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As filed with the Securities and Exchange Commission on June 1, 2000
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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SCHEDULE 14D-9
Solicitation/Recommendation Statement
Pursuant to Section 14(d)(4)
of the Securities Exchange Act of 1934
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MedQuist Inc.
(Name of Subject Company)
MedQuist Inc.
(Name of Person(s) Filing Statement)
Common Stock, No Par Value
(Title of Class of Securities)
584949101
(CUSIP Number of Class of Securities)
John M. Suender
Senior Vice President, General Counsel and Secretary
MedQuist Inc.
Five Greentree Centre, Suite 311
Marlton, New Jersey 08053
(856) 596-8877
(Name, Address and Telephone Number of Person
Authorized to Receive Notice and Communications on
Behalf of the Person(s) Filing Statement)
Copy to:
James D. Epstein, Esq.
Pepper Hamilton LLP
3000 Two Logan Square
Eighteenth and Arch Streets
Philadelphia, Pennsylvania 19103-2799
(215) 981-4000
[_] Check the box if the following relates solely to preliminary
communications made before the commencement of a tender offer.
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This Solicitation/Recommendation Statement on Schedule 14D-9 (this
"Statement") of MedQuist Inc., a New Jersey corporation ("MedQuist"), relates
to the tender offer by Koninklijke Philips Electronics N.V., a corporation
organized under the laws of the Netherlands ("Royal Philips"), to purchase
22,250,327 shares of the outstanding common stock of MedQuist, no par value, at
a purchase price of $51.00 per share, net to the seller in cash, without
interest thereon, upon the terms and subject to the conditions set forth in the
Offer to Purchase, dated June 1, 2000, filed as Exhibit 1 to this Statement
(the "Offer to Purchase"), and the related Letter of Transmittal filed as
Exhibit 2 to this Statement (in each case, together with any supplements or
amendments thereto, collectively, the "Offer Documents"), each of which is
incorporated herein by reference. This Schedule 14D-9 is being filed on behalf
of MedQuist.
Item 1. Subject Company Information.
(a) The name of the subject company is MedQuist Inc., a New Jersey
corporation. The address of its principal executive offices is Five Greentree
Centre, Suite 311, Marlton, NJ 08053 and the telephone number is (856) 596-
8877.
(b) The title of the equity securities to which this Statement relates is
the common stock, no par value, of MedQuist (the "Common Stock"). References
herein to the "Shares" mean the outstanding shares of the Common Stock. As of
May 19, 2000, there were 35,452,704 Shares.
Item 2. Identity and Background of Filing Person.
(a) The filing person is the subject company.
(b) This Statement relates to the tender offer (the "Offer") disclosed in a
Tender Offer Statement on Schedule TO, dated June 1, 2000 (the "Schedule TO"),
by Royal Philips, to purchase 22,250,327 Shares at a purchase price of $51.00
per Share, net to the seller in cash, without interest thereon, upon the terms
and subject to the conditions set forth in the Offer Documents.
According to the Schedule TO, the principal executive office of Royal
Philips is located at Rembrandt Tower, Amstelplein 1, 1096 HA Amsterdam, the
Netherlands.
The Offer is being made pursuant to the Tender Offer Agreement, dated as of
May 22, 2000 (the "Tender Offer Agreement"). A copy of the Tender Offer
Agreement is filed as Exhibit 3 to this Statement and is incorporated herein by
reference. In connection with the Tender Offer Agreement, MedQuist and Royal
Philips entered into a Governance Agreement, dated as of May 22, 2000 (the
"Governance Agreement"), which will become effective if Royal Philips purchases
Shares pursuant to the terms and conditions of the Offer, pursuant to which
Royal Philips and MedQuist agreed to various arrangements concerning both Royal
Philips' ability to sell and purchase Shares and the governance of MedQuist
after the expiration of the Offer. A copy of the Governance Agreement is filed
as Exhibit 4 to this Statement and is incorporated herein by reference.
MedQuist and Philips Speech Processing GmbH, a wholly-owned subsidiary of Royal
Philips ("Philips Speech Processing"), entered into a Licensing Agreement,
dated as of May 22, 2000 (the "License Agreement"), which will become effective
if Royal Philips purchases Shares pursuant to the terms and conditions of the
Offer, pursuant to which, among other things, MedQuist will be granted a
license to use certain speech-recognition technology in connection with its
business. A copy of the License Agreement is filed as Exhibit 5 to this
Statement and is incorporated herein by reference. See "Item 3--Past Contracts,
Transactions, Negotiations and Agreements."
In addition, as part of the transaction, Royal Philips and seven members of
MedQuist's management consisting of David A. Cohen, its Chairman and Chief
Executive Officer, John A. Donohoe, Jr., its President and Chief Operating
Officer, John R. Emery, its Senior Vice President, Treasurer and Chief
Financial Officer, Ronald A. Scarpone, its Senior Vice President--New Business
Development, John M. Suender, its Senior Vice President, General Counsel and
Secretary, Ethan Cohen, its Senior Vice President and Chief Technology
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Officer, and John W. Quaintance, its Senior Vice President-Western Region (each
an "Executive"), entered into both a Shareholder Agreement (the "Shareholder
Agreements") and a three-year Employment Agreement (the "Employment
Agreements"), each dated May 22, 2000. Pursuant to the Shareholder Agreements,
among other things, Royal Philips agreed to purchase from each such Executive,
promptly after the expiration of the Offer and the purchase of Shares in the
Offer, a specified number of Shares, totaling 1,149,759 Shares in the aggregate
(the "Purchase Shares") and representing approximately 37% of their current
aggregate beneficial ownership of Shares, at the same price per Share to be
paid by Royal Philips in the Offer (the "Share Purchase"). The Shareholder
Agreements, copies of which are filed as Exhibits 6 through 12 to this
Statement, are immediately effective, provided, that Royal Philips is only
obligated to purchase the Purchase Shares from the Executives if it purchases
Shares in the Offer. The Employment Agreements, copies of which are filed as
Exhibits 13 through 19 to this Statement, become effective if Royal Philips
purchases Shares pursuant to the terms and conditions of the Offer. See "Item
3--Past Contacts, Transactions, Negotiations and Agreements."
The Governance Agreement, the License Agreement, the Shareholder Agreements
and the Employment Agreements are, collectively, the "Related Documents".
Item 3. Past Contacts, Transactions, Negotiations and Agreements.
Except as set forth in this Item 3, to the knowledge of MedQuist, as of the
date hereof, there are no material contracts, agreements, arrangements or
understandings, and no actual or potential conflicts of interest, between
MedQuist or its affiliates, on the one hand, and (i) MedQuist's executive
officers, directors or affiliates or (ii) Royal Philips or its executive
officers, directors or affiliates, on the other hand.
Tender Offer Agreement. The following is a summary of the material terms of
the Tender Offer Agreement. The summary is qualified in its entirety by
reference to the Tender Offer Agreement, a copy of which has been filed with
the Securities and Exchange Commission (the "SEC") as an exhibit to this
Statement. The Tender Offer Agreement may be inspected at, and copies may be
obtained from, the same places and in the manner set forth in Section 17 of the
Offer to Purchase.
The Offer. The Tender Offer Agreement provides that Royal Philips will
commence the Offer and that upon the terms and subject to prior satisfaction or
waiver (to the extent permitted to be waived) of the conditions of the Offer,
promptly after expiration of the Offer, Royal Philips will accept for payment,
and pay for, 22,250,327 Shares validly tendered and not withdrawn pursuant to
the Offer that Royal Philips is permitted to accept and pay for under
applicable law. If more than 22,250,327 Shares are validly tendered and not
withdrawn, Royal Philips will accept for purchase an amount of the tendered
Shares equal to 22,250,327 Shares, on a pro rata basis from each stockholder
who has validly tendered Shares pursuant to the Offer, promptly after the
Expiration Date. The term "Expiration Date" means 12:00 midnight, New York City
time, on Wednesday, June 28, 2000, unless and until Royal Philips extends the
period for which the Offer is open, in which event the term "Expiration Date"
means the latest time and date on which the Offer, as so extended by Royal
Philips, expires. The condition that there be validly tendered and not
withdrawn at least 22,250,327 Shares is referred to as the "Tender Offer
Condition."
Subject to the applicable regulations of the SEC, Royal Philips expressly
reserves the right, in its sole discretion, to waive, set forth or change any
term and condition of the Offer; provided, that, unless previously approved by
MedQuist in writing, no provision may be set forth or changed which: (i)
increases or, except as set forth in the next succeeding sentence, decreases
the Tender Offer Condition; (ii) decreases the price per Share to be paid in
the Offer; (iii) changes the form of consideration payable in the Offer (other
than by adding consideration); (iv) imposes additional conditions to the Offer;
or (v) amends or modifies any term or condition of the Offer in a manner
adverse to the holders of Shares. Without the prior written consent of
MedQuist, Royal Philips may not extend the expiration date of the Offer beyond
the initial expiration date of the Offer; provided, that, if on the initially
scheduled Expiration Date of the Offer (or any subsequent Expiration Date) any
of the conditions to the Offer have not been satisfied, Royal Philips may in
its sole discretion extend from time to time the Offer for up to and including
an additional 20 business days in the aggregate after the initial
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Expiration Date of the Offer, and may in its sole discretion, in connection
with any such extension, amend the terms of the Offer, but only to reduce the
Tender Offer Condition to any number of Shares greater than 20,300,320 Shares,
it being understood that if Royal Philips accepts for payment any Shares
validly tendered and not withdrawn pursuant to the Offer, it will accept for
payment all such Shares up to the Tender Offer Condition (i.e., 22,250,327
Shares). During any such extension of the Offer, all Shares previously tendered
and not withdrawn will remain subject to the Offer, subject to the right of a
tendering stockholder to withdraw such stockholder's Shares.
Termination of the Tender Offer Agreement. The Tender Offer Agreement
may be terminated at any time before Royal Philips has purchased Shares
pursuant to the Offer:
(1) by mutual written consent duly authorized by the boards of directors
of Royal Philips and MedQuist;
(2) by the board of directors of either Royal Philips or MedQuist if:
. such termination of the Offer is not in violation of the terms of
the Offer or the Tender Offer Agreement; or
(3) by MedQuist if:
. Royal Philips has failed to comply in any material respect with
any of its covenants or agreements contained in the Tender Offer,
and which failure has not been cured prior to the earlier of:
. five business days following the giving of written notice to
Royal Philips; or
. the business day prior to the date on which the Offer is
scheduled to expire; or
. the board of directors of MedQuist (the "Board") receives or there
is publicly announced a bona fide written "Acquisition Proposal"
(as defined below), that was unsolicited and did not otherwise
result from a breach of the Tender Offer Agreement, and the Board
determines in good faith:
. after consultation with an investment banking firm of national
standing, that such Acquisition Proposal is a Superior
Proposal (as defined below); and
. after consultation with outside counsel, that approval,
acceptance or recommendation of such Acquisition Proposal or
tender or exchange offer is necessary in order for its
directors to comply with their respective fiduciary duties,
and MedQuist substantially concurrently with such termination
enters into a definitive agreement containing the terms of the
Superior Proposal.
Notwithstanding the above, MedQuist may not terminate the Tender
Offer Agreement pursuant to this provision, unless MedQuist
complies with:
. all the provisions of the Tender Offer Agreement, including
the applicable notification provisions; and
. all applicable requirements of the Tender Offer Agreement,
including the payment of the termination fee prior to or
concurrently with such termination.
In addition, MedQuist may not exercise its right to terminate this
Agreement pursuant to this provision until after three days following
Royal Philips' receipt of written notice from MedQuist advising Royal
Philips that the Board has received a Superior Proposal (or that a
tender or exchange offer with respect to the Shares has been
commenced) and that such Board will, subject to any action taken by
Royal Philips, cause MedQuist to accept such proposal (or recommend
such tender or exchange offer), and specifying the material terms and
conditions of the proposal and identifying the person making such
proposal (it being understood and agreed that any amendment to the
price or any other material term of the proposal requires an
additional notice and a new three-day period).
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(4) by the board of directors of Royal Philips if:
. MedQuist fails to comply in any material respect with any of its
covenants or agreements contained in the Tender Offer Agreement,
and which failure is not cured prior to the earlier of:
. five business days following the giving of written notice to
MedQuist of such failure; or
. the business day prior to the date on which the Offer is then
scheduled to expire; or
. the Board amends or modifies in a manner adverse to Royal Philips
its approval or recommendation of the Offer, withdraws such
recommendation or approves or recommends any other Acquisition
Proposal, or resolves to do any of the foregoing; or
. if MedQuist or any of the other affiliated or related persons or
entities described in the Tender Offer Agreement takes any actions
that would be proscribed by Section 3.2 of the Tender Offer
Agreement (relating to Acquisition Proposals and which are
described below) but for the exception therein allowing certain
actions to be taken by the Board after consultation with outside
counsel if necessary to comply with its fiduciary obligations
under applicable law.
Effect of Termination. If the Tender Offer Agreement is terminated,
neither Royal Philips nor MedQuist (nor any of their respective directors or
officers) will have any liability or further obligation to the other party,
except that each will remain liable for any breach of the Tender Offer
Agreement. In addition, the Tender Offer Agreement's provisions regarding
confidentiality, public statements regarding the transactions contemplated by
the agreement and fees and expenses will survive termination.
Fees and Expenses. Each of MedQuist and Royal Philips will pay their
respective expenses in connection with the Tender Offer Agreement, except that
the parties have agreed that MedQuist will be required to pay Royal Philips a
termination payment of $44,750,000 if:
. the Offer has remained open for at least 20 business days;
. the Tender Offer Condition has not been satisfied;
. the Offer is terminated without the purchase of any Shares thereunder;
. at the time the Offer is terminated, any corporation, partnership,
person, other entity or group (as defined in Section 13(d)(3) of the
Exchange Act) other than Royal Philips or any of its subsidiaries or
affiliates has publicly announced an intention (whether or not
conditional) to make a proposal or offer relating to an Acquisition
Proposal; and
. within 15 months after the date of such termination, MedQuist
consummates or enters into an agreement with respect to any Acquisition
Proposal; in addition, if MedQuist recommends acceptance by the
stockholders of a third-party tender offer or exchange offer, such
recommendation will be treated as though an agreement had been entered
into.
In addition, MedQuist will also be required to pay Royal Philips a termination
fee if:
. MedQuist fails to comply in any material respect with any of its
obligations or agreements in the Tender Offer Agreement, which failure
is not cured after Royal Philips informs MedQuist of such failure;
. the Board amends or modifies in a manner adverse to Royal Philips its
approval or recommendation of the Offer, withdraws such recommendation
or approves or recommends any other Acquisition Proposal, or resolves to
do any of the foregoing; or
. MedQuist terminates the Tender Offer Agreement in order to accept and
enter into an agreement relating to a Superior Proposal.
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If MedQuist is obligated to pay Royal Philips a termination fee as described
above, MedQuist will also reimburse Royal Philips' actual out-of-pocket costs
and expenses incurred in connection with the Tender Offer Agreement and the
transactions contemplated thereby up to a maximum of $2,500,000. The parties
have agreed that if Goldman, Sachs & Co. ("Goldman, Sachs") or any of its
affiliates is entitled to receive a portion of the termination payment pursuant
to the terms of its engagement with Royal Philips, such payment will not be
deemed part of Royal Philips' costs and expenses.
Acquisition Proposals. Neither MedQuist nor any of its subsidiaries nor
any of the respective officers and directors of MedQuist or its subsidiaries
will, and it will direct and use its best efforts to cause its employees,
agents and representatives (including, without limitation, any investment
banker, attorney or accountant retained by MedQuist or any of its subsidiaries)
not to:
. initiate, solicit or encourage, directly or indirectly, any inquiries or
the making of any proposal or offer (including, without limitation, any
proposal or offer to stockholders of MedQuist) with respect to a merger,
consolidation, share exchange or similar transaction involving, or any
purchase of all or 15% or more of the assets or the equity securities
of, MedQuist or any of its subsidiaries (any such proposal or offer
being hereinafter referred to as an "Acquisition Proposal"); or
. engage in any negotiations concerning, or provide any confidential
information or data to, or have any discussions with, any person
relating to an Acquisition Proposal, or otherwise facilitate any effort
or attempt to make or implement an Acquisition Proposal.
Notwithstanding the foregoing restriction, MedQuist or its Board has the right
to:
(1) comply with Rules 14d-9 and 14e-2 promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") with regard
to an Acquisition Proposal;
(2) provide information in response to a request by a person who has
made an unsolicited bona fide written Acquisition Proposal, but
only if the Board obtains from that person an executed
confidentiality agreement containing material terms no more
favorable to that person than those contained in the
Confidentiality Agreement executed by MedQuist and Royal Philips;
(3) engage in any negotiations or discussions with any person who has
made an unsolicited bona fide written Acquisition Proposal; or
(4) recommend such an Acquisition Proposal to the stockholders of
MedQuist.
MedQuist's ability to engage in any of the actions set forth in clauses (2),
(3) or (4) above is limited, however, in that in order to engage in such
actions the Board must first determine in good faith:
. after consultation with outside counsel, that such action is
necessary in order for the directors to comply with their respective
fiduciary duties under applicable law;
. that such Acquisition Proposal, if accepted, is reasonably likely to
be consummated, taking into account appropriate legal, financial and
regulatory aspects of the proposal and the person making the
proposal; and
. after consultation with an investment banking firm of national
standing, that such Acquisition Proposal is reasonably likely, if
consummated, to result in a transaction more favorable to MedQuist's
stockholders from a financial point of view than the transaction
contemplated by the Tender Offer Agreement (any such more favorable
Acquisition Proposal being referred to as a "Superior Proposal").
MedQuist is required to notify Royal Philips immediately if any such
inquiries or proposals are received by, any such information is requested from,
or any such negotiations or discussions are sought to be initiated or continued
with MedQuist or any of its representatives. MedQuist is also required to
further identify the offeror and furnish to Royal Philips a copy of any such
inquiry or proposal, if it is in writing, or to inform Royal Philips of the
material terms of any such inquiry or proposal, if it is oral, and to promptly
advise Royal Philips of any material development relating to such inquiry or
proposal. MedQuist is also required to promptly request each person that has
executed a confidentiality agreement in connection with its consideration of
acquiring MedQuist to return all confidential information furnished to such
person by or on behalf of MedQuist.
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Covenants. The Tender Offer Agreement also contains certain other
restrictions as to the conduct of business by MedQuist pending completion or
termination of the Offer, including covenants restricting MedQuist's ability to
take, among other things, actions that would change or affect the capital
structure of MedQuist and limit MedQuist's ability to make capital
expenditures, engage in acquisitions, amend benefit plans and settle claims.
Representations and Warranties. The Tender Offer Agreement contains
representations and warranties by each of MedQuist and Royal Philips that are
customary for a transaction of this kind. Certain of MedQuist's representations
and warranties are qualified by "Company Material Adverse Effect," which is
defined in the Tender Offer Agreement as a material adverse effect on the
condition (financial or otherwise), business or results of operations of
MedQuist and its subsidiaries taken as a whole other than any effect arising
out of (i) general economic conditions or (ii) economic conditions generally
affecting the medical services industry.
Amendment of the Tender Offer Agreement. Subject to the applicable
provisions of the New Jersey Business Corporation Act, at any time prior to the
purchase of the Shares pursuant to the Offer, MedQuist and Royal Philips may
modify or amend the Tender Offer Agreement only by written agreement executed
and delivered by duly authorized officers of the respective parties. After the
date on which Royal Philips' designees become members of the Board, the Tender
Offer Agreement may not be amended in any manner materially adverse to MedQuist
or any third-party beneficiary as provided in the Tender Offer Agreement
without the written consent of the members of the Supervisory Committee (being
the committee of the Board composed of Independent Directors (as defined below)
established and maintained pursuant to and in accordance with the Governance
Agreement).
Indemnification of Officers and Directors. From and after the date on
which Shares are purchased pursuant to the Offer, Royal Philips has agreed that
it will cause MedQuist to indemnify and hold harmless each present and former
director and officer of MedQuist, determined as of such date (each, an
"Indemnified Party" and, collectively, the "Indemnified Parties"), against any
costs or expenses (including reasonable attorneys' fees), judgments, fines,
losses, claims, damages or liabilities (collectively, "Costs") incurred in
connection with any claim, action, suit, proceeding or investigation, whether
civil, criminal, administrative or investigative, arising out of matters
existing or occurring at or prior to the date on which Shares are purchased
pursuant to the Offer, whether asserted or claimed prior to, at or after such
date, to the fullest extent that MedQuist would have been permitted under New
Jersey law and its Certificate of Incorporation or By-Laws in effect on the
date of the Tender Offer Agreement to indemnify such person. Royal Philips will
also advance expenses as incurred to the fullest extent permitted under
applicable law so long as the person to whom expenses are advanced provides an
undertaking to repay such advances if it is ultimately determined that such
person is not entitled to indemnification.
Any Indemnified Party wishing to claim indemnification under the provisions
of the Tender Offer Agreement, upon learning of any such claim, action, suit,
proceeding or investigation, must promptly notify MedQuist thereof, but the
failure to so notify will not relieve MedQuist of any liability it may have to
such Indemnified Party except to the extent such failure prejudices the
indemnifying party. In the event of any such claim, action, suit, proceeding or
investigation (whether arising before or after the date on which Shares are
purchased pursuant to the Offer), MedQuist has the right to assume and control
the defense thereof and MedQuist will not be liable to such Indemnified Parties
for any legal expenses of other counsel or any other expenses subsequently
incurred by such Indemnified Parties in connection with the defense thereof,
except that if MedQuist elects not to assume such defense or counsel for the
Indemnified Parties advises in writing that there are issues which raise
conflicts of interest between MedQuist and the Indemnified Parties, the
Indemnified Parties may retain counsel (which counsel will be reasonably
satisfactory to MedQuist), and MedQuist will pay all reasonable fees and
expenses of such counsel for the Indemnified Parties promptly as statements
therefor are received. This right to have MedQuist pay for counsel chosen by
the Indemnified Party is limited in that MedQuist is obligated to pay for only
one firm of counsel for all Indemnified Parties in any jurisdiction. In
addition, MedQuist is not liable for any settlement effected without its prior
written consent, the Indemnified Parties are required to cooperate in the
defense of any matter and MedQuist does not have any obligation to
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any Indemnified Party when and if a court of competent jurisdiction ultimately
determines, and such determination has become final, that the indemnification
of such Indemnified Party in the manner contemplated by the Tender Offer
Agreement is prohibited by applicable law.
Royal Philips has further agreed that after Royal Philips' purchase of
Shares pursuant to the Offer, it will cause MedQuist to maintain MedQuist's
existing officers' and directors' liability insurance ("D&O Insurance") for a
period of six years after the purchase of Shares pursuant to the Offer so long
as the annual premium therefor is not in excess of 200% of the last annual
premium paid prior to the date of the Tender Offer Agreement (the "Current
Premium"); provided, however, that (x) Royal Philips may substitute therefor
policies (which may be "tail" policies) containing terms with respect to
coverage and amount no less favorable in any material respect to such directors
and officers, and (y) if the existing D&O Insurance expires, is terminated or
canceled during such six-year period, Royal Philips will use its commercially
reasonable best efforts to obtain as much D&O Insurance as can be obtained for
the remainder of such period for a premium not in excess (on an annualized
basis) of 200% of the Current Premium.
Treatment of Employee Benefits. Royal Philips has agreed that, during
the period commencing on the date Shares are purchased pursuant to the Offer
and ending on the first anniversary thereof, the employees of MedQuist will
continue to be provided with employee benefit plans which in the aggregate are
substantially comparable to those currently provided by MedQuist to such
employees, provided that employees covered by collective bargaining agreements
need not be provided such benefits. Without limiting the generality of the
foregoing, Royal Philips has agreed to cause MedQuist to honor without
modification all employee (or former employee) benefit obligations, including
severance obligations, accrued as of the time Royal Philips purchases Shares
pursuant to the term of the Offer.
Certain Conditions of the Offer. Notwithstanding any other provision of
the Offer and provided that Royal Philips is not obligated to accept for
payment any Shares until expiration of all applicable waiting periods under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), Royal Philips is not required to accept for payment or pay for, or may
delay the acceptance for payment of or payment for, any tendered Shares, or
may, in its sole discretion, terminate or amend the Offer as to any Shares not
then paid for if Shares representing less than the Tender Offer Condition are
validly tendered pursuant to the Offer and not withdrawn prior to the
expiration of the Offer, or, if on or after May 22, 2000, and at or before the
time of payment for any of such Shares (whether or not any Shares have
theretofore been accepted for payment), any of the following events occurs:
(a) MedQuist breaches or fails to perform in any material respect
any of its obligations, covenants or agreements under the Tender Offer
Agreement or any representation or warranty of MedQuist set forth in the
Tender Offer Agreement which is qualified by "Company Material Adverse
Effect" was inaccurate or incomplete as so qualified when made or
thereafter has become inaccurate or incomplete as so qualified, or any
representation or warranty of MedQuist set forth in the Tender Offer
Agreement which is not qualified by "Company Material Adverse Effect" was
inaccurate or incomplete in any material respect when made or thereafter
becomes inaccurate or incomplete in any material respect;
(b) there is instituted or pending any action, litigation,
proceeding, investigation or other application (an "Action") before any
court or other governmental entity by any governmental entity or by any
other person, domestic or foreign (it being understood that, with respect
to any Action by any person other than a governmental entity, this clause
(b) will only apply to bona fide Actions that are reasonably likely to be
successful on the merits): (i) challenging the acquisition by Royal Philips
of Shares, seeking to restrain or prohibit the consummation of the
transactions contemplated by the Offer or seeking to obtain any material
damages in connection with the transactions contemplated by the Offer; (ii)
seeking to prohibit, or impose any material limitations on, Royal Philips'
ownership or operation of all or any portion of their or MedQuist's
business or assets (including the business or assets of their respective
affiliates and subsidiaries), or to compel Royal Philips to dispose of or
hold separate all or any portion of Royal Philips' or MedQuist's business
or assets (including the business or assets of their respective affiliates
and subsidiaries) as a result of the transactions contemplated by the
Offer; (iii) seeking to make the acceptance
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for payment, purchase of, or payment for, some or all of the Shares illegal
or render Royal Philips unable to, or result in a delay (other than an
immaterial delay) in, or restrict (other than immaterially), the ability of
Royal Philips to accept for payment, purchase or pay for some or all of the
Shares; (iv) seeking to impose material limitations on the ability of Royal
Philips effectively to acquire or hold or to exercise full rights of
ownership of the Shares including, without limitation, the right to vote
the Shares purchased by them on an equal basis with all other Shares on all
matters properly presented to the stockholders; or (v) that, in any event,
in the reasonable judgment of Royal Philips, is reasonably likely to have a
Company Material Adverse Effect or have a material adverse effect on the
value of the Shares to Royal Philips or the benefits expected to be derived
by Royal Philips as a result of consummation of the transactions
contemplated by the Offer;
(c) any statute, rule, regulation, order or injunction is enacted,
promulgated, entered, enforced or deemed applicable to the Offer, or any
other action has been taken, proposed or threatened, by any court or other
governmental entity other than the application to the Offer of waiting
periods under the HSR Act, that could, directly or indirectly, be
reasonably expected to result in any of the effects of, or have any of the
consequences sought to be obtained or achieved in, any Action referred to
in clauses (i) through (v) of paragraph (b) above;
(d) there has occurred a Company Material Adverse Effect or any
occurrence or event has occurred that is reasonably likely to result in a
Company Material Adverse Effect;
(e) the Board (or a special committee thereof) has amended or
modified in a manner adverse to Royal Philips its approval or
recommendation of the Offer, has withdrawn such recommendation or has
approved or recommended any other Acquisition Proposal, or has resolved to
do any of the foregoing;
(f) the Tender Offer Agreement is terminated by MedQuist or Royal
Philips in accordance with its terms, or Royal Philips reaches an agreement
or understanding in writing with MedQuist providing for termination;
(g) any of the Employment Agreements are terminated or repudiated by
the Executive a party thereto, except as may result from the death or
disability of such Executive;
(h) MedQuist terminates or repudiates the License Agreement;
(i) any of the Shareholder Agreements are terminated or repudiated
by the Executive a party thereto; or
(j) MedQuist terminates or repudiates the Governance Agreement;
which, in the good faith reasonable judgment of Royal Philips, in any such
case, and regardless of the circumstances (including any action or inaction by
Royal Philips other than a material breach of the Tender Offer Agreement)
giving rise to any such conditions, makes it inadvisable to proceed with the
Offer and/or with such acceptance for payment of or payment for Shares.
The foregoing conditions are for the sole benefit of Royal Philips and may
be asserted by Royal Philips regardless of the circumstances (including any
action or inaction by Royal Philips other than a material breach of this
Agreement) giving rise to such condition or may be waived by Royal Philips, in
its sole discretion, by express and specific action to that effect, in whole or
in part at any time and from time to time.
Governance Agreement. The following is a summary of the material terms of
the Governance Agreement. The summary is qualified in its entirety by reference
to the Governance Agreement, a copy of which has been filed with the SEC as an
exhibit to this Statement. The Governance Agreement may be inspected at, and
copies may be obtained from, the same places and in the manner set forth in
Section 17 of the Offer to Purchase.
Effective Time of the Governance Agreement. The Governance Agreement
will become effective at the time Royal Philips purchases Shares pursuant to
the terms and conditions of the Tender Offer Agreement (the "Governance
Agreement Effective Time").
8
<PAGE>
Termination of the Governance Agreement. The Governance Agreement will
terminate on the first date that Royal Philips is no longer the beneficial
owner of five percent of MedQuist's Voting Stock (as defined below), although
Royal Philips and MedQuist may terminate the agreement earlier by mutual
written consent and except that the provisions of the agreement relating to the
establishment of committees of the Board will terminate on the first date that
Royal Philips is the beneficial owner of less than a majority of the
outstanding Voting Stock. As used in the Governance Agreement, the term "Voting
Stock" means shares of the capital stock of MedQuist having the right to vote
generally in any election of directors of MedQuist.
Purchases of Shares by Royal Philips After the Offer. The Governance
Agreement provides that until the third anniversary of the Governance Agreement
Effective Time, Royal Philips will not, directly or indirectly, purchase or
otherwise acquire, or propose or offer to purchase or acquire, or otherwise
become the beneficial owner, individually or as a member of a "group" (as
defined for purposes of Section 13d of the Exchange Act), of any Equity
Securities, if, immediately after such transaction, Royal Philips and its
Affiliates or Associates would, directly or indirectly, beneficially own in
excess of 75% of the then outstanding shares of Voting Stock. As used in the
Governance Agreement, the term "Equity Security" means Voting Stock, securities
of MedQuist convertible into or exchangeable for Voting Stock, and options,
rights, warrants and similar securities issued by MedQuist to purchase Voting
Stock.
Notwithstanding the foregoing restriction, after the first anniversary of
the Governance Agreement Effective Time, Royal Philips or any of its Affiliates
or Associates (each of which terms have the respective meanings ascribed to
them under the rules promulgated under the Exchange Act) may acquire all, but
not less than all, of the Equity Securities of MedQuist which are not then
beneficially owned by Royal Philips or one or more of its Affiliates or
Associates. However, any transaction or series of related transactions during
that time period in which Royal Philips would acquire all of the Equity
Securities it does not then own is subject to the receipt of the approval of
the Supervisory Committee of the Board.
Transfers of Shares by Royal Philips After the Offer. Royal Philips has
agreed that until the first anniversary of the Governance Agreement Effective
Time, it will not, and will not permit any of its subsidiaries to, directly or
indirectly, sell, transfer or otherwise dispose of any Equity Securities
beneficially owned, directly or indirectly, by Royal Philips or its
subsidiaries except to Royal Philips or to any subsidiary of Royal Philips.
Notwithstanding the foregoing, the terms of the Governance Agreement permit
Royal Philips to sell, transfer or assign Equity Securities, or permit any of
its subsidiaries which beneficially own Equity Securities to sell, transfer or
assign such Equity Securities, so long as after giving effect to any such
sales, transfers or assignments of Equity Securities, Royal Philips and its
subsidiaries beneficially own at least 60% of the then outstanding shares of
Voting Stock.
After the first anniversary of the Governance Agreement Effective Time and
until the third anniversary of the Governance Agreement Effective Time, Royal
Philips may sell or dispose of any Equity Securities to any person, but may not
enter into or consummate any transaction (or series of related transactions)
involving the sale or transfer of Equity Securities that would result in (i)
any person other than Royal Philips or any Affiliate or Associate of Royal
Philips beneficially owning in excess of 10% of the outstanding Voting Stock (a
"Third Party Purchaser") and (ii) Royal Philips and its Affiliates and
Associates beneficially owning less than a majority of the then outstanding
Voting Stock, unless:
. the Third-Party Purchaser contemporaneously offers to acquire, or
acquires, on the same terms and conditions as are applicable to
Royal Philips, its Affiliates or Associates, 100% of the Voting
Stock beneficially owned by persons or entities other than Royal
Philips, its Affiliates or Associates; or
. the Third-Party Purchaser offers to purchase, on the same terms and
conditions as are applicable to Royal Philips, its Affiliates or
Associates, pursuant to a tender or exchange offer made in
accordance with applicable law, including Section 14(d)(1) and
Regulation 14D of the Exchange Act, all or the same percentage of
the then outstanding shares of Voting Stock.
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After the third anniversary of the Governance Agreement Effective Time,
Royal Philips may sell or dispose of any Equity Securities to any person
without any contractual limitations imposed by the Governance Agreement.
Composition of the Board. The Governance Agreement provides that
MedQuist will take any and all action necessary so that promptly following the
Governance Agreement Effective Time, the Board will consist of 11 directors.
These 11 directors will be comprised of the following individuals:
. one director will be the Chief Executive Officer of MedQuist and one
director will be another officer of MedQuist designated by the Chief
Executive Officer of MedQuist (together, the "Management
Directors");
. six directors will be designated by Royal Philips (the "Royal
Philips Directors"); and
. three directors will be "Independent Directors".
After the Governance Agreement Effective Time, the Board will have the power
to increase or decrease the size of the Board in its discretion so long as (x)
there are at least two Management Directors and three Independent Directors,
and (y) the relative percentage of Management Directors, Independent Directors
and Royal Philips Directors is maintained, in all material respects, as in
effect immediately prior to any such increase or decrease. As used in the
Governance Agreement, the term "Independent Director" means a director of
MedQuist (i) who is not and has never been an officer or employee of MedQuist,
any Affiliate or Associate of MedQuist, or an entity that derived five percent
or more of its revenues or earnings in its most recent fiscal year from
transactions involving MedQuist or any Affiliate or Associate of MedQuist, (ii)
who is not and has never been an officer, employee or director of Royal
Philips, any Affiliate or Associate of Royal Philips, or an entity that derived
more than five percent of its revenues or earnings in its most recent fiscal
year from transactions involving Royal Philips or any Affiliate or Associate of
Royal Philips and (iii) who was nominated for such position by the Nominating
Committee established and maintained pursuant to and in accordance with the
Governance Agreement. The initial Independent Directors will be John H.
Underwood, Richard H. Stowe and A. Fred Ruttenberg.
In addition, as set forth in the following table, the number of directors
Royal Philips is permitted to designate or nominate under the terms of the
Governance Agreement is based on its beneficial ownership of Voting Stock:
<TABLE>
<CAPTION>
Number of
Royal Philips
Beneficial Ownership of Voting Stock Directors
------------------------------------ -------------
<S> <C>
More than 50%.............................................. 6
More than 36%.............................................. 4
More than 27%.............................................. 3
More than 18%.............................................. 2
5% or more................................................. 1
Less than 5%............................................... 0
</TABLE>
If Royal Philips has the right to designate fewer than six directors, the
Nominating Committee of the Board will nominate that number of additional
Independent Directors as is necessary to constitute the entire Board.
Royal Philips will have the right to designate any replacement for a Royal
Philips Director at the termination of such director's term or upon such
director's death, resignation, retirement, disqualification, removal from
office or other cause, and the Chief Executive Officer of MedQuist will have
the right to designate any replacement for a Management Director at the
termination of such director's term or upon such director's death, resignation,
retirement, disqualification, removal from office or other cause.
10
<PAGE>
Committees of the Board. The Governance Agreement provides that the
Board will establish the following three committees, with the following
responsibilities:
. a Nominating Committee, responsible, among other things, for the
nomination, subject to the terms of the Governance Agreement, of the
Independent Directors and consisting solely of two Independent
Directors, one Royal Philips Director and one Management Director as
selected by the Board from time to time;
. a Compensation Committee, responsible, among other things, for the
adoption, amendment and administration of all employee benefit plans
and arrangements and the compensation of all officers of MedQuist,
and consisting of two Independent Directors and two Royal Philips
Directors as selected by the Nominating Committee and Royal Philips,
respectively, from time to time;
. a Supervisory Committee, consisting of at least three Independent
Directors selected by a majority of the Independent Directors,
responsible, among other things, for:
(A) the general oversight, administration, amendment and
enforcement, on behalf of MedQuist, of (1) those provisions of
the Tender Offer Agreement that survive Royal Philips' purchase
of Shares pursuant to the Offer, (2) the Governance Agreement
and (3) the License Agreement; and
(B) the entry into, general oversight, administration, amendment and
enforcement, on behalf of MedQuist, of any other agreements or
arrangements between MedQuist or any of its subsidiaries, on the
one hand, and Royal Philips and any of its subsidiaries on the
other hand, which would be required pursuant to Regulation S-K
promulgated by the SEC to be disclosed in a registration
statement filed under the Securities Act or in a proxy statement
or other report filed under the Exchange Act.
The Board may establish such other committees as it may determine in its
discretion so long as such other committees do not conflict with, supersede or
duplicate the duties or responsibilities of the Nominating Committee, the
Compensation Committee or the Supervisory Committee.
License Agreement. The following is a summary of the material terms of the
License Agreement. The summary is qualified in its entirety by reference to the
License Agreement, a copy of which has been filed with the SEC as an exhibit to
this Statement. The License Agreement may be inspected at, and copies may be
obtained from, the same places and in the manner set forth in Section 17 of the
Offer to Purchase.
Effective Time of the License Agreement. The License Agreement will
become effective at the time Royal Philips purchases Shares pursuant to the
terms and conditions of the Tender Offer Agreement (the "License Agreement
Effective Time").
Termination of the License Agreement. Subject to the parties' right to
terminate as provided in the License Agreement, the License Agreement will have
an initial term of five years from the License Agreement Effective Time and
will thereafter continue for subsequent five year terms. The License Agreement
may be terminated at any time by one party if the other materially breaches its
obligations under the License Agreement (which, in the case of MedQuist,
includes non-payment of monies owed to Philips Speech Processing) or becomes
subject to bankruptcy proceedings. The License Agreement may also be terminated
at the election of either party, but only at the end of the initial five year
term and during or at the end of any subsequent term, in either case with two
years written notice.
Subject of the License Agreement. The License Agreement provides that
MedQuist will license from Philips Speech Processing speech recognition and
processing software (the "Licensed Product"). The Licensed Product includes
software for the development of an electronic medical terminology database for
use in automated speech-to-text transformation (the "Contexts"). The Contexts
will be developed in part by using
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<PAGE>
MedQuist's speech data and will be optimized for a specific user or group of
medical specialists, such as gynecologists or radiologists. These Contexts, as
they are developed, will also be subject to the License Agreement. The License
Agreement also provides that Philips Speech Processing will provide support to
MedQuist in the areas of integration, customization, training and ongoing
support.
Scope of the License Agreement. The License Agreement provides that
Philips Speech Processing will grant MedQuist a non-assignable, non-exclusive
license to use the Licensed Product and the Contexts, as they are developed, in
connection with its transcription business. Philips Speech Processing has
agreed not to license the Licensed Product or the Contexts to any competitor of
MedQuist providing outsourced medical transcription services in the United
States; and MedQuist has agreed not to use or license a product that competes
with the Licensed Product. MedQuist will not have any ownership in the Licensed
Product or the Contexts, or in any derivative works or related documentation.
Philips Speech Processing will have access to MedQuist's medical documents and
user sound data in order to improve existing Contexts and generate new
Contexts. Philips Speech Processing will have the right to license these
Contexts to other licensees (other than any competitor of MedQuist providing
outsourced medical transcription services in the United States), subject to
MedQuist's right to receive them first. MedQuist will receive a royalty of 3.5%
of the license fees paid by other licencees to Philips Speech Processing in
connection with Contexts developed on the basis of access to MedQuist's speech
data.
License Fee. MedQuist will pay Philips Speech Processing an initial fee
of $2,250,000 and an ongoing license fee based on the number of lines of text
actually transcribed using the Licensed Product. The license fee will be
calculated, and be subject to a minimum license fee (through 2004), as follows.
The parties have assumed that four percent of "payroll lines" will be converted
using the Licensed Product in 2001, 13% in 2002, 25% in 2003 and 45% in 2004
(the "Projected Use Rate"). The term "payroll line" means the lines that
MedQuist uses as a basis to pay its transcriptionists. The parties have also
agreed that the per payroll line charge will be $0.012 for each line up to 500
million payroll lines and $0.010 for each line over 500 million lines. For each
year from 2001 to 2004 inclusive, the guaranteed license fee will be equal to a
fraction (which shall be 3/4 for each of 2001 and 2002, 1/2 for 2003 and 1/4
for 2004) of the Projected Use Rate multiplied by the total number of payroll
lines created by MedQuist during that year (whether using the Licensed Product
or not), multiplied by the per line charge. MedQuist has also agreed to pay for
certain support services provided by Philips Speech Processing.
Shareholder Agreements. The following is a summary of the material terms of
each of the Shareholder Agreements. The summary is qualified in its entirety by
reference to the Shareholders Agreements, copies of which have been filed with
the SEC as exhibits to this Statement. The Shareholder Agreements may be
inspected at, and copies may be obtained from, the same places and in the
manner set forth in Section 17 of the Offer to Purchase.
Each Shareholder Agreement, which became effective upon execution of such
agreement, provides that if Royal Philips purchases Shares pursuant to the
Offer, then promptly after the Offer expires, Royal Philips will purchase from
the Executive a party thereto the number of Shares set forth opposite that
Executive's name in the following table, at a price per Share equal to the
price per Share paid by Royal Philips in the Offer:
<TABLE>
<CAPTION>
Number of
Name Shares
---- ---------
<S> <C>
David A. Cohen..................................................... 779,530
John A. Donohoe, Jr................................................ 124,224
John R. Emery...................................................... 46,057
John M. Suender.................................................... 56,289
Ronald A. Scarpone................................................. 74,570
Ethan Cohen........................................................ 39,489
John W. Quaintance................................................. 29,600
---------
Total............................................................ 1,149,759
=========
</TABLE>
12
<PAGE>
In the aggregate, the 1,149,759 Shares to be purchased by Royal Philips
under the Shareholder Agreements represent approximately three percent of
MedQuist's fully diluted Shares and approximately 37% of those individuals'
combined holdings.
Each Shareholder Agreement also provides that until May 22, 2002, the
Executive a party thereto will not sell or dispose of (i) any Shares, or any
options or warrants to purchase any Shares, or any securities convertible into,
exchangeable for or that represent the right to receive Shares, owned on the
date of the Shareholder Agreement, (ii) any Shares issued upon the exercise of
options or warrants to purchase any Shares referred to in the preceding clause
(i), (iii) any options to purchase any Shares issued in accordance with the
option grant contemplated by such Executive's Employment Agreement with
MedQuist, dated as of May 22, 2000, or (iv) any Shares issued upon the exercise
of the options to purchase Shares referred to in the preceding clause (iii), in
each case, owned directly by the Executive a party thereto or with respect to
which such Executive has beneficial ownership within the rules and regulations
of the SEC.
Each Executive party to the Shareholder Agreements has also agreed that at
any shareholder meeting, or in any written consent in lieu thereof, such
Executive will vote his Shares against any action or agreement that would
impede, interfere with, delay, postpone or attempt to discourage the Offer,
including, but not limited to:
. any acquisition agreement or other similar agreement related to an
Acquisition Proposal;
. any change in MedQuist's management or the Board, except as otherwise
agreed to in writing by Royal Philips; or
. any other material change in MedQuist's corporate structure or business.
The Shareholder Agreements will terminate concurrent with the earlier of:
(a) the termination of the Tender Offer Agreement and (b) the occurrence of any
of the conditions that result in a revocation of the waiver given by such
Executive in his Employment Agreement with MedQuist with respect to certain
options held by such Executive that would otherwise vest upon Royal Philips'
purchase of Shares pursuant to the Offer.
Employment Agreements. The following is a summary of the material terms of
each of the Employment Agreements. The summary is qualified in its entirety by
reference to the Employment Agreements, copies of which have been filed with
the SEC as exhibits to this Statement. The Employment Agreements may be
inspected at, and copies may be obtained from, the same places and in the
manner set forth in Section 17 of the Offer to Purchase.
Each of the Employment Agreements will become effective at the time Royal
Philips pays for the Shares pursuant to the Tender Offer Agreement (the
"effective date"), so long as such Executive is employed by MedQuist at such
time. These Employment Agreements will supercede all prior employment
agreements between MedQuist and the Executives and will remain in effect until
the third anniversary of the effective date, with automatic renewals for one
year periods unless either party gives 90 days prior written notice.
The Employment Agreements provide that each Executive shall serve MedQuist
in the same position and role in which he served prior to the effective date.
Each Executive shall receive the same salary as he earned immediately prior to
the effective date. In addition, each Executive shall be eligible for
participation in MedQuist's short term targeted bonus plan in an amount equal
to up to a specified percentage of his base salary (for David A. Cohen, such
percentage will be 75%, for Mr. Donohoe, 45%, for Messrs. Emery, Scarpone,
Suender and Ethan Cohen, 30%, and for Mr. Quaintance, 25%). Subject to the
completion of the Offer on or following the effective date, the Executives
(with the exception of David A. Cohen) will also be granted an option to
purchase Shares under MedQuist's Incentive Stock Option Plan for Officers and
Key Employees. Specifically, Mr. Donohoe will be granted an option to purchase
100,000 Shares at an exercise price of $51.00 and 100,000 Shares at an exercise
price of $70.00; Messrs. Emery and Suender will each be granted an option to
purchase 40,000 Shares at an exercise price of $51.00 and 40,000 Shares at an
exercise price of $70.00; and Messrs. Ethan Cohen, Scarpone and Quaintance will
each be granted an option to purchase 25,000 Shares at an exercise price of
$51.00 and 25,000 Shares at an exercise price of $70.00.
13
<PAGE>
The consummation of the transactions authorized by the Tender Offer
Agreement will not constitute a "change in control" for purposes of all (in the
case of Messrs. David A. Cohen, Donohoe, Suender and Scarpone), 68,943 out of
78,000 (in the case of Mr. Emery), 59,234 out of 68,071 (in the case of Ethan
Cohen) or 44,400 out of 49,800 (in the case of Mr. Quaintance) outstanding
unvested options held by the Executives as of the effective date (the "deferred
vesting options") and the Executives have waived all rights to the accelerated
vesting of the deferred vesting options which would have occurred upon the
consummation of the transactions authorized by the Tender Offer Agreement. Such
waiver shall be deemed revoked, and all deferred vesting options shall
immediately vest in the event of the Executive's death or disability, a
termination of the Executive by MedQuist without "cause" (as such term is
defined in the Employment Agreement), the Executive's receipt of notice from
MedQuist of nonrenewal of the agreement, a voluntary resignation by the
Executive following a required relocation of the Executive's principal place of
business by more than 50 miles, or a failure by MedQuist to pay the
compensation authorized by the agreement, provided that the Executive has given
MedQuist notice of such breach and MedQuist has not cured such breach within 30
days of receipt of such notice (a "Material Breach").
If MedQuist terminates an Executive's employment without cause or if such
Executive voluntarily terminates his employment following a required relocation
of his principal place of business by more than 50 miles or following a
Material Breach, the Executive will receive (i) accrued but unpaid salary
prorated through the date of termination or effective date of resignation
("accrued salary"); (ii) a lump sum cash payment equal to two (in the case of
David A. Cohen and Mr. Donohoe) or 1.5 (in the case of the other Executives)
multiplied by the sum of all cash compensation awarded to the Executive in the
fiscal year immediately prior to termination, or if the Executive's
compensation was higher or would be higher on an annualized basis, in the
fiscal year in which such termination takes place; (iii) any benefits vested as
of the termination date ("vested benefits"); and (iv) unreimbursed expenses
incurred prior to the termination date. If the Executive's employment
terminates due to death, disability or resignation, or if MedQuist terminates
the Executive's employment for cause, the Executive will receive accrued
salary, vested benefits, and unreimbursed expenses incurred prior to the
termination date.
Each Executive is entitled to receive an additional tax "gross-up" payment
which would put him in the financial position after-tax that he would have been
in if the excise tax imposed by Code Section 4999 (the "excise tax") did not
apply to any benefits or payments received from MedQuist (the "payments").
Notwithstanding the foregoing, if it is determined that the payments would not
be subject to the excise tax if they were reduced by less than 10%, then the
payments will be reduced to the maximum amount that could be paid to the
Executive without giving rise to the excise tax. In addition, the gross-up
payment shall not apply to any stock option grant if the result would be to
alter the basis on which compensation expense is measured for purposes of ABP
Opinion Number 25.
During the term of the Employment Agreements, and for two years following an
Executive's termination of employment for any reason, such Executive is
prohibited from competing with MedQuist (limited to the electronic
transcription services and health information management solutions services
businesses) or soliciting MedQuist's clients or employees.
Item 4. The Solicitation or Recommendation.
(a) Solicitation or Recommendation.
The Board, at a meeting duly called and held on May 21, 2000, unanimously
(i) determined that the terms of the Offer were fair to, and in the best
interests of, the stockholders of MedQuist and declared that the Offer was
advisable, (ii) approved the Tender Offer Agreement and the Related Documents,
and the transactions contemplated thereby, including the Offer and the Share
Purchase, and (iii) recommended that the stockholders of MedQuist accept the
Offer and tender their Shares pursuant to the Offer.
The Board recommends the acceptance of the Offer by the stockholders of
MedQuist. See "--Reasons for the Recommendation" for a discussion of the
factors considered by the Board in making its recommendation.
14
<PAGE>
As set forth in the Offer, if Shares constituting less than the Tender Offer
Condition (i.e., 22,250,327 Shares) are validly tendered and not withdrawn at
the Expiration Date, then Royal Philips may terminate the Offer and the Tender
Offer Agreement; provided, that, in its discretion, Royal Philips may from time
to time extend the Offer for up to and including an additional 20 business days
in the aggregate after the initial expiration date of the Offer, to reduce the
Tender Offer Condition to any number of Shares greater than 20,300,320 Shares,
it being understood that if Royal Philips accepts for payment any Shares
validly tendered and not withdrawn pursuant to the Offer, it will accept for
payment all such Shares up to the Tender Offer Condition (i.e., 22,250,327
Shares). If more than 22,250,327 Shares are validly tendered and not withdrawn,
Royal Philips will accept for purchase an amount of the tendered Shares equal
to 22,250,327 Shares, on a pro rata basis from each stockholder who has validly
tendered Shares pursuant to the Offer, promptly after the Expiration Date. In
the event that proration of tendered Shares is required, Royal Philips will
determine the appropriate proration factor as soon as practicable following the
Expiration Date. Proration for each stockholder tendering Shares will be based
on the ratio of the number of Shares Royal Philips is offering to purchase to
the total number of Shares properly tendered and not withdrawn by all
stockholders (with adjustments to avoid purchases of fractional shares).
A copy of MedQuist's letter to stockholders and the press release issued by
MedQuist announcing the signing of the Tender Offer Agreement are included as
Exhibits 20 and 21, respectively, and are incorporated herein by reference.
(b) Background of the Tender Offer; Reasons for the Recommendation.
(1) Background of the Tender Offer. MedQuist's management and the Board
believes that the most significant impediment to MedQuist's growth has been and
will continue to be the availability of qualified medical transcriptionists.
From 1995 through 1999, MedQuist aggressively expanded its pool of qualified
transcriptionists through national recruitment efforts and the acquisition of
other medical transcription companies increasing annual revenue from $35
million for the year ended December 31, 1995 to $330 million for the year ended
December 31, 1999. In December 1998, MedQuist became the largest provider of
medical transcription services (and the largest employer of medical
transcriptionists) in the United States when it acquired its largest
competitor, The MRC Group, Inc. However, management believes that the pool of
available transcriptionists who meet MedQuist's quality and productivity
standards is limited and that it must find other means to increase productivity
and expand the pool of potential applicants in order to continue to grow in the
future.
Speech recognition technology, a process by which speech is converted to
text electronically, helps to achieve these goals. This technology currently
achieves a very high level of accuracy. However, medical documents must be
nearly 100% accurate, so speech recognition software has not met with a great
deal of success to date in the medical transcription setting. Nevertheless, if
the accuracy rate is high enough, speech recognition can improve the
productivity of a transcriptionist who can act as an editor of the document,
rather than a typist, and can then be available to work on more projects. In
addition, a person who has medical terminology skills, but otherwise lacks
typing skills, might become a productive transcriptionist with the aid of
speech recognition technology, thereby increasing the available pool of
qualified transcriptionists.
At MedQuist's three-day Board retreat in January 2000, the consensus of
management and the Board was that MedQuist needed to actively pursue a speech
recognition and technology partner as it did not have the financial resources
or the skilled personnel to develop this technology on its own. Management and
the Board recognized that there were companies, including Royal Philips, who
were developing speech recognition and other technology which, with
modifications and further development, could be used in the medical
transcription field. Moreover, it was recognized that a technology partner that
was willing to align its economic interests with those of MedQuist through a
substantial equity investment in MedQuist would be committed to assisting
MedQuist in its efforts.
15
<PAGE>
At the January Board retreat, representatives of UBS Warburg LLC ("UBS
Warburg") reviewed with the Board potential opportunities in the healthcare
information industry. The Board authorized management to pursue various
opportunities with other healthcare technology companies in an effort to find a
technology partner, including acquisitions, business partnerships and a sale of
MedQuist if an appropriate opportunity presented itself, and authorized certain
investment banks to make informal contacts with various parties.
During February 2000 through April 2000, MedQuist management, including
David A. Cohen, its Chairman and Chief Executive Officer, met with management
of several companies regarding a possible relationship. However, none of the
discussions, other than those with Royal Philips, led to an attractive
opportunity for MedQuist's stockholders.
On March 27, 2000, Mr. Donohoe participated in a telephone conference with
Tom Stolk, the General Manager--Speech Application of Philips Speech
Processing. Mr. Stolk informed Mr. Donohoe that Philips Speech Processing was
willing to recommend to Royal Philips that Royal Philips make an investment in
MedQuist as part of an overall strategic relationship between the two
companies. As a result of that telephone conference, on April 3, 2000, Messrs.
Cohen, Donohoe, Emery and Suender met with Cesar Vohringer, President and Chief
Executive Officer of Philips Speech Processing, Mr. Stolk, David Ames, Vice
President of Philips Speech Processing (USA), and Peter Foster, Executive Vice
President of Philips Speech Processing (USA), at MedQuist's headquarters in
Marlton, New Jersey. At that meeting, Mr. Vohringer reconfirmed that Philips
Speech Processing was willing to recommend to Royal Philips that Royal Philips
make an investment in MedQuist, although one involving a purchase of less than
a majority of the Shares.
On April 4, 2000, MedQuist retained UBS Warburg to serve as MedQuist's
exclusive financial advisor with respect to the potential transaction with
Royal Philips.
On April 11, 2000, Messrs. Cohen, Donohoe, Emery and Suender of MedQuist met
with Messrs. Vohringer, Stolk, Ames and Stephen Havering, Vice President of
Corporate Mergers and Acquisitions of Royal Philips, in Dallas, Texas during a
Health Information Management Systems Society conference. Also present were
representatives of UBS Warburg, and representatives of Mercer Management
Consulting ("Mercer"), an independent consultant to Royal Philips. At this
meeting, Royal Philips made a proposal to purchase newly issued shares of
Common Stock equivalent to a post-issue 20% interest in MedQuist at a price per
share of Common Stock approximately equal to the then prevailing market price.
Representatives of MedQuist expressed concern that MedQuist did not have an
immediate need for that amount of capital and, accordingly, any purchase would
need to be of outstanding Shares. There was also disagreement on the price
proposed to be paid by Royal Philips. Representatives of Royal Philips stated
that they would make a presentation to the management board of Royal Philips in
the next week, and that they would arrange a meeting with MedQuist at the end
of the following week to follow up.
On April 17, 2000, MedQuist and Royal Philips entered into a confidentiality
and standstill agreement. Thereafter, on April 20, 2000, Messrs. Cohen,
Donohoe, Emery and Suender of MedQuist met with Messrs. Vohringer, Stolk, Ames
and Havering of Royal Philips at Royal Philips' offices in New York City. Also
present were representatives of Mercer, Goldman, Sachs, Royal Philips'
financial advisor, and UBS Warburg. At this meeting, Royal Philips presented a
new proposal to acquire a minority stake in MedQuist's Common Stock for cash
and other arrangements between the parties which were then undefined. At the
conclusion of the meeting, Mr. Cohen stated that he believed the Board would
probably not support a transaction that did not involve Royal Philips'
acquisition of at least a majority of the Common Stock of MedQuist and that the
Board would prefer that the transaction involve all of the Common Stock. He
again expressed MedQuist's view that any purchase should be of Shares held
directly by MedQuist's stockholders since MedQuist did not have any immediate
need for significant capital and the Board believed that MedQuist's existing
stockholders should benefit directly from any transaction through a purchase of
their Shares. Representatives of Royal Philips indicated that Royal Philips was
unlikely to seek to acquire the entire company, but that it would present a
proposal to Royal Philips' management board to acquire a majority of the Shares
from MedQuist's existing stockholders. Representatives of Royal Philips
expressed the belief that it was important for MedQuist to remain publicly
traded for several reasons, including to permit management to continue to own
equity in a publicly-traded entity.
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On April 26, 2000, MedQuist held its regularly scheduled meeting of its
Board during which Mr. Cohen reviewed the status of discussions with Royal
Philips and others, the rationale for a possible transaction with Royal Philips
and other relevant information. The Board authorized Mr. Cohen to continue
discussions with Royal Philips.
On May 4, 2000, a meeting took place at Royal Philips' offices in New York
City. Present for MedQuist were Messrs. Cohen, Donohoe, Emery, Suender, and
Scarpone, and present for Royal Philips were Messrs. C. Boonstra, Royal
Philips' Chief Executive Officer, Jan Hommen, Royal Philips' Chief Financial
Officer, Adri Baan, the Chairman and Chief Executive Officer of Philips
Consumer Electronics, Ivo Lurvink, a Senior Director of Royal Philips, Mr.
Vohringer and Mr. Havering. Royal Philips expressed a willingness to purchase a
majority, but less than all, of the Shares from MedQuist's existing
stockholders and requested that all parties focus on preparing a business plan
to be presented to Royal Philips' management board for consideration.
On May 5, 2000, a special meeting of the Board was held. Mr. Cohen updated
the Board with respect to the status of the possible transaction with Royal
Philips. On that date, Messrs. Donohoe, Emery and Suender also met with
representatives of Royal Philips in New York City to develop a business plan.
On May 9, 2000, Mr. Cohen had a discussion with Mr. Hommen of Royal Philips.
In the course of that conversation, Mr. Hommen stated that Royal Philips was
prepared to make an offer to MedQuist's existing stockholders to purchase 60%
of the fully-diluted Shares for $50.00 per Share, subject to the completion of
Royal Philips' due diligence. Mr. Cohen stated that he would present the offer
to the Board.
On May 10, 2000, a special meeting of the Board was held during which Mr.
Cohen advised the Board of Royal Philips' offer. After discussion regarding the
offer, including the price being offered, the Board authorized Mr. Cohen to
continue negotiations with Royal Philips, including as to the proposed price.
Thereafter, on May 10, 2000, Mr. Cohen of MedQuist called Mr. Hommen of Royal
Philips and stated that the Board was interested in the proposed transaction
but that a price of $50.00 per Share, although a substantial increase from
earlier discussions, was not acceptable.
On May 11, 2000, Mr. Lurvink called Mr. Cohen and stated that Royal Philips
was prepared to raise its offer to $51.00 per Share and immediately commence
due diligence. Later that day, representatives of the parties had a conference
call in which a schedule was set forth for proceeding with due diligence, and
the negotiation and drafting of definitive agreements.
On May 13, 2000, attorneys from Sullivan & Cromwell, legal counsel to Royal
Philips, and from Pepper Hamilton, LLP, legal counsel to MedQuist ("Pepper
Hamilton"), visited MedQuist's offices in Marlton, New Jersey to review
documents and records for due diligence purposes. On May 14, 2000, a meeting
was held at the offices of UBS Warburg in New York City to continue due
diligence. The meeting included representatives of MedQuist and UBS Warburg, as
well as representatives of Royal Philips, Goldman, Sachs and Mercer. Also on
May 14, 2000, representatives of Royal Philips met with MedQuist's auditors to
conduct due diligence. Due diligence continued from May 14, 2000 through May
21, 2000, and during this period, legal counsel for the parties exchanged
drafts of the Tender Offer Agreement and the Related Documents.
From May 14, 2000 through May 16, 2000, representatives of MedQuist,
including its legal and financial advisors, met with representatives of Royal
Philips, including its legal and financial advisors, in New York City in order
to negotiate the terms of the Tender Offer Agreement and the Related Documents.
On May 15, 2000, the Board held a special meeting during which Mr. Cohen
updated the Board with respect to the status of negotiations with Royal Philips
and outstanding issues involving the possible transaction. Representatives of
Pepper Hamilton participated in the call and reviewed for the Board its legal
duties with respect to the possible transaction. In addition, representatives
of UBS Warburg were present and discussed certain financial aspects of the
transaction.
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Between May 15, 2000 and May 20, 2000, representatives of the parties
continued to negotiate the terms of the Tender Offer Agreement and the Related
Documents.
On May 19, 2000, the Board was provided with copies of the then most recent
drafts of the Tender Offer Agreement and the Related Documents, a summary of
those agreements and a financial presentation prepared by UBS Warburg with
respect to the $51.00 per Share cash consideration proposed to be paid by Royal
Philips pursuant to the Offer and the Share Purchase (the "Cash
Consideration"). On May 21, 2000, a meeting of the Board was convened in
Philadelphia to discuss the proposed transaction. At the meeting, Mr. Cohen
described, among other things, the background of the transaction and the status
of negotiations. Representatives of Pepper Hamilton reiterated the Board's
legal duties, reviewed with the Board the principal terms and conditions of the
then current draft of the Tender Offer Agreement and the Related Documents, and
responded to questions from the directors regarding such terms and the Board's
legal duties. Representatives of UBS Warburg reviewed with the Board its
financial presentation and responded to questions from the directors regarding
such presentation.
At this meeting, the directors and management also reviewed and discussed
the rationale for the transaction, including the impact that a relationship
with Royal Philips, including the License Agreement and the Governance
Agreement, could have on MedQuist's business and its prospects. Additionally,
the Board considered, with input from management and MedQuist's legal and
financial advisors, the likelihood of other potential buyers or partners
emerging, the regulatory, internal and other issues that such potential buyers
or partners would face in pursuing a transaction, and the risks that MedQuist
would face if such a transaction were delayed or not consummated. Management
and MedQuist's legal and financial advisors responded to questions from the
directors regarding, among other things, the termination fee and the non-
solicitation provisions of the Tender Offer Agreement. At this time, UBS
Warburg rendered to the Board its oral opinion to the effect that, as of the
date of the opinion and based upon and subject to certain matters described
therein, the $51.00 per Share Cash Consideration to be received in the Offer
and the Share Purchase by the holders of Shares was fair, from a financial
point of view, to such holders (other than Royal Philips and its affiliates),
which opinion was confirmed in writing by delivery of a written opinion dated
May 22, 2000, the date of execution of the Tender Offer Agreement and the
Related Documents. The full text of UBS Warburg's written opinion, dated May
22, 2000, which sets forth the assumptions made, matters considered and
limitations on the review undertaken, is attached hereto as Annex A and is
incorporated herein by reference. The opinion of UBS Warburg addressed to the
Board relates only to the fairness, from a financial point of view, of the
$51.00 per Share Cash Consideration to be received in the Offer and the Share
Purchase by the holders of Shares (other than Royal Philips and its
affiliates), and does not constitute a recommendation to any stockholder as to
whether or not such stockholder should tender or sell Shares in the Offer or
the Share Purchase or as to any other matters relating to the Offer or the
Share Purchase. Holders of Shares are urged to read such opinion carefully in
its entirety.
At the conclusion of this meeting, the Board unanimously (i) determined that
the terms of the Offer were fair to, and in the best interests of, the
stockholders of MedQuist and declared that the Offer was advisable, (ii)
approved the Tender Offer Agreement and the Related Documents, and the
transactions contemplated thereby, including the Offer and the Share Purchase,
and (iii) recommended that the stockholders of MedQuist accept the Offer and
tender their Shares pursuant to the Offer.
Later in the afternoon of May 21, 2000, a conference call was held between
representatives of MedQuist and Royal Philips in which certain non-economic and
technical details of the Tender Offer Agreement and the Related Documents were
discussed.
On May 22, 2000, the supervisory board of Royal Philips approved the
transaction and informed MedQuist of such approval. Thereafter, counsel for the
two parties and representatives of MedQuist and Royal Philips finalized the
Tender Offer Agreement and the Related Documents, all of which were executed by
the applicable parties on May 22, 2000, after which the transaction was
publicly announced.
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(2) Reasons for the Recommendation. In making the determination and
recommendation described above, the Board considered a number of factors,
including, without limitation, the following:
- The Board's belief that voice recognition technology can improve the
productivity of MedQuist's existing transcription work force and expand
the potential pool of qualified applicants;
- The Board's belief that, as a strategic matter, MedQuist needed to align
itself with a strong technology leader and its view that Royal Philips
would provide that technology base for MedQuist;
- The price being paid by Royal Philips for the Shares represents (a) a
30.4% premium over the closing price for the Shares of $39.125 on the
Nasdaq Stock Market on May 19, 2000 (the last trading day immediately
before announcement of the transaction), (b) a 41.26% premium over the
average closing price of $36.10 for the Shares for the 30 trading days
immediately preceding announcement of the transaction and (c) an 11.5%
premium over the 52-week high of $45.75 for the historical closing prices
for the Shares;
- The opinion of UBS Warburg to the Board to the effect that, as of the
date of the opinion and based upon and subject to certain matters
described therein, the $51.00 per Share Cash Consideration to be received
in the Offer and the Share Purchase by the holders of Shares was fair,
from a financial point of view, to such holders (other than Royal Philips
and its affiliates);
- The Offer allows MedQuist's stockholders to receive $51.00 in cash for a
substantial portion of their Shares and, at the same time, provides them
the opportunity to participate in the future performance of MedQuist
through continuing Share ownership;
- The Board's belief that, based upon the advice of counsel, the Governance
Agreement provides reasonable efforts to protect the interests of the
public stockholders after completion of the proposed transaction,
including, without limitation, implementing certain restrictions on Royal
Philips' purchase and sale of Shares, and delineating the composition of
the Board, including the institution of the Supervisory Committee;
- The fact that the Tender Offer Agreement permits the Board to respond
appropriately to an unsolicited offer from a third party and to terminate
the Tender Offer Agreement if there is a Superior Proposal and it is
necessary to terminate the Tender Offer Agreement for the Board to comply
with its fiduciary duties under applicable law;
- The Board's conclusion that the amount of the termination fee payable by
MedQuist was reasonable in light of the benefits of the transaction;
- The likelihood of MedQuist obtaining any necessary regulatory approvals,
including the termination of the waiting period under the HSR Act;
- The limited number and nature of the conditions to closing of the Offer;
and
- The other terms and conditions of the Offer.
The Board did not assign relative weights to the above factors or determine
that any factor was of particular importance. Rather, the Board viewed its
position and recommendations as being based on the totality of the information
presented to and considered by it.
(c) Intent to Tender.
To the best knowledge of MedQuist, (i) its directors, subsidiaries and
affiliates currently owning Shares presently intend to tender such Shares to
Royal Philips pursuant to the Offer, except to the extent such tender would
violate applicable securities laws or require disgorgement of any profits
arising from such tender under Section 16 of the Exchange Act, (ii) none of its
executive officers will tender Shares pursuant to the Offer, but instead,
intend to sell an aggregate of 1,149,759 Shares to Royal Philips pursuant to
the Share Purchase
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contemplated by each of the Shareholder Agreements, and (iii) none of its
executive officers, directors, subsidiaries or affiliates presently intend to
sell any Shares, other than described in clauses (i) and (ii) above, which are
owned beneficially or held of record by such persons. The foregoing does not
include any Shares over which, or with respect to which, any such executive
officer, director or affiliate acts in a fiduciary or representative capacity
or is subject to instructions from a third party with respect to such tender.
Additionally, the foregoing does not relate to transactions in the Shares by
executive officers, directors, subsidiaries or affiliates which may occur after
completion of the Offer or the termination of the Tender Offer Agreement,
except that the Executives who have entered into Shareholder Agreements will be
prohibited from selling any Shares or options to purchase Common Stock, other
than the 1,149,759 Purchase Shares, until the earlier of (i) May 22, 2002, (ii)
the termination of the Tender Offer Agreement in accordance with its terms or
(iii) the termination of their employment with MedQuist other than by MedQuist
for "cause" or by the Executive other than as a result of the required
relocation of the Executive's principal place of business by more than 50 miles
or a Material Breach by MedQuist.
Item 5. Persons/Assets, Retained, Employed, Compensated or Used.
MedQuist has retained UBS Warburg to act as its exclusive financial advisor
in connection with the Offer and related matters. Pursuant to the terms of this
engagement, MedQuist has agreed to pay UBS Warburg for its services upon
completion of the Offer and the Share Purchase an aggregate financial advisory
fee of approximately $6 million. MedQuist also has agreed to reimburse UBS
Warburg for reasonable travel and other out-of-pocket expenses, including the
reasonable fees and expenses of legal counsel, and to indemnify UBS Warburg and
related parties against certain liabilities, including liabilities under the
federal securities laws, relating to or arising out of their engagement. In the
ordinary course of business, UBS Warburg and its successors and affiliates may
actively trade or hold the securities of MedQuist and of Royal Philips and its
affiliates for their own accounts or for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
Neither MedQuist nor any person acting on its behalf has employed, retained
or compensated any person to make solicitations or recommendations to others
with respect to the Offer.
Item 6. Interest in Securities of the Subject Company.
Except as set forth below, and other than ordinary course purchases under
MedQuist's 401(k) Retirement Savings Plan, Employee Stock Purchase Plan and
Stock Option Plans, there have been no transactions in Shares which were
effected during the past 60 days by MedQuist, or to the best knowledge of
MedQuist, by any executive officer, director, affiliate or subsidiary of
MedQuist.
On May 10, 2000, William T. Carson, Jr., a director of MedQuist, exercised
options to purchase 9,000 shares of Common Stock at an exercise price of $2.25
per share, and 9,000 additional shares at an exercise price of $2.50 per share.
On or about May 8, 2000, Mr. Carson transferred 4,500 shares of Common Stock to
his children and on or about May 16, 2000, Mr. Carson transferred 100 shares of
Common Stock to Correll Institute, each as bona fide gifts.
On May 12, 2000, A. Fred Ruttenberg, a director of MedQuist, exercised
options to purchase 9,000 shares of Common Stock at an exercise price of $2.50
per share, 9,000 shares of Common Stock at an exercise price of $2.33 per
share, 9,000 shares of Common Stock at an exercise price of $2.25 per share,
9,000 shares of Common Stock at an exercise price of $2.00 per share, and 9,000
shares of Common Stock at an exercise price of $1.75 per share.
Item 7. Purposes of the Transaction and Plans or Proposals.
(a) Except as set forth in this Statement, no negotiation is being
undertaken or is underway by MedQuist in response to the Offer which relates to
or would result in (i) a tender offer or other acquisition of securities by or
of MedQuist; (ii) an extraordinary transaction, such as a merger,
reorganization or liquidation, involving
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MedQuist or any subsidiary of MedQuist; (iii) a purchase, sale or transfer of a
material amount of assets by MedQuist or any subsidiary of MedQuist; or (iv)
any material change in the present dividend rate or policy, indebtedness or
capitalization of MedQuist.
(b) Except as set forth in this Statement, there are no transactions,
resolutions of the Board, agreements in principle or signed contracts in
response to the Offer that relate to or would result in one or more of the
events referred to in Item 7(a) above.
Item 8. Additional Information to be Furnished.
(a) Section 14(f) Information Statement.
The Information Statement attached as Annex B hereto is being furnished in
connection with the designation by Royal Philips and MedQuist of certain
persons to be appointed to the Board other than at a meeting of MedQuist's
stockholders.
(b) Section 14A:10A-1, et seq., of the New Jersey Business Corporation Act.
As a New Jersey corporation, MedQuist is subject to Section 14A:10A-1, et
seq. of the New Jersey Business Corporation Act (the "Shareholder Protection
Act"). The Shareholder Protection Act generally provides that no resident
domestic corporation shall engage in any business combination with any
interested stockholder for a period of five years following that interested
stockholder's stock acquisition date unless the business combination is
approved by such corporation's board of directors prior to that stock
acquisition date. An "interested stockholder" is any person (other than the
resident domestic corporation or its subsidiary) that (i) is the beneficial
owner directly or indirectly, of 10% or more of the voting power of the
outstanding voting stock of the resident domestic corporation, or (ii) is an
affiliate or associate of that resident domestic corporation who, at any time
within the five year period immediately prior to the date in question, was a
beneficial owner, directly or indirectly, of 10% or more of the voting power of
the outstanding stock of the resident domestic corporation. The Board has
unanimously ratified and approved, for the purposes of the Shareholder
Protection Act, any business combination and the transactions contemplated
thereby with Royal Philips, or any affiliate or associate of Royal Philips,
notwithstanding that such business combination may be entered into subsequent
to Royal Philips' stock acquisition date; provided that any such business
combination shall be approved by a vote of the Supervisory Committee of the
Board established pursuant to the Governance Agreement during such period as
the Supervisory Committee is operational under the Governance Agreement (or, if
the Supervisory Committee is not then operational, such other committee of the
Board made up entirely of directors who are not affiliates or associates of
Royal Philips), and such business combination is not prohibited by the
Governance Agreement (during such period as the Governance Agreement is in
effect).
(c) Dissenters' Rights.
No dissenters' rights are available to holders of Shares in connection with
the Offer.
(d) Antitrust.
Under the HSR Act, and the rules that have been promulgated thereunder by
the Federal Trade Commission ("FTC"), certain acquisition transactions may not
be consummated unless certain information has been furnished to the Antitrust
Division of the Department of Justice (the "Antitrust Division") and the FTC
and certain waiting period requirements have been satisfied. The acquisition of
Shares pursuant to the Offer is subject to such requirements.
Each of Royal Philips and MedQuist expect to file with the FTC and the
Antitrust Division, on or about June 2, 2000, a Notification and Report Form in
connection with the purchase of Shares pursuant to the Offer and the
Shareholder Agreements. Under the provisions of the HSR Act applicable to the
Offer, the purchase of
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Shares pursuant to the Offer may not be consummated until the expiration of a
15-calendar day waiting period following the filing by Royal Philips and
MedQuist, unless both the Antitrust Division and the FTC terminate the waiting
period prior thereto. If, within such 15-calendar day waiting period, either
the Antitrust Division or the FTC requests additional information or
documentary material from Royal Philips and/or MedQuist, the waiting period
would be extended for an additional 10 calendar days following substantial
compliance by Royal Philips and/or MedQuist with such request. Thereafter, the
waiting period may be extended only by court order. Only one extension of such
waiting period pursuant to a request for additional information is authorized
by the HSR Act and the rules promulgated thereunder, except by court order. Any
such extension of the waiting period will not give rise to any withdrawal
rights not otherwise provided for by applicable law.
The FTC and the Antitrust Division frequently scrutinize the legality under
the antitrust laws of transactions such as the proposed acquisition of Shares
by Royal Philips pursuant to the Offer. At any time before or after the
purchase by Royal Philips of Shares pursuant to the Offer, either of the FTC or
the Antitrust Division could take such action under the antitrust laws as it
deems necessary or desirable in the public interest, including seeking to
enjoin the purchase of Shares pursuant to the Offer or seeking the divestiture
of Shares purchased by Royal Philips or the divestiture of substantial assets
of Royal Philips, its subsidiaries or MedQuist. Private parties and state
attorneys general may also bring legal action under federal or state antitrust
laws under certain circumstances.
Although MedQuist believes that Royal Philips' acquisition of Shares
pursuant to the Offer would not violate the antitrust laws, there can be no
assurance that a challenge to the Offer on antitrust grounds will not be made
or, if such challenge is made, what the outcome will be.
(e) Forward-Looking Statements
This Statement, including the exhibits referred to herein, contains certain
statements by or relating to MedQuist and the transaction with Royal Philips
that are neither reported financial results nor other historical information.
These statements are forward-looking statements and include statements of
market estimates, growth and expansion plans and opportunities, potential
revenue and cost synergies, and the benefits of new technologies. These
forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially from those expressed in the forward-
looking statements. Many of these risks and uncertainties relate to factors
that are beyond MedQuist's ability to control or estimate precisely, including,
without limitation, future market and economic conditions; the behavior of
other market participants; MedQuist's ability to implement and achieve market
acceptance of new technology platforms, including speech processing technology;
MedQuist's ability to successfully integrate acquired businesses and achieve
anticipated synergies; MedQuist's ability to recruit and retain qualified
transcriptionists and other employees; the impact of new services or products
on the demand for MedQuist's services; and MedQuist's ability to expand its
customer base. Stockholders are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this Statement.
MedQuist does not undertake any obligation to publicly release any revisions to
these forward-looking statements to reflect events or circumstances after the
date of this Statement. The safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 are not applicable to forward-looking statements
made in this Statement.
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Item 9. Material to be filed as Exhibits.
The following exhibits are filed herewith:
<TABLE>
<C> <S>
Exhibit 1 Offer to Purchase, dated June 1, 2000 (1)(2)
Exhibit 2 Letter of Transmittal, dated June 1, 2000 (1)(2)
Exhibit 3 Tender Offer Agreement, dated as of May 22, 2000
Exhibit 4 Governance Agreement, dated as of May 22, 2000
Exhibit 5 Licensing Agreement, dated as of May 22, 2000
Shareholder Agreement, dated as of May 22, 2000, between MedQuist
Exhibit 6 and David A. Cohen
Exhibit 7 Shareholder Agreement, dated as of May 22, 2000, between MedQuist
and John A. Donohoe, Jr.
Exhibit 8 Shareholder Agreement, dated as of May 22, 2000, between MedQuist
and John R. Emery
Exhibit 9 Shareholder Agreement, dated as of May 22, 2000, between MedQuist
and John M. Suender
Exhibit 10 Shareholder Agreement, dated as of May 22, 2000, between MedQuist
and Ronald A. Scarpone
Exhibit 11 Shareholder Agreement, dated as of May 22, 2000, between MedQuist
and Ethan Cohen
Exhibit 12 Shareholder Agreement, dated as of May 22, 2000, between MedQuist
and John W. Quaintance
Exhibit 13 Employment Agreement, dated as of May 22, 2000, between MedQuist
and David A. Cohen
Exhibit 14 Employment Agreement, dated as of May 22, 2000, between MedQuist
and John A. Donohoe, Jr.
Exhibit 15 Employment Agreement, dated as of May 22, 2000, between MedQuist
and John R. Emery
Exhibit 16 Employment Agreement, dated as of May 22, 2000, between MedQuist
and John M. Suender
Exhibit 17 Employment Agreement, dated as of May 22, 2000, between MedQuist
and Ronald A. Scarpone
Exhibit 18 Employment Agreement, dated as of May 22, 2000, between MedQuist
and Ethan Cohen
Exhibit 19 Employment Agreement, dated as of May 22, 2000, between MedQuist
and John W. Quaintance
Exhibit 20 Company's Letter to Stockholders, dated June 1, 2000 (2)
Exhibit 21 Press Release, dated May 23, 2000
Exhibit 22 Opinion of UBS Warburg LLC, dated May 22, 2000 (2)(3)
Exhibit 23 Information Statement Pursuant to Section 14(f) of the Securities
Exchange Act of 1934 and Rule 14f-1 thereunder (2)(4)
</TABLE>
--------
(1) Filed as an exhibit to the Tender Offer Statement on Schedule TO, dated
June 1, 2000, of Royal Philips and incorporated herein by reference.
(2) Included in copy mailed to stockholders.
(3) Filed herewith as Annex A to this Statement.
(4) Filed herewith as Annex B to this Statement.
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SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify that
the information set forth in this statement is true, complete and correct.
MedQuist Inc.
/s/ John M. Suender
By: _________________________________
Name: John M. Suender
Title:Senior Vice President and
General Counsel
Dated: June 1, 2000
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ANNEX A
[LETTERHEAD OF UBS WARBURG LLC]
May 22, 2000
The Board of Directors
MedQuist Inc.
Five Greentree Centre, Suite 311
Marlton, New Jersey 08053
Dear Members of the Board:
We understand that MedQuist Inc. ("MedQuist") is considering a transaction
whereby Koninklijke Philips Electronics N.V. ("Philips") will acquire
approximately 60% of the outstanding shares of the common stock, no par value,
of MedQuist ("MedQuist Common Stock") on a fully diluted basis through (i) a
tender offer for 22,250,327 outstanding shares of MedQuist Common Stock (the
"Tender Offer"), at a purchase price of $51.00 per share, net to the seller in
cash (the "Cash Consideration"), and (ii) the purchase, promptly following the
expiration of the Tender Offer, of a portion of the shares of MedQuist Common
Stock beneficially owned by certain shareholders of MedQuist at a purchase
price equal to the Cash Consideration paid by Philips in the Tender Offer (the
"Stock Purchase" and, together with the Tender Offer, the "Transaction").
Representatives of MedQuist have advised us that, in connection with the
Transaction, MedQuist will enter into an agreement with Philips pursuant to
which Philips will grant MedQuist a license to use certain speech recognition
technology of Philips (the "Technology License"). The terms and conditions of
the Transaction are more fully set forth in the Tender Offer Agreement, dated
as of May 22, 2000, by and between MedQuist and Philips (the "Agreement") and
certain related documents.
You have requested our opinion as to the fairness, from a financial point of
view, to the holders of MedQuist Common Stock (other than Philips and its
affiliates) of the Cash Consideration to be received in the Transaction by such
holders.
UBS Warburg LLC ("UBSW") has acted as financial advisor to MedQuist in
connection with the Transaction and will receive a fee for its services, a
significant portion of which is contingent upon the consummation of the
Transaction and a portion of which is payable upon delivery of this opinion. In
the ordinary course of business, UBSW, its successors and affiliates may trade
securities of MedQuist and of Philips and its affiliates for their own accounts
and accounts of customers and, accordingly, may at any time hold a long or
short position in such securities.
Our opinion does not address MedQuist's underlying business decision to
effect the Transaction or constitute a recommendation to any shareholder of
MedQuist as to whether such shareholder should tender or sell shares of
MedQuist Common Stock in the Transaction or as to any other matter relating to
the Transaction. At your direction, we have not been asked to, nor do we, offer
any opinion as to the material terms (other than with respect to the Cash
Consideration to the extent expressly specified herein) of the Agreement or any
related documents and the obligations thereunder, or the form of the
Transaction. We express no opinion as to the prices at which MedQuist Common
Stock will trade or otherwise be transferable at any time. In rendering this
opinion, we have assumed, with your consent, that each of MedQuist and Philips
will comply with all material covenants and agreements set forth in, and other
material terms of, the Agreement and related documents, as applicable, and that
the Transaction will be validly consummated in accordance with its terms. At
your direction, we also have assumed, to the extent material to our analysis
with respect to the Transaction, that the arrangements relating to the
Technology License will be validly consummated in accordance with the terms
discussed with us by representatives of MedQuist.
A-1
<PAGE>
The Board of Directors
MedQuist Inc.
May 22, 2000
Page 2
In arriving at our opinion, we have, among other things: (i) reviewed
current and historical market prices and trading volumes of MedQuist Common
Stock; (ii) reviewed certain publicly available business and historical
financial information relating to MedQuist; (iii) reviewed certain internal
financial information and other data relating to the businesses and financial
prospects of MedQuist both before and after giving effect to the Transaction,
as well as estimates and financial forecasts prepared by the management of
MedQuist as to the potential incremental revenue, cost savings and other
financial benefits anticipated to result from the Technology License and other
arrangements with Philips, that were provided to or discussed with us by
MedQuist and are not publicly available; (iv) conducted discussions with
members of the senior managements of MedQuist and Philips; (v) reviewed
publicly available financial and stock market data with respect to certain
companies in lines of business we believe to be generally comparable to those
of MedQuist; (vi) compared the financial terms of the Transaction with the
publicly available financial terms of certain other transactions which we
believe to be generally relevant; (vii) reviewed the Agreement and certain
related documents; and (viii) conducted such other financial studies, analyses,
and investigations, and considered such other information as we deemed
necessary or appropriate.
In connection with our review, with your consent, we have not assumed any
responsibility for independent verification of any of the information provided
to or reviewed by us for the purpose of this opinion and have, with your
consent, relied on its being complete and accurate in all material respects. In
addition, at your direction, we have not made any independent evaluation or
appraisal of any of the assets or liabilities (contingent or otherwise) of
MedQuist, nor have we been furnished with any such evaluation or appraisal.
With respect to the financial forecasts and estimates relating to MedQuist both
before and after giving effect to the Transaction and the Technology License
and other arrangements with Philips referred to above, we have assumed, at your
direction, that they have been reasonably prepared on a basis reflecting the
best currently available estimates and judgments of the management of MedQuist
as to the future performance of MedQuist and the potential incremental revenue,
costs savings and other financial benefits (including the amount, timing and
achievability thereof) anticipated to result from the Technology License and
other arrangements with Philips. In connection with our engagement, we were not
requested to, and we did not, solicit third party indications of interest in
the acquisition of all or a part of MedQuist, and we were not requested to, nor
do we, express any opinion as to any transactions related to the Tender Offer
or the effect of any other transaction in which MedQuist might engage. Our
opinion is necessarily based on economic, monetary, market and other conditions
as in effect on, and the information made available to us as of, the date of
this letter.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Cash Consideration to be received in the Transaction by the
holders of MedQuist Common Stock is fair, from a financial point of view, to
such holders (other than Philips and its affiliates).
Very truly yours,
/s/ UBS Warburg LLC
UBS WARBURG LLC
A-2
<PAGE>
ANNEX B
MedQuist Inc.
Five Greentree Centre, Suite 311
Marlton, New Jersey 08053
(856) 596-8877
Information Statement Pursuant to
Section 14(f) of the Securities
Exchange Act of 1934 and Rule 14f-1 Thereunder
This Information Statement ("Information Statement") is being mailed on or
about June 1, 2000, as part of the Solicitation/Recommendation Statement on
Schedule 14D-9 (the "Schedule 14D-9") of MedQuist Inc., a New Jersey
corporation ("MedQuist"), to the holders of outstanding shares of common stock,
no par value, of MedQuist (the "Common Stock"). The Information Statement is
being furnished in connection with the Tender Offer Agreement, dated as of May
22, 2000 (the "Tender Offer Agreement"), by and among Koninklijke Philips
Electronics N.V., a company organized under the laws of the Netherlands ("Royal
Philips"), and MedQuist, setting forth the terms and conditions pursuant to
which Royal Philips will commence a tender offer (the "Offer") to purchase
22,250,327 shares of the outstanding Common Stock (the "Shares") at a price of
$51.00 per Share, net to the seller in cash, without interest thereon.
You are receiving this Information Statement in connection with the possible
appointment of persons designated by Royal Philips to a majority of the seats
on MedQuist's Board of Directors (the "Board") under the circumstances
described in the Governance Agreement, dated as of May 22, 2000 (the
"Governance Agreement"), by and between MedQuist and Royal Philips. This
Information Statement is required by Section 14(f) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and Rule 14f-1 thereunder. See
"Royal Philips' Designees" below.
Royal Philips commenced the Offer on June 1, 2000. The Offer is scheduled to
expire at 12:00 midnight, New York City time, on Wednesday, June 28, 2000,
unless the Offer is extended pursuant to the terms of the Tender Offer
Agreement.
You are urged to read this Information Statement carefully. You are not,
however, required to take any action. Capitalized terms used herein and not
otherwise defined herein shall have the meaning set forth in the Schedule 14D-
9.
The information contained in this Information Statement or incorporated by
reference herein concerning Royal Philips and its respective officers,
directors, representatives or affiliates or actions or events with respect to
any of them, was provided by Royal Philips and MedQuist takes no responsibility
for such information.
ROYAL PHILIPS' DESIGNEES
Royal Philips has informed MedQuist that the directors and executive
officers of Royal Philips and/or its affiliates listed in Schedule I attached
hereto will be its initial designees to the Board pursuant to the Governance
Agreement (the "Designees"). Royal Philips has informed MedQuist that each of
the directors and executive officers listed in Schedule I has consented to act
as a director of MedQuist if so designated. The business address of Royal
Philips is Koninklijke Philips Electronics N.V., Rembrandt Tower, Amstelplein
1, 1096 HA Amsterdam, the Netherlands.
Those persons nominated to serve as directors of MedQuist by Royal Philips
will serve in accordance with the terms of the Governance Agreement, the New
Jersey Business Corporation Act, and MedQuist's Certificate of Incorporation
and By-Laws. Pursuant to the Governance Agreement, MedQuist has agreed to take
any and
B-1
<PAGE>
all action necessary (including by securing the resignation of persons who were
directors prior to the closing of the Offer) so that promptly thereafter the
Board shall consist of 11 directors, of which (i) one director shall be the
Chief Executive Officer of MedQuist and one director shall be another officer
of MedQuist designated by the Chief Executive Officer of MedQuist (together,
the "Management Directors"), (ii) six directors shall be designated by Royal
Philips, all of whom may be directors, officers, employees, affiliates or
associates of Royal Philips (the "Royal Philips Directors"), and (iii) three
directors shall be independent directors (the "Independent Directors") selected
by MedQuist's current Board. From and after the time the Board has been
reconstituted in accordance with the preceding sentence, the Board shall
consist of 11 directors, of which (i) two directors shall be Management
Directors, (ii) six or fewer directors shall be Royal Philips Directors, and
(iii) three or more shall be Independent Directors to be selected by a newly-
constituted nominating committee (the "Nominating Committee") in accordance
with the Governance Agreement; provided, however, the Board shall be empowered
in its discretion to increase or decrease, from time to time, the number of
directors so long as (x) there shall be at least two Management Directors and
three Independent Directors, and (y) the relative percentage of Management
Directors, Independent Directors and Royal Philips Directors shall be
maintained, in all material respects, as in effect immediately prior to any
such increase or decrease; and, provided, further, that if the Board changes
the number of directors constituting the entire Board, then the number of
directors and the percentages set forth below shall be appropriately adjusted,
subject to the immediately preceding provisions.
The Governance Agreement further provides that:
(1) until the first date that Royal Philips and its subsidiaries shall
not beneficially own, in the aggregate, at least a majority of the
outstanding voting stock of MedQuist, Royal Philips shall have the right to
designate six Royal Philips Directors;
(2) after the first date that Royal Philips and its subsidiaries shall
beneficially own, in the aggregate, less than a majority but at least 36%
of the outstanding voting stock of MedQuist, Royal Philips shall have the
right to nominate four, but not more than four, Royal Philips Directors;
(3) after the first date that Royal Philips and its subsidiaries shall
beneficially own, in the aggregate, less than 36% but at least 27% of the
outstanding voting stock of MedQuist, Royal Philips shall have the right to
nominate three, but not more than three, Royal Philips Directors;
(4) after the first date that Royal Philips and its subsidiaries shall
beneficially own, in the aggregate, less than 27% but at least 18% of the
outstanding voting stock of MedQuist, Royal Philips shall have the right to
nominate two, but not more than two, Royal Philips Directors;
(5) after the first date that Royal Philips and its subsidiaries shall
beneficially own, in the aggregate, less than 18% but at least five percent
of the outstanding voting stock of MedQuist, Royal Philips shall have the
right to nominate one, but not more than one, Royal Philips Director; and
(6) After the first date that Royal Philips and its subsidiaries shall
beneficially own, in the aggregate, less than five percent of the
outstanding voting stock of MedQuist, Royal Philips shall have no right to
nominate any directors.
In the event that Royal Philips has the right to designate less than six
directors, the Nominating Committee shall nominate that number of additional
Independent Directors as is necessary to constitute the entire Board (as
constituted at such time) and Royal Philips has agreed to cause Royal Philips
Directors to resign promptly so as to permit the additional independent
directors to be appointed or elected. Royal Philips has the right to designate
any replacement for a Royal Philips Director at the termination of such
director's term or upon such director's death, resignation, retirement,
disqualification, removal from office or other cause, and the Chief Executive
Officer of MedQuist has the right to designate any replacement for a Management
Director at the termination of such director's term or upon such director's
death, resignation, retirement, disqualification, removal from office or other
cause. In connection with the filling of any vacancy on the Board, however such
vacancy has resulted, Royal Philips has agreed to cause each Royal Philips
Director to vote in favor of those
B-2
<PAGE>
directors nominated or designated in accordance with the foregoing
arrangements. Royal Philips also has agreed not take any action or permit any
Royal Philips Director to take any action to remove any director, other than a
Royal Philips Director, without cause.
Based solely on the information set forth in the Offer to Purchase, none of
the Designees (i) is currently a director of, or holds any position with,
MedQuist, (ii) has a familial relationship with any current directors or
executive officers of MedQuist, (iii) to the best knowledge of Royal Philips,
beneficially owns any securities (or any rights to acquire such securities) of
MedQuist or (iv) has been involved in any transactions with MedQuist or any of
its directors, officers or affiliates which are required to be disclosed
pursuant to the rules and regulations of the Securities and Exchange Commission
(the "SEC"), except as may be disclosed herein.
INFORMATION CONCERNING DIRECTORS AND EXECUTIVE
OFFICERS OF MEDQUIST
The Current Members of the Board. The Board currently consists of 12
members. The Board is divided into three classes and each director serves for a
term of three years and until his successor is duly elected and qualified or
until his death, resignation or removal. The names of the current members of
the Board, their ages (as of April 25, 2000) and certain other information
about them are set forth below. However, seven of the current members of the
Board will resign effective immediately following the purchase of the Shares by
Royal Philips pursuant to the Offer to allow for the appointment of six
Designees as Royal Philips Directors who will join two Management Directors and
three Independent Directors as members of the Board. The initial Management
Directors will be David A. Cohen and John A. Donohoe, Jr. and the initial
Independent Directors will be Richard H. Stowe, John H. Underwood and A. Fred
Ruttenberg.
<TABLE>
<CAPTION>
Name Positions with Director Principal Occupations
(Year Term Expires) MedQuist Since During Last Five Years Age Other Directorships
------------------- -------------- -------- ---------------------- --- -------------------
<S> <C> <C> <C> <C> <C>
A. Fred
Ruttenberg Director 1991 Partner in the law firm 57 None
(2000) Blank, Rome, Comisky &
McCauley, L.L.P.
Edward L.
Samek Director 1998 Chief Executive Officer 62 The Medical
(2000) of The MRC Group, Transcription
10/95 to 6/98; President Industry Alliance;
of The MRC Group, 8/96 MedPlus, Inc.
to 2/97; Chairman of the
Board and President of
The MRC Group, 10/95
to 8/96
R. Timothy
Stack Director 1997 President and Chief 48 None
(2000) Executive Officer of
Borgess Health Alliance,
1987 to present
James R.
Emshoff Director 1992 Chairman and Chief 57 Healthsync.com Inc.;
(2000) Executive Officer of MedAssets, Inc.
IndeCap Enterprises, Inc., (Board of Advisors)
1992 to present
David A.
Cohen Chief 1994 Chief Executive Officer 59 None
(2002) Executive of MedQuist Inc., 11/95
Officer; to present; President of
Chairman of MedQuist Inc., 11/95 to
the Board 8/98
</TABLE>
B-3
<PAGE>
<TABLE>
<CAPTION>
Name Positions with Director Principal Occupations
(Year Term Expires) MedQuist Since During Last Five Years Age Other Directorships
------------------- -------------- -------- ---------------------- --- -------------------
<S> <C> <C> <C> <C> <C>
John H. Underwood Director 1994 Managing Partner with 41 None
(2002) Pfingsten Partners,
L.L.C., 12/96 to present;
Vice President with
Heller Equity Capital
Corporation, 1989 to
12/96
Terrence J. Mulligan Director 1996 Management consultant 54 University of Iowa
(2002) and private investor; College of Business
Group Vice President-- and Administration
Health Systems, 1994 to (Board of Visitors);
1996 Physician
Dynamics, Inc.
William T. Carson Director 1991 Business consultant, 1998 67 Correll Institute of
(2001) to present; Vice President Medical Research;
and Corporate Secretary of Petrochem
Covertant Bank, 1988 to
1998
John T. Casey Director 1997 Chairman and Chief 54 None
(2001) Executive Officer of
Physician Reliance
Network, Inc., 10/97 to
8/99
Richard J. Censits Director 1987 Retired, 1995 to present 62 Checkpoint
(2001) Systems, Inc.
John A. Donohoe, Jr. President; 1998 Chief Operating Officer 45 None
(2001) Chief of MedQuist Inc., 1995 to
Operating present; President of
Officer MedQuist Inc., 1998 to
present
Richard H. Stowe Director 1998 Private investor and Senior 55 Health Management
(2001) Advisor for Capital Systems, Inc.;
Counsel LLC, a private The Cerplex Group, Inc.;
investment management firm; New American Healthcare
General partner of Welsh, Corporation
Carson, Andersen & Stowe,
1979 to 1/99
</TABLE>
B-4
<PAGE>
Executive Officers. The following individuals currently serve as executive
officers of MedQuist:
<TABLE>
<CAPTION>
Principal Occupations During Last
Name Positions Five Years and Directorships
---- --------- ---------------------------------
<S> <C> <C>
David A.
Cohen Chief Executive Officer; Chief Executive Officer of MedQuist Inc., 11/95
Chairman of the Board to present; President of MedQuist Inc., 11/95 to
8/98
John A.
Donohoe,
Jr. President; Chief Operating Officer of MedQuist Inc., 1995
Chief Operating Officer to present; President of MedQuist Inc., 1998 to
present
John R.
Emery Treasurer; Treasurer of MedQuist Inc., 1997 to present;
Chief Financial Officer; Chief Financial Officer of MedQuist Inc., 1997
Senior Vice President to present; Senior Vice President of MedQuist
Inc., 12/98 to present; Various positions, including
as Senior Vice President--Operations and Finance of
Integra Life Sciences Corporation, 1994 to 1997
Ronald
A.
Scarpone Senior Vice President - Senior Vice President--New Business
New Business Development Development of MedQuist Inc., 12/98 to present;
Vice President of MedQuist Inc., 1/96 to 12/98;
Vice President of Information Services of
MedQuist Inc., 5/94 to 1/96; Chief Technology
Officer of MedQuist Inc., 5/94 to 12/98
John M. Senior Vice President; General Counsel and Secretary of MedQuist Inc.,
Suender General Counsel; 9/92 to present; Senior Vice President of
Secretary MedQuist Inc., 12/98 to present; Vice President
of MedQuist Inc., 10/92 to 12/98
Ethan Senior Vice President; Senior Vice President and Chief Technology
Cohen Chief Technology Officer Officer of MedQuist Inc., 12/98 to present;
Chief Technology Officer of the MRC
Group, Inc., 4/97 to 12/98; Employed in various
capacities with McKinsey & Company, 9/91 to 4/97
</TABLE>
Board of Directors and Committees of the Board. The Board held six meetings
during MedQuist's 1999 fiscal year, which ended on December 31, 1999. The Board
also acted two times by unanimous written consent. During fiscal 1999, each
director attended at least 75% of the aggregate of the total number of meetings
of the Board held during the period he served as a director and the total
number of meetings held by each committee of the Board on which he served
during the period for which he served. The Board currently has the following
standing committees:
The Audit Committee. The Audit Committee, which held two meetings during
fiscal 1999, currently consists of Messrs. Censits, Emshoff and Stowe. The
Board elects or appoints a chairman of the Audit Committee who will have
authority to act on behalf of the Audit Committee between meetings. The
Audit Committee has the authority and responsibility: to hire an outside
auditor to audit MedQuist's books; to ensure the Audit Committee's receipt
from the outside auditor of a formal written statement, delineating all
relationships between the outside auditor and MedQuist consistent with
Independence Standards Board Standard 1; to review with the outside
auditor, MedQuist's internal auditor (if any), and financial and accounting
personnel, the adequacy and effectiveness of the accounting and financial
controls of MedQuist, and elicit any recommendations for the improvement of
such internal control procedures or particular areas where new or more
detailed controls or procedures are desirable; to consider, in consultation
with the outside auditor and the Board, the audit scope and procedures; to
make such other recommendations to the Board on such matters, within the
scope of the Audit Committee's functions, as may come to its attention and
which in its discretion warrant consideration by the Board; and to review
B-5
<PAGE>
the financial statements contained in the annual report to stockholders
with management and the outside auditor to determine that the outside
auditor is satisfied with the disclosure and content of the financial
statements to be presented to the stockholder. Additionally, the Audit
Committee, acting together with the Board, has the ultimate authority and
responsibility to select, evaluate, and, where appropriate, replace the
outside auditor (or nominate an outside auditor for stockholder approval in
any proxy statement).
The Compensation Committee. The Compensation Committee, which held two
meetings during fiscal 1999, currently consists of Messrs. Underwood
(Chairman), Casey and Mulligan. The Compensation Committee is responsible
for fixing the compensation of the Chief Executive Officer and the Chief
Operating Officer, and making recommendations to the Board 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. If the Offer is completed, the Compensation Committee will be
reconstituted as provided in the Governance Agreement to consist of two
Royal Philips Directors and two Independent Directors.
Nominating Committee. The Nominating Committee, which currently consists
of Messrs. Carson (Chairman), Ruttenberg and Stack, makes recommendations
to the Board with respect to management and other nominees to the Board,
reviews stockholder nominees to the Board and periodically reports its
findings to the Board. In 1999, the Nominating Committee held one meeting.
If the Offer is completed, the Nominating Committee will be reconstituted
as provided in the Governance Agreement to consist of two Royal Philips
Directors and two Independent Directors. Pursuant to the Governance
Agreement, the Nominating Committee will be responsible for, among other
things, nominating the Independent Directors.
Under the Governance Agreement, MedQuist will establish a Supervisory
Committee consisting of at least three Independent Directors which will be
required to approve and administer, on behalf of MedQuist, any material
transactions between MedQuist and Royal Philips (or any of its affiliates or
associates), and will administer, on behalf of MedQuist, the existing
arrangements between MedQuist (or any of its affiliates), including the
Agreement, the Governance Agreement and that certain Licensing Agreement, dated
as of May 22, 2000, between MedQuist and Philips Speech Processing.
Director Compensation. Employee directors (i.e., Messrs. Cohen and Donohoe)
are not entitled to any compensation or stock options for serving on the Board.
MedQuist has a stock-based deferred compensation plan for the Board (the
"Deferred Stock Plan"). Under the Deferred Stock Plan, each non-employee
director of MedQuist is entitled to receive deferred compensation annually 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 of the date of grant and
the director may elect to receive up to $6,000 of the award in cash. 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 1999 and 2000, respectively,
the fair market value of a share of Common Stock on the date of grant (January
1) under such plan was $39.50 and $25.813.
Pursuant to the terms of MedQuist'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 years after the individual ceases to be a director of MedQuist but in no
event later than the 10 year expiration date.
B-6
<PAGE>
SECURITY OWNERSHIP
The Shares are the only class of voting securities of MedQuist outstanding.
The holders of a majority of the Shares represented in person or by proxy will
constitute a quorum for any meeting of stockholders. Each stockholder is
entitled to one vote per Share on each matter brought before a vote of the
stockholders. Assuming the presence of a quorum, the affirmative vote of a
plurality in interest of the stockholders present in person or by proxy and
entitled to vote thereon is required to elect directors. As of May 19, 2000,
there were 35,452,704 Shares outstanding.
The information presented below regarding beneficial ownership of the Shares
has been presented in accordance with rules of the SEC and is not necessarily
indicative of beneficial ownership for any other purpose. Under these rules,
beneficial ownership of Common Stock includes any shares as to which a person,
directly or indirectly, has or shares voting power or investment power and also
shares any as to which a person has the right to acquire such voting or
investment power within 60 days through the exercise of any stock option or
other right.
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of May 19, 2000 (i) by each person or group
known to MedQuist to be the beneficial owner of more than five percent of the
Common Stock, (ii) by each of MedQuist's directors and the Named Officers (as
defined below) and (iii) by all executive officers and directors of MedQuist 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)
------------------------
Number of Percent of
Name and Address(2) Shares Class(3)
------------------- --------- ----------
<S> <C> <C>
Pilgram Baxter & Associates, Ltd....................... 2,554,300(4) 7.2%
825 Duportial Road
Wayne, PA 19087
Putnam Investments..................................... 1,802,200(5) 5.1%
One Post Office Square
Boston, MA 02109
Morgan Stanley Dean Witter & Co........................ 1,811,569(6) 5.1%
1585 Broadway, 30th Floor
New York, NY 10036
Richard J. Censits..................................... 186,009(7) *
688 Annemore Lane
Naples, FL 34108
David A. Cohen......................................... 1,582,828(8) 4.4%
William T. Carson, Jr. ................................ 89,484(9) *
John T. Casey.......................................... 21,383(10) *
James R. Emshoff....................................... 102,723(11) *
Terrence J. Mulligan................................... 35,865(12) *
A. Fred Ruttenberg..................................... 99,223(13) *
Edward L. Samek........................................ 408,294(14) 1.1%
R. Timothy Stack....................................... 23,272(15) *
Richard H. Stowe....................................... 4,153(16) *
John H. Underwood...................................... 20,370(17) *
</TABLE>
B-7
<PAGE>
<TABLE>
<CAPTION>
Shares Beneficially
Owned(1)
------------------------
Number of Percent of
Name and Address(2) Shares Class(3)
------------------- --------- ----------
<S> <C> <C>
John A. Donohoe, Jr. ................................ 337,894(18) *
John R. Emery........................................ 46,057(19) *
Ronald A. Scarpone................................... 105,425(20) *
John M. Suender...................................... 65,722(21) *
Executive officers and directors as a group (16 2,982,182(22) 8%
persons)............................................
</TABLE>
--------
* Less than one percent
(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 May 19,
2000 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 May 19, 2000 is based upon
35,452,704 shares of Common Stock outstanding.
(4) Reflects information set forth in a Schedule 13G filed by Pilgrim, Baxter
& Associates, Ltd.
(5) Reflects information set forth in a Schedule 13G filed by Putnam
Investments.
(6) Reflects information set forth in a Schedule 13G filed by Morgan Stanley
Dean Witter & Co.
(7) Includes 151,300 shares of Common Stock owned by Mr. Censits' spouse and
3,000 shares of Common Stock issuable upon exercise of options granted to
Mr. Censits.
(8) Includes 374,002 shares of Common Stock issuable upon the exercise of
options granted to Mr. Cohen. Mr. Cohen owns 1,208,116 shares jointly with
his spouse.
(9) Includes 27,000 shares of Common Stock issuable upon the exercise of
options granted to Mr. Carson and 23,350 shares of Common Stock held for
Mr. Carson's benefit in individual retirement accounts.
(10) Includes 18,000 shares of Common Stock issuable upon exercise of options
granted to Mr. Casey and 3,383 shares issuable under the Company's
Deferred Compensation Plan for Non-Employee Directors (the "Deferred Stock
Plan").
(11) Includes 59,806 shares of Common Stock issuable upon the exercise of
options granted to Mr. Emshoff and 3,203 shares issuable under the
Deferred Stock Plan.
(12) Includes 27,000 shares of Common Stock issuable upon the exercise of
options to Mr. Mulligan and 5,720 shares issuable under the Deferred Stock
Plan.
(13) Includes 23,200 shares of Common Stock issuable upon the exercise of
options granted to Mr. Ruttenberg and 8,525 shares issuable under the
Deferred Stock Plan.
(14) Includes 281,794 shares of Common Stock issuable upon the exercise of
options granted to Mr. Samek and 30,300 owned by the Edward L. Samek
Foundation.
(15) Includes 18,000 shares of Common Stock issuable upon exercise of options
granted to Mr. Stack and 815 shares of Common Stock issuable under the
Deferred Stock Plan.
(16) Includes 3,000 shares of Common Stock issuable upon the exercise of
options granted to Mr. Stowe and 1,153 shares issuable under the Deferred
Stock Plan.
(17) Includes 13,000 shares of Common Stock issuable upon the exercise of
options granted to Mr. Underwood, 4,370 shares issuable under the Deferred
Compensation Plan and 3,000 shares of Common Stock held for Mr.
Underwood's benefit in an individual retirement account.
(18) Includes 228,392 shares of Common Stock issuable upon the exercise of
options granted to Mr. Donohoe and 43,000 shares owned by Mr. Donohoe's
children.
(19) Includes 45,914 shares of Common Stock issuable upon exercise of options
granted to Mr. Emery.
(20) Includes 90,088 shares of Common Stock issuable upon the exercise of
options granted to Mr. Scarpone.
(21) Includes 47,000 shares of Common Stock issuable upon the exercise of
options granted to Mr. Suender.
(22) Includes 1,220,879 options granted to directors and executive officers,
and 26,354 shares issuable under the Deferred Stock Plan.
B-8
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
Executive Compensation. The following table sets forth the compensation paid
by MedQuist for services rendered in all capacities during the calendar years
1997, 1998 and 1999, 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 $100,000 and who were serving at
December 31, 1999 (collectively, the "Named Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Annual
Compensation Long-Term Compensation Awards
------------------ --------------------------------
Securities
Underlying All Other
Name Year Salary($) Bonus($) Options(#)(1) Compensation($)(2)
---- ---- --------- -------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
David A. Cohen(3)....... 1999 $400,000 $300,000 0 $ 4,016
1998 321,154 362,500 70,000 1,675
1997 270,000 135,000 210,000 4,568
John A. Donohoe,
Jr.(4)................. 1999 $300,000 $135,000 0 $ 4,304
1998 228,846 170,000 40,000 1,768
1997 186,346 63,000 60,000 634
John R. Emery(5)........ 1999 $175,000 $ 52,500 0 $10,074
1998 146,346 78,750 20,000 1,562
1997 97,500 24,375 90,000 250
Ronald A. Scarpone(6)... 1999 $150,000 $ 45,000 0 $ 4,016
1998 139,000 34,750 20,000 1,427
1997 130,419 31,750 30,000 4,498
John M. Suender(7)...... 1999 $160,000 $ 48,000 0 $ 9,400
1998 135,277 74,750 20,000 1,440
1997 118,904 28,625 30,000 3,831
</TABLE>
--------
(1) The number of securities underlying the options reflect a 3-for-2 split of
Common Stock on September 9, 1997 and a 2-for-1 split on June 15, 1998.
(2) Represents employer matching contributions under the MedQuist's 401(k)
plan and premiums paid by MedQuist on term life insurance and pay out of
unused vacation time.
(3) Mr. Cohen serves as Chairman and Chief Executive Officer.
(4) Mr. Donohoe serves as President and Chief Operating Officer.
(5) Mr. Emery serves as Senior Vice President, Treasurer and Chief Financial
Officer. Mr. Emery joined MedQuist on March 24, 1997.
(6) Mr. Scarpone serves as Senior Vice President--New Business Development.
(7) Mr. Suender serves as Senior Vice President, General Counsel and
Secretary.
Stock Option Grants in Fiscal 1999. No stock options or stock appreciation
rights were granted to any of the Named Officers during 1999.
Stock Option Exercises and Holdings in Fiscal 1999. 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.
B-9
<PAGE>
Aggregated Option Exercises In Last Fiscal Year
And Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Shares of
Common Stock Underlying Value of Unexercised
Options at Fiscal Year- in-the-Money Options at
End Fiscal Year-End(1)
------------------------- -------------------------
Shares Acquired Value
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David A. Cohen.......... 0 $ 0 374,002 295,998 $6,814,840 $3,808,460
John A. Donohoe, Jr..... 0 $ 0 228,392 119,000 $4,666,153 $1,505,421
John R. Emery........... 9,000 $300,265 25,000 70,000 $ 300,483 $ 858,942
Ronald A. Scarpone...... 0 $ 0 75,088 70,000 $1,441,427 $1,140,120
John M. Suender......... 6,522 $172,279 52,000 55,000 $ 906,624 $ 650,817
</TABLE>
--------
(1) Based on the closing price on the Nasdaq Stock Market of $25.813 per share
of Common Stock on December 31, 1999.
Executive Employment Contracts and Severance Agreements. MedQuist has 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)
within 12 months after a "change in control,' such covered executive is to
receive, within 10 days of the termination, a one time 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, 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 MedQuist, (b) the sale of all
or substantially all of the assets of MedQuist, (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 MedQuist
(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 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 MedQuist's stockholders in which a majority of
the Board of the surviving corporation (or its ultimate parent) are not members
of the Board, (f) commencement of a tender offer to purchase securities
representing more than 50% of the combined voting power in the election of
directors of MedQuist (after giving effect to the exercise of any options,
warrants or other convertible securities held by such person or group).
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 MedQuist that would call into
question their independence with respect to their duties.
Compensation Committee Report on Executive Compensation. The Compensation
Committee of the Board submits the following report to stockholders on the
compensation policies applicable to MedQuist's executive officers with respect
to compensation reported for the fiscal year ended December 31, 1999. 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
MedQuist's executive compensation program is a critical part of the
effective management of its key executives. If MedQuist is to be
successful, its executive compensation programs must be geared to attract
and retain superior quality employees. Additionally, the executive
compensation program should provide incentives that will reward key
executives for pursuing actively the actions necessary to strengthen
MedQuist's performance and enhancing stockholder value. To that end,
MedQuist's compensation program for executives is designed to:
. Promote the execution of MedQuist's business strategies and
operating objectives
B-10
<PAGE>
. Link executive compensation with corporate performance
. Align performance objectives with the interest of stockholders
. Encourage a career commitment on the part of executives
Executive Compensation Program. MedQuist's executive compensation
program for fiscal year 1999 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 1999
was substantially similar to the program for 1998. Nevertheless, the
Compensation Committee engaged an independent compensation consultant to
review executive compensation and, based upon that analysis, recommended
changes in base salary in 1999 for the Named Officers and a modification of
the stock option bonus as described below.
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.
For 1999, base salaries for the Named Officers were determined after
considering the advise and recommendations of an independent compensation
consultant.
Short Term Incentive Compensation. MedQuist provides short term
incentive compensation designed to reward executives for meeting current
financial goals. In 1999, the short term award for executive officers was
based 50% upon the operations of MedQuist and was 50% discretionary. The
discretionary portion of any such bonus is determined by Mr. Cohen for all
persons other than himself and Mr. Donohoe and approved by the Compensation
Committee. The Compensation Committee determines the discretionary portion
of the bonus for Messrs. Cohen and Donohoe and approves the recommendation
of Mr. Cohen with respect to other executive officers. For fiscal year
1999, all of the Named Officers earned 100% of their respective short term
award. Under the formula portion of the short term award in 1999, the award
was earned 100% if earnings per share met or exceeded confidential earnings
per share goals.
Stock Option Grants. MedQuist believes it is important to provide long
term incentive compensation to the Named Officers. In addition, the
Compensation Committee believes that such compensation should be closely
aligned to the interests of stockholders. The Compensation Committee
believes stock options are particularly well designed to achieve these
goals because executives gain over time only when stockholders gain through
the appreciation of the market price of the Common Stock. To encourage long
term performance and retain its most senior management, the Compensation
Committee approved grants to the Named Officers on January 3, 2000 that
vest in 20% increments over five years. Awards of stock options to Named
Officers are determined pursuant to the same formula described in "Short
Term Incentive Compensation" above. At the beginning of each year, the
Compensation Committee determines the maximum number of options each Named
Officer is eligible to receive if 100% of the award is earned. In 1999,
100% of the Stock Option Bonus was achieved by each of the Named Officers.
50% of the options granted have an exercise price equal to the closing
price on Nasdaq of the Common Stock on the grant date ($24.9375). 25% of
the options have an exercise price of 150% ($37.4063) of that price and 25%
have an exercise price of 200% ($49.8750) of that price. Although actually
granted on January 3, 2000, the Named Officers received grants of stock
options for performance in 1999 on the foregoing terms as follows:
<TABLE>
<CAPTION>
Exercise Price Per Share
----------------------------------
$24.9375 $ 37.4063 $ 49.8750
---------- ---------- ----------
(Number of Securities Underlying
Options)
Named Officer
-------------
<S> <C> <C> <C>
David A. Cohen...................... 35,000 17,500 17,500
John A. Donohoe, Jr. ............... 20,000 10,000 10,000
John R. Emery....................... 10,000 5,000 5,000
Ronald A. Scarpone.................. 10,000 5,000 5,000
John M. Suender..................... 10,000 5,000 5,000
</TABLE>
B-11
<PAGE>
The exercise prices are tiered in order to reward a Named Officer for
substantial increases in the stock price.
Chief Executive Officer Compensation. Mr. Cohen's salary of $400,000
was paid in accordance with his employment contract, which was negotiated
at arm's length and reflects increases approved by the Compensation
Committee. In determining changes in Mr. Cohen's compensation, the
Compensation Committee considered an analysis prepared in 1999 by an
independent compensation consultant.
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
MedQuist, 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 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 stockholders 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).
2000 Compensation Committee
By: John H. Underwood
John T. Casey
Terrence J. Mulligan
B-12
<PAGE>
Certain Relationships and Related Transactions
Richard J. Censits. MedQuist and Mr. Censits, a director and former
president and chief executive officer of MedQuist, entered into an
employment agreement January 1, 1993 and amended January 1, 1996. Under his
employment 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 MedQuist 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 MedQuist as collateral. The loan must be repaid three years
after grant or earlier if the stock is sold. The employment agreement
restricts Mr. Censits from competing with MedQuist, hiring employees of
MedQuist or disclosing or using confidential information of MedQuist so
long as he is receiving benefits under the employment agreement.
Noncompetition Agreements. Messrs. Cohen, Donohoe, Emery and Scarpone
are subject to confidentiality and non-competition agreements. Upon any
termination, each has agreed to retain in confidence and not otherwise to
use any confidential or proprietary information of MedQuist. Additionally,
following any termination of employment, each is prohibited from competing
with MedQuist or from soliciting clients, customers or employees of
MedQuist for a period of time (Messrs. Cohen and Donohoe, 3 years; Mr.
Scarpone, 2 years; and Mr. Emery, 1 year).
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires MedQuist's directors and
executive officers, and persons who beneficially own more than 10% of the
Common Stock, to file with the SEC initial reports of ownership and reports of
changes in ownership of the Common Stock and other equity securities of
MedQuist. Officers, directors and greater than 10% stockholders are required
under regulations promulgated by the SEC to furnish MedQuist with copies of all
Section 16(a) forms which they file.
To MedQuist's knowledge, based solely on a review of copies of such reports
furnished to MedQuist and written representations that no other reports were
required, during the fiscal year ended December 31, 1999, all Section 16(a)
filing requirements were satisfied.
B-13
<PAGE>
STOCKHOLDER RETURN PERFORMANCE GRAPH
Nasdaq MedQuist Inc. Medical Services Index*
1995 100 100 100
1996 123 307 83
1997 149 643 117
1998 208 1462 68
1999 387 956 71
*The Medical Services Index is an equally weighted index and is comprised of
a group of seventeen medical services companies compiled by BancBoston -
Robertson Stephens.
B-14
<PAGE>
SCHEDULE I
ROYAL PHILIPS' DESIGNEES
<TABLE>
<CAPTION>
Present Principal Occupation or
Employment and Five-Year
Name and Business Address* Office(s) Employment History
-------------------------- -------- -------------------------------
<S> <C> <C>
Jan H.M. Hommen............. Director of MedQuist Inc. Executive Vice-President, Member
of the Board of Management and
the Group Management Committee
and Chief Financial Officer of
Royal Philips Electronics. Prior
to 1997, Chief Financial Officer
of Alcoa International Holdings
Co. From 1997 to 1999, Member of
the Supervisory Board of
PolyGram N.V.
Adri Baan................... Director of MedQuist Inc. Executive Vice-President, Member
of the Board of Management and
the Group Management Committee
and President/Chief Executive
Officer of the Consumer
Electronics Division of Royal
Philips Electronics. Prior to
1998, Chairman of the Philips
Business Electronics Division of
Royal Philips Electronics.
Hans M. Barella............. Director of MedQuist Inc. Senior Vice-President, Member of
the Group Management Committee
of Royal Philips Electronics.
President/Chief Executive
Officer of the Medical Systems
Division of Royal Philips
Electronics.
William E. Curran........... Director of MedQuist Inc. Chief Executive Officer of
1251 Avenue of the Americas Philips Electronics North
New York, New York 10020- America Corporation. Prior to
1104 July 1999, Chief Financial
USA Officer of Philips Electronics
Citizen of the United States North America Corporation. Prior
of America to February 1996, Vice
President, Chief Operating
Officer and Chief Financial
Officer of Philips Medical
Systems.
Ivo J.M. Lurvink............ Director of MedQuist Inc. Executive Vice President and
Head of Corporate Mergers and
Acquisitions of Philips
International B.V. since April
1997. Prior to that time,
Director of Mergers and
Acquisitions (Eastern Europe) at
Credit Suisse First Boston.
Cesar Vohringer............. Director of MedQuist Inc. Chief Executive Officer of
Computerstrasse 6 Philips Speech Processing since
P.O. Box 274 March 2000. Prior to that time,
A-1101 Vienna Senior Vice President, Program
Austria Manager and Manager of Marketing
Citizen of Brazil and Business Strategy of the
Business Group Television of the
Consumer Electronics Division of
Royal Philips Electronics.
</TABLE>
--------
* Each person has a business address at Rembrandt Tower, Amstelplein 1, 1096
HA Amsterdam, the Netherlands and is a citizen of the Netherlands, unless a
different address and/or citizenship is indicated under his name.
S-1
