permit the granting of "Incentive
Stock Options" (as that term is defined in Section 422 of the Code and
regulations thereunder) pursuant to
15
<PAGE>
the modified or amended Stock Option Plan, such modification or amendment shall
also be approved by the shareholders of the Company in such manner as is
prescribed by the Code and the regulations thereunder. If the Board of Directors
voluntarily submits a proposed modification, amendment, suspension or
termination for shareholder approval, such submission shall not require any
future modifications, amendments (whether or not relating to the same provision
or subject matter), suspensions or terminations to be similarly submitted for
shareholder approval.
Number of Shares and Adjustment. The aggregate number of shares which may
presently be issued upon the exercise of options granted under the Stock Option
Plan is 1,740,000 shares of Common Stock. The aggregate number and kind of
shares issuable under the Stock Option Plan is subject to appropriate adjustment
to reflect changes in the capitalization of the Company, such as by stock
dividend, stock split or other circumstances deemed by the Committee to be
similar. Any shares of Common Stock subject to options that terminate
unexercised will be available for future options granted under the Stock Option
Plan.
Exercise Price and Terms. The exercise price for Incentive Options granted
under the Stock Option Plan shall be equal to at least the fair market value of
the Common Stock as of the date of the grant of the option, except that the
option exercise price of Incentive Options granted to an individual owning
shares of the Company possessing more than 10% of the total combined voting
power of all classes of stock of the Company must not be less than 110% of the
fair market value as of the date of the grant of the option. The exercise price
for Non-Qualified Options shall be determined by a Committee of the Board of
Directors but, in no event shall the price be less than $1.00 per share. The
market value of a share of Common Stock on April 10, 1998 was $40 1/16.
The aggregate fair market value of the stock determined on the date of
grant with respect to which Incentive Options are exercisable for the first time
by an optionee during any calendar year cannot exceed $100,000.
Unless terminated earlier by the option's terms, Options granted under the
Stock Option Plan will expire ten years after the date they are granted, except
that if Incentive Options are granted to an individual owning shares of the
Company possessing more than 10% of the total combined voting power of all
classes of stock of the Company on the date of the grant, Section 422 of the
Code requires that such options expire five years after the date they are
granted.
Immediate Vesting Upon the Occurrence of Certain Events. The Stock Option
Plan provides that all options vest immediately in the event of (a) the
acquisition, directly or indirectly by any person or group (as such terms are
defined in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934 as
in effect on the date hereof (the "1934 Act")), of beneficial ownership (as such
term is defined under Rule 13d-3 of the 1934 Act) of securities representing
50.1% or more of the combined voting power in the election of directors of the
then outstanding securities of the Company or any successor of the Company
(after giving affect to the exercise of any derivative securities held by such
person or group) (the "Voting Power") or (b) the election of a majority of the
Board of Directors as a result of one or more proxy contests within any period
of three (3) years. In such a case, the option holder would become immediately
vested and therefore be able to exercise the option and benefit from any
increase in the Company's stock price.
Payment of Exercise Price. Payment of the option price on exercise of
Incentive Options and Non-Qualified Options may be made in cash, shares of
Common Stock of the Company or a combination of both. Under the terms of the
Stock Option Plan, the Committee could interpret the provision of the Stock
Option Plan which allows payment of the option price in shares of Common Stock
to permit the "pyramiding" of shares in successive, simultaneous exercises. As a
result, an optionee could initially exercise an option in part, acquiring a
small number of shares of Common Stock and immediately thereafter effect further
exercises of the option, using the shares of Common Stock acquired upon earlier
exercises to pay for an increasingly greater number of shares received on each
successive exercise. This procedure could permit an optionee to pay the option
price by using a single share of Common Stock or a small number of shares of
Common Stock to acquire a number of shares of Common Stock.
16
<PAGE>
Termination of Service; Death; Non-Transferability. All unexercised
incentive options will terminate such number of days (not to exceed 90) as
determined by the Compensation Committee after the date either (i) the optionee
ceases to perform services for the Company or a Subsidiary, or (ii) the Company
or a Subsidiary delivers or receives notice of an intention to terminate the
employment relationship, regardless of whether or not a different effective date
of termination is provided in such notice, but this termination date shall not
apply in the cases of disability or death of the optionee (but in no event later
than the expiration date). An incentive optionee who ceases to be an employee
because of a disability must exercise the option within one year after he or she
ceases to be an employee (but in no event later than the expiration date). The
heirs or personal representative of a deceased optionee who could have exercised
an option while alive may exercise such option within one year following the
optionee's death (but in no event later than the expiration date). The Committee
can provide that the options may be transferred to descendants on trusts for the
benefits of such descendants. Otherwise, no option granted under the Stock
Option Plan is transferable except in the event of death by will or the laws of
descent and distribution. Non-qualified options may have such termination dates
and other terms as are determined by the Committee and consistent with the terms
of the Stock Option Plan.
Federal Income Tax Consequences of the Stock Option Plan. Set forth below
is a description of the federal income tax consequences to the recipient of
options and the Company under the Internal Revenue Code of 1986, as amended, of
the grant and exercise of options awarded under the Stock Option Plan.
Incentive Stock Options. Generally, under the Code, an optionee will not
realize taxable income by reason of the grant or the exercise of an Incentive
Option (see, however, discussion of Alternative Minimum Tax below). If an
optionee exercises an Incentive Option and does not dispose of the shares until
the later of (i) two years from the date the option was granted and (ii) one
year from the date of exercise, the entire gain, if any, realized upon
disposition of such shares will be taxable to the optionee as capital gain, and
the Corporation will not be entitled to any deduction. A holding period of more
than eighteen months is required in order to tax such gain at the 20% rate added
to the Code by the Taxpayer Relief Act of 1997. If an optionee disposes of the
shares within the period of two years from the date of grant or one year from
the date of exercise (a "disqualifying disposition"), the optionee generally
will realize ordinary income in the year of disposition and the Corporation will
receive a corresponding deduction, in an amount equal to the excess of (1) the
lesser of (a) the amount, if any, realized on the disposition and (b) the fair
market value of the shares on the date the option was exercised over (2) the
option price. Any additional gain realized on the disposition will be long-term,
mid-term, or short-term capital gain and any loss will be long-term, mid-term or
short-term capital loss. The optionee will be considered to have disposed of a
share if he sells, exchanges, makes a gift of or transfers legal title to the
share (except transfers, among others, by pledge, on death or to spouses). If
the disposition is by sale or exchange, the optionee's tax basis will equal the
amount paid for the share plus any ordinary income realized as a result of the
disqualifying disposition.
The exercise of an Incentive Option may subject the optionee to the
alternative minimum tax. The amount by which the fair market value of the shares
purchased at the time of the exercise exceeds the option exercise price is an
adjustment for purposes of computing the so-called alternative minimum tax. In
the event of a disqualifying disposition of the shares in the same taxable year
as exercise of the Incentive Option, no adjustment is then required for purposes
of the alternative minimum tax, but regular income tax, as described above, may
result from such disqualifying disposition. Effective January 1, 1994, the
Revenue Reconciliation Act of 1994 replaced the 24% alternative minimum tax rate
on individuals with a two-tier alternative minimum tax rate having an initial
rate of 26% and a second-tier rate of 28% on alternative minimum taxable income
over $175,000.
An optionee who surrenders shares as payment of the exercise price of his
Incentive Option generally will not recognize gain or loss on his surrender of
such shares. The surrender of shares previously acquired upon exercise of an
Incentive Option in payment of the exercise price of another Incentive Option,
is, however, a "disposition" of such stock. If the incentive stock option
holding period requirements described above have not been satisfied with respect
to such stock, such
17
<PAGE>
disposition will be a disqualifying disposition that may cause the optionee to
recognize ordinary income as discussed above.
Under the Code, all of the shares received by an optionee upon exercise of
an Incentive Option by surrendering shares will be subject to the incentive
stock option holding period requirements. Of those shares, a number of shares
(the "Exchange Shares") equal to the number of shares surrendered by the
optionee will have the same tax basis for capital gains purposes (increased by
any ordinary income recognized as a result of any disqualifying disposition of
the surrendered shares if they were incentive stock option shares) and the same
capital gains holding period as the shares surrendered. For purposes of
determining ordinary income upon a subsequent disqualifying disposition of the
Exchange Shares, the amount paid for such shares will be deemed to be the fair
market value of the shares surrendered. The balance of the shares received by
the optionee will have a tax basis (and a deemed purchase price) of zero and a
capital gains holding period beginning on the date of exercise. The Incentive
Stock Option holding period for all shares will be the same as if the option had
been exercised for cash.
Non-Qualified Options. Generally, there will be no federal income tax
consequences to either the optionee or the Corporation on the grant of
Non-Qualified Options. On the exercise of a Non-Qualified Option, the optionee
has taxable ordinary income equal to the excess of the fair market value of the
shares acquired on the exercise date over the option price of the shares. The
Corporation will be entitled to a federal income tax deduction (subject to the
limitations contained in Section 162 of the Code) in an amount equal to such
excess.
Upon the sale of stock acquired by exercise of a Non-Qualified Option,
optionees will realize long-term, mid-term, or short-term capital gain or loss
depending upon their holding period for such stock. The Taxpayer Relief Act of
1997 revised the holding periods and tax rates for capital gains. In order to
qualify for the new reduced 20% rate, a holding period of more than eighteen
months is required. Capital losses are deductible only to the extent of capital
gains for the year plus $3,000 for individuals.
An optionee who surrenders shares in payment of the exercise price of a
Non-Qualified Option will not recognize gain or loss with respect to the shares
so delivered unless such shares were acquired pursuant to the exercise of an
Incentive Option and the delivery of such shares is a disqualifying disposition.
See "Incentive Stock Options." The optionee will recognize ordinary income on
the exercise of the Non-Qualified Option as described above. Of the shares
received in such an exchange, that number of shares equal to the number of
shares surrendered will have the same tax basis and capital gains holding period
as the shares surrendered. The balance of the shares received will have a tax
basis equal to their fair market value on the date of exercise and the capital
gains holding period will begin on the date of exercise.
Limitation on Corporation's Deduction. Section 162(m) of the Code will
generally limit to $1.0 million the Corporation's federal income tax deduction
for compensation paid in any year to its chief executive officer and its four
highest paid executive officers, to the extent that such compensation is not
"performance based." Under Treasury regulations, and subject to certain
transition rules, a stock option will, in general, qualify as "performance
based" compensation if it (i) has an exercise price of not less than the fair
market value of the underlying stock on the date of grant, (ii) is granted under
a plan that limits the number of shares for which options may be granted to an
employee during a specified period, which plan is approved by a majority of the
shareholders entitled to vote thereon, and (iii) is granted by a compensation
committee consisting solely of at least two independent directors. If a stock
option to an executive referred to above is not "performance based", the amount
that would otherwise be deductible by the Corporation in respect of such stock
option will be disallowed to the extent that the executive's aggregate
non-performance based compensation paid in the relevant year exceeds $1.0
million.
New Plan Benefits Table. The amount, if any, of stock options to be
awarded to key employees is determined on an annual basis by the Committee and
is not presently determinable. Information regarding awards to the Named
Officers in 1997 is provided elsewhere in this Proxy Statement. See "Executive
Compensation." There would not have been any difference in the amount of these
grants had they been made under the Stock Option Plan if the amendments were
approved.
18
<PAGE>
OTHER MATTERS
The Board of Directors is not aware of any other matters which may come
before the Annual Meeting. However, in the event such other matters come before
the meeting, it is the intention of the persons named in the proxy to vote on
any such matters in accordance with the recommendation of the Board of
Directors.
Shareholder Proposals. If a shareholder wishes to have a proposal included
in the Company's proxy statement for the 1999 Annual Meeting of Shareholders,
the proposal must be received at the Company's principal executive offices by
December 1, 1998. To be considered, a recommendation for a Board nominee must be
accompanied by (i) such information regarding the nominee as would be required
to be included in a proxy statement filed pursuant to the Securities Exchange
Act of 1934, as amended, (ii) a description of any arrangements or
understandings between the recommending shareholder(s) and each nominee and any
other person or entity with respect to such nomination and (iii) the consent of
each nominee to serve as a director if elected.
Shareholders are urged to sign the enclosed proxy, which is solicited on
behalf of the Board of Directors, and return it in the enclosed envelope.
EACH PERSON SOLICITED HEREUNDER CAN OBTAIN A COPY OF THE COMPANY'S ANNUAL
REPORT ON FORM 10-K AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION FOR THE
YEAR ENDED DECEMBER 31, 1997, WITHOUT CHARGE, BY SENDING A WRITTEN REQUEST TO
MEDQUIST INC., FIVE GREENTREE CENTRE, SUITE 311, MARLTON, NEW JERSEY 08053,
ATTENTION: SECRETARY.
By Order of the Board of Directors,
John M. Suender, Vice President,
General Counsel and Secretary
19
<PAGE>
MedQuist Inc.
Five Greentree Centre
Suite 311
Marlton, New Jersey 08053
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby appoints John M. Suender and John R. Emery or either
of them as Proxies, each with the power to appoint his substitute, and hereby
authorizes them to represent and to vote, as designated on the reverse, all the
shares of common stock of MedQuist Inc. held of record by the undersigned on
April 10, 1998, at the annual meeting of shareholders to be held on May 27, 1998
or any adjournments thereof.
Please sign on the reverse side
<PAGE>
A. / / Please mark your
Votes as in this example.
FOR WITHHELD
1. Election of / / / / Nominees: William T. Carson, Jr.
Directors
John T. Casey
For, except vote withheld from the Richard J. Censits
following Nominee(s):
John A. Donohoe, Jr.
__________________________________
FOR AGAINST ABSTAIN
2. AMENDMENT TO INCREASE THE NUMBER OF SHARES / / / / / /
UNDER STOCK OPTION PLAN.
3. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
This Proxy when properly executed will be voted in the manner directed
herein by the undersigned shareholder. If no direction is made, this Proxy
will be voted FOR Proposals 1 and 2.
Please mark, sign, date and return Proxy Card Promptly Using the Enclosed
Envelope.
SIGNATURE(S) ________________________________________ DATE ____________________
_____________________________________________________ DATE ____________________
SIGNATURE IF HELD JOINTLY
NOTE: Please sign name exactly as it appears above. When shares are held by
joint tenants, both should sign. When signing as attorney, as executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by President or other authorized
officer. If a partnership, please sign in partnership name by authorized person.
