Phillips Nizer LLP
666 Fifth Avenue
New York, NY 10103
212-977-9700
November 5, 2007
VIA EDGAR
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Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Attn: Michael K. Pressman
Mail Stop 3698
Re: MedQuist, Inc.
PREC14A filed on October 19, 2007
by Costa Brava Partnership III L.P., et al.
File No. 000-19941
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Ladies and Gentlemen:
On behalf of Costa Brava Partnership III, L.P., a Delaware limited
partnership ("Costa Brava") and certain other participants (collectively, the
"Participants"), we are filing herewith via Edgar a response to the Staff's
comment letter dated October 31, 2007, with respect to the Participant's
Preliminary Proxy Statement concerning MedQuist Inc. ("MedQuist" or the
"Company"). The Staff's comments are set forth below in bold and are immediately
followed by the Participants' proposed responses.
General
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1. Support for each statement or assertion of opinion or belief must be
self-evident, disclosed in the proxy materials, or provided to the
staff on a supplemental basis. Examples of statements for which you
need to provide the basis include, but are not necessarily limited to
the following statements:
o "We believe that other stockholders share our dissatisfaction
with the present state of affairs and ask that you vote for
directors who are not nominees of Philips or the present
Board, but rather truly independent directors dedicated to
representing the interests of ALL MedQuist stockholders.;"
The Participants believe that the dissatisfaction of
MedQuist's stockholders is clearly evidenced by the decline in
its stock price from the $51.00 per share that Philips paid in
its June 2000 partial tender offer to the recent trading range
(in the third quarter through July 31, 2007) of $ 9.10 to
$12.18 per share.
However, rather than making an issue of this statement, we
will revise this language to read as follows:
"As significant stockholders, we are dissatisfied with the
present state of affairs and ask that you vote for directors
who are not nominees of Philips or the present Board, but
rather truly independent directors dedicated to representing
the interests of ALL MedQuist stockholders."
o "The Board of Directors; disappointing performance;"
The board of directors of a corporation is responsible for,
and obligated to manage, the business and affairs of the
corporation for the benefit of all of its stockholders. This
responsibility includes a duty of oversight of management and
a duty of loyalty that prohibits self-dealing transactions. In
light of these responsibilities, the Participants believe that
it is a fair statement to say that the performance of the
MedQuist board has been disappointing based upon the specific
events and consequences disclosed in the Preliminary Proxy
Statement under the heading "Allegations of Improper Billing
Practises and Resulting Problems" (and the matters discussed
below in response to Comment No. 2).
"Our Company's public stockholders demand representation by
board members truly independent of Philips to assure fair
treatment of all stockholders and the accountability of the
Company's executives;"
We will revise this statement as follows:
"As significant stockholders, we believe that the Company is
best served by board members truly independent of Philips to
assure fair treatment of all stockholders and the
accountability of the Company's executives;"
o "If elected to the Board of Directors of the Company, the
Costa Brava Nominees will be aligned with your interests as a
stockholder and will represent ALL stockholders;" and
The Participant's proxy solicitation is clearly directed at
public stockholders (i.e., stockholders other than Philips)
with whom the Participants share a mutual interest (i.e., an
alignment) in maximizing the value of the Company without any
predetermined plan for doing so, unlike Philips, which has
announced its intentions to dispose of its interests in the
Company. As a public company in its own right, Philips appears
to have concluded that the value of the parent company stock
will benefit from a quick sale of its interest in MedQuist
which may be contrary to the interests of the minority
stockholders of the Company. In this regard, we have attached
hereto a copy of a press release issued by Philips on November
2, 2007 with respect to Philips' decision to dispose of its
interests in the Company. The Company's press release
announcing its decision to consider a sale of the entire
company was issued immediately after the Philips release and
has been filed as an exhibit to the Company's Form 8-K dated
November 2, 2007. The Participants' nominees are prepared to
represent all stockholders, including Philips, without regard
to the special interests that Philips may have in a sale or
other strategic transaction.
Your nominees possess the "specific skills and experiences to
lead our Company."
The biographies of the Participant's Board Nominees that are
included in the Proxy Statement indicate that they have
experience as directors of public companies and they are
either experienced financial or business executives. In order
to clarify this language we will revise it as follows:
"We believe that all five of these candidates are highly
qualified business or financial industry professionals who
have served as executives and on the boards of directors of
other public companies and who possess the skills and
experiences to lead our Company."
Where the basis of support is other documents, such as analysts'
reports and newspaper articles, provide either complete copies of the
documents or sufficient pages of information so that we can assess the
context of the information upon which you rely. Mark any supporting
documents provided to identify the specific information relied upon,
such as quoted statements, financial statement line items, press
releases, and mathematical computations, and identify the sources of
all data utilized. In addition, when you refer to particular periods,
explain why you believe that the periods selected are representative
and do not inappropriately skew the data.
2. Please tell us why you believe that the board does not have independent
members. In the alternative, you should revise your disclosure to
acknowledge the current presence of independent directors.
The Participant's belief that the current Board of the Company is not
"fully" or "truly" independent of Philips is based on the following
facts and inferences:
(i) Four out of the seven current members of the Board are
executives of Philips.
(ii) The three remaining directors are supposed to be independent
directors chosen by a Nominating Committee in which a Philips
executive is one out of four committee members, but in
violation of this requirement of the Governance Agreement, the
Company's Nominating Committee consists of a Philips
representative and an independent director giving Philips a
veto over the selection of independent directors.
(iii) The actions of the Board (including the independent directors)
reflect a lack of independence from Philips. For example, in
July 2007, Philips announced that it was reviewing all of its
options with respect to its ownership interest in MedQuist
following a determination by Philips that it views its
ownership interest in MedQuist to be a none-core holding. The
announcement also indicated that in connection with such
review, Philips may consider possible transactions or other
changes in its ownership interest. In direct reaction to
Philips statement, the Company announced that it had engaged
Bear Stearns & Co., Inc. as its financial advisor to review
its "strategic alternatives", which is commonly understood on
Wall Street to include a sale transaction. Then, on November
2, 2007, Philips announced that it intends to proceed with a
sale of its interest in the Company and that such sale will
result in a loss to Philips of approximately EUR 320 million.
This announcement was immediately followed by an announcement
from the Company in which it indicated that it was evaluating
whether a sale of the Company was in the best interests of the
Company in light of the Philips announcement. The Participants
believe that the timing of these announcements reflects an
inclination of the Company's Board to facilitate a sale by
Philips whether or not such a sale would be in the best
interests of the minority stockholders.
(iv) In addition, the separate conduct of the so called independent
directors raises questions as to their independence from
Philips. The Company's board has established a Supervisory
Committee consisting of the independent directors that is
charged with overseeing the Governance Agreement and other
related party contracts with Philips and its affiliates. In
this capacity and as the sole members of the Company's audit
committee, the independent directors have approved the filing
of disclosure documents by the Company that omit material
disclosure about the related party contracts with the
Company's majority stockholder, Philips. For example, in the
2005 10-K filed on July 5, 2007, MedQuist seeks confidential
treatment for an Amended and Restated OEM Supply Agreement
(the "OEM Agreement") with an affiliate of Philips, Philips
Speech Recognition Systems GmbH ("PSP") (filed in redacted
form as Exhibit 10.27 to the 2005 10-K). MedQuist's 10-Q for
the quarter ended June 30, 2007 (filed on October 4, 2007)
states that the OEM Agreement was amended on September 21,
2007 (the "OEM Amendment"), but MedQuist failed to file the
OEM Amendment (redacted or otherwise) and did not disclose the
economic terms of this relationship with Philips. This is
particularly troubling because the OEM Amendment occurred
after MedQuist announced the prospective sale of the Company,
and the OEM Amendment may affect values realized by the
shareholders in the sale process, but the partially disclosed
terms of the OEM Amendment indicate that Philips will receive
undisclosed payments from MedQuist through at least 2010 (and
potentially through 2013) even if MedQuist is sold. In
essence, this undisclosed arrangement has the potential for
Philips to realize a certain value from its shareholding in
the Company, while the minority shareholders receive a
different and potentially lesser value.
The Participants do not believe that truly independent
directors, and especially in their capacities as the sole
members of the Company's audit committee, would permit the
terms of this arrangement to be hidden from the Company's
stockholders.
MedQuist also seeks confidential treatment for certain
amendments to a Licensing Agreement with PSP, another Philips
affiliate, dated May 22, 2000 (as amended, the "Licensing
Agreement" and with the OEM Agreement and the OEM Amendment,
the "Philips Agreements") (redacted amendments filed as
Exhibit Nos. 10.26.2 to 10.26.6 to the 2005 10-K). Although
MedQuist filed each of the Philips Agreements with the SEC,
MedQuist redacted the critical financial terms including,
among other things:
o The minimum cumulative license fees in the License
Agreement payable to PSP. See 2005 10-K, Ex. 10.26.4,
ss. 3.
o The revised license fee schedule. See 2005 10-K, Ex.
10.26.6, P. 1.5.
The Participants believe that truly independent directors and
as the sole members of the Company's audit committee would not
have permitted the filing of disclosure documents that omit
material information concerning the terms of related party
transactions with the Company majority stockholder.
On behalf of the Participants, we hereby acknowledge the following:
o the Participants are responsible for the adequacy and
accuracy of the disclosure in the filing;
o staff comments or changes to disclosure in response
to staff comments do not foreclose the Commission
from taking any action with respect to the filing;
and
o the Participants may not assert staff comments as a
defense in any proceeding initiated by the Commission
or any person under the federal securities laws of
the United States.
If you have any questions concerning the responses, please do not
hesitate to call me at 212-841-0700.
Very truly yours,
/s/ Brian Brodrick
Brian Brodrick
cc: Costa Brava Partnership III, L.P.
PHILIPS PLANS TO SELL MEDQUIST STAKE
2007-11-02 03:15 (New York)
(The following is a reformatted version of a statement by Royal Philips
Electronics NV, sent via e-mail today. The statement hasn't been confirmed by
the sender.)
Amsterdam, The Netherlands - Royal Philips Electronics (NYSE:PHG, AEX: PHI) will
today file an amendment to its Schedule 13D filing with the United States
Securities and Exchange Commission (SEC) in which it will announce that a
decision has been made to proceed with the sale of its approximate 70% ownership
interest in MedQuist Inc. (Pink Sheets: MEDQ.PK) if a satisfactory price and
other acceptable terms can be realized.
Today's announcement follows a July 6, 2007 announcement, when Philips indicated
it was reviewing all of its options with respect to its ownership interest in
MedQuist, following a determination by Philips that it viewed its MedQuist
ownership interest as a non-core holding.
Today's announcement also follows an announcement by MedQuist on October 4, 2007
that it had become current in its SEC filings.
The current intention of Philips is to pursue a transaction in which MedQuist's
other shareholders will be offered the same consideration as Philips, subject to
any necessary approval of the MedQuist board of directors. Accordingly, Philips
intends to coordinate with MedQuist in conducting an auction for such a sale
with all interested potential purchasers. However, there can be no full
assurance as to either the ultimate structure of any resulting transaction or
whether any transaction will occur.
As a consequence of the decision announced today, the net results attributable
to Philips' interest in MedQuist for the full year 2007 will be presented under
Discontinued Operations in our Annual Report 2007.
Prior-year consolidated financial statements will be restated to conform to this
presentation. The decision will result in a loss of approximately EUR 320
million (non-cash and non-tax deductible) to be recognized in the fourth quarter
of 2007, and which will be presented under Discontinued Operations. This loss
takes into account the cumulative translation differences related to Philips'
USD-denominated investment in MedQuist, which have been accumulated under equity
as of the date of acquisition in mid-2000. The recognition of this loss will not
affect Philips' equity.
The amendment to the Schedule 13D filing will become available later today on
the SEC's website at http://www.sec.gov.
Ams, MvdS