<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 30, 1996
REGISTRATION NO. 333-
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
TRANSCEND SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0378756
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
3353 PEACHTREE ROAD, N.E.
SUITE 1000
ATLANTA, GEORGIA 30326
(404) 364-8000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
LARRY G. GERDES
PRESIDENT AND CHIEF EXECUTIVE OFFICER
3353 PEACHTREE ROAD, N.E.
SUITE 1000
ATLANTA, GEORGIA 30326
(404) 364-8000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
HELEN T. FERRARO, ESQ. FREDERICK W. KANNER, ESQ.
SMITH, GAMBRELL & RUSSELL DEWEY BALLANTINE
3343 PEACHTREE ROAD, N.E., 1301 AVENUE OF THE AMERICAS
SUITE 1800 NEW YORK, NEW YORK 10019
ATLANTA, GEORGIA 30326 (212) 259-8000
(404) 264-2620
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF
SCURITIES TO BE REGISTERED TO BE REGISTERED(1) PRICE PER UNIT(2) OFFERING PRICE(1)(2) REGISTRATION FEE
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.01 per share............
=================================================================================================================================
</TABLE>
(1) Includes 450,000 shares subject to the Underwriters' over-allotment
option.
(2) Estimated solely for the purpose of calculating the filing fee pursuant to
Rule 457(c) under the Securities Act of 1933.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
===============================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 30, 1996
PROSPECTUS
3,000,000 Shares
[LOGO of Transcend Services, Inc.]
Common Stock
---------
All of the shares of Common Stock offered hereby are being offered by
Transcend Services, Inc., (the "Company" or "Transcend").
The Common Stock of the Company is listed on The Nasdaq Stock Market's
National Market under the symbol "TRCR." On May 29, 1996, the last sale price
of the Common Stock as reported by Nasdaq was $10.50.
SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
---------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
- --------------------------------------------------------------------------------
Total(3)................................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting."
(2) Before deducting expenses of the offering estimated at $ payable by
the Company.
(3) The Company has granted to the Underwriters a 30-day option to purchase
up to 450,000 additional shares of Common Stock on the same terms as set
forth above to cover over-allotments, if any. If the Underwriters
exercise such option in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
---------
The shares of Common Stock are offered by the several Underwriters named
herein, subject to prior sale, when, as and if accepted by them and subject to
certain conditions. It is expected that certificates for the shares of Common
Stock offered hereby will be available for delivery on or about , 1996
at the offices of Smith Barney Inc., 333 West 34th Street, New York,
New York 10001.
---------
Smith Barney Inc. Dain Bosworth
Incorporated
, 1996
<PAGE>
STRATEGIC DIRECTION
A diagram that depicts the flow of patient information across the pre-
admission to post-discharge continuum.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE
"UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including the consolidated financial statements and notes thereto,
appearing elsewhere in this Prospectus.
THE COMPANY
Transcend is a leader in the emerging field of health care information
management services to hospitals and other associated health care providers.
The Company provides a range of services along the following lines: (i)
contract management ("outsourcing") of health information management ("medical
records"), patient access ("admissions") and other affiliated departments; (ii)
medical transcription services for physician dictation; and (iii) consulting
services relating to health information management and reimbursement coding.
The Company currently operates, on a contract management basis, the health
information management ("HIM"), or medical records departments, of 15 general
acute care hospitals located in ten states and the District of Columbia. The
Company also provides case management and disability management services to
insurance carriers, third party administrators and self-insured employers.
The health care industry is undergoing significant and rapid change.
Hospitals and other health care providers have come under increased scrutiny
from regulators and third party payors. As a result, hospitals are now looking
to outsource to third parties certain costly or complicated functions that are
not directly related to core competencies or where they are unable to achieve
economies of scale. In particular, patient information, and the delivery of
such information in a timely fashion, have become critical to improving
productivity, efficiency and cost containment, while maintaining a high level
of patient care. For instance, many hospitals are finding that their medical
records departments are inadequate, and to remedy the inadequacies of these
functions, they are beginning to turn to third party service providers which
have expertise in managing medical records, admissions and other affiliated
departments.
With over 5,000 hospitals in the United States, the market for outsourcing
the management of medical records departments and other affiliated departments
is sizable. Approximately 3,000 hospitals in the United States have more than
100 beds and constitute the Company's first tier of market opportunity.
American Hospital Publishing, Inc. has reported that in 1995 two out of three
U.S. hospitals were outsourcing one or more departments. According to Modern
Healthcare magazine's 17th Annual Contract Management Survey, published in
September 1995, the total number of hospital management contracts increased by
nearly 12% from the end of 1993 to the end of 1994, from approximately 7,800 to
approximately 8,770.
The health care industry has recognized the need for improvement in the
processing of health care information, and to achieve this improvement, there
has been a dramatic increase in the development of technological solutions
offered by third party vendors of computer hardware and software. Although
there have been significant advances in the management of medical information
in general, little progress has been made introducing technology to the
management of the medical records departments, patient admissions or other
affiliated departments of hospitals that handle the flow of patient
information. The Company believes that there is a need, and therefore an
emerging market, for third party service providers to assist hospitals and
other health care providers in (i) the effective implementation of the
available technological tools for health care information management, (ii) the
process of managing health care information across the pre-admission to post-
discharge continuum of the health care delivery system and (iii) the management
and training of personnel in health care information departments. By managing
the entire flow of patient information through the hospital, errors,
inefficiencies and their associated costs can be minimized.
The Company's business strategy focuses on the application of advanced
technological tools and health care information management expertise to improve
the efficiency and productivity of health care information management services
from pre-admission of the patient through post-discharge. Key elements of the
Company's business strategy include: (i) the expansion of the Company's core
HIM business; (ii) the application of emerging technology to HIM; (iii) the
development of Information Service Centers as a business model for the
provision of future outsourcing services designed to consolidate all of the
functional and technological aspects of HIM into one centralized center; (iv)
the expansion of contract management services offered to include patient
admitting and the business office; and (v) the use of strategic acquisitions
and alliances to complement, expand and diversify the Company's services
portfolio and to accelerate growth.
3
<PAGE>
THE OFFERING
Common Stock offered.............. 3,000,000 shares
Common Stock to be outstanding 21,401,403 shares(1)
after the offering...............
Use of proceeds................... General corporate purposes and for working
capital. See "Use of Proceeds."
Nasdaq National Market symbol..... TRCR
- --------
(1) Excludes (a) 1,298,275 shares of Common Stock issuable as of May 24, 1996
upon the exercise of outstanding stock options, 872,875 of which are
presently exercisable or become exercisable within the next 60 days, (b)
572,000 shares of Common Stock issuable upon conversion of the Company's
8% Subordinated Convertible Debentures, (c) 25,000 shares issuable upon
exercise of the outstanding Warrant to purchase Common Stock, (d) 45,750
shares reserved for future issuance under the Company's 1992 Stock Option
Plan, as amended and (e) 155,524 shares reserved for future issuance under
the Company's 1990 Employee Stock Purchase Plan, as amended.
SUMMARY CONSOLIDATED FINANCIAL DATA(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------- ----------------
1993 1994 1995 1995 1996
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues.................. $ 6,208 $ 12,393 $ 25,882 $ 4,897 $ 8,688
Direct costs.................. 5,125 10,787 22,334 4,346 7,260
------- -------- -------- ------- -------
Gross profit.................. 1,083 1,606 3,548 551 1,428
Marketing and sales expenses.. 378 929 2,186 437 641
General and administrative ex-
penses....................... 1,330 1,673 4,604 1,113 1,122
Amortization expense.......... 310 357 633 145 145
------- -------- -------- ------- -------
Operating loss................ (935) (1,353) (3,875) (1,144) (480)
Other, net ................... (31) (53) (21) 36 (43)
------- -------- -------- ------- -------
Net loss...................... $ (966) $ (1,406) $ (3,896) $(1,108) $ (523)
======= ======== ======== ======= =======
Net loss per share............ $ (0.11) $ (0.14) $ (0.22) $ (0.06) $ (0.03)
Weighted average shares out-
standing..................... 8,866 9,733 17,818 17,533 18,217
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------
AS
ACTUAL ADJUSTED(2)
------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital.......................................... $ (16) $29,408
Total assets............................................. 16,651 46,075
Long-term debt and capital lease obligations............. 2,368 2,368
Shareholders' equity..................................... $ 9,556 $38,980
</TABLE>
- --------
(1) On January 10, 1995, the Company acquired a Georgia corporation then known
as "Transcend Services, Inc." by the merger of Transcend into a subsidiary
of the Company. The merger was treated for financial accounting purposes as
the acquisition of the Company by the former Transcend and the historical
financial statements of the former Transcend have become the financial
statements of the Company and include the business of both companies after
the effective date of the merger. See "The Company."
(2) Adjusted to give effect to the sale by the Company of 3,000,000 shares of
Common Stock at an assumed public offering price of $10.50 per share and
the application of the net proceeds therefrom as described under "Use of
Proceeds."
----------------
Unless otherwise indicated, the information in this Prospectus assumes the
Underwriters' over-allotment option is not exercised. The "fiscal year" when
used in this Prospectus shall mean the twelve-month period ended December 31 of
the calendar year indicated.
4
<PAGE>
RISK FACTORS
In addition to other information contained in this Prospectus, the following
factors should be considered carefully in evaluating the Company and its
business before purchasing any of the shares of Common Stock offered hereby.
This Prospectus contains, in addition to historical information, forward-
looking statements that involve risks and uncertainties. The Company's actual
results could differ materially. Factors that could cause or contribute to
such differences include, but are not limited to, those discussed below, as
well as those discussed elsewhere in this Prospectus.
OPERATING LOSSES
Although the Company has experienced revenue growth on an annual basis since
the fiscal year ended December 31, 1992, the Company has not operated
profitably during its last five fiscal years, and for the quarter ended March
31, 1996, it continued to experience losses. At March 31, 1996, the Company
had an accumulated deficit of $7,426,000. There can be no assurance that
revenue growth will continue in the future or that the Company will achieve
profitability. Management believes that the Company's losses are primarily
attributable to the significant expenditures made by the Company to build its
infrastructure to support future growth and expansion of the services that the
Company provides to health care institutions. These expenditures are currently
above a level which the Company's revenues can support. There can be no
assurance that the Company will be able to increase its revenues from contract
management contracts and other services to the extent necessary to support
expenses and achieve profitability. In addition, the Company's pricing
mechanism on most of its outsourcing contracts requires the Company to
increase operating efficiencies over the life of the contract in order to
become profitable. To achieve and sustain profitability, the Company also
believes that it must acquire a critical mass of such contracts, and be able
to renew such contracts on favorable terms. There can be no assurance that the
Company will be able to attain the required operating efficiencies or increase
the number of outsourcing contracts to the level needed to become profitable.
Also, there can be no assurance that the Company will be able to utilize the
proceeds from this offering for the profitable expansion of its business and
there can be no assurance that the Company will operate profitably in the
future or that the losses which the Company is presently experiencing will not
worsen in the future.
MANAGEMENT OF GROWTH
The Company has experienced significant growth, principally through
acquisitions of transcription businesses and the expansion of its contract
management business. The Company intends to continue to pursue an aggressive
growth strategy for the foreseeable future, and its future operating results
will depend largely upon its ability to ensure that an adequate infrastructure
is in place to support this growth. The process of integrating acquired
businesses into the Company's operations may result in unforeseen difficulties
and may require a disproportionate amount of resources and management's
attention. There can be no assurance that the Company will be able to expand
its market presence in its current locations or successfully enter other
markets through acquisitions or that any such expansion will be profitable. If
the Company's management is unable to manage growth effectively, the Company's
business, results of operations and financial condition could be materially
and adversely affected. See "Business--Strategy."
MARKET ACCEPTANCE OF OUTSOURCING STRATEGY
The success of the Company will require acceptance by hospitals and other
health care providers of the concept of outsourcing their information
management departments. Such acceptance will depend on the ability of the
Company to alleviate outsourcing concerns of hospital management, including
loss of control, information quality and integrity concerns and a bias against
outsourcing due to previous poor experiences. There can be no assurance that
the Company will be successful in alleviating these concerns and in marketing
its services. Failure of the Company to achieve market acceptance of its
services could have a material adverse effect on the Company's business,
financial condition and results of operations. Additionally, under the terms
of five of its existing outsourcing contracts, the Company has undertaken to
provide not only health information management
5
<PAGE>
(medical records) services, but also to manage that hospital's patient access
(admissions) function, as well as the social services, utilization management
and quality management functions for one hospital. The Company intends to seek
more outsourcing contracts providing fully integrated health care information
management services across multiple departments of the same institution. In
light of the Company's lack of any prior experience with such integrated
outsourcing arrangements, there can be no assurance that such services will
achieve market acceptance by health care providers or that the Company will be
able to market successfully or provide such integrated outsourcing services to
health care providers.
NATURE OF CONTRACTS
The Company derives a substantial portion of its revenues from 15
outsourcing contracts which have remaining terms ranging from one to five
years. At the end of each contract's duration, the Company must renegotiate a
new contract. Should the Company fail to retain an existing customer or fail
to adequately expand its base of contracts, the Company's future revenues
could be at substantial risk. While the Company believes that there is a
significant target market in which the Company may expand its outsourcing
contracts base, there can be no assurance that the Company will be able to
obtain new outsourcing contracts. Due to its limited operating history in
medical records management, there can be no assurance that the Company will be
able to renegotiate or renew its existing outsourcing contracts. In addition,
the limited number of contracts places an emphasis on the margin earned for
each contract. Should the Company be unable to achieve the necessary operating
efficiencies in its contracts, the margin earned for each contract will be
reduced. The Company is also beginning to explore new methods for pricing its
contract management contracts, including a more volume oriented "capitated"
pricing mechanism that is based on a hospital customer's activity levels such
as the weighted average number of annual patient discharges. In the future,
the Company also intends to offer its customers a "per member per month"
capitated pricing option. Although the Company believes that these new pricing
mechanisms will benefit its customers and generate adequate revenues for the
Company, there can be no assurance that these pricing alternatives will be
successful or that they will generate sufficient revenues to operate
profitably. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Overview."
COMPETITION
The outsourcing or contract management of health information services
departments is still a relatively new concept in the hospital industry.
Management believes that the Company's greatest competition comes from
existing, internal medical records departments. To the Company's knowledge,
there is currently only one regional firm and one national firm engaged in the
same business. The Company expects that as the concept of outsourcing becomes
more widely accepted, it will encounter further competition from some or all
of the following sources: other traditional health care information management
consultants; coding consultants; multi-specialty health care services
businesses which currently provide contract management to clinical,
housekeeping, dietary or other non-medical services departments of hospitals;
management information services providers, particularly developers and vendors
of management software; and other parties in contract management businesses
(for example, business or financial management services) desiring to enter the
health care field. The Company expects that competitive factors will include
reputation for expertise in health information management, size and scope of
referenceable accounts, prior experience in outsourcing and pricing. Some of
its potential competitors are larger, better known and better capitalized than
the Company, and such factors could affect the Company's ability to withstand
such competition over the long term. There are also companies that operate in
other areas of the health information management spectrum, including
admissions and the business office. As the Company expands its scope of
business into these other areas of health information management, the Company
will confront other, sometimes more established competitors.
The Company also experiences significant competition with respect to its
transcription, consulting and case management businesses from a variety of
sources, including, in each case, both local and national businesses. The
markets both for medical transcription services and for medical records coding
and consultation services are highly fragmented, and no competitor or
identifiable group of competitors could be said to be dominant. See
"Business--Competition."
6
<PAGE>
LITIGATION
On September 17, 1993, the Company and its health care subsidiaries and the
physician-owned medical groups which had contracts with the health care
subsidiaries, initiated a lawsuit against 22 insurance carriers seeking $115
million in compensatory damages plus punitive damages. The claims arise out of
the Company's former business, which prior to the merger with Transcend
Services, Inc., included the business of providing medical/legal evaluations
and medical treatment services (in association with managed medical groups) in
the workers' compensation industry in California. In connection with this
lawsuit, seven of the insurance carriers have filed cross complaints seeking
restitution for funds previously paid by the defendants, disgorgement of
profits and punitive damages, based primarily upon allegations of illegal
corporate practice of medicine, illegal referral arrangements and related
improper conduct. The costs associated with the claims asserted against the
insurance companies and the defense of the cross complaints cannot be
ascertained with any certainty, but are expected to be substantial. The
Company is deferring these costs until resolution of the litigation. The costs
associated with this litigation will reduce the Company's results of
operations, and there can be no assurance as to the outcome of this
litigation, including potential recovery, if any, of the Company's claims or
damages, if any. The cross complaints expose the Company to risk of liability
which, if the Company is unsuccessful in the defense of such cross complaints,
could have a materially adverse impact on the Company's results of operations
for a particular period. The Company believes that the cross complaints
against the Company are without merit and that the final resolution of the
cross complaints will not have a material adverse effect on the Company's
financial condition or results of operations; however, there can be no
assurance that the Company will be successful in the defense of such cross
complaints. See "Business--Legal Proceedings" and Note 2 of Notes to
Consolidated Financial Statements.
HEALTH CARE INDUSTRY AND UNCERTAINTY OF REFORM
The health care industry is subject to changing political, economic and
regulatory influences that may affect the outsourcing practices and other
operational aspects of hospitals in the Company's target market. The levels of
revenues and profitability of the Company may be affected by the continuing
efforts of government and third party payors to contain or reduce the costs of
health care through various means. In the United States there have been, and
the Company expects that there will continue to be, a number of federal and
state proposals to control health care costs. These proposals contain measures
intended to control public and private spending on health care as well as to
provide universal public access to the health care system. If enacted, these
proposals may result in a substantial restructuring of the health care
delivery system. Significant changes in the nation's health care system could
have an adverse impact on the Company's outsourcing services, although the
impact of such changes cannot be predicted with any certainty.
DEPENDENCE ON KEY PERSONNEL
The success of the Company has been largely dependent on the skills,
experience and efforts of its senior management and especially its President
and Chief Executive Officer, Larry G. Gerdes, its Chief Operating Officer,
Julian L. Cohen, its Chief Financial Officer, David W. Murphy and its Chief
Development Officer, G. Scott Dillon. The loss of the services of Messrs.
Gerdes, Cohen, Murphy or Dillon or other members of the Company's senior
management could have a material adverse effect on the Company's business and
prospects. The Company believes that its future success will also depend in
part upon its ability to attract, retain and motivate qualified personnel.
Competition for such personnel is intense. There can be no assurance that the
Company will be successful in attracting and retaining such personnel. The
loss of key personnel, or inability to hire or retain qualified personnel,
could have an adverse effect on the Company's business, financial condition
and results of operations. The Company does not carry any "key-man" insurance
on the life of any officer of the Company. See "Management."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 21,401,403 shares of
Common Stock outstanding. Of these shares, a total of 21,341,403, including
the 3,000,000 shares offered hereby, will be eligible for sale in
7
<PAGE>
the open market without restriction under the Securities Act of 1933, as
amended (the "Securities Act"), except to the extent any shares are purchased
by "affiliates" (as that term is defined under the Securities Act) of the
Company. All of the remaining 60,000 shares of Common Stock are "restricted
securities" as that term is defined in Rule 144 promulgated under the
Securities Act, none of which are currently eligible for sale in the public
market. Additional shares of Common Stock, including shares issuable upon
exercise of options and the Warrant to purchase Common Stock and upon
conversion of the Company's 8% Convertible Debentures, will also become
eligible for sale in the public market from time to time. Certain of the
holders of these additional shares have registration rights obligating the
Company to register their shares under certain circumstances. See "Shares
Eligible for Future Sale--Registration Rights." The Company and the Company's
officers and directors have agreed not to sell any of their shares of Common
Stock for a period of 120 days from the date of this Prospectus without the
prior written consent of Smith Barney Inc. Following this offering, sales and
potential sales of substantial amounts of the Company's Common Stock in the
public market pursuant to Rule 144 or otherwise could adversely affect the
prevailing market prices for the Common Stock and impair the Company's ability
to raise additional capital through the sale of equity securities. See
"Description of Capital Stock," "Shares Eligible for Future Sale" and
"Underwriting."
ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation, as amended, authorizes the
issuance of up to 21,000,000 shares of Preferred Stock, issuable in series,
the relative rights and preferences of which may be designated by the Board of
Directors. The issuance of Preferred Stock could make it more difficult for a
third party to acquire a majority of the outstanding voting stock.
Accordingly, the issuance of Preferred Stock may be used as an "anti-takeover"
device without further action on the part of the stockholders of the Company.
No shares of Preferred Stock have been issued, and the Company has no present
plans to issue any shares of Preferred Stock. See "Description of Capital
Stock."
DILUTION; NO DIVIDENDS
The public offering price per share of Common Stock will exceed the net
tangible book value per share of the Common Stock. Purchasers of the Common
Stock in this offering will experience immediate and substantial dilution. See
"Dilution." In addition, the Company has not previously paid any dividends on
its Common Stock and for the foreseeable future intends to retain earnings to
finance the development and expansion of its business. Pursuant to the terms
of certain financing agreements, the Company is restricted from paying
dividends to its shareholders. See "Dividend Policy."
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Stock could be subject to significant
fluctuations in response to the Company's operating results and other factors,
and there can be no assurance that the market price of the Common Stock will
not decline below the public offering price herein. In addition, the stock
market has from time to time experienced extreme price and volume volatility.
These fluctuations may be unrelated to the operating performance of particular
companies whose shares are traded and may adversely affect the market price of
the Common Stock. See "Price Range of Common Stock."
8
<PAGE>
THE COMPANY
The Company was incorporated in California in 1976 and was reorganized as a
Delaware corporation in 1988. On January 10, 1995, the Company, formerly known
as "TriCare, Inc.," acquired Transcend Services, Inc., then a Georgia
corporation, by the merger of Transcend Services, Inc. into First Western
Health Corporation ("First Western"), a subsidiary of the Company (the
"Merger"). Prior to the Merger, Transcend Services, Inc., which was originally
organized in 1984, provided consulting services for medical records
management, quality and utilization management, records coding and records
management software. In 1992, the former Transcend Services, Inc. developed,
tested and marketed new lines of business intended to capitalize on the
increasing need for the outsourcing of medical records, and by the end of 1992
had entered into its first long-term agreement for the management of a
hospital's medical records department. On May 31, 1995, Transcend Services,
Inc. and Veritas Healthcare Management ("Veritas"), another subsidiary of the
Company, merged into the Company, whose name was then changed to "Transcend
Services, Inc." The Merger was treated for financial accounting purposes as
the acquisition of TriCare, Inc. by Transcend Services, Inc. and the
historical financial statements of the former Transcend Services, Inc. have
become the financial statements of the Company and include the businesses of
both companies after the effective date of the Merger. The Company has one
wholly-owned subsidiary, Sullivan Health and Rehabilitation Services, Inc.
("Sullivan"). When used in this Prospectus, the term "Company" or "Transcend"
shall mean Transcend Services, Inc. and Sullivan unless otherwise stated in
this Prospectus or unless the context otherwise requires.
The Company's executive offices are located at 3353 Peachtree Road, N.E.,
Suite 1000, Atlanta, Georgia 30326. Its telephone number is (404) 364-8000.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,000,000 shares
offered by the Company hereby (after deducting the underwriting discount and
estimated offering expenses payable by the Company) at an assumed public
offering price of $10.50 per share are estimated to be approximately $29.4
million ($33.9 million if the Underwriters' over-allotment option is exercised
in full).
The Company intends to use the net proceeds for general corporate purposes
and for working capital to fund the Company's growth pursuant to its business
strategy, which may include the use of up to approximately $12 million of the
net proceeds to finance the installation and development of its Information
Service Center concept if the Company is successful in marketing the concept
to certain of its customers. The Company may also use up to approximately $5
million of net proceeds to purchase computer hardware and optical imaging
equipment in connection with the application of better technologies in its
contract management business. The Company may also utilize a portion of the
net proceeds to fund future acquisitions, should suitable opportunities arise.
See "Business-Strategy." Pending such uses, the net proceeds will be invested
in short-term, interest-bearing obligations of investment grade.
9
<PAGE>
PRICE RANGE OF COMMON STOCK
The Common Stock is traded on the Nasdaq National Market under the symbol
"TRCR." The following table sets forth, for the Company's fiscal periods
indicated, the high and low sales prices per share for the Common Stock, as
reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
1994
First Quarter.................................................. $ 3.50 $2.00
Second Quarter................................................. 3.25 2.38
Third Quarter.................................................. 3.00 1.75
Fourth Quarter................................................. 2.75 1.50
1995
First Quarter.................................................. $ 4.13 $1.56
Second Quarter................................................. 3.69 2.50
Third Quarter.................................................. 7.50 2.50
Fourth Quarter................................................. 7.13 4.75
1996
First Quarter.................................................. $ 9.38 $4.88
Second Quarter (through May 29, 1996).......................... $12.13 $8.63
</TABLE>
On May 29, 1996, the last sale price of the Common Stock as reported on the
Nasdaq National Market was $10.50 per share. As of May 29, 1996, there were
approximately 403 holders of record of the Common Stock.
10
<PAGE>
DILUTION
As of March 31, 1996, the Company had a net tangible book value of
$4,338,000, or $0.23 per share. Net tangible book value per share is
determined by dividing the net tangible book value (tangible assets less
liabilities) of the Company by the number of shares of Common Stock
outstanding at that date (giving effect to the conversion of 8% Convertible
Subordinated Debentures and the exercise of the outstanding Warrant to
purchase Common Stock, as if converted on March 31, 1996). Without taking into
account any changes in net tangible book value after March 31, 1996, other
than to give effect to the sale of the 3,000,000 shares of Common Stock
offered by the Company hereby (at an assumed public offering price of $10.50
per share) and the receipt of the net proceeds therefrom, the net tangible
book value of the Company as of March 31, 1996 would have been $33,762,000, or
$1.54 per share. This represents an immediate increase in net tangible book
value of $1.31 per share to existing shareholders and an immediate dilution of
$8.96 per share to new investors. The following table illustrates this
dilution per share.
<TABLE>
<S> <C> <C>
Assumed public offering price per share........................ $10.50
Net tangible book value per share as of March 31, 1996......... $0.23
Increase in net tangible book value per share attributable to
the offering(1)............................................... 1.31
-----
Adjusted net tangible book value per share after the offering.. 1.54
------
Dilution per share to new investors(2)......................... $ 8.96
======
</TABLE>
- --------
(1) After deduction of underwriting discounts and commissions and estimated
offering expenses.
(2) Determined by subtracting the adjusted net tangible book value per share
after the offering from the amount of cash paid by a new investor for a
share of Common Stock.
DIVIDEND POLICY
The Company intends to retain its earnings to finance the growth and
development of its business and does not anticipate paying cash dividends on
the Common Stock in the foreseeable future. The payment of any future
dividends will be at the discretion of the Company's Board of Directors and
will depend upon, among other things, future earnings, operations, capital
requirements, contractual restrictions, the general financial condition of the
Company and general business conditions. Pursuant to the terms of certain
financing agreements, the Company is restricted from paying dividends to its
shareholders.
11
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1996 on an actual basis and as adjusted to give effect to the sale of the
3,000,000 shares of Common Stock, at an assumed public offering price of
$10.50 per share, offered by the Company hereby and the application of the net
proceeds therefrom as described under "Use of Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt and capital lease obligation............... $ 2,368 $ 2,368
Shareholders' equity:
Preferred stock--par value $.01 per share; 21,000,000
shares authorized; no shares issued and outstanding...... -- --
Common stock, par value $.01 per share; 30,000,000 shares
authorized; 18,291,000 and 21,291,000 shares issued and
outstanding on an actual and as adjusted basis, respec-
tively(1)................................................ 183 213
Paid-in capital........................................... 16,799 46,193
Accumulated deficit....................................... (7,426) (7,426)
------- -------
Total shareholders' equity................................ 9,556 38,980
------- -------
Total capitalization...................................... $11,924 $41,348
======= =======
</TABLE>
- --------
(1) Excludes (a) 1,298,275 shares of Common Stock issuable as of May 24, 1996
upon the exercise of outstanding stock options, 872,875 of which are
presently exercisable or become exercisable within the next 60 days, (b)
572,000 shares of Common Stock issuable upon conversion of the Company's
8% Subordinated Convertible Debentures, (c) 25,000 shares issuable upon
exercise of the outstanding Warrant to purchase Common Stock, (d) 45,750
shares reserved for future issuance under the Company's 1992 Stock Option
Plan, as amended and (e) 155,524 shares reserved for future issuance
under the Company's 1990 Employee Stock Purchase Plan, as amended.
12
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth selected consolidated financial data of the
Company for the periods indicated, which data has been derived from the
Company's consolidated financial statements as of December 31, 1994 and 1995
and the consolidated financial statements for the three years in the period
ended December 31, 1995. The report of Arthur Andersen LLP, independent public
accountants, with respect to such consolidated financial statements as of
December 31, 1994 and 1995 and for the three years in the period ended
December 31, 1995 is included on page F-2. The consolidated financial
statements of the Company for each of the years in the two-year period ended
December 31, 1992 were derived from financial statements audited by another
firm of independent certified public accountants. The selected financial data
for the three month periods ended March 31, 1995 and 1996 are derived from the
unaudited consolidated financial statements of the Company. The unaudited
consolidated financial statements include all adjustments, consisting of
normal recurring accruals, which the Company considers necessary for a fair
presentation of the consolidated financial condition and results of operations
for these periods. Operating results for the three months ended March 31, 1996
are not necessarily indicative of the results that may be expected for the
entire year ending December 31, 1996. This selected consolidated financial
data should be read in conjunction with the consolidated financial statements,
related notes and other financial information included and incorporated by
reference herein.
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Net revenues............ $1,854 $1,702 $6,208 $12,393 $25,882 $ 4,897 $ 8,688
Direct costs............ 1,074 893 5,125 10,787 22,334 4,346 7,260
------ ------ ------ ------- ------- ------- -------
Gross profit............ 780 809 1,083 1,606 3,548 551 1,428
Marketing and sales ex-
pense.................. 362 209 378 929 2,186 437 641
General and administra-
tive expense........... 538 715 1,330 1,673 4,604 1,113 1,122
Amortization expense of
intangible assets...... -- -- 310 357 633 145 145
------ ------ ------ ------- ------- ------- -------
Operating loss.......... (120) (115) (935) (1,353) (3,875) (1,144) (480)
Interest, net........... (40) (16) (132) (65) (21) 36 (43)
Other................... -- (2) 101 25 -- -- --
------ ------ ------ ------- ------- ------- -------
Total other income (ex-
penses)................ (40) (18) (31) (40) (21) 36 (43)
------ ------ ------ ------- ------- ------- -------
Pre-Tax loss............ (160) (133) (966) (1,393) (3,896) (1,108) (523)
Provision for income
tax.................... -- -- -- 13 -- -- --
------ ------ ------ ------- ------- ------- -------
Net loss................ $ (160) $ (133) $ (966) $(1,406) $(3,896) $(1,108) $ (523)
====== ====== ====== ======= ======= ======= =======
Net loss per share...... $ (.04) $ (.02) $ (.11) $ (.14) $ (.22) $ (0.06) $ (0.03)
Weighted average shares
outstanding............ 3,774 7,162 8,866 9,733 17,818 17,533 18,217
<CAPTION>
THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
---------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......... $ 384 $ 202 $ (552) $(3,001) $ 461 $ 1,109 $ (16)
Total assets............ $ 922 $ 790 $1,191 $ 2,680 $16,833 $16,018 $16,651
Long-term debt and capi-
tal lease obligations.. $ 355 $ 300 $ -- $ -- $ 2,392 $ -- $ 2,368
Shareholders' equity.... $ 411 $ 277 $ 162 $(1,233) $ 9,921 $12,270 $ 9,556
</TABLE>
- --------
(1) On January 10, 1995, the Company acquired a Georgia corporation then
known as "Transcend Services, Inc." by the merger of Transcend into a
subsidiary of the Company. The merger was treated for financial
accounting purposes as the acquisition of the Company by the former
Transcend and the historical financial statements of the former Transcend
have become the financial statements of the Company and include the
business of both companies after the effective date of the merger. See
"The Company."
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements of the Company (including the notes thereto) contained
elsewhere in this Prospectus.
OVERVIEW
Transcend is a leader in the emerging field of health care information
management services to hospitals and other associated health care providers.
The Company provides a range of services along the following lines: (i)
contract management ("outsourcing") of health information management ("medical
records"), patient access ("admissions") and other affiliated departments;
(ii) medical transcription services for physician dictation; and (iii)
consulting services relating to health information management and
reimbursement coding. The Company currently operates, on a contract management
basis, the health information management ("HIM"), or medical records
departments, of 15 general acute care hospitals located in ten states and the
District of Columbia. The Company also provides case management and disability
management services to insurance carriers, third party administrators and
self-insured employers.
The Company intends to expand the range of its contract management services
to include management of other functional areas of hospitals associated with
health information management, such as management of patient access
(admissions), utilization review, quality assurance and the business office.
The Company presently provides full contract management outsourcing services
in the admissions departments for five of the 15 hospitals it manages. The
Company is actively seeking to provide this expanded range of services to its
current and future hospital customers. The Company also provides, through
outsourcing as well as other contracts, medical records transcription services
through computer and telephone links from centralized facilities to
approximately 100 hospital customers.
Approximately 3,000 hospitals in the United States have more than 100 beds
and constitute the Company's first tier of market opportunity. The Company
currently has contract management contracts covering the HIM departments of 15
hospitals ranging in bed size from 56 beds to 541 beds, with the average
contract size of approximately $1.5 million. The initial contract terms of the
Company's current contracts range from two to five years and are generally
terminable without cause upon expiration of the initial term or for cause at
any time during the initial term thereof. The Company's existing contracts
currently have remaining terms ranging from approximately one to five years.
Due to its limited operating history in medical records management, the
Company is unable to assess or predict its contract renewal rate.
The Company negotiates its contract management fees on a fixed installment
basis which represents, at contract inception, an immediate savings to the
contracting hospital as compared to its historical costs. In the early term of
such a contract, the Company's expenses in providing the contract services
remain relatively high, as a percentage of contract revenues received, as set-
up and training costs are incurred, new procedures are implemented and
departmental reorganizations are initiated. Completion of such steps should
result in lower operating expenses, which in turn should increase the profit
margin of a constant revenue stream over time. Due to the Company's limited
operating history in the contract management business, however, there can be
no assurances that operating expenses will sufficiently decrease over the life
of such contracts. The Company is considering alternative pricing structures
and has recently developed a more volume oriented "capitated" pricing
mechanism based on its hospital customers' activity levels such as the
weighted average number of annual patient discharges. In the future, the
Company also intends to offer a "per member per month" (PMPM) capitated
pricing option which is similar to the current pricing mechanisms used by
managed health care institutions and will therefore enable its customers to
more effectively compete in a managed care environment.
14
<PAGE>
The Company is typically paid for its transcription services on a production
basis at rates determined on a per-line-transcribed basis. Where transcription
services are included as part of the services provided in the Company's
outsourcing contracts for health information management, however, the services
are provided by the Company as part of a set contract fee. The Company is paid
for its consulting and coding services on a negotiated fee for services basis.
In addition, the Company is paid for its health care case management services
primarily on an hourly basis.
On January 10, 1995, the Company acquired a Georgia corporation then known
as "Transcend Services, Inc." by the merger of Transcend Services into a
subsidiary of the Company. The merger was treated for financial accounting
purposes as the acquisition of the Company by the former Transcend Services
and the historical financial statements of the former Transcend Services have
become the financial statements of the Company and include the business of
both companies after the effective date of the merger. See "The Company."
RESULTS OF OPERATIONS
The following table presents for the periods indicated, as a percentage of
total net revenues, components of the Company's net revenues and categories
from the Company's consolidated statements of operations and the period-to-
period changes in the dollar amounts of the respective line items:
<TABLE>
<CAPTION>
PERIOD TO PERIOD PERCENTAGE
PERCENTAGE OF NET REVENUES INCREASE (DECREASE)
----------------------------------------- -----------------------------
THREE MONTHS THREE MONTHS
FISCAL YEAR ENDED MARCH 31, FISCAL YEAR ENDED MARCH 31,
--------------------- ----------------- ------------ ---------------
1994 1995 1996
VS VS VS
1993 1994 1995 1995 1996 1993 1994 1995
----- ----- ----- ------- ------- ----- ----- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Contract management..... 62.3% 74.6% 55.3% 57.3% 61.0% 139.1% 54.8% 88.7%
Medical transcription... 18.3 19.6 25.7 24.7 23.0 113.4 174.4 65.6
Consulting and coding... 19.4 5.8 3.0 3.2 2.5 (40.0) 6.2 38.6
Case management......... -- -- 16.0 14.8 13.5 -- -- 61.7
----- ----- ----- ------- ------- ----- ----- -----
Net revenues.......... 100.0% 100.0% 100.0% 100.0% 100.0% 99.6% 108.8% 77.4%
----- ----- ----- ------- ------- ----- ----- -----
Direct costs............ 82.6 87.0 86.3 88.8 83.6 110.5 107.0 67.1
Gross profit.......... 17.4 13.0 13.7 11.2 16.4 48.3 120.9 159.2
Marketing and sales ex-
pense.................. 6.1 7.5 8.4 8.9 7.4 145.8 135.3 46.7
General and
administrative expense. 21.4 13.5 17.8 22.7 12.9 25.8 175.2 0.8
Amortization expense.... 5.0 2.9 2.5 3.0 1.7 15.2 77.3 --
----- ----- ----- ------- ------- ----- ----- -----
Operating loss........ (15.1)% (10.9)% (15.0)% (23.4)% (5.5)% 44.7% 186.4% (58.0)%
</TABLE>
15
<PAGE>
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31,
1995
The increase in total revenues for the quarter ended March 31, 1996 is
primarily attributable to (i) the increased contract management outsourcing
revenues attributable to six contract management contracts signed in August
and September 1995 and two contracts signed in February and March 1996; (ii)
increased medical transcription operations revenues resulting from the April
1995 acquisition of Medical Transcription of Atlanta, Inc. ("MTA"); and (iii)
the increase in case management and rehabilitation revenues resulting from
enhanced sales and marketing efforts in 1995 that resulted in new customers as
well as the expansion of case management services into Texas by means of an
acquisition made in July 1995.
Gross profit increased 159.2% to $1,428,000 for the quarter ended March 31,
1996 from $551,000 in the first quarter of the prior year. Gross profit as a
percentage of revenues increased to 16.4% for the quarter ended March 31, 1996
from 11.2% in the same prior year period. This increase was primarily
attributable to the contract management outsourcing division which expanded
its gross margin from 13.3% in 1995 to 16.6% in 1996, as a result of increased
efficiencies and lower operating costs following the Company's re-engineering
efforts, and the medical transcription business which expanded its gross
margin from 11.6% in the quarter ended March 31, 1995, to 17.3% in the quarter
ended March 31, 1996. The margin improvement in transcription is a result of
increased efficiencies and lower operating costs following the continued
deployment of digital technology and the improved productivity of the
Company's transcriptionists. The Company's overall gross margin was further
enhanced in the 1995 to 1996 quarter comparison by the increase in case
management's gross margin from 13.4% for the quarter ended March 31, 1995 to
27.1% for the quarter ended March 31, 1996. This gain in case management gross
margin is the result of increased operating efficiencies and lower direct
costs across an expanded, more diverse (less concentrated) customer base.
Marketing and sales expenses increased 46.7% to $641,000 in the quarter
ended March 31, 1996 from $437,000 in the same prior year period and decreased
as a percentage of revenues to 7.4% for the quarter ended March 31, 1996 from
8.9% for the quarter ended March 31, 1995. The increase in sales and marketing
expenses from the first quarter 1995 to 1996 is primarily attributable to (i)
a larger national sales force in place in the 1996 quarter; (ii) increased
expenditures for telemarketing and market analysis implemented to provide the
Company better sales lead qualification and more accurate target marketing
opportunities; and (iii) sales commissions paid on two new sales in the first
quarter 1996 as compared to only one sale in the first quarter 1995. The
Company typically pays and expenses 100% of its sales commission upon contract
signing. With much of the Company's investment in a national sales force,
telemarketing and marketing/advertising now in place, the Company anticipates
that sales and marketing expenses, as a percentage of revenues, will decline,
as revenues increase.
General and administrative expenses remained relatively constant at
$1,122,000 for the quarter ended March 31, 1996 and $1,113,000 in the same
prior year period and decreased as a percentage of revenues to 12.9% for the
quarter ended March 31, 1995 from 22.7% in the first quarter of the prior
year. General and administrative expenses remained constant in the quarter-to-
quarter comparison and declined as a percentage of revenues due to the
Company's investment over the past 18 to 24 months in building the corporate
structure necessary to support the Company's growth for the foreseeable
future.
The Company's loss from operations decreased to $480,000 for the quarter
ended March 31, 1996 from $1,144,000 in the first quarter of the prior year
period. This $480,000 quarterly loss compares to an operating loss of $502,000
for the quarter ended December 31, 1995 and an operating loss of $834,000 for
the quarter ended September 30, 1995.
Other expenses increased to $43,000 for the quarter ended March 31, 1996
from other income of $36,000 in the first quarter of the prior year period,
primarily due to the impact of interest expense incurred in connection with
the August 15, 1995 private placement of 8% Subordinated Convertible
Debentures.
16
<PAGE>
Year Ended December 31, 1995 Compared with Year Ended December 31, 1994
Net revenues increased 109% to $25,882,000 in 1995 from $12,393,000 in 1994.
The increase in net revenues is primarily attributable to operations in the
Company's contract management outsourcing division, contributing $5,058,000 of
the overall increase due to the addition of six new outsourcing contracts.
Medical transcription revenues grew from $2,428,000 in 1994 to $6,662,000 for
1995, primarily due to the acquisition of IDS and MTA. Sullivan's 1994
revenues are not included as they were prior to the Merger.
Gross profit increased 121% to $3,548,000 in 1995 from $1,606,000 in 1994.
Gross profit as a percentage of revenues increased to 13.7% in 1995 from 13.0%
in 1994. This increase was primarily attributable to the addition of
Sullivan's case management revenues reflecting an overall 21% gross margin.
Gross margins in contract management outsourcing increased to 14% from 11% in
1994. Average transcription margins decreased from 19% to 14% as a result of
the Script-Ease, Inc. and IDS acquisitions.
Marketing and sales expenses increased 135% to $2,186,000 in 1995 from
$929,000 in 1994 and increased as a percentage of revenues to 8.4% from 7.5%
in 1994. The increase is attributable to expenses associated with the efforts
to heighten market awareness of the Company and contract outsourcing, the
expansion of the Company's sales force, an increase in commission compensation
relating to the six new contract management contracts signed in the third
quarter and the additional sales costs related to the case management
division.
General and administrative expenses increased 175% to $4,604,000 in 1995
from $1,673,000 in 1994 and increased as a percentage of revenues to 17.8%
from 13.5%. The increase reflects additional expense for expanded management
and support staff incurred to position the Company for future growth, as well
as the additional overhead attributable to the Merger.
Amortization expenses increased to $633,000 in 1995 from $357,000 in 1994
reflecting the full impact of the intangible assets associated with the
Company's acquisition of three medical transcription businesses and the
additional amortization expense related to the Merger.
The Company's loss from operations increased to $3,875,000 in 1995 from
$1,353,000 in 1994; however, beginning in the second quarter of 1995, the
Company realized an improving trend with regard to minimizing its loss from
operations. The Company's loss from operations was $1,393,000 in the second
quarter ending June 30, 1995. The loss from operations for the third quarter
ended September 30, 1995 was $867,000, while the fourth quarter ended December
31, 1995 loss from operations decreased to $527,000.
Other expense decreased to $21,000 in 1995 from $40,000 in 1994, primarily
as the result of the Company's recognition of higher interest income as
applied against interest expense.
Year Ended December 31, 1994 Compared With Year Ended December 31, 1993
Net revenues increased 99.6% to $12,393,000 in 1994 from $6,208,000 in 1993.
This increase in net revenues is primarily attributable to increased sales in
the contract management outsourcing division, reflecting the full year impact
of five new outsourcing contracts entered into in 1993 and one outsourcing
contract entered into on June 1994. Other factors contributing to the increase
in net revenues include the acquisition of the transcription business Script-
Ease, Inc. in September 1994 and the full year impact of the acquisition of
dataLogix Transcription, Inc. ("dataLogix") in April 1993.
Gross profit increased 48.3% to $1,606,000 in 1994 from $1,083,000 in 1993.
Gross profit as a percentage of revenues declined to 13.0% in 1994 from 17.5%
in 1993. This decline was primarily attributable to higher costs associated
with the implementation of the six new outsourcing contracts entered into in
1993 and 1994, which the Company anticipates will decrease as a percentage of
revenues over the life of the contract. Transcription profit margins increased
from 12% in 1993 to 20% in 1994 due to reduced costs resulting from
efficiencies implemented in 1994 at the transcription office in Chicago,
Illinois. Consulting and coding margins declined in 1994 due to the Company's
increased focus on contract management outsourcing.
17
<PAGE>
Marketing and sales expenses increased 145.8% to $929,000 in 1994 from
$378,000 in 1993 and increased as a percentage of revenues to 7.5% from 6.1%
in 1993. This increase reflects increased expenses associated with additional
marketing efforts in the contract management outsourcing division and
expansion of the contract management sales force, which resulted in additional
salaries and sales commissions.
General and administrative expenses increased 25.8% to $1,673,000 in 1994
from $1,330,000 in 1993 but decreased as a percentage of revenues, to 13.5%
from 21.4%. The increase reflects additional expense for expanded management
and support staff incurred to support the Company's present and future growth.
The increase in amortization expenses to $357,000 in 1994 from $310,000 in
1993 reflects the full impact of the intangible assets associated with the
dataLogix acquisition and the additional amortization expense related to the
acquisition of Script-Ease, Inc.
The Company's loss from operations increased to $1,353,000 in 1994 from
$953,000 in 1993.
Other expense increased to $40,000 in 1994 from $31,000 in 1993, primarily
as the result of the Company's recognition of a gain of $100,000 from the sale
of the software division in April 1993 as compared to the recognition of only
a $25,000 gain in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash are internally generated funds and the
net assets of the Company's discontinued operations, the remainder of which
are expected to be collected over the next several years.
In 1995 the Company expended $1,232,000 in cash to acquire the medical
transcription businesses of IDS and MTA. In connection with these
acquisitions, on August 15, 1995, the Company raised $2 million in cash
through the private placement of 8% Subordinated Convertible Debentures. The
Debentures are unsecured and subordinated to all other debt of the Company.
The interest rate on the Debentures is 8%, payable semi-annually, and the
principal amount is due in full on August 15, 2000. The Debentures are
convertible into Common Stock by the holder at any time prior to August 15,
2000 at a rate of 286 shares of Common Stock for each $1,000 in principal
amount and are convertible by the Company at any time when the Common Stock
trades at $10.50 per share for 30 consecutive trading days. The Company may
redeem the Debentures at any time upon 30 to 60 days notice to the holder of a
Debenture.
The Company's working capital position decreased during the quarter ended
March 31, 1996 from $461,000 at December 31, 1995 to $(16,000) at March 31,
1996. This decrease in the Company's working capital position arises from a
combination of several factors including the financing from current cash
sources of capital expenditures for equipment during the quarter ended March
31, 1996 and the continued funding of losses from the Company's operations.
On April 30, 1996, the Company established two separate credit facilities
with Silicon Valley East (Wellesley, Massachusetts), a division of Silicon
Valley Bank, a California-chartered bank (Santa Clara, CA). The aggregate
credit available to the Company (under both facilities) is $5.75 million. The
banking facilities are secured by all of the Company's assets. One of the
facilities is a $5.0 million working capital credit line subject to an initial
cap of $3.0 million. The cap is removed subject to the Company's compliance
with several covenants going forward. The second facility is a $750,000 term
facility set up to help the Company meet its capital investment requirements
in the near term. This term note is subject to an initial cap of $250,000,
with the cap being removed upon the Company's compliance with specific
covenants. Both facilities will mature on April 30, 1997.
The Company anticipates that cash on hand, together with internally
generated funds, cash collected from discontinued operations and the net
proceeds from this offering should be sufficient to finance continuing
operations for the foreseeable future as well as the civil litigation action
against certain insurance carriers.
IMPACT OF INFLATION
Inflation has not had a material effect on the Company to date. However, the
effects of inflation on future operating results will depend in part, on the
Company's ability to increase prices and/or lower expenses in amounts
offsetting inflationary cost increases and on reimbursement levels established
by state authorities.
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BUSINESS
GENERAL
Transcend is a leader in the emerging field of health care information
management services to hospitals and other associated health care providers.
The Company provides a range of services along the following lines:
(i) contract management ("outsourcing") of health information management
("medical records"), patient access ("admissions") and other affiliated
departments; (ii) medical transcription services for physician dictation; and
(iii) consulting services relating to health information management and
reimbursement coding. The Company currently operates, on a contract management
basis, the health information management ("HIM"), or medical records
departments, of 15 general acute care hospitals located in ten states and the
District of Columbia. The Company also provides case management and disability
management services to insurance carriers, third party administrators and
self-insured employers.
The health care industry is undergoing significant and rapid change.
Hospitals and other health care providers have come under increased scrutiny
from regulators and third party payors. As a result, hospitals are now looking
to outsource to third parties certain costly or complicated functions that are
not directly related to core competencies or where they are unable to achieve
economies of scale. In particular, patient information, and the delivery of
such information in a timely fashion, have become critical to improving
productivity, efficiency and cost containment, while maintaining a high level
of patient care. For instance, many hospitals are finding that their medical
records departments are inadequate, and to remedy the inadequacies of these
functions, they are beginning to turn to third party service providers which
have expertise in managing medical records, admissions and other affiliated
departments.
With over 5,000 hospitals in the United States, the market for outsourcing
the management of medical records departments and other affiliated departments
is sizable. Approximately 3,000 hospitals in the United States have more than
100 beds and constitute the Company's first tier of market opportunity.
American Hospital Publishing, Inc. has reported that in 1995 two out of three
U.S. hospitals were outsourcing one or more departments. According to Modern
Healthcare magazine's 17th Annual Contract Management Survey, published in
September 1995, the total number of hospital management contracts increased by
nearly 12% from the end of 1993 to the end of 1994, from approximately 7,800
to approximately 8,770.
The health care industry has recognized the need for improvement in the
processing of health care information, and to achieve this improvement, there
has been a dramatic increase in the development of technological solutions
offered by third party vendors of computer hardware and software. Although
there have been significant advances in the management of medical information
in general, little progress has been made introducing technology to the
management of the medical records departments, patient admissions or other
affiliated departments of hospitals that handle the flow of patient
information. The Company believes that there is a need, and therefore an
emerging market, for third party service providers to assist hospitals and
other health care providers in (i) the effective implementation of the
available technological tools for health care information management, (ii) the
process of managing health care information across the pre-admission to post-
discharge continuum of the health care delivery system and (iii) the
management and training of personnel in health care information departments.
By managing the entire flow of patient information through the hospital,
errors, inefficiencies and their associated costs can be minimized.
INDUSTRY OVERVIEW
The health care industry is undergoing significant and rapid change.
Hospitals and other health care providers have come under increased scrutiny
from regulators and third party payors, which has forced the providers to
examine their cost structures and business practices. The industry has
recognized the need for improvement in the processing of health care
information, and to achieve this improvement, there has been a dramatic
increase in the development of technological solutions offered by third party
vendors of computer hardware and software. Although there have been
significant advances in the management of medical information in general,
little progress has been made introducing technology to the management of the
medical records
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departments, patient admissions or other affiliated departments of hospitals
that handle the flow of patient information. Health care information
technology vendors have focused on developing information systems such as
"electronic medical records" that promise to move all patient information on-
line, giving all constituents immediate access to relevant information.
However, the development of such systems and more importantly the widespread
adoption of such systems is still several years away. The Company believes
that transitioning the medical record from paper to electronic format will
require a higher level of service in the performance of certain HIM functions,
including coding, record analysis and completion, transcription, as well as
others. With the expansion of the Company's contract management business and
the development of the Information Service Center business model, the Company
believes it will be well positioned to provide hospitals and other health care
providers with this higher level of service.
Many hospitals are finding that their medical records departments are in
many respects inadequate and that outsourcing HIM and related departments can
result in competitive advantages by reducing costs such as employee training
and technology and equipment upgrades.
Hospitals have outsourced basic services including housekeeping, laundry and
food preparation for a number of years to reduce operating costs and ensure
quality of service and are now looking to outsource other costly or
complicated functions that are not directly related to core competencies or
where they are unable to achieve economies of scale. An increasing number of
health care providers are now outsourcing the pharmacy, emergency room
staffing and physical therapy staffing functions and have more recently
started to outsource critical administrative functions such as patient health
information management of medical records departments and related functions
including patient admission, utilization review, quality assurance and the
business office.
Many hospitals are now turning to third party providers to apply their
expertise in managing not only the medical records, but admissions and other
affiliated departments as well. This development is helping providers control
costs and allowing them to concentrate on the core business of providing high
quality patient care and at the same time creating a significant opportunity
for third party service providers to assist hospitals and other health care
providers in processing and managing health care information across the pre-
admission to post-discharge continuum.
BUSINESS STRATEGY
The Company's business strategy focuses on the application of advanced
technological tools and health care information management expertise to
improve the efficiency and productivity of health care information management
services from pre-admission of the patient through post-discharge. Key
elements of the Company's business strategy consist of the following:
Increase Penetration of HIM Outsourcing Market. The Company is focused on
increasing its penetration of the HIM outsourcing market through the
implementation of an enhanced sales, marketing and lead generation program.
The Company's initial target market is comprised of the approximate 3,000
hospitals in the United States with more than 100 beds. The Company has
substantially expanded its marketing efforts, evidenced by the fact that the
Company conducted 49 onsite operational assessments through the four month
period ended April 30, 1996 as compared to a total of 16 assessments during
calendar 1995. Furthermore, the Company intends to continue expanding its
marketing efforts to include large clinics, sub-acute care facilities, HMOs,
skilled nursing facilities and other health care providers as part of the
integrated health care delivery system.
Apply Emerging Technology. Although the Company is a service company and
therefore does not intend to develop a proprietary software/hardware system,
the Company is technology oriented and intends to utilize the most effective
technology available to reshape the way information is managed across the
integrated health care delivery system to obtain new levels of cost
effectiveness. Through a strategic partnership with a small imaging company,
the Company has introduced an electronic document management ("EDM") product
in two of its contract management sites. However, the Company does not intend
to invest in the research and development of EDM systems, and to the extent
that more effective technological products become available,
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the Company will use such technology, or partner with qualified technology
companies, to establish the most effective optical scanning or electronic
imaging capabilities at its sites.
Develop Information Service Centers. The Company has developed the concept
of an Information Service Center as a business model for the provision of
future outsourcing services in a unique format, designed to further reduce
hospital costs and improve efficiencies by reducing and moving staff off-site
and taking advantage of economies of scale. Under the model, once the Company
has signed contracts with a group of health care provider customers which are
under common ownership and/or located in a given geographic area, the Company
plans to consolidate all of the functional and technological aspects of health
information management into one centralized off-site service center. The
Company believes that the Information Service Center model offers several
benefits, including the ability to perform similar functions for multiple
clients, to offer outsourcing services to larger integrated delivery systems
and to provide geographically spaced health care providers with a central
location for the receipt of patient data.
Expand Range of Contract Management Services. Once the Company has
established itself in a hospital by successfully managing the medical records
department, the Company believes it is well positioned to manage other aspects
of the hospital's operations related to health information, including patient
admitting and the business office. The Company intends to pursue additional
outsourcing business from existing as well as new customers. The Company
believes that additional efficiencies in information management can be
achieved through the management of the record creation process at its point of
beginning (pre-registration, admitting) through post-discharge (the business
office).
Pursue Acquisitions and Strategic Alliances. The Company has historically
used an acquisition strategy to fulfill part of its business plan, and will
continue to seek acquisition opportunities to complement, expand and diversify
its services portfolio. The Company will also pursue the formation of
strategic alliances in an effort to accelerate its growth through market
expansion. The Company is presently pursuing joint marketing efforts with
other companies to establish more comprehensive outsourcing relationships,
including the business office of the hospital, to be implemented over a larger
shared client base.
SERVICES
Contract Management (Outsourcing). Contract management, or outsourcing, of
health information involves the management by the Company of patient
information, both clinical and financial, throughout the health care delivery
system beginning before a patient is admitted and continuing after the patient
is discharged. The Company's principal source of revenues is currently from
long-term contracts for outsourcing, or contract management, of the HIM, or
medical records, departments of hospitals. Under the terms of its outsourcing
contracts, the Company provides the contracting medical facility with complete
day-to-day management and operation of the facility's medical records
department, including maintenance of patient records, monitoring and reduction
of backlog in record keeping and chart completion, compliance with record
keeping and record retention requirements of governmental and other third-
party payors, implementation of record coding functions to optimize
reimbursement, medical record abstracting and maintenance of record storage
and retrieval systems.
With respect to staffing requirements, the Company's outsourcing contracts
are of two types. The first is a "Management Only" contract by which the
Company provides a department director to supervise a hospital's medical
records department and employs the departmental supervisory personnel, while
all other employees of the department remain on the hospital's payroll. The
second type is a full contract management services agreement by which the
Company provides not only a records-management director but also hires all the
employees of the department as the Company's employees. The Company generally
provides supplemental training to these employees once it takes over the
department. The Company prefers, whenever possible, to maintain the employment
of all of the employees of a hospital's outsourced department and is rarely
required to hire new employees.
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A significant feature of the Company's contract management services is the
use of a Professional Services Team, made up of highly skilled and experienced
HIM professionals, whose responsibility is to act as an internal consulting
team to its outsourced customers. This team is used during initial
implementation to reengineer the outsourced department's work processes, to
support the customer sites at any time and to develop "Best Practices," the
Company's quality standards that are continuously updated to represent the
best in the HIM marketplace.
The Company believes that the application of better technology in contract
management will reshape the way information is managed across the health care
delivery system in the future and provide additional cost savings. Although
the Company does not intend to directly invest in research and development of
electronic document management ("EDM") systems, it will use the most effective
technology available to the extent that its customers desire to implement such
systems. Such technology is designed to provide simultaneous access to the
medical record by multiple users. The Company has partnered with a small
imaging company to develop and beta test an EDM product, trademarked
"TransChart(TM)," and has now installed this optical scanning product in two
of its contract management sites. The Company will continue to use this
technology, or partner with qualified providers, to establish the most
effective optical scanning capabilities at its sites. The application of more
advanced technologies is a key factor in the Company's planned implementation
of its Information Service Center concept. See "--Future Outsourcing
Services--Information Service Centers."
Management of the Company believes that through its services, it provides
immediate and long-term cost savings to its health care provider customers
which helps them compete in a managed care environment. The Company also
believes that health care providers have overlooked other services which are
attractive outsourcing candidates such as admissions, utilization review,
quality assurance and the business office. Because such services are essential
to the efficient flow of information along the pre-admission to post-discharge
continuum in the health care delivery system, the Company believes that these
services are suited to outsourcing and are a natural extension of the
outsourcing of the medical records department.
The Company believes that there is a significant outsourcing opportunity in
the health care industry to provide multiple information management and
processing functions on an integrated basis beginning before a patient is
admitted, through the creation and management of the medical record and
continuing after a patient is discharged, in the business office. It is the
intention of the Company to seek more outsourcing contracts providing fully-
integrated health care information management across multiple departments of
the same institution for a single fee. Under the terms of five of the
Company's outsourcing contracts, the Company has undertaken to provide not
only HIM services, but also to manage that hospital's patient access
(admissions) function. The Company also manages the social services,
utilization management and quality management functions for two hospitals.
Although the Company currently has no outsourcing contracts for the hospital
business office, the Company is exploring opportunities for contract
management of the business office. Better management of the business office
benefits the hospital by both reducing costs and increasing the turnover rate
of accounts receivable. The Company has demonstrated that by more effectively
managing medical records, it has significantly reduced the level of unbilled
accounts receivable and has created a more efficient and accurate flow of
information to the business office.
Future Outsourcing Services--Information Service Centers. The Company has
developed the concept of an Information Service Center ("ISC") as a business
model for the provision of future outsourcing services in a format designed to
reduce hospital costs and improve efficiencies. Under the model, once the
Company has signed contracts with a group of health care provider customers
which are under common ownership and/or located in a given geographic area,
the Company plans to consolidate all of the functional and technological
aspects of health information management into one centralized service center.
Specific areas of initial focus would include functions such as chart assembly
and analysis, coding, transcription and information retrieval and storage. In
order to streamline the flow of patient information as much as possible,
additional labor intensive
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services such as scheduling, preregistration information assembly, benefit
verification and procedure precertification, and almost all patient accounting
and billing functions, could also be added. In contrast to the current model,
under which most of the personnel remains on site at the customer's facility,
all of the staff performing these functions would be relocated to the service
center, with the potential for a significant portion of the personnel to
become home-based "telecommuters." Fewer than ten individuals would remain at
the client hospital with responsibilities for document scanning and customer
service functions, as well as to provide an administrative liaison role in the
hospital, participate in hospital committee functions, oversee compliance
issues and other management functions. The Company believes that the ISC model
offers several benefits, including the ability to (i) perform similar
functions for multiple clients that are common throughout the pre-admission to
post-discharge health care continuum, thereby increasing efficiency and
reducing staffing needs, (ii) offer outsourcing services to larger integrated
delivery systems with multiple facilities and to provide geographically spaced
health care providers with a central location from which they receive patient
data, and (iii) increase the scope of potential clients to include larger
medical clinics, skilled nursing facilities, long-term care facilities and,
eventually, payors such as HMOs with complex information management
requirements.
Medical Transcription Services. The Company entered the medical
transcription services business because it saw an opportunity to improve
accuracy, reduce turnaround time and improve margins for its contract
management customers, primarily through advances in technology. The market for
medical transcription is not formally tracked, but the Executive Director of
the Medical Transcription Industry Alliance has estimated that the total U.S.
market for medical transcription services is in excess of the one billion
dollar range, and that the market is continuing to experience growth as more
hospitals outsource their medical transcription needs. The medical
transcription services market is highly fragmented, with over 500
transcription companies nationally.
The Company's transcription business provides a computer-based service for
transcription of physician dictation for hospitals. While its service
arrangements vary from institution to institution, some of which require
transcription to be performed on-site or by hospital employees, the
transcription division's services are primarily defined as transcription of
dictation at remote locations, and transmission via modem or similar telephone
link into the computer data base of the contracting hospital. As a result,
while it currently provides services to over 100 different medical
institutions in the eastern half of the United States, the transcription
division is able to provide such services from a central office and therefore
many of its transcription employees are able to work as "telecommuters" using
networked computer terminals in their homes.
The Company is typically paid for its transcription services on a production
basis at rates determined on a per-line-transcribed basis. The Company also
provides transcription services in connection with nine of its contract
management contracts. Where transcription services are included as part of the
services provided in the Company's outsourcing contracts for health
information management, the services are provided internally by the Company's
transcription sites as part of the overall services provided by the Company
for a set contract fee. The Company seeks wherever possible to cross-market
its transcription services with its outsourcing contract services, using the
institutions with which it has outsourcing contracts as a base for generation
of additional transcription business and using the institutions with which it
has transcription contracts as a basis for generating additional contract
management outsourcing business.
Consulting and Coding Services. The Company continues to offer independent
consulting services to hospitals on a case by case basis, and believes that
its consulting services comprise an additional services offering to its
existing customer base. The Company provides advice with respect to management
and operations of medical records departments and related health care
information management, particularly reimbursement coding or "optimization"
services, as well as consultation services regarding the health information
aspects of hospitals' utilization management and quality management functions.
Such services, which can also include interim medical records department
management and related services, are provided on a negotiated fee for service
basis. The Company's consulting and coding department includes specialists in
various aspects of records coding and management. The Company recently added a
medical doctor to its staff of consultants, which will allow the
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Company to offer consultation services to physicians who are interested in
improving their coding and reimbursement practices.
Health Care Case Management. Medical case management provides assessment,
care planning, recommendations, and care coordination services for injured and
ill persons covered by insurance carriers or self-insured employers. The
Company employs or contracts with registered nurses who act as a coordinator
between the patient, the health care providers and the insurance carriers,
seeking to ensure the provision of optimal health care with an efficient use
of resources. Case management typically involves routine onsite visits to the
patient and monthly reporting to the insurance carriers. In addition, the
Company provides vocational evaluations and computerized skills assessments
for clients covered by insurance programs, workers' compensation, long-term
disability and Social Security disability. The Company faces a very
competitive market on a national, regional and local level, with all of the
competition offering the full continuum of cost containment products,
including field case management, telephonic case management, pre-certification
utilization review, PPO networks, bill repricing and managed care.
CUSTOMERS
The Company's current customer base consists primarily of hospitals for
which the Company provides contract management or outsourcing of the medical
records department, medical transcription services and/or consulting services.
However, the Company believes that the outsourcing concept can meet the needs
of many other health care providers, and the Company's marketing efforts are
designed to eventually expand its customer profile to include larger clinics,
sub-acute care facilities, HMOs, skilled nursing facilities and others.
With over 5,000 hospitals in the United States, the market for outsourcing
the management of medical records departments and other affiliated departments
is sizable. Approximately 3,000 of the hospitals in the United States have
more than 100 beds and constitute the Company's first tier opportunity. The
Company further screens potential hospitals through a variety of lead
generation methods, including a recently initiated telemarketing program,
which helps pinpoint those hospitals that may benefit most from outsourcing
their medical records department and focuses the Company's efforts on
approximately 2,000 target hospitals.
As the use of health care information management technology increases in the
future, the Company believes that three levels of health care provider
customers will emerge. The Company divides these customers into "No Tech,"
"Medium Tech," and "High Tech" categories. The No Tech customer is one that
has not embraced the use of technology within the facility's medical records
functions to enhance productivity, quality and costs. This customer will
either lack the financial resources and/or vision to progress past the paper
record. For this customer, the Company will continue to reengineer the paper
processes and continue to guarantee the customer reduced costs and improved
quality, timeliness and service. The Medium Tech customer will be ready to
begin to leverage technology, primarily through the use of optical scanning to
reduce costs, improve quality and timeliness and provide multiple users access
to the same record simultaneously. This will also allow for the electronic
completion of the patient record by the physician, providing a significant
productivity tool for the physician as well. The High Tech customer will
likely initially be large for-profit systems or not-for-profit multi-hospital
groups, which will be committed to the complete change of the medical record
process as it is known today. The Company believes that the High Tech customer
group will be the initial market for its Information Service Center concept.
SALES AND MARKETING
The Company currently employs ten full-time sales personnel in the contract
management area of its business. Because the Company's outsourcing services
are relatively new in the industry, marketing of those services has proceeded
principally on the basis of personal contacts by the Company's sales personnel
with senior hospital executives as well as referrals from its consulting
clients. Beginning in early 1996, the Company has added a telemarketing
program, targeting hospital chief executive and chief financial officers, in
an effort to significantly improve qualified sales leads and shorten the
overall sales cycle. Having established its initial base
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of outsourcing contract clientele, the Company's sales force provides coverage
in virtually every major hospital market in the country, with sales
representatives in each of the principal geographic regions of the country
(Southwest, West, Midwest, Southeast, Mid-Atlantic and Northeast). The
Company's 1996 marketing strategy also includes targeted advertising in
industry trade publications, direct mailings, trade shows, customer
testimonials, seminars and other educational literature that emphasizes the
Company's market leadership position, its management expertise and its track
record with current clients.
The Company's transcription and consulting services have historically been
marketed primarily through personal contacts and referrals from existing
clients. While management believes that this is an appropriate marketing
strategy, particularly for consulting services, the Company has begun to
implement a broader marketing campaign for its transcription services,
particularly in those markets in which its transcription offices are located,
and has employed two national sales persons targeting this business.
COMPETITION
Outsourcing or contract management of health information services
departments is still a relatively new concept in the hospital industry. The
Company believes it is a pioneer in developing outsourcing of health
information management functions on a national basis, and therefore the
Company's greatest competition comes from existing, internal medical records
departments of hospitals. There is currently one national firm and one
regional firm engaged in the same business. The Company expects that as the
concept of outsourcing becomes more accepted, it will encounter further
competition from some or all of the following sources: other traditional
health care information management consultants; coding consultants; multi-
specialty health care services businesses which currently provide contract
management to clinical, housekeeping, dietary or other non-medical services
departments of hospitals; management information services providers,
particularly developers and vendors of management software; and other parties
in contract management businesses (for example, business or financial
management services) desiring to enter the health care field. The Company
expects that competitive factors will include reputation for expertise in
health information management, size and scope of referenceable accounts, prior
experience in outsourcing, and pricing. Additionally, there are companies that
operate in other areas of the health information management spectrum,
including admissions, the business office and transcription. As the Company
expands its scope into these other areas of health information management, the
Company expects to confront other, perhaps better established, better
capitalized and larger competitors.
The Company experiences competition with respect to both its transcription
and consulting business from a variety of sources, including, in each case,
both local and national businesses. The markets both for medical transcription
services and for medical records coding and consultation services are highly
fragmented, and no competitor or identifiable group of competitors could be
said to be dominant. The Company believes the principal competitive factors in
each case include reputation and prior experience, and in the case of
transcription services, pricing, timeliness (i.e., turnaround times on
transcribed documents) and accuracy of performance. In both fields, the
Company, in some cases, competes with larger, better known and better
capitalized competitors. With respect to its case management business, the
Company competes with several large national vendors, as well as many regional
and local competitors that have established a niche in the business.
Additionally, many insurance carriers and third party administrators have
developed case management programs of their own rather than outsourcing this
business.
GOVERNMENT REGULATION
Virtually all aspects of the practice of medicine and the provision of
health care services are regulated by federal or state statutes and
regulations, by rules and regulations of state medical boards and state and
local boards of health and by codes established by various medical
associations. The Company has attempted to structure its operations to comply
with these regulations. The Company is not presently subject to direct
regulation as an outsourcing services provider. Future government regulation
of the practice of medicine and the provision of health care services may
impact the Company and require it to restructure its operations in order to
comply with such regulations. In addition, in connection with its case
management business, certain of the
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Company's employees and independent contractors are registered nurses. These
individuals are subject to certain licensing standards in the states in which
they practice, and are responsible for maintaining their licenses. The
Company's case management division is not subject to any material governmental
regulation, although certain states in which the Company provides case
management services have established fee schedules under their workers'
compensation laws which apply to certain case management services provided by
the Company.
EMPLOYEES
As of May 15, 1996, the Company had approximately 693 full-time employees
and 164 part-time employees, including 20 administrative and executive
employees at its headquarters office in Atlanta, Georgia; 29 employees in
sales and marketing or consultative functions; and 456 employees at
outsourcing sites, as well as 285 employees in its medical transcription
operations. As of that date, Sullivan had 52 full-time employees and contracts
with over 15 part-time registered nurses who are not employees of the Company.
The Company also supervises an additional 162 employees of contracting
hospitals at outsourcing sites, pursuant to the terms of its outsourcing
agreements. Neither the Company nor any of the employees it supervises is
currently a party to any collective bargaining agreement; the hospital
employees at one outsourcing site have been solicited by union
representatives, but no definitive action toward representation has been
taken. The Company has not experienced any strikes or work stoppages, and
believes that its relations with its employees are good.
PROPERTIES
The Company leases the space for its principal offices in Atlanta, Georgia,
and space for satellite sales offices in Dallas, Texas and Newton,
Pennsylvania. It also leases space for its transcription offices in Chicago,
Illinois; Pittsburgh and Erie, Pennsylvania; Boston and Worcester,
Massachusetts; and Atlanta, Georgia. The Company leases space for its case
management business in Atlanta, Georgia; Orlando, Florida; and Dallas, Texas.
LEGAL PROCEEDINGS
The Company is subject to certain claims in the ordinary course of business
which are not material.
On September 17, 1993, the Company and its health care subsidiaries and the
physician-owned medical groups which had contracts with the health care
subsidiaries initiated a lawsuit in the Superior Court of the State of
California, County of Los Angeles, against 22 of the largest California
workers' compensation insurance carriers seeking $115 million in compensatory
damages plus punitive damages. The plaintiffs claim abuse of process,
intentional interference with contractual and prospective business relations,
negligent interference and unlawful or unfair business practices which led to
the discontinuation in April 1993 of the former business of the Company's
health care subsidiaries and their contracting associated medical groups (the
"Lawsuit"). The claims arise out of the Company's former business, which prior
to the merger with Transcend Services, Inc., included the business of
providing medical/legal evaluations and medical treatment services (in
association with managed medical groups) in the workers' compensation industry
in California. Seven defendants in the Lawsuit have filed cross complaints
against the plaintiffs seeking restitution, accounting from the plaintiffs for
monies previously paid by the defendants, disgorgement of profits, injunctive
relief, attorneys' fees and punitive damages, based upon allegations of
illegal corporate practice of medicine, illegal referral arrangements,
specific statutory violations and related improper conduct. The case is
presently in the early stages of discovery. The defendants have filed various
motions to dismiss and other motions seeking the failure of the plaintiffs'
cause of action, none of which have been successful. The Company and its
counsel do not believe that it is likely that the Company will be held liable
on any of the cross complaints; however, there can be no assurance that the
Company will be successful in the defense of the cross complaints. In
addition, there can be no assurance as to the recovery by the Company of the
damages sought in its complaint against the defendants. The costs associated
with the conduct of the Lawsuit cannot be ascertained with certainty but are
expected to be substantial, and the Company has to date deferred such costs
until resolution of the litigation. Based upon facts and circumstances known
to date, in the opinion of management, final resolution of the Lawsuit will
not have a material adverse effect on the Company's financial condition or
results of operations. See "Risk Factors--Litigation" and Note 2 of Notes to
Consolidated Financial Statements.
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On June 22, 1995, an action was filed by Timothy S. Priest in his capacity
as administrator of the estate of Robert V. Taylor against Carol Brown, Debbie
Ostwald, the Company's subsidiary Sullivan, and Fireman's Fund Insurance
Company, in the Circuit Court of Franklin County, Tennessee, alleging breach
of the duty to provide reasonably competent nursing care to an injured
individual. The plaintiff demands compensatory damages in the amount of $1
million and punitive damages in the amount of $2 million, plus costs.
Management of the Company believes that the Company has meritorious defenses
to the allegations and intends to vigorously contest liability in this matter.
At the present time, management of the Company cannot predict the outcome of
this litigation, but does not believe that the resolution of the litigation
will have a material adverse effect on the Company's financial condition or
results of operations.
DISCONTINUED OPERATIONS
At March 31, 1996, the net assets related to the discontinued operations of
the Company's health care subsidiaries, First Western and Veritas, both of
which ceased operations as of April 30, 1993, were $3,015,000, including
deferred legal costs related to the Lawsuit and $2,407,000 in net accounts
receivable. The collection liabilities of First Western and Veritas have been
deducted in determining net accounts receivable. The Company has contracted
with a third party to service and manage the remaining accounts receivable
balance for a set fee. The Company will continue to re-evaluate the net
realizability of the net assets related to discontinued operations on an
ongoing basis. Any such re-evaluation could result in an adjustment that may
potentially be material to the carrying value of the asset.
In September 1994, the Company sold substantially all of the assets and
liabilities of its wholly-owned subsidiary, Occu-Care, Inc., which operated
industrial medical clinics, to AmHealth, Inc. ("AmHealth") for a purchase
price of $4,000,000. The purchase price included $1,500,000 in cash paid at
closing and the issuance of two promissory notes bearing interest at 8% per
annum. AmHealth defaulted on the first interest payments on the two notes and
on December 30, 1994, the Company agreed to exchange the notes receivable of
$2,500,000 for 2,500,000 shares of convertible redeemable preferred stock with
a 6.5% cumulative dividend. In conjunction with the Merger on January 10,
1995, the Company recorded these securities at $2,050,000, which was the
Company's estimate of their fair value. AmHealth defaulted on a December 1,
1995 mandatory redemption of a portion of the preferred stock. However,
AmHealth has executed a definitive agreement with CORE, Inc., a public
company, pursuant to which CORE would purchase for cash substantially all the
assets of AmHealth in a transaction expected to close by July 1996. In
anticipation of the consummation of the foregoing transaction, AmHealth and
the Company are presently negotiating to settle AmHealth's obligation to the
Company, but no agreement has been reached. There can be no assurance that the
CORE/AmHealth transaction will close and there can be no assurance that the
amount the Company will ultimately realize on the preferred stock will not be
materially less than the carrying value of the investment as reflected in the
Company's financial statements. See Note 2 of Notes to Consolidated Financial
Statements.
27
<PAGE>
MANAGEMENT
The following table sets forth certain information regarding executive
officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
<S> <C> <C>
Larry G. Gerdes............ 47 President, Chief Executive Officer and Director
Julian L. Cohen............ 40 Chief Operating Officer
G. Scott Dillon............ 46 Chief Development Officer
David W. Murphy............ 38 Chief Financial Officer, Secretary and Treasurer
Donald L. Lucas............ 66 Chairman of the Board
George B. Caldwell......... 65 Director
Walter S. Huff, Jr......... 61 Director
Charles E. Thoele.......... 60 Director
</TABLE>
DIRECTORS AND EXECUTIVE OFFICERS
The following persons serve as the directors and executive officers of the
Company:
Mr. Gerdes has served as a director of the Company since June 1985 and as
its President and Chief Executive Officer since May 1993. From 1991 to 1993,
Mr. Gerdes was a private investor and from May 1992 until the Merger Mr.
Gerdes was the Chairman of the Board of Directors of the former Transcend
Services, Inc. For the five years prior to 1991, Mr. Gerdes held various
executive positions with HBO & Company, a provider of information services to
the healthcare industry, including Chief Financial Officer and Executive Vice
President. Mr. Gerdes also serves as a director of Delphi Information Systems,
Inc. and Aksys, Ltd.
Mr. Cohen has served as the Company's Chief Operating Officer since October
1994. Mr. Cohen served in various capacities at MCC Behavioral Care, Inc., a
provider of managed behavioral health products and services from November 1987
to September 1994, including President from October 1992 to September 1994.
Mr. Cohen previously served as Administrator of Northwestern Memorial
Hospitals Institute of Psychiatry, Assistant Executive Director for
professional services at Menorah Hospital and Assistant Administrator at
University Hospital of New York at Stonybrook.
Mr. Dillon has served as the Company's Chief Development Officer since
September 1995. From September 1992 to August 1995, Mr. Dillon served as
Executive Vice President and Chief Development Officer for Coastal Physician
Services. Prior to Coastal Physician Services, Mr. Dillon served as Executive
Vice President and Chief Operating Officer of the Fisher Mangold Group from
January 1991 to September 1992. Mr. Dillon's 17 years in the health care
industry also includes his service in various senior sales and marketing
positions with ARAMARK, Inc., EmCare Holdings and the Patient Care Products
division of Proctor and Gamble. Mr. Dillon is active in various professional
organizations including, the American Hospital Association, the Healthcare
Financial Management Association and the Center for Health Information
Management.
Mr. Murphy has served as the Company's Chief Financial Officer since May
1995. Mr. Murphy joined the Company in September 1994 as Vice-President of
Acquisitions. Prior to joining the Company, Mr. Murphy was a founder and
General Partner of an investment company and served in various financial,
operating and mergers and acquisition positions with companies such as
Hutchinson SA (France), First Boston and International Paper Company.
Mr. Lucas has served as a director of the Company since December 1985 and
has served as Chairman since August 1989. Mr. Lucas has been a venture
capitalist for more than twenty-five years. Mr. Lucas also serves on the
boards of directors of Amati Communications Corporation; Cadence Design
Systems, Inc.; Delphi Information Systems, Inc.; Kahler Realty Corporation;
Macromedia, Inc.; Oracle Corporation; Quantum Health Resources, Inc.; Racotek,
Inc. and Tricord Systems, Inc.
28
<PAGE>
Mr. Caldwell has served as a director of the Company since May 1995. Mr.
Caldwell is the President Emeritus of Lutheran General HealthSystem in Park
Ridge, Illinois. Mr. Caldwell served as President and Chief Executive Officer
of Lutheran General Health Care System from 1979 to 1989. Prior to 1979, Mr.
Caldwell served as the President and Chief Executive Officer of The Greater
Southeast Community Hospital Foundation of Washington, D.C., and as President
and Chief Executive Officer of Lake Forest Hospital, Lake Forest, Illinois.
Mr. Caldwell is presently the Chairman of The Collier Company, a healthcare
consulting company in Chicago, Illinois. Mr. Caldwell is also the Chairman of
The Hunter Group and a Director of MMI Companies.
Mr. Huff has served as a director of the Company since October 1993. Mr.
Huff was the founder of HBO & Company, a provider of information services to
the healthcare industry and served as its Chairman from 1974 until 1990 and
Chief Executive Officer from 1974 to 1984 and 1986 until 1989. Since 1990, Mr.
Huff has been a private investor.
Mr. Thoele has served as a director of the Company since October 1993. Mr.
Thoele has been a consultant to Sisters of Mercy Health Systems since February
1991. From 1986 to February 1991, he served as a director and the Chief
Operating Officer of Sisters of Mercy Health Systems. Mr. Thoele is currently
Chairman of the Catholic Hospital Association. Mr. Thoele is also director of
HBO & Company.
BOARD OF DIRECTORS
The Board of Directors of the Company currently consists of five persons.
The Company's By-Laws provide that the Board of Directors shall consist of not
less than one person, the precise number to be determined from time to time by
the Board of Directors or shareholders of the Company. The directors are
elected annually by the shareholders of the Company and serve for a term of
one year, or until their earlier resignation, removal from office or death.
The executive officers of the Company are elected annually by the Board of
Directors and serve for a term of one year, or until their earlier
resignation, removal from office or death.
The Company's Board of Directors has two standing committees--the Audit and
Finance Committee and the Stock Option and Compensation Committee. The Audit
and Finance Committee, which is comprised of Messrs. Lucas and Huff, has been
assigned the principal functions of: (i) recommending the independent
auditors; (ii) reviewing and approving the annual report of the independent
auditors; (iii) approving the annual financial statements; and (iv) reviewing
and approving summary reports of the auditor's findings and recommendations.
The Stock Option and Compensation Committee, which is comprised of Messrs.
Huff and Thoele, has been assigned the functions of administering the
Company's 1992 Stock Option Plan, as amended and making recommendations
concerning the establishment of additional employee benefit plans and
compensation for the Company's executive officers.
29
<PAGE>
EXECUTIVE COMPENSATION
The following table provides certain summary information for the fiscal
years ended December 31, 1995 and 1994 and May 31, 1994 concerning
compensation paid or accrued by the Company to or on behalf of the Company's
Chief Executive Officer and the other executive officers of the Company (the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------- -------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION YEAR(1) SALARY BONUS OPTIONS/SAR'S
- --------------------------- -------- -------- ------- -------------
<S> <C> <C> <C> <C>
Larry G. Gerdes........................ 12/31/95 $205,376 $ -- --
President and Chief Executive Officer 12/31/94 116,700 -- --
05/31/94 200,000 -- --
Julian L. Cohen........................ 12/31/95 $193,756 $ --
Chief Operating Officer 12/31/94 39,600 -- 145,000
05/31/94 -- --
David W. Murphy........................ 12/31/95 $100,130 $22,675 60,000
Chief Financial Officer, 12/31/94 28,385 --
Treasurer and Secretary 05/31/94 -- --
G. Scott Dillon........................ 12/31/95 $ 59,599 $ -- 60,000
Chief Development Officer 12/31/94 -- --
05/31/94 -- --
</TABLE>
- --------
(1) Information relates to the fiscal years ended May 31, 1993 and December
31, 1994 and 1995. The fiscal year ended December 31, 1994 was for a
seven month period.
COMPENSATION OF DIRECTORS
Directors of the Company who are compensated as officers of the Company
serve without compensation for their services as directors. Each director of
the Company who is not a compensated officer of the Company is paid a fee of
$8,000 per annum. Each person who first becomes a non-employee director is
granted, as of the date such person becomes a director of the Company, an
option to purchase 10,000 shares of Common Stock. Each non-employee director
will be granted an option to purchase 6,000 shares of the Common Stock, except
the Chairman who will be granted an option to purchase 9,000 shares, upon
election or reelection at the annual meeting of shareholders provided they
have served on the board a minimum of six months.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The following persons served as members of the Stock Option and Compensation
Committee of the Board of Directors during the year ended December 31, 1995:
Walter J. Huff, Jr. and Charles E. Thoele. None of the members of the Stock
Option and Compensation Committee has been an officer or employee of the
Company.
STOCK OPTION PLAN
The Company has adopted a 1992 Stock Option Plan, as amended (the "Plan")
for selected employees and directors who are not employed by the Company
("Non-Employee Directors"). The Plan is administered by the Stock Option and
Compensation Committee of the Board of Directors and provides for the grant of
incentive and non-qualified stock options to purchase up to 1,600,000 shares
of Common Stock. On April 30, 1996, the Board of Directors adopted a
resolution to amend the Plan by increasing the number of shares reserved for
issuance under the Plan by 400,000 shares. The Company is submitting the
proposed amendment to the shareholders of the Company for their approval at a
special meeting of shareholders to be held on June 5, 1996.
30
<PAGE>
Under the terms of the Plan, the Stock Option and Compensation Committee may
determine the employees to whom options will be granted, the time or times of
exercise, the number of shares subject to an option and the terms and
conditions of each stock option agreement. The Stock Option and Compensation
Committee also determines whether an option is an incentive stock option or a
non-qualified stock option. The price per share of stock subject to an
incentive stock option must equal 100% of the fair market value thereof on the
date of grant. The price per share of stock subject to a non-qualified stock
option is to be determined by the Stock Option and Compensation Committee and
may be less than fair market value. The exercise period for an incentive stock
option cannot exceed ten years, while there is no limitation with respect to
non-qualified stock options. In addition, the Stock Option and Compensation
Committee cannot grant an incentive stock option to any person who owns at
least 10% of the outstanding Common Stock unless the price is 110% of fair
market value and the option exercise period does not exceed five years.
The Plan also provides for non-discretionary or automatic grants of options
to Non-Employee Directors. See "Management--Compensation of Directors." The
price of Common Stock subject to a Non-Employee Director option is the fair
market value on the date of grant, except that the price of Common Stock
subject to options granted on March 16, 1992 was the fair market value on
October 14, 1992, the date the Plan was approved by the shareholders of the
Company. Each Non-Employee Director option must conform to the provisions of
the Plan. Non-Employee Director options become exercisable six months from the
date of grant and expire ten years from the date of grant. Moreover, in the
event a Non-Employee Director terminates membership on the Board for any
reason, an option held by him may be exercised until the earlier of the
expiration of the option or 12 months from the date of termination.
As of May 24, 1996, options to purchase a total of 1,276,500 shares of
Common Stock were outstanding at a weighted average exercise price of $2.76
per share. In addition, as of May 24, 1996, options to purchase a total of
21,775 shares of Common Stock were outstanding under the former Transcend
Services, Inc. stock option plan at a weighted average exercise price of $.19
per share.
The following table sets forth information regarding individual grants of
stock options under the Plan made during the year ended December 31, 1995 to
the Named Executive Officers.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT
ASSUMED ANNUAL RATES
OF STOCK PRICE
APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(3)
-------------------------------------------------- --------------------
% OF TOTAL
NUMBER OF OPTIONS/SAR'S
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES EXERCISE OR
OPTIONS/SAR'S IN FISCAL BASE PRICE EXPIRATION
NAME GRANTED(#)(1) YEAR(2) ($/SHARE) DATE 5% 10%
- ---- ------------- ------------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Larry G. Gerdes......... -- -- -- -- -- --
Julian L. Cohen(4)...... 25,000 16.5% $3.31 3/21/05 $ 52,000 $ 132,000
20,000 5.00 12/20/05 63,000 159,000
David W. Murphy(5)...... 30,000 14.6% 2.25 02/23/05 43,000 108,000
10,000 5.00 12/20/05 31,000 80,000
G. Scott Dillon(6)...... 60,000 21.6% 3.50 08/15/05 132,000 335,000
</TABLE>
OPTION GRANTS IN FISCAL 1995
- --------
(1) Stock options were granted with an exercise price equal to the fair
market value of the Company's Common Stock on the date of grant.
(2) The Company granted options to purchase 273,000 shares to employees in
the year ended December 31, 1995.
(3) The dollar amounts under these columns represent the potential realizable
value of each grant of options assuming that the market price of the
Company's Common Stock appreciates in value from the date of grant at the
5% and 10% annual rates prescribed by the Commission and therefore are
not intended to forecast possible future appreciation, if any, of the
price of the Company's Common Stock.
31
<PAGE>
(4) Mr. Cohen was granted an option to purchase 25,000 shares on March 21,
1995 and an option to purchase 20,000 shares on December 20, 1995 which
vest annually in equal increments over the subsequent four years
beginning on the first anniversary of the date of grant.
(5) Mr. Murphy was granted an option to purchase 30,000 shares on February
23, 1995 and an option to purchase 10,000 shares on December 20, 1995
which vest annually in equal increments over the subsequent four years
beginning on the first anniversary of the date of grant.
(6) Mr. Dillon was granted an option to purchase 60,000 shares on August 15,
1995 which vests annually in equal increments over the subsequent four
years beginning on the first anniversary of the date of grant.
The following table sets forth certain information concerning the
unexercised stock options held by the Named Executive Officers. During the
year ended December 31, 1995, only one of the individuals listed below
exercised any options. Larry G. Gerdes exercised a Non-Qualified Stock Option
to purchase 50,000 shares of Common Stock on December 1, 1995. The exercise
price was $1.94 per share and the market value was $5.13 per share on the date
of exercise.
AGGREGATED OPTION EXERCISES IN FISCAL 1995 AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED OPTIONS AT FISCAL YEAR END
---------------------------------------------------
NUMBER VALUE OF UNEXERCISED (1)
OF SECURITIES IN-THE-MONEY OPTIONS
SHARES UNDERLYING UNEXERCISED AT FY-END ($)
ACQUIRED VALUE OPTIONS AT FY-END IN-THE-MONEY
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ----------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Larry G. Gerdes......... 50,000 $159,350 549,333 / 166,666 $2,065,069 / $635,330
Julian L. Cohen......... -- -- 25,000 / 120,000 96,875 / 366,562
David W. Murphy......... -- -- 5,000 / 55,000 19,375 / 170,625
G. Scott Dillon......... -- -- -- / 60,000 -- / 135,000
</TABLE>
- --------
(1) Dollar values calculated by determining the difference between the fair
market value of the underlying securities at December 31, 1995 ($5.75 per
share) and the aggregate exercise price of the options.
EMPLOYEE RETIREMENT SAVINGS PLAN
The Company has established a savings and profit-sharing plan that qualifies
as a tax-deferred savings plan under Section 401(k) of the Internal Revenue
Code (the "401(k) Plan") for its salaried, clerical and hourly employees.
Under the 401(k) Plan, eligible employees may contribute up to $9,240 of their
gross salary to the 401(k) Plan. Each participating employee is fully vested
in contributions made by such employee. The Company presently matches 10% of
the amount contributed by an employee up to 6% of the employee's salary, but
the Company's policy regarding matching contributions may be changed annually
in the discretion of the Board of Directors. All amounts contributed under the
401(k) Plan are invested in one or more investment accounts administered by an
independent plan administrator.
EMPLOYEE STOCK PURCHASE PLAN
The Company has adopted a 1990 Employee Stock Purchase Plan, as amended (the
"Stock Purchase Plan"). The purpose of the Stock Purchase Plan is to provide
an incentive for employees of the Company and its subsidiaries to acquire or
increase their proprietary interests in the Company through the purchase of
shares of Common Stock of the Company. The Stock Purchase Plan is administered
by the Board of Directors of the Company, which has the authority to interpret
the Stock Purchase Plan, to prescribe, amend and rescind rules and regulations
relating to it and to establish the terms of each offering of Common Stock
under the Stock Purchase Plan. All employees of the Company are eligible to
participate in the Stock Purchase Plan with certain limited exceptions.
Participants may direct the deduction of a specified percentage, as set by
the Board of Directors, from their eligible compensation to be used to
purchase Common Stock under the Stock Purchase Plan. The terms of the
32
<PAGE>
Stock Purchase Plan provide for two offering periods each calendar year at the
beginning of which eligible employees must elect to participate. At the end of
each offering period, the Company uses the accumulated payroll deductions to
purchase Common Stock for the participant. The price of Common Stock purchased
with such payroll deductions during each offering period shall be the lesser
of: (i) 85% of the mean between the bid and asked prices of the Common Stock
at the beginning of each offering; or (ii) 85% of the mean between the bid and
asked prices of the Common Stock on the last day of such offering period.
The Company will not grant to any participant any right to purchase Common
Stock under the Stock Purchase Plan if the exercise of such right would cause
such participant to own 5% or more of the combined voting power or value of
all classes of the Company's capital stock. In addition, an employee may not
participate if such participation would permit the employee to purchase stock
under all employee stock purchase plans of the Company and its subsidiaries to
accrue at a rate which exceeds $25,000 of the fair market value of the stock
for each calendar year in which an option to purchase stock under the Plan is
outstanding at any time.
An aggregate of 225,000 shares of Common Stock have been reserved for
issuance under the Stock Purchase Plan.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In September 1994, the Company loaned the sum of $80,000 to Julian L. Cohen,
the Chief Operating Officer of the Company, which was used by Mr. Cohen to
purchase his residence. The loan to Mr. Cohen was in the form of a promissory
note for the principal sum of $80,000, bearing interest at 7 3/4% per annum,
payable on each January 1, April 1, July 1 and October 1, commencing on
January 1, 1995, with the principal due in one lump sum on September 30, 1999.
As of May 1, 1996, $80,000 remained outstanding under the note. The note is
secured by Mr. Cohen's right to purchase shares of the Company's Common Stock
pursuant to the Company's 1992 Stock Option Plan, as amended, and the shares
of Common Stock underlying such rights.
33
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is authorized to issue up to 30,000,000 shares of Common Stock,
$.01 par value per share, and up to 21,000,000 shares of Preferred Stock $.01
par value per share.
COMMON STOCK
Subject to the rights of any holder of Preferred Stock, each holder of
Common Stock is entitled to one vote per share for the election of directors
as well as on other matters, to dividends as and when declared by the
Company's Board of Directors, and upon liquidation to share in the net assets
of the Company pro rata in accordance with his holdings. The Common Stock has
no preemptive, redemption, conversion or subscription rights, and all
outstanding shares of Common Stock are, and the shares of Common Stock offered
by the Company hereby will be, fully paid and nonassessable.
PREFERRED STOCK
The Company is authorized to issue up to 21,000,000 shares of $.01 par value
Preferred Stock, none of which is outstanding. The Board of Directors has the
power, without further action by the stockholders, to divide any and all
shares of Preferred Stock into series and to fix and determine the relative
rights and preferences of the Preferred Stock, such as the designation of
series and the number of shares constituting such series, dividend rights,
redemption and sinking fund provisions, liquidating and dissolution
preferences, conversion or exchange rights and voting rights, if any.
Issuances of Preferred Stock by the Board of Directors may result in such
shares having senior dividend and/or liquidation preferences to the holders of
shares of Common Stock and may dilute the voting rights of such holders.
Issuances of Preferred Stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could,
among other things, adversely affect the voting rights of holders of the
Common Stock. In addition, the issuance of Preferred Stock could make it more
difficult for a third party to acquire a majority of the outstanding voting
stock. Accordingly, the issuance of Preferred Stock may be used as an "anti-
takeover" device without further action on the part of the shareholders of the
Company. No shares of Preferred Stock have been issued and the Company has no
present plans to issue any shares of Preferred Stock.
CERTAIN PROVISIONS OF CERTIFICATE OF INCORPORATION AND BYLAWS
The Company's Bylaws permit it to indemnify a director and officer who was
or is a party to any threatened, pending or completed action, suit or other
type of proceeding, whether civil, criminal, administrative or investigative
(other than an action by or any right of the Company) by reason of the fact
that he or she is or was a director or officer or is or was serving at the
request of the Company as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorney's fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit
or proceeding. These indemnification rights apply if the director or officer
acted in good faith and in a manner in which he or she reasonably believed to
be in or not opposed to the best interest of the Company and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his or
her conduct was unlawful. In addition, under the Bylaws, the Company may
indemnify and hold harmless an officer or director who is a party in an action
by or in the right of the Company against expenses (including attorney's fees)
actually and reasonably incurred in connection with the defense or settlement
of such proceeding. Such indemnification shall be authorized if the director
or officer has acted in good faith and in a manner in which he or she
reasonably believed to be in or not opposed to the best interest of the
Company, except indemnification is not authorized where there is an
adjudication of liability, unless the court in which such proceeding was
brought, or any other Court of Chancery, shall determine, in view of all the
circumstances, that such person is fairly and reasonably entitled to indemnity
for such expenses which such court shall deem proper.
The Company's Bylaws provide that indemnification of the costs and expenses
of defending any action is required to be made to any officer or director who
is successful (on the merits or otherwise) in defending an
34
<PAGE>
action of the type referred to in the immediately preceding paragraph. Except
with regard to the costs and expenses of successfully defending an action as
may be ordered by a court, indemnification as described in the previous
paragraph is only required to be made to a director or officer if a
determination is made that indemnification is proper under the circumstances.
Such determination shall be made: (i) by the Company's Board by a majority
vote of a quorum consisting of directors who were not parties to such action,
suit or proceeding; (ii) by independent legal counsel if such a quorum is not
obtainable, or, even if obtainable a quorum of disinterested directors so
directs; or (iii) by the affirmative vote of a majority of shares entitled to
vote.
The Bylaws of the Company also permit the Company to purchase and maintain
insurance on behalf of any director or officer of the corporation against any
liability asserted against the director or officer and incurred in such
capacity, whether or not the corporation would have the power to indemnify the
director or officer against such liability. The Bylaws of the Company further
provide that any expenses (including attorney's fees) incurred by any officer
or director in defending a civil or criminal action, suit or proceeding may be
paid by the Company in advance of the final disposition of such action upon
receipt of an undertaking by such director or officer to repay all amounts
advanced if it shall be determined that he or she is not entitled to be
indemnified by the Company.
Subject to certain limitations, the Company's executive officers and
directors are insured against losses arising from claims made against them for
wrongful acts which they may become obligated to pay or for which the Company
may be required to indemnify them.
Limitation of Liability. In addition, the Certificate of Incorporation also
provides that directors of the Company will not be personally liable for
monetary damages to the Company or its shareholders for certain breaches of
their fiduciary duty as directors, unless they violated their duty of loyalty
to the Company or its shareholders, acted in bad faith, knowingly or
intentionally violated the law, authorized illegal dividends or redemptions or
derived an improper personal benefit from their action as directors. This
provision would have no effect on the availability of equitable remedies or
non-monetary relief, such as an injunction or rescission for breach of the
duty of care. In addition, the provision applies only to claims against a
director arising out of his role as a director and not in any other capacity
(such as an officer or employee of the Company). Further, liability of a
director for violations of the federal securities laws will not be limited by
this provision.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is First
Interstate Bank of California.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
21,401,403 shares of Common Stock. Of these shares, a total of 21,341,403
shares, including all of the 3,000,000 shares of Common Stock sold in this
offering, will be freely transferable without restriction or limitation under
the Securities Act. The remaining 60,000 shares are "restricted" shares within
the meaning of Rule 144 adopted under the Securities Act (the "Restricted
Shares"). The Restricted Shares were issued and sold by the Company in private
transactions in reliance upon exemptions from registration under the
Securities Act and may not be sold except in compliance with the registration
requirements of the Securities Act or pursuant to an exemption from
registration, such as the exemption provided by Rule 144 under the Securities
Act.
None of the Restricted Shares are currently eligible for sale in the public
market pursuant to Rule 144. In general, under Rule 144 as currently in
effect, any person (or persons whose shares are aggregated), including an
affiliate of the Company, who has held shares for at least a two-year period
(as computed under Rule 144) is entitled to sell within any three-month period
a number of shares that does not exceed the greater of (i) 1% of the then
outstanding shares of the Company's Common Stock (approximately 184,014
shares) and (ii) the average weekly trading volume in the Company's Common
Stock during the four calendar weeks immediately
35
<PAGE>
preceding the date on which the notice of sale is filed with the Commission.
Sales under Rule 144 are also subject to certain provisions relating to the
manner of sale, the filing of a notice of sale and the availability of current
public information about the Company. A person (or persons whose shares are
aggregated) who is not deemed an affiliate of the Company at any time during
the 90 days immediately preceding a sale and who has held shares for at least
a three-year period (as computed under Rule 144), would be entitled to sell
such shares under Rule 144(k) without regard to the volume limitation and
other conditions described above.
No prediction can be made as to the effect, if any, that market sales or the
availability of such shares of sale will have on the market price of the
Common Stock. Nevertheless, sales of substantial amounts of Common Stock in
the public market may have an adverse impact on such market price.
As of May 24, 1996, outstanding options to purchase 1,298,275 shares of
Common Stock were held by certain officers, directors and employees of the
Company pursuant to the Company's 1992 Stock Option Plan, as amended, and
pursuant to the former Transcend Services, Inc. stock option plan, and an
aggregate of 45,750 shares were available for the grant of future options
under the Company's 1992 Stock Option Plan, as amended. The Company has filed
registration statements to register shares of Common Stock issuable upon the
exercise of stock options under the 1992 Stock Option Plan, as amended, and
under the former Transcend Services, Inc. stock option plan. Shares issued
upon the exercise of stock options will be available for sale in the open
market. In addition, as of May 24, 1996, the Company had 8% Convertible
Debentures outstanding which are convertible into an aggregate of 572,000
shares of Common Stock and one Warrant outstanding to purchase an aggregate of
25,000 shares of Common Stock. Shares issued upon the conversion of the
Debentures and exercise of the Warrant will be eligible for sale in the open
market in accordance with Rule 144 as described above.
The Company and the Company's officers and directors, who beneficially own
in the aggregate 6,241,440 shares of Common Stock (approximately 33.92% of the
outstanding Common Stock) have agreed that, for a period of 120 days after the
date of this Prospectus, they will not, without the prior written consent of
Smith Barney Inc., offer, sell, contract to sell or otherwise dispose of any
Common Stock (or any securities convertible into or exercisable or
exchangeable for shares of Common Stock) (the "Lock-up Period"). Following the
Lock-up Period, those shares will be eligible for sale in the public market,
subject to the conditions and restrictions of Rule 144, as described above.
REGISTRATION RIGHTS
Holders of 60,000 shares of Common Stock, the Warrant to purchase 25,000
shares of Common Stock and the 8% Convertible Debentures which are convertible
into an aggregate of 572,000 shares of Common Stock have certain rights with
respect to the registration under the Securities Act of shares of Common Stock
owned by them from time to time (the "Registrable Shares"). Each holder of
Registrable Shares has "piggyback" registration rights, subject to certain
limitations, in the event the Company proposes to register the sale of any of
its securities for its own account or for the account of its shareholders. The
Company is obligated to bear all expenses in connection with the registration
of the Registrable Shares, except underwriting commissions and discounts and
fees and disbursements of legal counsel to holders thereof.
36
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions in the Underwriting Agreement
dated the date hereof, each Underwriter named below has severally agreed to
purchase, and the Company has agreed to sell to such Underwriter, shares of
Common Stock which shall equal the number of shares set forth opposite the
name of such Underwriter below.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ----------- ---------
<S> <C>
Smith Barney Inc......................................................
Dain Bosworth Incorporated............................................
---------
Total............................................................... 3,000,000
=========
</TABLE>
The Underwriters are obligated to take and pay for all shares of Common
Stock offered hereby (other than those covered by the over-allotment option
described below) if any such shares are taken.
The Underwriters, for whom Smith Barney Inc. and Dain Bosworth Incorporated
are acting as Representatives, propose initially to offer part of the shares
of the Common Stock directly to the public at the public offering price set
forth on the cover page hereof and part to certain dealers at a price that
represents a concession not in excess of $ per share under the public
offering price. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to other Underwriters or to certain
other dealers. After the initial offering, the public offering price and such
concessions may be changed by the Underwriters.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an additional 450,000
shares of Common Stock at the price to the public set forth on the cover page
hereof less underwriting discounts and commissions. The Underwriters may
exercise such option to purchase additional shares solely for the purpose of
covering over-allotments, if any, incurred in connection with the sale of the
shares of Common Stock offered hereby. To the extent such option is exercised,
the Underwriters will be obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number of
shares of Common Stock set forth opposite such Underwriter's name in the
preceding table bears to the total number of shares of Common Stock in such
table.
The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
The rules of the Commission generally prohibit the Underwriters and other
members of the selling group from making a market in the Common Stock during
the two business days prior to commencement of sales in this offering (the
"Cooling Off Period"). The Commission has, however, adopted Rule 10b-6A, which
provides an exemption from such prohibition for certain passive market making
transactions. Such passive market making transactions must comply with
applicable price and volume limits and must be identified as passive market
making transactions. In general, pursuant to Rule 10b-6A, a passive market
maker must display its bid for a security at a price not in excess of the
highest independent bid for the security. If all independent bids are lowered
below the passive market maker's bid, however, such bid must then be lowered
when certain purchase limits are
37
<PAGE>
exceeded. Further, net purchases by a passive market maker on each day are
generally limited to a specified percentage of the passive market maker's
average daily trading volume in a security during a specified prior period and
must be discontinued when such limit is reached. Pursuant to the exemption
provided by Rule 10b-6A, certain of the Underwriters and selling group members
may engage in passive market making in the Common Stock during the Cooling Off
Period. Passive market making may stabilize the market price of the Common
Stock at a level above that which might otherwise prevail, and if commenced,
may be discontinued at any time.
The Company and the Company's officers and directors, who beneficially own
in the aggregate 6,241,440 shares of Common Stock (approximately 33.92% of the
outstanding Common Stock) have agreed that, for a period of 120 days after the
date of this Prospectus, they will not, without the prior written consent of
Smith Barney Inc., offer, sell, contract to sell or otherwise dispose of any
Common Stock (or any securities convertible into or exercisable or
exchangeable for shares of Common Stock).
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Smith, Gambrell & Russell, Atlanta, Georgia, and for the
Underwriters by Dewey Ballantine, New York, New York.
EXPERTS
The consolidated financial statements and schedule of Transcend Services,
Inc. and subsidiaries, included and/or incorporated by reference in this
Prospectus and elsewhere in the Registration Statement to the extent and for
the periods indicated in their reports, have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports thereto,
and are included herein in reliance upon the authority of said firm as experts
in giving said reports.
The financial statements of Medical Transcription of Atlanta, Inc.,
incorporated by reference in this Prospectus and elsewhere in the Registration
Statement to the extent and for the periods indicated in their report, have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report thereto and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
AVAILABLE INFORMATION
The Company is subject to certain informational requirements of the
Securities Exchange Act of 1934 (the "1934 Act") and, in accordance therewith,
files reports and other information with the Securities and Exchange
Commission (the "Commission"). Such reports and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the Commission's regional offices located at 7 World Trade Center, 13th Floor,
New York, New York 10048 and Midwest Regional Office, Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can also be obtained at prescribed rates by writing to the Securities
and Exchange Commission, Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549.
The Company has filed a Registration Statement on Form S-3 (together with
all amendments and exhibits filed or to be filed in connection therewith, the
"Registration Statement") under the Securities Act of 1933, as amended, with
respect to the Common Stock offered hereby. This Prospectus does not contain
all the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. Statements contained herein concerning the provisions of documents
are necessarily summaries of such documents, and each statement is qualified
in its entirety by reference to the copy of the applicable document filed with
the Commission.
38
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission pursuant to the
1934 Act are hereby incorporated in this Prospectus by reference:
1. The Company's Annual Report on Form 10-K for the year ended December 31,
1995;
2. The Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1996;
3. The Company's Current Report on Form 8-K dated May 2, 1995;
4. The Company's Amendment No. 1 on Form 8-K/A dated June 30, 1995 to its
Current Report on Form 8-K dated May 2, 1995;
5. The Company's Amendment No. 2 on Form 8-K/A dated May 30, 1996 to its
Current Report on Form 8-K dated May 2, 1995; and
6. The description of the Company's Common Stock contained in the
Company's Registration Statement on Form 8-A as filed with the
Commission on January 8, 1990.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the 1934 Act subsequent to the date of this Prospectus and prior to
the termination of this offering shall be deemed to be incorporated by
reference into this Prospectus and to be a part hereof from the respective
dates of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent
that a statement contained herein or in any other subsequently filed document
which also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified and superseded, to constitute a part of
this Prospectus.
The Company will provide without charge to each person to whom a Prospectus
is delivered, upon written or oral request of such person, a copy of any and
all of the information that has been incorporated by reference in this
Prospectus (excluding exhibits unless such exhibits are specifically
incorporated by reference into such documents). Please direct such requests to
the Secretary of Transcend Services, Inc. at the Company's principal offices
located at 3353 Peachtree Road, N.E., Suite 1000, Atlanta, Georgia 30326,
telephone number (404) 364-8000.
39
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
TRANSCEND SERVICES, INC.
Report of Arthur Andersen LLP, Independent Public Accountants............ F-2
Consolidated Balance Sheets at December 31, 1995 and 1994 and March 31,
1996 (unaudited)........................................................ F-3
Consolidated Statements of Operations for the years ended December 31,
1995, 1994 and 1993 and for the three months ended March 31, 1996 and
1995 (unaudited)........................................................ F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1995, 1994 and 1993 for the three months ended
March 31, 1996 (unaudited).............................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1994 and 1993 and for the three months ended March 31, 1996 and
1995 (unaudited)........................................................ F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Transcend Services, Inc.:
We have audited the accompanying consolidated balance sheets of Transcend
Services, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1994 and 1995 and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Transcend Services, Inc.
and subsidiaries as of December 31, 1994 and 1995 and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Atlanta, Georgia
February 13, 1996
F-2
<PAGE>
TRANSCEND SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............. $ 150,000 $ 1,073,000 $ 635,000
Trade accounts receivable, net of
allowance for doubtful accounts
of $15,000, $42,000 and
$46,000 respectively................. 700,000 3,056,000 2,815,000
Prepaid expenses...................... 62,000 309,000 721,000
----------- ----------- -----------
Total current assets................ 912,000 4,438,000 4,171,000
NET ASSETS RELATED TO DISCONTINUED
OPERATIONS............................. -- 2,893,000 3,015,000
SECURITIES OF AMHEALTH.................. -- 2,050,000 2,050,000
OFFICE FURNITURE AND EQUIPMENT, at cost,
less accumulated depreciation of
$298,000, $1,059,000 and $1,235,000
respectively........................... 558,000 1,681,000 1,816,000
DEPOSITS AND OTHER ASSETS............... 130,000 408,000 381,000
GOODWILL AND OTHER INTANGIBLE ASSETS,
less accumulated amortization of
$381,000, $1,301,000 and $1,446,000
respectively........................... 1,080,000 5,363,000 5,218,000
----------- ----------- -----------
$ 2,680,000 $16,833,000 $16,651,000
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long term debt..... 2,025,000 208,000 108,000
Accounts payable...................... 783,000 1,268,000 1,173,000
Accrued compensation and employee
benefits............................. 506,000 1,560,000 1,527,000
Other accrued liabilities............. 578,000 808,000 1,276,000
Current portion of capital lease
obligation........................... 21,000 -- --
Deferred income taxes................. -- 133,000 103,000
----------- ----------- -----------
Total current liabilities........... 3,913,000 3,977,000 4,187,000
----------- ----------- -----------
LONG TERM DEBT.......................... -- 392,000 368,000
CONVERTIBLE DEBENTURES.................. -- 2,000,000 2,000,000
DEFERRED INCOME TAXES................... -- 543,000 540,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value;
21,000,000 shares authorized; none
outstanding.......................... -- -- --
Common stock, $.01 par value,
31,000,000 shares authorized,
9,733,000, 18,113,000 and 18,291,000
shares issued and outstanding as of
December 31, 1994 and 1995 and March
31, 1996 respectively................ 97,000 181,000 183,000
Additional paid in capital............ 1,677,000 16,643,000 16,799,000
Accumulated deficit................... (3,007,000) (6,903,000) (7,426,000)
----------- ----------- -----------
Total shareholders' equity.......... (1,233,000) 9,921,000 9,556,000
----------- ----------- -----------
$ 2,680,000 $16,833,000 $16,651,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
TRANSCEND SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ ------------------------
1993 1994 1995 1995 1996
---------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET REVENUE............. $6,208,000 $12,393,000 $25,882,000 $ 4,897,000 $ 8,688,000
DIRECT COSTS............ 5,125,000 10,787,000 22,334,000 4,346,000 7,260,000
---------- ----------- ----------- ----------- -----------
Gross profit........... 1,083,000 1,606,000 3,548,000 551,000 1,428,000
MARKETING AND SALES
EXPENSES............... 378,000 929,000 2,186,000 437,000 641,000
GENERAL AND
ADMINISTRATIVE
EXPENSES............... 1,330,000 1,673,000 4,604,000 1,113,000 1,122,000
AMORTIZATION EXPENSE.... 310,000 357,000 633,000 145,000 145,000
---------- ----------- ----------- ----------- -----------
Operating loss......... (935,000) (1,353,000) (3,875,000) (1,144,000) (480,000)
OTHER INCOME
(EXPENSES):
Interest expense....... (135,000) (66,000) (96,000) -- (52,000)
Interest income........ 3,000 1,000 75,000 36,000 9,000
Other.................. 101,000 25,000 -- -- --
---------- ----------- ----------- ----------- -----------
(31,000) (40,000) (21,000) 36,000 (43,000)
---------- ----------- ----------- ----------- -----------
LOSS BEFORE PROVISION
FOR INCOME TAXES....... (966,000) (1,393,000) (3,896,000) (1,108,000) (523,000)
PROVISION FOR INCOME
TAXES.................. -- 13,000 -- -- --
---------- ----------- ----------- ----------- -----------
NET LOSS................ $ (966,000) $(1,406,000) $(3,896,000) $(1,108,000) (523,000)
========== =========== =========== =========== ===========
Loss per common share.. $ (.11) $ (.14) $ (.22) $ (.06) $ (.03)
========== =========== =========== =========== ===========
Weighted average common
shares outstanding..... 8,866,000 9,733,000 17,818,000 17,533,000 18,217,000
========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
TRANSCEND SERVICES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN WARRANTS ACCUMULATED SHAREHOLDERS'
STOCK CAPITAL OUTSTANDING DEFICIT EQUITY
-------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31,
1992................... 72,000 840,000 -- (635,000) 277,000
Issuance of 2,103,847
shares of Common stock
in stock offering..... 21,000 714,000 -- -- 735,000
Other issuances of
common stock.......... 1,000 28,000 -- -- 29,000
Purchase of shares of
common stock.......... -- (17,000) -- -- (17,000)
Issuance of warrants... -- -- 104,000 -- 104,000
Net loss............... -- -- -- (966,000) (966,000)
-------- ----------- -------- ----------- -----------
BALANCE, December 31,
1993................... 94,000 1,565,000 104,000 (1,601,000) 162,000
-------- ----------- -------- ----------- -----------
Issuance of 341,546
shares of common stock
from exercise of
warrants.............. 3,000 101,000 (104,000) -- --
Other issuance of
common stock.......... -- 11,000 -- -- 11,000
Net loss............... -- -- -- (1,406,000) (1,406,000)
-------- ----------- -------- ----------- -----------
BALANCE, December 31,
1994................... 97,000 1,677,000 -- (3,007,000) (1,233,000)
-------- ----------- -------- ----------- -----------
Issuance of 7,792,446
shares of Common Stock
with Merger........... 78,000 14,533,000 -- -- 14,611,000
Issuance of 60,000
shares of Common Stock
in acquisition........ 1,000 171,000 -- -- 172,000
Issuance of 527,130
shares from exercise
of options and other
issuances............. 5,000 262,000 -- -- 267,000
Net loss............... -- -- -- (3,896,000) (3,896,000)
-------- ----------- -------- ----------- -----------
BALANCE, December 31,
1995................... $181,000 $16,643,000 $ -- $(6,903,000) $ 9,921,000
-------- ----------- -------- ----------- -----------
Issuance of 178,000
shares from exercise
of options and other
issuances............. 2,000 156,000 -- -- 158,000
Net loss............... -- -- -- (523,000) (523,000)
-------- ----------- -------- ----------- -----------
BALANCE, March 31, 1996. $183,000 $16,799,000 $ -- $(7,426,000) $ 9,556,000
======== =========== ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
TRANSCEND SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ ----------------------
1993 1994 1995 1995 1996
---------- ----------- ----------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss................ $ (966,000) $(1,406,000) $(3,896,000) $(1,108,000) $(523,000)
Adjustments to
reconcile net loss to
net cash provided by
(used in) operating
activities:
Depreciation and
amortization........... 396,000 530,000 1,134,000 255,000 322,000
Loss on disposal of
assets................. 12,000 -- -- -- --
Loss on forgiveness of
note receivable........ 60,000 -- -- -- --
Gain on sale of
software division...... (100,000) -- -- -- --
Interest expense........ 104,000 -- -- -- --
Changes in assets and
liabilities, net of
acquisitions:
Receivables............. 166,000 (226,000) (1,412,000) (145,000) 242,000
Prepaid expenses........ 4,000 (51,000) (187,000) (111,000) (412,000)
Deposits and other
assets................. (20,000) (101,000) (351,000) (17,000) 27,000
Accounts payable........ 109,000 539,000 (37,000) (929,000) (95,000)
Accounts compensation
and benefits........... -- -- -- 359,000 (34,000)
Accrued expenses and
other liabilities...... 619,000 255,000 291,000 (189,000) 467,000
Other................... 53,000 (119,000) 123,000 (36,000) (30,000)
---------- ----------- ----------- ----------- ---------
Total adjustments....... 1,403,000 827,000 (439,000) (813,000) 487,000
---------- ----------- ----------- ----------- ---------
Net cash provided by
(used in) continuing
operations............. 437,000 (579,000) (4,335,000) (1,921,000) (36,000)
---------- ----------- ----------- ----------- ---------
Net cash provided by
discontinued
operations............. -- -- 202,000 79,000 (122,000)
---------- ----------- ----------- ----------- ---------
Net cash provided by
(used in) operating
activities............. 437,000 (579,000) (4,133,000) (1,842,000) (158,000)
---------- ----------- ----------- ----------- ---------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Capital expenditures.... (126,000) (440,000) (1,220,000) (472,000) (313,000)
Proceeds from sale of
assets................. 21,000 -- -- -- --
Proceeds from note
receivable............. 12,000 -- -- -- --
Proceeds from sale of
software division...... 100,000 -- -- -- --
Acquisitions............ (1,050,000) (1,000,000) (1,527,000) (966,000) --
Disposal and transfer
of property............ -- -- 60,000 -- --
---------- ----------- ----------- ----------- ---------
Net cash used in
investing activities... (1,043,000) (1,440,000) (2,687,000) (1,438,000) (313,000)
---------- ----------- ----------- ----------- ---------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Borrowing from
short-term debt........ 200,000 1,000,000 -- -- --
Borrowing under line of
credit agreement....... 401,000 1,025,000 -- -- --
Principal payments on
long-term debt......... (26,000) -- (60,000) -- (24,000)
Principal payments on
short-term debt........ (200,000) -- -- (1,007,000) (100,000)
Principal payment on
capital lease
obligations............ (25,000) -- -- -- --
Repayments of line of
credit................. (651,000) -- (2,025,000) (1,020,000) --
Purchase of common
stock.................. (17,000) -- -- -- --
Proceeds from
Convertible Debenture.. -- -- 2,000,000 -- --
Proceeds from stock
options................ -- -- -- -- 157,000
Proceeds from common
stock issuance......... 764,000 11,000 268,000 -- --
---------- ----------- ----------- ----------- ---------
Net cash provided by
financing activities.... 446,000 2,036,000 183,000 (2,027,000) 33,000
---------- ----------- ----------- ----------- ---------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............. (160,000) 17,000 (6,637,000) (5,307,000) (438,000)
CASH ACQUIRED FROM
ACQUISITIONS............ -- 2,000 7,560,000 7,486,000 --
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF PERIOD..... 291,000 131,000 150,000 150,000 1,073,000
---------- ----------- ----------- ----------- ---------
CASH AND CASH
EQUIVALENTS AT END OF
PERIOD.................. $ 131,000 $ 150,000 $ 1,073,000 $ 2,329,000 $ 635,000
========== =========== =========== =========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Transcend Services, Inc. (the "Company"), established in 1984, is engaged in
the field of contract outsourcing of the health information management/medical
records and patient access functions of hospitals. The Company offers
operations evaluation, consulting, reimbursement coding, transcription, and
other services generally resident in the medical records department of
hospitals. Currently, it emphasizes three- to five-year contractual
relationships for management of the entire hospital medical records and
patient access departments. The Company's three largest hospital contracts
accounted for approximately 58%, 50% and 24% of sales in 1993, 1994, and 1995,
respectively.
On January 10, 1995, TriCare, Inc., acquired Transcend Services, Inc., a
Georgia corporation by the merger of Transcend into First Western Health
Corporation ("Merger"). On May 31, 1995, Transcend Services, Inc., a
California corporation following its January 10, 1995 merger into TriCare, and
Veritas Healthcare Management, a California corporation owned by TriCare,
merged into the TriCare corporation, whose name was then changed to "Transcend
Services, Inc." Transcend Services, Inc. now operates as a Delaware
corporation. Inasmuch as the Merger is being treated for financial accounting
purposes as the acquisition of TriCare by Transcend, following the Merger, the
historical financial statements of Transcend have become the financial
statements of TriCare and include the businesses of both companies after the
effective date of the merger.
BASIS OF PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly-liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE
An allowance for doubtful accounts has been established to provide for
losses on uncollectible accounts based on management's estimates and
historical collection. Bad debt expense amounted to $30,000, $9,000 and $0 in
1993, 1994 and 1995, respectively.
REVENUE AND COST RECOGNITION
Revenue is recognized monthly as the work is performed. One-time
nonrefundable contract implementation fees have been amortized over the first
three months of a contract to match when the costs are incurred for
implementation. Direct costs are expensed as incurred. Gross margins vary by
contract. Direct costs include contract labor costs related to medical records
processing, transcription, coding costs and case management costs, as well as
purchased services, such as microfilming, record storage, software licenses,
etc.
F-7
<PAGE>
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
DEPRECIATION AND AMORTIZATION
Depreciation and amortization are computed using the straight-line method
over the estimated useful lives of the respective assets which range from
three to seven years.
INCOME TAXES
The Company follows Statement of Financial Accounting Standards No 109
("SFAS 109"). Under the asset and liability method of SFAS 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
DEPOSITS AND OTHER ASSETS
Deposits and other assets includes $360,000 in restricted cash used as
collateral for a letter of credit related to a contract outsourcing agreement
which expires in September, 1996.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets are currently being amortized over
periods ranging from three to thirty years. The Company periodically evaluates
whether events and circumstances since acquisition have occurred that indicate
that the remaining estimated useful life of goodwill may warrant revision or
that the remaining balance of goodwill may not be recoverable. When factors
(such as a change in law or regulatory environment or forecasts showing
changing long-term profitability) indicate that goodwill should be evaluated
for possible impairment, the Company uses an estimate of the related business
unit's undiscounted net income over the remaining life of the goodwill to
measure whether the goodwill is recoverable.
FAIR VALUE OF DEBT
In accordance with SFAS No. 107, "Disclosures About Fair Value of Financial
Investments", the fair value of short-term debt is estimated to be its
carrying value. The fair value of long-term debt is estimated based on
approximate market interest rates for similar issues. The estimated fair value
of long-term debt at December 31, 1995 was equal to the carrying amount
included in the accompanying balance sheet.
NET LOSS PER COMMON SHARE AND COMMON SHARE EQUIVALENT
Net loss per common share has been computed based on the weighted average
number of the Company's common shares outstanding as of December 31, 1993,
1994, and 1995. The common stock equivalents related to stock options were not
included in the computation due to their antidilutive effect.
INTERIM FINANCIAL STATEMENTS
The Company has made all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the financial condition of the
Company at March 31, 1996, and the results of operations and cash flows for
the three months ended March 31, 1995 and 1996, as presented in the
accompanying unaudited financial statements.
RESTATEMENT OF PRIOR YEAR BALANCES
Certain prior year balances have been restated to conform with current year
presentation.
F-8
<PAGE>
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
2. DISCONTINUED OPERATIONS
Legal Proceedings
On September 17, 1993, TriCare and its healthcare subsidiaries (now part of
Transcend) and the physician-owned medical groups that have contracts with the
healthcare subsidiaries initiated a lawsuit in the Superior Court of the State
of California, County of Los Angeles, against twenty-two insurance carriers
seeking $115 million in compensatory damages claiming abuse of process,
intentional interference with contractual and prospective economic relations
and unfair business practices which led to the discontinuation of the business
of TriCare's healthcare subsidiaries and their contracting associated medical
groups in April 1993 (the "Lawsuit"). Certain of the defendants in the Lawsuit
have filed cross complaints seeking restitution from TriCare, its healthcare
subsidiaries and their associated managed medical groups for funds previously
paid to the medical groups and other damages. The costs associated with the
above claims cannot be ascertained with any certainty but are expected to be
substantial. The Company intends to defer such costs until resolution of the
litigation and has $479,000 of deferred legal fees included in net assets from
discontinued operations at December 31, 1995. There can be no assurance as to
the outcome of this litigation, including potential recovery, if any, of the
Company's claims, or damages if any. Based upon facts and circumstances known
to date, in the opinion of management, final resolution of the cross complaint
will not have a material adverse effect on the Company's financial condition
or results of operations.
First Western/Veritas
The net assets of the discontinued operations of Tricare's healthcare
subsidiaries, First Western and Veritas (now part of Transcend), both of which
ceased operations as of April 30, 1993, are shown on the combined balance
sheet and the related statement of cash flows as a separate line item.
The net assets related to the discontinued operations at December 31, 1995
were $2,893,000. This amount consisted of $479,000 in deferred legal fees and
$2,414,000 in net accounts receivable. Collection liabilities of First Western
and Veritas have been deducted in determining net accounts receivable.
On October 14, 1995, the Company sold approximately 38% of its discontinued
operations' gross accounts receivable balance to Medical Receivables Finance,
LLC ("MRF"), a Delaware limited liability company for:
. Approximately $932,000 in cash ($882,000 in cash at closing; $50,000
held in escrow)
. An opportunity to share in future cash receipts based on MRF's
collection activity.
As a result, the Company closed its California-based collections operation.
The future costs associated with the collection of the accounts receivable
have been netted with the assets related to discontinued operations.
The sale agreement with MRF did not result in any gain or loss for the
Company. The Company will continue to re-evaluate the realizability of the net
assets related to its discontinued operations which were not sold. Any such
re-evaluation could result in an adjustment that may potentially be material
to the carrying value of this asset.
In addition to the above, the Company has contracted with MRF for the
servicing and managing of the remaining 62% of the accounts receivable
balance.
Securities of AmHealth
Prior to its acquisition by Transcend, TriCare sold substantially all of the
assets and liabilities of its wholly-owned subsidiary, Occu-Care to AmHealth,
Inc. ("AmHealth") for a purchase price of $4,000,000. The purchase price
included $1,500,000 in cash paid at closing; AmHealth's Series A Note in the
face amount of $1,500,000 bearing interest of 8% per annum commencing December
1, 1994, payable quarterly thereafter, with the principal payable on or prior
to December 1, 1995; and AmHealth's Series B Note in the face amount of
$1,000,000 bearing interest of 8% per annum commencing December 1, 1994,
payable quarterly thereafter, with the principal payable in equal quarterly
installments starting December 1, 1995 and continuing until September 1, 2000.
TriCare did not receive its first interest payment on its $2,500,000 note
receivable from its sale of the assets of Occu-Care, which constituted an
event of default and, therefore, TriCare deferred recognition of the gain from
F-9
<PAGE>
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
the transaction in the amount of $450,000. On December 30, 1994, TriCare
entered into negotiations with AmHealth which resulted in an agreement to
exchange its note receivable of $2,500,000 for 2,500,000 shares of $1.00
convertible redeemable preferred stock which pay cumulative dividends at a
rate of 6.5% per annum. In conjunction with the Merger on January 10, 1995,
Transcend recorded these securities at their fair value of $2,050,000. Under
certain circumstances and at the Company's option, the preferred stock is
convertible into common stock of AmHealth. The preferred stock is subject to
mandatory redemption as follows: 1,500,000 shares (less any shares previously
converted) on December 1, 1995, and the balance in nineteen quarterly
installments commencing December 1, 1995 which was consistent with the payment
schedule of the original notes. The redemption on December 1, 1995 did not
occur and discussions are underway with AmHealth to determine a future course
of action with regard to the redemption of these securities.
In December, 1995, AmHealth signed a Letter of Intent with CORE, Inc.
(NASDAQ; CORE) for CORE to purchase substantially all the assets of AmHealth
primarily in exchange for CORE stock. The transaction is expected to close by
May, 1996. If the above transaction occurs, Transcend would likely settle
AmHealth's $2.5 million obligation to Transcend in exchange for CORE stock.
However, there can be no assurances that these transactions will take place.
The amount the Company will ultimately realize could differ materially from
the carrying value of the investments as reflected in the financial statements
due to changes in the financial condition of the purchaser and/or the ultimate
valuation of its obligation to Transcend in any purchase of AmHealth by Core,
Inc. or any other third party.
Unaudited Subsequent Event
On May 10, 1996, AmHealth executed a definitive agreement with CORE, Inc., a
public company, pursuant to which CORE would purchase for cash substantially
all the assets of AmHealth in a transaction expected to close by July 1996. In
anticipation of the consummation of the foregoing transaction, AmHealth and
the Company are presently negotiating to settle AmHealth's obligation to the
Company, but no agreement has been reached. There can be no assurance that the
CORE/AmHealth transaction will close and there can be no assurance that the
amount the Company will ultimately realize on the preferred stock will not be
materially less than the carrying value of the investment as reflected in the
Company's financial statements.
3. OFFICE FURNITURE AND EQUIPMENT
The summary of office furniture and equipment at December 31, 1994 and 1995
is as follows:
<TABLE>
<CAPTION>
1994 1995
--------- -----------
<S> <C> <C>
Office furniture and equipment....................... $ 856,000 $ 2,740,000
Less accumulated depreciation........................ (298,000) (1,059,000)
--------- -----------
$ 558,000 $ 1,681,000
========= ===========
</TABLE>
4. INDEBTEDNESS
Long-term debt is summarized as follows at December 31, 1994 and 1995;
<TABLE>
<CAPTION>
1994 1995
---------- --------
<S> <C> <C>
$1,200,000 revolving line of credit, interest computed
at prime; repaid in 1995............................... $1,025,000 --
Promissory note, interest computed at prime; repaid in
1995................................................... 1,000,000 --
Note payable, interest computed at 8.5%; Note matures on
January 1, 1996........................................ -- 100,000
Note payable, interest computed at 8.5% monthly payments
of principal and interest at $11,284 beginning May 19,
1995; Note matures on May 19, 2000..................... -- 490,000
Other Notes payable..................................... -- 10,000
---------- --------
-- 600,000
Less: Current Portion of Long-Term Debt................. 2,025,000 208,000
---------- --------
$ -- $392,000
========== ========
</TABLE>
F-10
<PAGE>
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
The revolving line of credit expired in January, 1995 and was not renewed.
The outstanding balance of both credit facilities at the time of the merger of
TriCare and Transcend was $2,200,000 and was paid off with cash received in
the Merger (Note 1).
The Company expended $1,232,000 in cash to acquire the medical transcription
businesses of IDS and MTA in 1995 and, as a result, the Company issued $2.0
million in Subordinated Convertible Debt, which took place on August 15, 1995.
Key terms of the debt are:
<TABLE>
<S> <C>
Interest Rate: 8%
Interest Paid: Semi-annually
Term: Five (5) Years, due in full at
maturity if not converted
Secured Status: Unsecured and subordinated to all
other indebtedness
Convertible Features:
</TABLE>
. Convertible for five (5) years at $3.50 per share of Transcend's common
stock as recorded on August 15, 1995, the "Closing Price".
. Convertible by the Company if Transcend's common stock trades at three
(3) times the Closing Price for 30 consecutive trading days.
Unaudited Subsequent Event
On April 30, 1996, the Company established two separate credit facilities
with Silicon Valley East (Wellesley, Massachusetts), a division of Silicon
Valley Bank, a California-chartered bank (Santa Clara, CA). The aggregate
credit available to the Company (under both facilities) is $5.75 million. The
banking facilities are secured by all of the Company's assets. One of the
facilities is a $5.0 million working capital credit line subject to an initial
cap of $3.0 million. The cap is removed subject to the Company's compliance
with several covenants going forward. The second facility is a $750,000 term
facility set up to help the Company meet its capital investment requirements
in the near term. This term note is subject to an initial cap of $250,000,
with the cap being removed upon the Company's compliance with specific
covenants. Both facilities will mature on April 30, 1997.
5. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest was $31,000, $36,000 and $56,000 for 1993, 1994 and
1995, respectively.
6. LEASE COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company has entered into operating leases for certain office facilities.
At December 31, 1994, the minimum rental payments due under noncancelable
operating lease agreements are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31
- -----------
<S> <C>
1996................................................................ $ 517,000
1997................................................................ 471,000
1998................................................................ 325,000
1999................................................................ 271,000
2000................................................................ 178,000
Thereafter.......................................................... --
----------
$1,762,000
==========
</TABLE>
F-11
<PAGE>
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
Rental expense for the operating leases amounted to approximately $97,000,
$150,000 and $443,000 for 1993, 1994 and 1995, respectively.
Litigation
On June 22, 1995, an action was filed by Timothy S. Priest in his capacity
as administrator of the estate of Robert V. Taylor against Carol Brown, Debbie
Ostwald, Sullivan Health & Rehabilitation Management, Inc. ("Sullivan") and
Fireman's Fund Insurance Company, in the Circuit Court of Franklin County,
Tennessee, alleging breach of the duty to provide reasonably competent nursing
care to an injured individual (now deceased). The Company's subsidiary,
Sullivan, and a former employee of Sullivan are defendants in the case. The
Plaintiff demands compensatory damages in the amount of $1 million and
punitive damages in the amount of $2 million, plus costs. Management of the
Company believes that Sullivan has meritorious defenses to the allegations and
intends to vigorously contest liability in this matter. At the present time,
management of the Company cannot predict the outcome of this litigation, but
does not believe that the resolution of the litigation will have a material
adverse effect on the Company's financial condition or results of operations.
See Note 2 for additional litigation discussion.
7. RETIREMENT PLAN
The Company sponsors a 401(k) retirement plan that covers substantially all
employees after satisfying certain requirements as to length of service.
Employees are eligible to contribute amounts to the plan subject to certain
minimum and maximum limitations. The Company matches employee contributions on
a discretionary basis as determined by the Company's board of directors. In
1993 and 1994, the Company matched employee contributions at a rate of 10% of
employee contributions up to 6% of salary. For 1993, 1994 and 1995, the
expense was approximately $6,000, $17,000 and $0 respectively.
8. TRANSACTIONS WITH RELATED PARTIES
Approximately 23% of the subordinated debt (Note 4) is held by parties
affiliated with certain members of the board of directors.
During 1993, the Company paid $91,000 in management fees to a shareholder.
During 1993, the Company issued warrants to purchase 146,000 shares to the
controlling shareholders in consideration of such shareholders' personal
guarantee of the loan to purchase dataLogix (Note 12). The warrants are
exercisable at $.01 per warrant and were exercised during 1994. The difference
between fair value and exercise price of these warrants of $104,000 was
expensed in 1993.
9. SHAREHOLDERS' EQUITY
The historical shareholders' equity of Transcend prior to the merger has
been retroactively restated for the equivalent number of shares received in
the Merger (2.34 to 1). Earnings per share for the periods prior to the Merger
are restated to reflect the number of equivalent shares received.
In 1995, the Company increased the authorized common stock to 30,000,000
shares. The Company has authorized 21,000,000 shares of preferred stock, $.01
par value.
F-12
<PAGE>
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
10. STOCK OPTIONS AND WARRANTS
The Company has established a stock option plan for the employees of the
Company. The plan authorizes the grant of "incentive stock options" and
"nonstatutory options." Under this plan, options are granted for the Company's
common stock at the approximate fair value, as defined in the option
agreement. The following is a summary of transactions:
<TABLE>
<CAPTION>
OPTIONS PRICE RANGE
--------- --------------
<S> <C> <C>
OPTIONS OUTSTANDING, December 31, 1992............ 1,083,000 $ .07 to $ .10
Options granted during the year.................. 294,000 $ .07 to $ .30
Options canceled during the year................. (589,000) $ .09
Options exercised during the year................ (64,000) $ .09
---------
OPTIONS OUTSTANDING, December 31, 1993............ 724,000 $ .07 to $ .30
Options canceled during the year................. (31,000) $ .07
Options exercised during the year................ (10,000) $ .07
---------
OPTIONS OUTSTANDING, December 31, 1994............ 683,000 $ .07 to $ .30
Options issued in Merger (Note 1)................ 1,158,000 $1.87 to $3.75
Options issued, other............................ 331,000 $1.87 to $5.62
Options canceled during the year................. (161,000) $.068 to $3.13
Options exercised during the year................ (511,000) $.068 to $3.13
---------
Options Outstanding, December 31, 1995........... 1,500,000
=========
Options eligible for exercise at December 31,
1995............................................ 576,000 $ .07 to $3.75
=========
</TABLE>
The directors who were not employees of the Company were granted non-
qualified stock options to purchase shares of the Company's common stock prior
to May 31, 1991. These options, which expire ten years from the date of grant,
were granted at prices between $2.00 and $5.17 per share, the fair market
value on the date of grant, and are all exercisable. During the twelve (12)
months ended December 31, 1995, no options were exercised and options to
purchase 7,500 shares are still outstanding.
At December 31, 1995 there were a total of 159,000 shares of common stock
reserved for this plan.
11. INCOME TAXES
The components of the net deferred tax (liability) asset as of December 31,
1994 and 1995 were as follows:
<TABLE>
<CAPTION>
1994 1995
--------- -----------
<S> <C> <C>
Deferred tax liabilities:
Office furniture and equipment..................... $ -- $ (44,000)
Goodwill and other intangibles..................... -- (290,000)
Discontinued Operations............................ -- (1,128,000)
-----------
(1,462,000)
-----------
Deferred tax assets:
Tax net operating loss............................. 454,000 3,122,000
Cash-basis deferral................................ 453,000 330,000
Accrued Liabilities................................ -- 331,000
Other.............................................. 27,000 186,000
Valuation allowance................................ (934,000) (1,831,000)
--------- -----------
$ -- $ 676,000
========= ===========
</TABLE>
F-13
<PAGE>
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
At December 31, 1995, the Company had net operating loss carryforwards of
approximately $8,001,000 which can be used to reduce future income taxes. If
not utilized these carryforwards will expire in 2007. The tax benefit differed
from the amount computed using the statutory Federal income tax rate due
primarily to the increase in the valuation allowance for the past three years.
The Company has established a valuation allowance of $934,000 and $1,831,000
at December 31, 1994 and 1995, respectively due to the uncertainty regarding
the realizability of certain deferred tax assets, including its net operating
loss carryforward.
12. ACQUISITIONS
On April 29, 1993, the Company acquired dataLogix, a supplier of medical
record transcription services, for $1,100,000. The Company accounted for the
acquisition under the purchase method of accounting. The results of operations
for dataLogix are included in the statement of loss of the Company beginning
on the date of acquisition. The fair value of tangible assets acquired and
liabilities assumed was $315,000 and $37,000, respectively. The majority of
the excess purchase price over net tangible assets relate to non-compete
agreements and customer contracts which are being amortized over three years,
using an accelerated method of amortization.
On September 30, 1994, the Company acquired the assets of Script-Ease, Inc.,
a Pittsburgh-based medical transcription business for $1,000,000. The Company
accounted for the acquisition under the purchase method of accounting. The
results of operations for Script-Ease are included in the statement of loss of
the Company beginning on the date of the acquisition. The fair value of
tangible assets acquired and liabilities assumed was $259,000 and $161,000,
respectively. The majority of the excess purchase price over net tangible
assets related to customer lists, which is being amortized over seven years
and a non-compete agreement that is being amortized over a three year period.
The balance of the additional intangibles is goodwill which is being amortized
over thirty years.
On January 10, 1995, Transcend acquired TriCare, Inc. in a merger accounted
for as a reverse merger (Note 1). The acquisition was treated as a purchase.
There were approximately 7.7 million shares issued in the transaction
resulting in goodwill of approximately $3.2 million. This goodwill is being
amortized over twenty years. On June 15, 1994, TriCare had completed the
acquisition of Sullivan for an adjusted purchase price of $3,285,000.
Subsequent to the Merger, the Company issued a final payment of $285,000 in
lieu of the $1,260,000 obligation which was payable in stock in January 1995
and July 1995, to the former owners of Sullivan Health and Rehabilitation in
full satisfaction of its long-term obligation related to the acquisition of
Sullivan and gave the former owners a release from any and all further
liabilities in connection therewith.
On January 31, 1995, the Company acquired the assets of International
Dictating Services ("IDS"), a Boston based medical transcription business for
approximately $832,000, which consisted of approximately $682,000 paid in cash
at closing with the balance payable to the sellers over the next two years.
The Company accounted for the acquisition under the purchase method of
accounting. The results of operations for IDS are included in the statement of
loss of the Company beginning on the date of acquisition. The fair value of
tangible assets acquired and liabilities assumed was $245,000 and $86,000,
respectively. The intangible related to customer lists is being amortized over
seven years and a non-compete agreement is being amortized over a two year
period. The balance of the additional intangible asset is goodwill which is
being amortized over twenty years.
On April 19, 1995, the Company acquired the assets of Medical Transcription
of Atlanta, Inc. ("MTA") for $1,372,000, consisting of $550,000 paid in cash
at closing, promissory notes of $650,000, and 60,000 shares of Transcend
common stock valued at $172,000 at the time of the acquisition. The Company
accounted for the acquisition under the purchase method of accounting. The
results of operations for MTA are included in the
F-14
<PAGE>
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
DECEMBER 31, 1993, 1994 AND 1995
statement of loss of the Company beginning on the date of acquisition. The
fair value of tangible assets acquired and liabilities assumed was $363,000
and $27,000, respectively. The intangible related to customer lists is being
amortized over seven years and a non-compete agreement is being amortized over
a three-year period. The balance of the additional intangible is goodwill
which is being amortized over twenty years.
The following pro-forma amounts presented below represent the results of
operations (excluding discontinued operations) of the Company adjusted to
include TriCare; Script-Ease, Inc.; MTA and IDS as if these transactions had
been consummated at the beginning of each period presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1994 1995
----------- -----------
(UNAUDITED)
<S> <C> <C>
Sales............................................. $20,705,000 $26,508,000
Net Income (Loss)................................. $(2,321,000) $(3,918,000)
Net Loss per common Share......................... $ (0.13) $ (0.22)
Weighted Average Shares Outstanding............... 17,743,000 17,836,000
</TABLE>
F-15
<PAGE>
MAP DEPICTING THE COMPANY'S OFFICES AND MANAGED SITE LOCATIONS.
<PAGE>
================================================================================
NO DEALER, REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY THE
UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE
DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO
ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
----------------
TABLE OF CONTENTS
----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 5
The Company............................................................... 9
Use of Proceeds........................................................... 9
Price Range of Common Stock............................................... 10
Dilution.................................................................. 11
Dividend Policy........................................................... 11
Capitalization............................................................ 12
Selected Consolidated Financial Data...................................... 13
Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................... 14
Business.................................................................. 19
Management................................................................ 28
Certain Relationships and Related Transactions............................ 33
Description of Capital Stock.............................................. 34
Shares Eligible For Future Sale........................................... 35
Underwriting.............................................................. 37
Legal Matters............................................................. 38
Experts................................................................... 38
Available Information..................................................... 38
Incorporation of Certain Documents by Reference........................... 39
Index to Consolidated Financial Statements................................ F-1
</TABLE>
================================================================================
================================================================================
3,000,000 Shares
[LOGO OF TRANSCEND SERVICES, INC.]
Common Stock
--------
PROSPECTUS
--------
Smith Barney Inc.
Dain Bosworth
Incorporated
, 1996
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses of issuance and distribution of the Common Stock,
other than underwriting discounts, are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee................ 12,417
National Association of Securities Dealers, Inc. Filing Fee........ 4,101
Legal Fees and Expenses............................................ 100,000
Accounting Fees and Expenses....................................... 40,000
Printing and Engraving............................................. 35,000
Blue Sky Fees and Expenses......................................... 20,000
Miscellaneous...................................................... 13,482
--------
TOTAL............................................................ $225,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Bylaws permit it to indemnify a director and officer who was
or is a party to any threatened, pending or completed action, suit or other
type of proceeding, whether civil, criminal, administrative or investigative
(other than an action by or any right of the Company) by reason of the fact
that he or she is or was a director or officer or is or was serving at the
request of the Company as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorney's fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit
or proceeding. These indemnification rights apply if the director or officer
acted in good faith and in a manner in which he or she reasonably believed to
be in or not opposed to the best interest of the Company and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his or
her conduct was unlawful. In addition, under the Bylaws, the Company may
indemnify and hold harmless an officer or director who is a party in an action
by or in the right of the Company against expenses (including attorney's fees)
actually and reasonably incurred in connection with the defense or settlement
of such proceeding. Such indemnification shall be authorized if the director
or officer has acted in good faith and in a manner in which he or she
reasonably believed to be in or not opposed to the best interest of the
Company, except indemnification is not authorized where there is an
adjudication of liability, unless the court in which such proceeding was
brought, or any other Court of Chancery, shall determine, in view of all the
circumstances, that such person is fairly and reasonably entitled to indemnity
for such expenses which such court shall deem proper.
The Company's Bylaws provide that indemnification of the costs and expenses
of defending any action is required to be made to any officer or director who
is successful (on the merits or otherwise) in defending an action of the type
referred to in the immediately preceding paragraph. Except with regard to the
costs and expenses of successfully defending an action as may be ordered by a
court, indemnification as described in the previous paragraph is only required
to be made to a director or officer if a determination is made that
indemnification is proper under the circumstances. Such determination shall be
made: (i) by the Company's Board by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or proceeding; (ii) by
independent legal counsel if such a quorum is not obtainable, or, even if
obtainable a quorum of disinterested directors so directs; or (iii) by the
affirmative vote of a majority of shares entitled to vote.
The Bylaws of the Company also permit the Company to purchase and maintain
insurance on behalf of any director or officer of the corporation against any
liability asserted against the director or officer and incurred in such
capacity, whether or not the corporation would have the power to indemnify the
director or officer against such liability. The Bylaws of the Company also
provide that any expenses (including attorney's fees) incurred
II-1
<PAGE>
by any officer or director in defending a civil or criminal action, suit or
proceeding may be paid by the Company in advance of the final disposition of
such action upon receipt of an undertaking by such director or officer to
repay all amounts advanced if it shall be determined that he or she is not
entitled to be indemnified by the Company.
Subject to certain limitations, the Company's executive officers and
directors are insured against losses arising from claims made against them for
wrongful acts which they may become obligated to pay or for which the Company
may be required to indemnify them.
The indemnification provisions contained in the Company's Bylaws are
substantially co-extensive with the provisions of Section 145 of the Delaware
General Corporation Law, which sets forth the applicable terms, conditions and
limitations governing the indemnification of officers, directors and other
persons.
Limitation of Liability. In addition, the Certificate of Incorporation
provides that directors of the Company will not be personally liable for
monetary damages to the Company or its shareholders for certain breaches of
their fiduciary duty as directors, unless they violated their duty of loyalty
to the Company or its shareholders, acted in bad faith, knowingly or
intentionally violated the law, authorized illegal dividends or redemptions or
derived an improper personal benefit from their action as directors. This
provision would have no effect on the availability of equitable remedies or
non-monetary relief, such as an injunction or rescission for breach of the
duty of care. In addition, the provision applies only to claims against a
director arising out of his role as a director and not in any other capacity
(such as an officer or employee of the Company). Further, liability of a
director for violations of the federal securities laws will not be limited by
this provision.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1 Form of Underwriting Agreement.
4 Specimen of Common Stock Certificate.
4.1 Subordinated Convertible Debenture Purchase Agreement, filed as
Exhibit 4 to the Registrant's Form 10-Q for the quarter ended
September 30, 1995, which exhibit is incorporated herein by reference.
5 Opinion of Smith, Gambrell & Russell.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Smith, Gambrell & Russell (contained in their opinion filed
as Exhibit 5).
24.1 Powers of Attorney.
</TABLE>
ITEM 17. UNDERTAKINGS
(1) The undersigned registrant hereby undertakes that, for purposes of
determining liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Act of 1934 (and, where applicable, each filing of an employee
benefit plan's annual report pursuant to Section 15(d) of the Securities
Exchange Act of 1934) that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to the
securities offering therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(2) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that, in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling
II-2
<PAGE>
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
(3) The undersigned registrant hereby undertakes that:
(a) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUND TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF ATLANTA, STATE OF GEORGIA, ON THIS 30TH DAY OF MAY,
1996.
Transcend Services, Inc.
/s/ Larry G. Gerdes
By: _________________________________
LARRY G. GERDES
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURES TITLE DATE
* Chairman of the May 30, 1996
- ------------------------------------- Board of Directors
DONALD L. LUCAS
/s/ Larry G. Gerdes President, Chief May 30, 1996
- ------------------------------------- Executive Officer
LARRY G. GERDES and Director
(Principal
Executive Officer)
/s/ David W. Murphy Chief Financial May 30, 1996
- ------------------------------------- Officer, Secretary
DAVID W. MURPHY and Treasurer
(Principal
Financial and
Accounting Officer)
* Director May 30, 1996
- -------------------------------------
GEORGE B. CALDWELL
* Director May 30, 1996
- -------------------------------------
WALTER S. HUFF, JR.
* Director May 30, 1996
- -------------------------------------
CHARLES E. THOELE
/s/ Larry G. Gerdes
*By: ________________________________
LARRY G. GERDES, AS ATTORNEY-IN-FACT
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
S-K REFERENCE
NUMBER DESCRIPTION PAGE
------------- ----------- ----
<C> <S> <C>
1 Form of Underwriting Agreement.
4 Specimen of Common Stock Certificate.
5 Opinion of Smith, Gambrell & Russell.
23.1 Consent of Arthur Andersen LLP.
24.1 Powers of Attorney.
</TABLE>
<PAGE>
_________ SHARES
TRANSCEND SERVICES, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
----------------------
, 1996
Smith Barney Inc.
Dain Bosworth Incorporated
As Representatives of the Several Underwriters
c/o Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Dear Sirs:
Transcend Services, a Delaware corporation (the "Company"), proposes
to issue and sell an aggregate of _________ shares (the "Firm Shares") of its
common stock, par value $0.01 per share (the "Common Stock"), to the several
Underwriters named in Schedule I hereto (the "Underwriters"). In addition,
solely for the purpose of covering over-allotments, the Company proposes to sell
to the Underwriters, upon the terms and conditions set forth in Section 2
hereof, up to an additional _______ shares (the "Additional Shares") of Common
Stock. The Firm Shares and the Additional Shares are hereinafter collectively
referred to as the "Shares."
The Company wishes to confirm as follows its agreement with you (the
"Representatives") and the other several Underwriters on whose behalf you are
acting, in connection with the several purchases of the Shares by the
Underwriters.
1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has prepared
and filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively, the
"Act"), a registration statement on Form S-3 under the Act (the "registration
statement"), including a prospectus subject to completion, relating to the
Shares. The term "Registration Statement" as used in this Agreement means the
registration statement (including all financial schedules and exhibits) as
amended at the time it becomes effective or, if the registration statement
became effective prior to the execution of this Agreement, as supplemented or
amended prior to the execution of this Agreement. If it is contemplated, at the
time this Agreement is executed, that a post-effective amendment to the
registration statement will be filed and must be declared effective before the
offering of the Shares may commence, the term "Registration Statement" as used
in this Agreement means the registration
<PAGE>
statement as amended by said post-effective amendment. If an additional
registration statement is prepared and filed with the Commission in accordance
with Rule 462(b) under the Act (an "Additional Registration Statement"), the
term "Registration Statement" as used in this Agreement includes the Additional
Registration Statement. The term "Prospectus" as used in this Agreement means
the prospectus in the form included in the Registration Statement, or, if the
prospectus included in the Registration Statement omits information in reliance
on Rule 430A under the Act and such information is included in a prospectus
filed with the Commission pursuant to Rule 424(b) under the Act, the term
"Prospectus" as used in this Agreement means the prospectus in the form included
in the Registration Statement as supplemented by the addition of the Rule 430A
information contained in the prospectus filed with the Commission pursuant to
Rule 424(b). The term "Prepricing Prospectus" as used in this Agreement means
the prospectus subject to completion in the form included in the registration
statement at the time of the initial filing of the registration statement with
the Commission and as such prospectus shall have been amended from time to time
prior to the date of the Prospectus. Any reference herein to the registration
statement, the Registration Statement, any Prepricing Prospectus or the
Prospectus shall be deemed to refer to and include the documents incorporated by
reference therein pursuant to Form S-3 under the Act, as of the date of the
registration statement, the Registration Statement, such Prepricing Prospectus
or the Prospectus, as the case may be, and any reference to any amendment or
supplement to the registration statement, the Registration Statement, any
Prepricing Prospectus or the Prospectus shall be deemed to refer to and include
any documents filed after such date under the Securities Exchange Act of 1934,
as amended, and the rules and regulations of the Commission thereunder
(collectively, the "Exchange Act") and deemed incorporated by reference pursuant
to Form S-3 under the Act. As used herein, the term "Incorporated Documents"
means the documents which at the time are incorporated by reference in the
registration statement, the Registration Statement, any Prepricing Prospectus,
the Prospectus or any amendment or supplement thereto.
2. AGREEMENTS TO SELL AND PURCHASE. The Company hereby agrees,
subject to all the terms and conditions set forth herein, to issue and sell to
each Underwriter and, upon the basis of the representations, warranties and
agreements of the Company herein contained and subject to all the terms and
conditions set forth herein, each Underwriter agrees, severally and not jointly,
to purchase from the Company, at a purchase price of $ per share (the
"purchase price per share"), the number of Firm Shares set forth opposite the
name of such Underwriter in Schedule I hereto (or such number of Firm Shares
increased as set forth in Section 10 hereof).
The Company also agrees, subject to all the terms and conditions set
forth herein, to sell to the Underwriters, and, upon the basis of the
representations, warranties and agreements of the Company herein contained and
subject to all the terms and conditions set forth herein, the Underwriters shall
have the right to purchase from the Company, at the purchase price per share,
pursuant to an option (the "over-allotment option") which may be exercised at
any time and from time to time prior to 9:00 p.m., New York City time, on the
30th day after the date of the Prospectus (or, if such 30th day shall be a
Saturday or Sunday or a holiday, on the next business day thereafter when the
New York Stock Exchange is open for trading), up to an aggregate of _______
Additional Shares from the Company. Additional Shares may be purchased only to
cover over-allotments made in connection with the offering of the Firm Shares.
Upon any exercise of the over-allotment option, each Underwriter, severally and
not jointly, agrees to purchase from the Company the number of Additional Shares
(subject to such adjustments as you may determine in order to avoid fractional
shares) which bears the same proportion to the number of Additional Shares to be
purchased by the Underwriters as the number of Firm Shares set forth opposite
the name of such Underwriter in Schedule I hereto (or such number of Firm Shares
increased as set forth in Section 10 hereof) bears to the aggregate number of
Firm Shares.
2
<PAGE>
3. TERMS OF PUBLIC OFFERING. The Company has been advised by you
that the Underwriters propose to make a public offering of their respective
portions of the Shares as soon after the Registration Statement and this
Agreement have become effective as in your judgment is advisable and initially
to offer the Shares upon the terms set forth in the Prospectus.
4. DELIVERY OF THE SHARES AND PAYMENT THEREFOR. Delivery to the
Underwriters of and payment for the Firm Shares shall be made at the office of
Smith Barney Inc., 388 Greenwich Street, New York, New York 10013, at 10:00
A.M., New York City time, on , 1996 (the "Closing Date"). The place
of closing for the Firm Shares and the Closing Date may be varied by agreement
between you and the Company.
Delivery to the Underwriters of and payment for any Additional Shares
to be purchased by the Underwriters shall be made at the aforementioned office
of Smith Barney Inc. at such time on such date (the "Option Closing Date"),
which may be the same as the Closing Date but shall in no event be earlier than
the Closing Date nor earlier than two nor later than ten business days after the
giving of the notice hereinafter referred to, as shall be specified in a written
notice from you on behalf of the Underwriters to the Company of the
Underwriters' determination to purchase a number, specified in such notice, of
Additional Shares. The place of closing for any Additional Shares and the
Option Closing Date for such Shares may be varied by agreement between you and
the Company.
Certificates for the Firm Shares and for any Additional Shares to be
purchased hereunder shall be registered in such names and in such denominations
as you shall request by written notice, it being understood that a facsimile
transmission shall be deemed written notice, prior to 9:30 A.M., New York City
time, on the second business day preceding the Closing Date or any Option
Closing Date, as the case may be. Such certificates shall be made available to
you in New York City for inspection and packaging not later than 9:30 A.M., New
York City time, on the business day next preceding the Closing Date or the
Option Closing Date, as the case may be. The certificates evidencing the Firm
Shares and any Additional Shares to be purchased hereunder shall be delivered to
you on the Closing Date or the Option Closing Date, as the case may be, against
payment of the purchase price therefor by certified or official bank check or
checks payable in New York Clearing House (next day) funds to the order of the
Company.
5. AGREEMENTS OF THE COMPANY. The Company agrees with the several
Underwriters as follows:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the registration statement or a post-effective amendment thereto
or any Additional Registration Statement to be declared effective before the
offering of the Shares may commence, the Company will endeavor to cause the
Registration Statement or such post-effective amendment or Additional
Registration Statement to become effective as soon as possible and will advise
you promptly and, if requested by you, will confirm such advice in writing, when
the Registration Statement or such post-effective amendment or Additional
Registration Statement has become effective.
3
<PAGE>
(b) The Company will advise you promptly and, if requested by you,
will confirm such advice in writing: (i) of any request by the Commission for
amendment of or a supplement to the Registration Statement, any Prepricing
Prospectus or the Prospectus or for additional information; (ii) of the issuance
by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of the suspension of qualification of the Shares for
offering or sale in any jurisdiction or the initiation of any proceeding for
such purpose; and (iii) within the period of time referred to in paragraph (f)
below, of any change in the Company's condition (financial or other), business,
prospects, properties, net worth or results of operations, or of the happening
of any event, which makes any statement of a material fact made in the
Registration Statement or the Prospectus (as then amended or supplemented)
untrue or which requires the making of any additions to or changes in the
Registration Statement or the Prospectus (as then amended or supplemented) in
order to state a material fact required by the Act or the regulations thereunder
to be stated therein or necessary in order to make the statements therein not
misleading, or of the necessity to amend or supplement the Prospectus (as then
amended or supplemented) to comply with the Act or any other law. If at any
time the Commission shall issue any stop order suspending the effectiveness of
the Registration Statement, the Company will make every reasonable effort to
obtain the withdrawal of such order at the earliest possible time.
(c) The Company will furnish to you, without charge, four signed
copies of the registration statement as originally filed with the Commission and
of each amendment thereto, including financial statements and all exhibits and
Incorporated Documents thereto and will also furnish to you, without charge,
such number of conformed copies of the registration statement as originally
filed and of each amendment thereto, but without exhibits, and Incorporated
Documents thereto as you may request.
(d) The Company will not (i) file any amendment to the Registration
Statement or make any amendment or supplement to the Prospectus of which you
shall not previously have been advised or to which you shall object after being
so advised or (ii) so long as, in the opinion of counsel for the Underwriters, a
prospectus is required to be delivered in connection with sales by any
Underwriter or dealer, file any information, documents or reports pursuant to
the Exchange Act which upon filing becomes an Incorporated Document, without
delivering a copy of such information, documents or reports to you, as
Representatives of the Underwriters, prior to or concurrently with such filing.
(e) Prior to the execution and delivery of this Agreement, the Company
has delivered or will deliver to you, without charge, in such quantities as you
have requested or may hereafter request, copies of each form of the Prepricing
Prospectus. The Company consents to the use, in accordance with the provisions
of the Act and with the securities or Blue Sky laws of the jurisdictions in
which the Shares are offered by the several Underwriters and by dealers, prior
to the date of the Prospectus, of each Prepricing Prospectus so furnished by the
Company.
(f) As soon after the execution and delivery of this Agreement as
possible and thereafter from time to time for such period as in the opinion of
counsel for the Underwriters a prospectus is required by the Act to be delivered
in connection with sales by any Underwriter or dealer, the Company will
expeditiously deliver to each Underwriter and each dealer, without charge, as
many copies of the Prospectus (and of any amendment or supplement thereto) as
you may request. The Company consents to the use of the Prospectus (and of any
amendment or supplement thereto) in accordance with the provisions of the Act
and with the securities or Blue Sky laws of the jurisdictions in which the
Shares are offered by the several Underwriters and by all dealers to whom Shares
may be sold, both in connection with the offering and sale of the Shares and for
such period of time thereafter as the Prospectus is required by the Act to be
delivered in connection with sales by any Underwriter or dealer. If during such
period of time any event shall occur that in the judgment of the Company or in
4
<PAGE>
the opinion of counsel for the Underwriters is required to be set forth in the
Prospectus (as then amended or supplemented) or should be set forth therein in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, or if it is necessary to supplement or
amend the Prospectus, or to file under the Exchange Act any document which upon
filing becomes an Incorporated Document, to comply with the Act, the Exchange
Act or any other law, the Company will forthwith prepare and, subject to the
provisions of paragraph (d) above, file with the Commission an appropriate
supplement or amendment thereto or Incorporated Document and will expeditiously
furnish copies thereof to the Underwriters and dealers in such quantities as you
shall request. In the event that the Company and you, as Representatives of the
several Underwriters, agree that the Prospectus should be amended or
supplemented, or that a document should be filed under the Exchange Act which
upon filing becomes an Incorporated Document, the Company, if requested by you,
will promptly issue a press release announcing or disclosing the matters to be
covered by the proposed amendment or supplement.
(g) The Company will cooperate with you and with counsel for the
Underwriters in connection with the registration or qualification of the Shares
for offering and sale by the several Underwriters and by dealers under the
securities or Blue Sky laws of such jurisdictions as you may designate and will
file such consents to service of process or other documents necessary or
appropriate in order to effect such registration or qualification; provided that
in no event shall the Company be obligated to qualify to do business in any
jurisdiction where it is not now so qualified or to take any action that would
subject it to service of process in suits, other than those arising out of the
offering or sale of the Shares, in any jurisdiction where it is not now so
subject.
(h) The Company will make generally available to its security holders
a consolidated earnings statement, which need not be audited, covering a twelve-
month period commencing after the effective date of the Registration Statement
and ending not later than 15 months thereafter, as soon as practicable after the
end of such period, which consolidated earnings statement shall satisfy the
provisions of Section 11(a) of the Act.
(i) During the period of five years hereafter, the Company will
furnish to you (i) as soon as available, a copy of each report of the Company
mailed to stockholders or filed with the Commission and (ii) from time to time
such other information concerning the Company as you may reasonably request.
(j) If this Agreement shall terminate or shall be terminated after
execution pursuant to any provisions hereof (otherwise than pursuant to the
second paragraph of Section 10 hereof or by notice given by you terminating this
Agreement pursuant to Section 10 or Section 11 hereof), or if this Agreement
shall be terminated by the Underwriters because of any failure or refusal on the
part of the Company to comply with the terms or fulfill any of the conditions of
this Agreement, the Company agrees to reimburse the Representatives for all out-
of-pocket expenses (including fees and expenses of counsel for the Underwriters)
incurred by you in connection herewith.
(k) The Company will apply the net proceeds from the sale of the
Shares substantially in accordance with the description set forth in the
Prospectus.
(l) If Rule 430A of the Act is employed, the Company will timely file
the Prospectus pursuant to Rule 424(b) under the Act and will advise you of the
time and manner of such filing.
(m) Except as provided in this Agreement, the Company will not sell,
offer to sell, contract to sell or otherwise transfer or dispose of any Common
Stock (or any securities convertible into
5
<PAGE>
or exercisable or exchangeable for Common Stock), or grant any options or
warrants to purchase Common Stock, for a period of 180 days after the date of
the Prospectus, without the prior written consent of Smith Barney Inc.
(n) The Company has furnished or will furnish to you "lock-up"
letters, in form and substance satisfactory to you, signed by each of its
current officers and directors and each of its stockholders designated by you.
(o) Except as stated in this Agreement and in the Prepricing
Prospectus and Prospectus, the Company has not taken, nor will it take, directly
or indirectly, any action designed to or that might reasonably be expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Shares.
(p) The Company will timely file with The Nasdaq Stock Market a
notification form for listing of additional shares on the Nasdaq National Market
with respect to the Shares.
6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to each Underwriter that:
(a) Each Prepricing Prospectus included as part of the registration
statement as originally filed or as part of any amendment or supplement thereto,
or filed pursuant to Rule 424 under the Act, complied when so filed in all
material respects with the provisions of the Act. The Commission has not issued
any order preventing or suspending the use of any Prepricing Prospectus.
(b) The Company meets the requirements for use of Form S-3 under the
Act. The registration statement in the form in which it became or becomes
effective and also in such form as it may be when any post-effective amendment
thereto or any Additional Registration Statement shall become effective, and the
Prospectus and any supplement or amendment thereto when filed with the
Commission under Rule 424(b) under the Act, complied or will comply in all
material respects with the provisions of the Act and did not or will not at any
such times contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, except that this representation and warranty does not
apply to statements in or omissions from the registration statement or the
Prospectus made in reliance upon and in conformity with information relating to
any Underwriter furnished to the Company in writing by or on behalf of any
Underwriter through you expressly for use therein.
(c) All the outstanding shares of capital stock of the Company have
been duly authorized and validly issued, are fully paid and nonassessable, are
free of any preemptive or similar rights (other than such rights as shall
terminate upon completion of the offering contemplated hereby, as set forth in
the Registration Statement and the Prospectus) and have been issued and sold in
compliance with all Federal and state securities laws; the Shares have been duly
authorized and, when issued and delivered to the Underwriters against payment
therefor in accordance with the terms hereof, will be validly issued, fully paid
and nonassessable and free of any preemptive or similar rights; and the capital
stock of the Company conforms to the description thereof in the Registration
Statement and the Prospectus.
(d) The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware with full corporate
power and authority to own, lease and operate its properties and to conduct its
business as described in the Registration Statement and the Prospectus,
6
<PAGE>
and is duly registered and qualified to conduct its business and is in good
standing in each jurisdiction or place where the nature of its properties or the
conduct of its business requires such registration or qualification, except
where the failure so to register or qualify does not have a material adverse
effect on the condition (financial or other), business, prospects, properties,
net worth or results of operations of the Company and the Subsidiaries (as
hereinafter defined) taken as a whole (a "Material Adverse Effect").
(e) All the Company's subsidiaries (as defined in the Act), are
listed in an exhibit to the Registration Statement and are referred to herein
individually as a "Subsidiary" and collectively as the "Subsidiaries." Each
Subsidiary is a corporation duly organized, validly existing and in good
standing in the jurisdiction of its incorporation, with full corporate power and
authority to own, lease and operate its properties and to conduct its business
as described in the Registration Statement and the Prospectus and is duly
registered and qualified to conduct its business and is in good standing in each
jurisdiction or place where the nature of its properties or the conduct of its
business requires such registration or qualification, except where the failure
so to register or qualify would not have a Material Adverse Effect. All the
outstanding shares of capital stock of each of the Subsidiaries have been duly
authorized and validly issued, are fully paid and nonassessable, and are wholly-
owned by the Company directly or indirectly through one of the other
Subsidiaries, free and clear of any lien, adverse claim, security interest,
equity or other encumbrance, except as disclosed in the Registration Statement
and the Prospectus (or any amendment or supplement thereto).
(f) There are no legal or governmental proceedings pending or, to the
knowledge of the Company, threatened, against the Company or any of the
Subsidiaries, or to which the Company or any of the Subsidiaries or any of their
respective properties is subject, that are required to be described in the
Registration Statement or the Prospectus but are not described as required.
There are no agreements, contracts, indentures, leases or other instruments that
are required to be described in the Registration Statement or the Prospectus or
to be filed as an exhibit to the Registration Statement or an Incorporated
Document that are not described or filed as required by the Act or the Exchange
Act. Neither the Company nor any of the Subsidiaries is involved in any strike,
job action or labor dispute, and to the Company's best knowledge no such action
or dispute is threatened.
(g) Neither the Company nor any of the Subsidiaries is (i) in
violation of its certificate of incorporation or by-laws, or of any law,
ordinance, administrative or governmental rule or regulation applicable to the
Company or any of the Subsidiaries or of any decree of any court or governmental
agency or body having jurisdiction over the Company or any of the Subsidiaries,
or (ii) in default in the performance of any obligation, agreement or condition
contained in any bond, debenture, note or any other evidence of indebtedness or
in any agreement, indenture, lease or other instrument to which the Company or
any of the Subsidiaries is a party or by which any of them or any of their
respective properties may be bound.
(h) Neither the issuance and sale of the Shares, the execution,
delivery or performance of this Agreement by the Company nor the consummation by
the Company of the transactions contemplated hereby (i) requires any consent,
approval, authorization or other order of, or registration or filing with, any
court, regulatory body, administrative agency or other governmental body, agency
or official (except such as may be required for the registration of the Shares
under the Act, which has been or will be effected in accordance with this
Agreement, and compliance with the securities or Blue Sky laws of various
jurisdictions) or conflicts or will conflict with or constitutes or will
constitute a breach of, or a default under, the certificate of incorporation or
bylaws, or other organizational documents, of the Company or any of the
Subsidiaries or (ii) conflicts or will conflict with or constitutes or will
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constitute a breach of, or a default under, any agreement, indenture, lease or
other instrument to which the Company or any of the Subsidiaries is a party or
by which the Company or any of the Subsidiaries or any of their respective
properties may be bound, or violates or will violate any statute, law,
regulation or filing or judgment, injunction, order or decree applicable to the
Company or any of the Subsidiaries or any of their respective properties, or
will result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company or any of the Subsidiaries pursuant
to the terms of any agreement or instrument to which any of them is a party or
by which any of them may be bound or to which any of their respective property
or assets is subject.
(i) The accountants, Arthur Andersen LLP, who have certified or shall
certify the financial statements filed or to be filed as part of the
Registration Statement or the Prospectus (or any amendment or supplement
thereto), are independent public accountants as required by the Act and the
Exchange Act.
(j) The financial statements, together with the related schedules and
notes forming part of the Registration Statement and the Prospectus (and any
amendment or supplement thereto), comply with the requirements of the Act and
the Exchange Act and present fairly the consolidated financial position, results
of operations and changes in stockholders' equity and cash flows of the Company
on the basis stated in the Registration Statement at the respective dates or for
the respective periods to which they apply; such statements and related
schedules and notes have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods involved,
except as disclosed therein; and the other financial and statistical information
and data set forth in the Registration Statement and the Prospectus (and any
amendment or supplement thereto) are accurately presented and prepared on a
basis consistent with such financial statements and the books and records of the
Company.
(k) The Company has all requisite power and authority to execute,
deliver and perform its obligations under this Agreement; the execution and
delivery of, and the performance by the Company of its obligations under, this
Agreement have been duly and validly authorized by the Company, and this
Agreement has been duly executed and delivered by the Company and constitutes
the valid and legally binding agreement of the Company, enforceable against the
Company in accordance with its terms, except as rights to indemnity and
contribution hereunder may be limited by federal or state securities laws or
principles of public policy and subject to the qualification that the
enforceability of the Company's obligations hereunder may be limited by
bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium and
other laws relating to or affecting creditors' rights generally and by general
equitable principles.
(l) Except as disclosed in the Registration Statement and the
Prospectus (or any amendment or supplement thereto), subsequent to the
respective dates as of which such information is given in the Registration
Statement and the Prospectus (or any amendment or supplement thereto), neither
the Company nor any of the Subsidiaries has incurred any liability or
obligation, direct or contingent, or entered into any transaction that is
material to the Company and the Subsidiaries taken as a whole, and there has not
been any change in the capital stock, or material increase in the consolidated
short-term or long-term debt, of the Company, or any material adverse change, or
any development involving or which may reasonably be expected to involve a
prospective material adverse change, in the condition (financial or other),
business, prospects, properties, net worth or results of operations of the
Company and the Subsidiaries taken as a whole.
(m) The Company and each of the Subsidiaries has good and marketable
title to all property (real and personal) described in the Prospectus as being
owned by it, free and clear of all liens,
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claims, security interests or other encumbrances except such as are described in
the Registration Statement and the Prospectus or in a document filed as an
exhibit to the Registration Statement or an Incorporated Document, and all the
property described in the Prospectus as being held under lease by the Company or
any of the Subsidiaries is held by it under valid, subsisting and enforceable
leases.
(n) The Company has not distributed and, prior to the later to occur
of the Closing Date and completion of the distribution of the Shares, will not
distribute any offering material in connection with the offering and sale of the
Shares other than the Registration Statement, the Prepricing Prospectus, the
Prospectus or other materials, if any, permitted by the Act.
(o) The Company and each of the Subsidiaries has such permits,
licenses, franchises, authorizations and clearances ("Permits") of governmental
or regulatory authorities, including, without limitation, such Permits relating
to the provision of healthcare services by the Company or any of the
Subsidiaries, as are necessary to own, lease and operate its properties and to
conduct its business in the manner described in the Prospectus, subject to such
qualifications as may be set forth in the Prospectus; subject to such
qualifications as may be set forth in the Prospectus, the Company and each of
the Subsidiaries has fulfilled and performed all its material obligations with
respect to the Permits, and no event has occurred which allows, or after notice
or lapse of time would allow, revocation or termination thereof or results in
any other material impairment of the rights of the holder of any Permit, subject
in each case to such qualification as may be set forth in the Prospectus.
Except as described in the Prospectus, none of the Permits contains any
restriction that is materially burdensome to the Company or any of the
Subsidiaries. The Company's and each Subsidiary's business practices do not
violate any federal or state laws regarding physician ownership of (or financial
relationship with) and referral to entities providing healthcare-related goods
or services, or laws requiring disclosure of financial interests held by
physicians in entities to which they may refer patients for the provisions of
health care related goods or services.
(p) The Company and the Subsidiaries own or possess all patents,
trademarks, trademark registrations, service marks, service mark registrations,
trade names, copyrights, licenses, inventions, trade secrets and rights
described in the Prospectus as being owned by any of them or necessary for the
conduct of their respective businesses, and the Company is not aware of any
claim to the contrary or any challenge by any other person to the rights of the
Company and the Subsidiaries with respect to the foregoing.
(q) The Company has not received nor is it aware of any communication
(written or oral) relating to the termination or modification or threatened
termination or modification of the agreements described or referred to in the
Prospectus under the caption "Risk Factors-Nature of Contracts" nor is it aware
of any communication (written or oral) relating to any determination or
threatened determination not to renew or extend any agreement described or
referred to under such caption at the end of the current term of any such
agreement.
(r) The property, assets and operations of the Company and the
Subsidiaries comply in all material respects with all applicable federal, state
and local laws, rules, orders, decrees, judgments, injunctions, licenses,
permits or regulations relating to environmental matters (the "Environmental
Laws"). To the Company's best knowledge, none of the Company's nor any of the
Subsidiaries property, assets or operations is the subject of any federal, state
or local investigation evaluating whether any remedial action is needed to
respond to a release of any substance regulated by or form the basis of
liability under any Environmental Laws (a "Hazardous Material") into the
environment or is in contravention of any federal, state, local or foreign law,
order or regulation. Neither the Company nor
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any of the Subsidiaries has received any notice or claim, nor are there any
pending or, to the Company's best knowledge, threatened or reasonably
anticipated lawsuits against the Company or any of the Subsidiaries with respect
to violations of an Environmental Law or in connection with the release of any
Hazardous Material into the environment. Neither the Company nor any of the
Subsidiaries has any material contingent liability in connection with any
release of Hazardous Material into the environment.
(s) The Company and the Subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are customary in the businesses in which they are engaged; (ii) all
policies of insurance insuring the Company or any of the Subsidiaries or their
respective businesses, assets, employees, officers and directors are in full
force and effect; (iii) the Company and the Subsidiaries are in compliance with
the terms of such policies and instruments in all material respects; and (iv)
there are no claims by the Company or any of the Subsidiaries under any such
policy or instrument as to which any insurance company is denying liability or
defending under a reservation of rights clause.
(t) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(u) Neither the Company nor any of the Subsidiaries nor, to the
Company's best knowledge, any employee or agent of the Company or any of the
Subsidiaries has made any payment of funds of the Company or received or
retained any funds in violation of any law, rule or regulation, which payment,
receipt or retention of funds is of a character required to be disclosed in the
Prospectus.
(v) The Company and the Subsidiaries have filed all federal, state,
local and foreign tax returns and tax forms required to be filed; such returns
and forms are complete and correct in all material respects; and all taxes shown
by such returns or otherwise assessed that are due or payable have been paid,
except such taxes as are being contested in good faith and as to which adequate
reserves have been provided. All payroll withholdings required to be made by
the Company with respect to employees have been made. The charges, accruals and
reserves on the books of the Company and the Subsidiaries in respect of any tax
liability for any year not finally determined are adequate to meet any
assessments or reassessments for additional taxes; and there have been no tax
deficiencies asserted and, to the best knowledge of the Company, no tax
deficiency might be reasonably asserted and threatened against the Company or
any of the Subsidiaries that could, singularly or in the aggregate, have a
Material Adverse Effect.
(w) No holder of any security of the Company has any right to require
(not heretofore waived) registration of shares of Common Stock or any other
security of the Company because of the filing of the registration statement or
the consummation of the transactions contemplated by this Agreement and, except
as disclosed in the Prospectus, no person has the right to require registration
under the Act of any shares of Common Stock or other securities of the Company.
No person has the right, contractual or otherwise, to cause the Company to
permit such person to underwrite the sale of any of the Shares. Except as
described in or contemplated by the Prospectus, there are no outstanding
options, warrants or other rights calling for the issuance of, and there are no
commitments, plans or arrangements to issue, any shares of capital stock of the
Company or any of the Subsidiaries or any
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security convertible into or exchangeable or exercisable for capital stock of
the Company or any of the Subsidiaries.
(x) Neither the Company nor any of the Subsidiaries is, and, upon the
sale of the Shares to be issued and sold by it hereunder and application of the
net proceeds from such sale as described in the Prospectus under the caption
"Use of Proceeds," will not be an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
(y) The Company and each of the Subsidiaries is in compliance with
all provisions of Florida Statutes (S) 517.075 and the regulations thereunder,
relating to issuers doing business with Cuba.
(z) The Incorporated Documents heretofore filed were filed in a
timely manner and, when they were filed (or, if any amendment with respect to
any such document was filed, when such document was filed), conformed with the
requirements of the Exchange Act and did not contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; and any further
Incorporated Documents will, when so filed, be filed in a timely manner and
conform with the requirements of the Exchange Act and will not contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading.
7. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to
indemnify and hold harmless each of you and each other Underwriter and each
person, if any, who controls any Underwriter within the meaning of Section 15 of
the Act or Section 20 of the Exchange Act from and against any and all losses,
claims, damages, liabilities and expenses (including reasonable costs of
investigation) arising out of or based upon any untrue statement or alleged
untrue statement of a material fact contained in any Prepricing Prospectus or in
the Registration Statement or the Prospectus or in any amendment or supplement
thereto, or arising out of or based upon any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, except insofar as such losses, claims,
damages, liabilities or expenses arise out of or are based upon any untrue
statement or omission or alleged untrue statement or omission which has been
made therein or omitted therefrom in reliance upon and in conformity with the
information relating to such Underwriter furnished in writing to the Company by
or on behalf of any Underwriter through you expressly for use in connection
therewith; provided, however, that the indemnification contained in this
paragraph (a) with respect to any Prepricing Prospectus shall not inure to the
benefit of any Underwriter (or to the benefit of any person controlling such
Underwriter) on account of any such loss, claim, damage, liability or expense
arising from the sale of Shares by such Underwriter to any person if (i) a copy
of the Prospectus shall not have been delivered or sent to such person within
the time required by the Act and the untrue statement or alleged untrue
statement or omission or alleged omission of a material fact contained in such
Prepricing Prospectus was corrected in the Prospectus and (ii) the Company has
delivered the Prospectus to the several Underwriters in requisite quantity on a
timely basis to permit such delivery or sending. The foregoing indemnity
agreement shall be in addition to any liability which the Company may otherwise
have.
(b) If any action, suit or proceeding shall be brought against any
Underwriter or any person controlling any Underwriter in respect of which
indemnity may be sought against the Company, such Underwriter or such
controlling person shall promptly notify the Company, and the Company shall
assume the defense thereof, including the employment of counsel and payment of
all fees and expenses. Such Underwriter or any such controlling person shall
have the right to employ separate counsel in any such action, suit or proceeding
and to participate in the defense thereof, but the fees and expenses of such
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counsel shall be at the expense of such Underwriter or such controlling person
unless (i) the Company has agreed in writing to pay such fees and expenses, (ii)
the Company has failed to assume the defense and employ counsel or (iii) the
named parties to any such action, suit or proceeding (including any impleaded
parties) include both such Underwriter or such controlling person and the
Company and such Underwriter or such controlling person shall have been advised
by its counsel that representation of such indemnified party and the Company by
the same counsel would be inappropriate under applicable standards of
professional conduct (whether or not such representation by the same counsel has
been proposed) due to actual or potential differing interests between them (in
which case the Company shall not have the right to assume the defense of such
action, suit or proceeding on behalf of such Underwriter or such controlling
person). It is understood, however, that the Company shall, in connection with
any one such action, suit or proceeding or separate but substantially similar or
related actions, suits or proceedings in the same jurisdiction arising out of
the same general allegations or circumstances, be liable for the reasonable fees
and expenses of only one separate firm of attorneys (in addition to any local
counsel) at any time for all such Underwriters and controlling persons not
having actual or potential differing interests with you or among themselves,
which firm shall be designated in writing by Smith Barney Inc., and that all
such fees and expenses shall be reimbursed as they are incurred. The Company
shall not be liable for any settlement of any such action, suit or proceeding
effected without its written consent, but if settled with such written consent,
or if there be a final judgment for the plaintiff in any such action, suit or
proceeding, the Company agrees to indemnify and hold harmless any Underwriter
and any such controlling person, to the extent provided in the preceding
paragraph, from and against any loss, claim, damage, liability or expense by
reason of such settlement or judgment.
(c) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement, and any person who controls the Company within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act, to the same
extent as the foregoing indemnity from the Company to each Underwriter, but only
with respect to information relating to such Underwriter furnished in writing to
the Company by or on behalf of such Underwriter through you expressly for use in
the Registration Statement, the Prospectus or any Prepricing Prospectus, or any
amendment or supplement thereto. If any action, suit or proceeding shall be
brought against the Company, any of its directors, any such officer or any such
controlling person based on the Registration Statement, the Prospectus or any
Prepricing Prospectus, or any amendment or supplement thereto, and in respect of
which indemnity may be sought against any Underwriter pursuant to this paragraph
(c), such Underwriter shall have the rights and duties given to the Company by
paragraph (b) above (except that if the Company shall have assumed the defense
thereof such Underwriter shall not be required to do so, but may employ separate
counsel therein and participate in the defense thereof, but the fees and
expenses of such counsel shall be at such Underwriter's expense), and the
Company, its directors, any such officer, and any such controlling person shall
have the rights and duties given to the Underwriters by paragraph (b) above.
The foregoing indemnity agreement shall be in addition to any liability which
the Underwriters may otherwise have.
(d) If the indemnification provided for in this Section 7 is
unavailable to an indemnified party under paragraphs (a) or (c) hereof in
respect of any losses, claims, damages, liabilities or expenses referred to
therein, then an indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or expenses (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Underwriters on the other hand from the offering
of the Shares, or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the Company on the one hand and the Underwriters on the other
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hand in connection with the statements or omissions that resulted in such
losses, claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the Underwriters on the other hand shall be deemed to be in the
same proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company bear to the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the table
on the cover page of the Prospectus; provided that, in the event that the
Underwriters shall have purchased any Additional Shares hereunder, any
determination of the relative benefits received by the Company and the
Underwriters from the offering of the Shares shall include the net proceeds
(before deducting expenses) received by the Company, and the underwriting
discounts and commissions received by the Underwriters, from the sale of such
Additional Shares, in each case computed on the basis of the respective amounts
set forth in the notes to the table on the cover page of the Prospectus. The
relative fault of the Company on the one hand and the Underwriters on the other
hand shall be determined by reference to, among other things, whether the untrue
or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
on the one hand or by the Underwriters on the other hand and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
(e) The Company and the Underwriters agree that it would not be just
and equitable if contribution pursuant to this Section 7 were determined by a
pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation that does not take account of
the equitable considerations referred to in paragraph (d) above. The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages, liabilities and expenses referred to in paragraph (d) above shall be
deemed to include, subject to the limitations set forth above, any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating any claim or defending any such action, suit or proceeding.
Notwithstanding the provisions of this Section 7, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price of the Shares underwritten by it and distributed to the public exceeds the
amount of any damages which such Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations to contribute pursuant to this Section 7 are several in proportion
to the respective numbers of Firm Shares set forth opposite their names in
Schedule I hereto (or such numbers of Firm Shares increased as set forth in
Section 10 hereof) and not joint.
(f) No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
action, suit or proceeding in respect of which any indemnified party is or could
have been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release of
such indemnified party from all liability on claims that are the subject matter
of such action, suit or proceeding.
(g) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 7 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 7 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter, the Company, its directors or officers or any person
controlling the Company,
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(ii) acceptance of any Shares and payment therefor hereunder, and (iii) any
termination of this Agreement. A successor to any Underwriter or any person
controlling any Underwriter, or to the Company, its directors or officers, or
any person controlling the Company, shall be entitled to the benefits of the
indemnity, contribution and reimbursement agreements contained in this Section
7.
8. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several obligations
of the Underwriters to purchase the Firm Shares hereunder are subject to the
following conditions:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the registration statement or a post-effective amendment thereto
or an Additional Registration Statement to be declared effective before the
offering of the Shares may commence, the registration statement or such post-
effective amendment or Additional Registration Statement shall have become
effective not later than 5:30 P.M., New York City time, on the date hereof, or
at such later date and time as shall be consented to in writing by you, and all
filings, if any, required by Rules 424 and 430A under the Act shall have been
timely made.
(b) Subsequent to the effective date of this Agreement, there shall
not have occurred (i) any change, or any development involving a prospective
change, in or affecting the condition (financial or other), business, prospects,
properties, net worth, or results of operations of the Company not contemplated
by the Prospectus, which in your opinion, as Representatives of the several
Underwriters, would materially, adversely affect the market for the Shares, or
(ii) any event or development relating to or involving the Company or any of the
Subsidiaries, or any officer or director of the Company or any of the
Subsidiaries, which makes any statement made in the Prospectus untrue or which,
in the opinion of the Company and its counsel or the Underwriters and their
counsel, requires the making of any addition to or change in the Prospectus in
order to state a material fact required by the Act or any other law to be stated
therein or necessary in order to make the statements therein not misleading, if
amending or supplementing the Prospectus to reflect such event or development
would, in your opinion, as Representatives of the several Underwriters,
materially, adversely affect the market for the Shares.
(c) You shall have received on the Closing Date an opinion of Smith,
Gambrell & Russell, special counsel for the Company, dated the Closing Date and
addressed to you, as Representatives of the several Underwriters, that:
(i) The Company is a corporation duly incorporated and validly
existing in good standing under the laws of the State of Delaware with full
corporate power and authority to own, lease and operate its properties and
to conduct its business as described in the Registration Statement and the
Prospectus (and any amendment or supplement thereto), and is duly
registered and qualified to conduct its business and is in good standing in
each jurisdiction or place where the nature of its properties or the
conduct of its business requires such registration or qualification, except
where the failure so to register or qualify does not have a Material
Adverse Effect;
(ii) Each Subsidiary is a corporation duly incorporated and
validly existing and in good standing under the laws of the jurisdiction of
its organization, with full corporate power and authority to own, lease,
and operate its properties and to conduct its business as described in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto); each Subsidiary is duly registered and qualified to conduct its
business and is in good standing as a foreign corporation in each
jurisdiction or place where the nature of its properties or the conduct of
its business requires such registration or qualification, except where the
failure
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so to register or qualify or to be in good standing would not have a
Material Adverse Effect; and all the outstanding shares of capital stock of
each of the Subsidiaries have been duly authorized and validly issued, are
fully paid and nonassessable, and are owned of record by the Company
directly, or indirectly through one of the other Subsidiaries, free and
clear of any perfected security interest or, to such counsel's knowledge,
any other lien, adverse claim, equity or other encumbrance, except as
disclosed in the Registration Statement and the Prospectus (or any
amendment or supplement thereto);
(iii) The authorized capital stock of the Company is as set
forth under the caption "Capitalization" in the Prospectus, and the
authorized capital stock of the Company conforms in all material respects
to the description contained in the Prospectus under the caption
"Description of Capital Stock";
(iv) All the shares of capital stock of the Company outstanding
prior to the issuance of the Shares have been duly authorized and validly
issued, are fully paid and nonassessable and were issued and sold in
compliance with all applicable federal and state securities laws;
(v) The Shares have been duly authorized and, when issued and
delivered to the Underwriters against payment therefor in accordance with
the terms hereof, will be validly issued, fully paid and nonassessable and
free of (A) any preemptive rights arising under the Company's certificate
of incorporation or the Delaware General Corporation Law or (B) to the
knowledge of such counsel, similar rights that entitle or will entitle any
person to acquire any shares of capital stock of the Company upon the
issuance and sale of the Shares by the Company;
(vi) The form of certificate for the Shares conforms to the
requirements of the Delaware General Corporation Law;
(vii) The Registration Statement and all post-effective
amendments, if any, have become effective under the Act and, to the
knowledge of such counsel, no stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings for that
purpose are pending before or contemplated by the Commission; and any
required filing of the Prospectus pursuant to Rule 424(b) has been made in
accordance with Rule 424(b);
(viii) The Company has the corporate power and authority to
enter into this Agreement and to issue, sell and deliver the Shares to the
Underwriters as provided herein, and this Agreement has been duly
authorized, executed and delivered by the Company and is a valid, legal and
binding agreement of the Company, enforceable against the Company in
accordance with its terms, except as enforcement of rights to indemnity and
contribution hereunder may be limited by federal or state securities laws
or principles of public policy and subject to the qualification that the
enforceability of the Company's obligations hereunder may be limited by
bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium
and other laws relating to or affecting creditors' rights generally and by
general equitable principles;
(ix) To the knowledge of such counsel, neither the Company nor
any of the Subsidiaries is in violation of its certificate of incorporation
or bylaws, or other organizational documents, or in default in the
performance of any material obligation, agreement or condition contained in
any bond, debenture, note or other evidence of indebtedness made an exhibit
to the Registration Statement or any Incorporated Document;
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(x) Neither the offer, sale or delivery of the Shares, the execution,
delivery or performance of this Agreement, compliance by the Company with
the provisions hereof nor consummation by the Company of the transactions
contemplated hereby conflicts or will conflict with or constitutes or will
constitute a breach of, or a default under, the certificate of
incorporation or bylaws, or other organizational documents, of the Company
or any of the Subsidiaries or any agreement, indenture, lease or other
instrument to which the Company or any of the Subsidiaries is a party or by
which the Company or any of the Subsidiaries or any of their respective
properties is bound that is an exhibit to the Registration Statement or any
Incorporated Document, or is known to such counsel after reasonable
inquiry, or to the knowledge of such counsel will result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets
of the Company or any of the Subsidiaries, nor will any such action result
in any violation of any existing law, regulation, ruling (assuming
compliance with all applicable state securities and Blue Sky laws),
judgment, injunction, order or decree known to such counsel and applicable
to the Company or any of the Subsidiaries or any of its properties;
(xi) No consent, approval, authorization or other order of, or
registration or filing with, any court, regulatory body, administrative
agency or other governmental body, agency, or official is required on the
part of the Company or any of the Subsidiaries (except as have been
obtained under the Act or such as may be required under state securities or
Blue Sky laws governing the purchase and distribution of the Shares) for
the valid issuance and sale of the Shares to the Underwriters as
contemplated by this Agreement;
(xii) To the knowledge of such counsel, (A) there are no legal
or governmental proceedings pending or threatened against the Company or
any of the Subsidiaries, or to which the Company or any of the Subsidiaries
or any of their respective properties is subject, which are required to be
described in the Registration Statement or Prospectus (or any amendment or
supplement thereto) that are not described as required and (B) there are no
agreements, contracts, indentures, leases or other instruments that are
required to be described in the Registration Statement or the Prospectus
(or any amendment or supplement thereto) or to be filed as an exhibit to
the Registration Statement or any Incorporated Document that are not
described or filed as required, as the case may be;
(xiii) To the knowledge of such counsel, neither the Company nor
any of the Subsidiaries is in violation of any law, ordinance,
administrative or governmental rule or regulation applicable to the Company
or any of the Subsidiaries the violation of which would have a Material
Adverse Effect or of any decree of any court or governmental agency or body
having jurisdiction over the Company or any of the Subsidiaries;
(xiv) The Company and each of the Subsidiaries has full
corporate power and authority and all necessary Permits (except where the
failure to so have any such Permits, individually or in the aggregate,
would not have a Material Adverse Effect to own its properties and to
conduct its business as now being conducted as described in the Prospectus;
(xv) The Registration Statement and the Prospectus and any
supplements or amendments thereto (except for the financial statements and
the notes thereto and the schedules and other financial and statistical
data included therein, as to which such counsel need not express any
opinion) comply as to form in all material respects with the requirements
of the Act; and
16
<PAGE>
(xvi) The statements in the Registration Statement and
Prospectus, insofar as they are descriptions of contracts, agreements or
other legal documents, or refer to statements of law or legal conclusions,
are accurate and present fairly the information purported to be shown.
(xvii) Except as described in the Prospectus, such counsel does
not know of any holder of any securities of the Company or any of the
Subsidiaries or any other person who has the right, contractual or
otherwise, to cause the Company to sell or otherwise issue to them, or to
permit them to underwrite the sale of, any of the Shares or the right to
have any Common Stock or other securities of the Company included in the
Registration Statement or the right, as a result of the filing of the
Registration Statement, to require the Company to register under the Act
any shares of Common Stock or other securities of the Company, and any
registration rights in connection with the offering contemplated hereby
have been waived;
(xviii) Neither Company nor any of the Subsidiaries is an
"investment company" or a person "controlled" by an "investment company"
within the meaning of the Investment Company Act of 1940, as amended; and
(xix) All documents incorporated by reference in the Prospectus
(excluding any financial statements and footnotes thereto and other
financial or statistical data included or incorporated by reference
therein, as to which such counsel need express no opinion), at the time
they were filed with the Commission, complied as to form in all material
respects with the requirements of the Exchange Act;
In addition, such counsel shall state that although such counsel has
not undertaken, except as otherwise indicated in their opinion, to determine
independently, and does not assume any responsibility for, the accuracy,
completeness or fairness of the statements in the Registration Statement, such
counsel has participated in the preparation of the Registration Statement and
the Prospectus, including review and discussion of the contents thereof, and
nothing has come to the attention of such counsel that has caused it to believe
that the Registration Statement, at the time the Registration Statement became
effective, contained an untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading, or that the Prospectus, as of its date and as
of the Closing Date or the Option Closing Date, as the case may be, contained an
untrue statement of a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or that any amendment
or supplement to the Prospectus, as of its date, and as of the Closing Date or
the Option Closing Date, as the case may be, contained or contains an untrue
statement of a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading (it being understood that such
counsel need express no opinion with respect to the financial statements and the
notes thereto and the schedules and other financial and statistical data
included in the Registration Statement or the Prospectus).
In addition, such counsel shall state that (A) although such counsel
has not undertaken, except as otherwise indicated in their opinion, to determine
independently, and does not assume any responsibility for, the accuracy,
completeness or fairness of the statements in the Registration Statement, such
counsel has participated in the preparation of the Registration Statement and
the Prospectus, including review and discussion of the contents thereof, and
nothing has come to the attention of such counsel that has caused it to believe
that the Registration Statement, at the time the Registration Statement became
effective, contained an untrue statement of a material fact or omitted to state
a material fact
17
<PAGE>
required to be stated therein or necessary to make the statements therein not
misleading, or that the Prospectus, as of its date and as of the Closing Date or
the Option Closing Date, as the case may be, contained an untrue statement of a
material fact or omitted or omits to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading, or that any amendment or supplement to the
Prospectus, as of its date, and as of the Closing Date or the Option Closing
Date, as the case may be, contained or contains an untrue statement of a
material fact or omitted or omits to state a material fact necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading (it being understood that such counsel need express no
opinion with respect to the financial statements and the notes thereto and the
schedules and other financial and statistical data included in the Registration
Statement or the Prospectus); and (B) such counsel has no reason to believe that
any Incorporated Documents (other than the financial statements and footnotes
thereto or other financial or statistical data contained in any such
Incorporated Document, as to which such counsel expresses no belief), when they
were filed with the Commission, contained any untrue statement of a material
fact or omitted to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were made
when such documents were so filed, not misleading.
(d) You shall have received on the Closing Date an opinion of Dewey
Ballantine, counsel for the Underwriters, dated the Closing Date and addressed
to you, as Representatives of the several Underwriters, with respect to the
matters referred to in clauses (v) (other than subclause (B) thereof), (vii),
(viii), (xv) and the penultimate paragraph of Section 8(c) hereof and such other
related matters as you may request.
(e) You shall have received letters addressed to you and dated the
date hereof and the Closing Date from Arthur Andersen LLP, independent certified
public accountants, substantially in the forms heretofore approved by you.
(f)(i) No stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall have
been instituted or, to the knowledge of the Company, contemplated by the
Commission at or prior to the Closing Date and any request of the Commission for
additional information (to be included in the registration statement or the
prospectus or otherwise) shall have been complied with; (ii) there shall not
have been any change in the capital stock of the Company nor any material
increase in the consolidated short-term or long-term debt of the Company from
that set forth or contemplated in the Registration Statement or the Prospectus
(or any amendment or supplement thereto); (iii) there shall not have been, since
the respective dates as of which information is given in the Registration
Statement and the Prospectus (or any amendment or supplement thereto), except as
may otherwise be stated in the Registration Statement and Prospectus (or any
amendment or supplement thereto), any material adverse change in the condition
(financial or other), business, prospects, properties, net worth or results of
operations of the Company and the Subsidiaries, taken as a whole; (iv) neither
the Company nor any of the Subsidiaries shall have any liabilities or
obligations, direct or contingent (whether or not in the ordinary course of
business), that are material to the Company and the Subsidiaries, taken as a
whole, other than those reflected in or contemplated by the Registration
Statement or the Prospectus (or any amendment or supplement thereto); and (v)
all the representations and warranties of the Company contained in this
Agreement shall be true and correct in all material respects on and as of the
date hereof and on and as of the Closing Date as if made on and as of the
Closing Date, and you shall have received a certificate, dated the Closing Date
and signed by the chief executive officer and the chief financial officer of the
Company (or such other officers as are acceptable to you), as to the matters set
forth in this Section 8(f) and in Section 8(g) hereof.
18
<PAGE>
(g) The Company shall not have failed at or prior to the Closing Date
to have performed or complied with any of its agreements herein contained and
required to be performed or complied with by it hereunder at or prior to the
Closing Date.
(h) The Company shall have furnished or caused to be furnished to you
such further certificates and documents as you shall have reasonably requested.
All such opinions, certificates, letters and other documents will be
in compliance with the provisions hereof only if they are satisfactory in form
and substance to you, as Representatives of the Underwriters, and counsel for
the Underwriters.
Any certificate or document signed by any officer of the Company and
delivered to you, as Representatives of the several Underwriters, or to counsel
for the Underwriters, shall be deemed a representation or warranty by the
Company to each Underwriter as to the statements made therein.
The several obligations of the Underwriters to purchase Additional
Shares hereunder are subject to the satisfaction on and as of any Option Closing
Date of the conditions set forth in this Section 8, except that, if any Option
Closing Date is other than the Closing Date, the certificates, opinions and
letters referred to in paragraphs (c) through (f) and paragraph (h) shall be
dated the Option Closing Date in question and the opinions called for by
paragraphs (c) and (d) shall be revised to reflect the sale of Additional
Shares.
9. EXPENSES. The Company agrees to pay the following costs and expenses
and all other costs and expenses incident to the performance by it of its
obligations hereunder: (i) the preparation, printing or reproduction, and
filing with the Commission of the registration statement (including financial
statements and exhibits thereto), each Prepricing Prospectus, the Prospectus,
and each amendment or supplement to any of them; (ii) the printing (or
reproduction) and delivery (including postage, air freight charges and charges
for counting and packaging) of such copies of the registration statement, each
Prepricing Prospectus, the Prospectus, the Incorporated Documents and all
amendments or supplements to any of them as may be reasonably requested for use
in connection with the offering and sale of the Shares; (iii) the preparation,
printing, authentication, issuance and delivery of certificates for the Shares,
including any stamp taxes in connection with the offering of the Shares; (iv)
the printing (or reproduction) and delivery of this Agreement, the preliminary
and supplemental Blue Sky Memoranda and all other agreements or documents
printed (or reproduced) and delivered in connection with the offering of the
Shares; (v) the registration of the Common Stock under the Exchange Act and the
listing of the Shares on the Nasdaq National Market; (vi) the registration or
qualification of the Shares for offer and sale under the securities or Blue Sky
laws of the several states as provided in Section 5(g) hereof (including the
reasonable fees, expenses and disbursements of counsel for the Underwriters
relating to the preparation, printing or reproduction, and delivery of the
preliminary and supplemental Blue Sky Memoranda and such registration and
qualification); (vii) the filing fees and the reasonable fees and expenses of
counsel for the Underwriters in connection with any filings required to be made
with the National Association of Securities Dealers, Inc. in connection with the
offering; (viii) the transportation and other expenses incurred by or on behalf
of representatives of the Company in connection with presentations to
prospective purchasers of the Shares; (ix) the fees and expenses of the
Company's accountants and the fees and expenses of counsel (including local and
special counsel) for the Company; and (x) the performance by the Company of its
other obligations under this Agreement.
10. EFFECTIVE DATE OF AGREEMENT. This Agreement shall become effective:
(i) upon the execution and delivery hereof by the parties hereto; or (ii) if, at
the time this Agreement is executed and
19
<PAGE>
delivered, it is necessary for the registration statement or a post-effective
amendment thereto or an Additional Registration Statement to be declared
effective before the offering of the Shares may commence, when notification of
the effectiveness of the registration statement or such post-effective amendment
or Additional Registration Statement has been released by the Commission. Until
such time as this Agreement shall have become effective, it may be terminated by
the Company, by notifying you, or by you, as Representatives of the several
Underwriters, by notifying the Company.
If any one or more of the Underwriters shall fail or refuse to
purchase Shares which it or they have agreed to purchase hereunder, and the
aggregate number of Shares which such defaulting Underwriter or Underwriters
agreed but failed or refused to purchase is not more than one-tenth of the
aggregate number of Shares which the Underwriters are obligated to purchase on
the Closing Date, each non-defaulting Underwriter shall be obligated, severally,
in the proportion which the number of Firm Shares set forth opposite its name in
Schedule I hereto bears to the aggregate number of Firm Shares set forth
opposite the names of all non-defaulting Underwriters or in such other
proportion as you may specify in accordance with Section 20 of the Master
Agreement Among Underwriters of Smith Barney, Harris Upham & Co. Incorporated
(predecessor of Smith Barney Inc.), to purchase the Shares which such defaulting
Underwriter or Underwriters agreed, but failed or refused, to purchase. If any
Underwriter or Underwriters shall fail or refuse to purchase Shares which it or
they are obligated to purchase on the Closing Date and the aggregate number of
Shares with respect to which such default occurs is more than one-tenth of the
aggregate number of Shares which the Underwriters are obligated to purchase on
the Closing Date and arrangements satisfactory to you and the Company for the
purchase of such Shares by one or more non-defaulting Underwriters or other
party or parties approved by you and the Company are not made within 36 hours
after such default, this Agreement will terminate without liability on the part
of any non-defaulting Underwriter or the Company. In any such case which does
not result in termination of this Agreement, either you or the Company shall
have the right to postpone the Closing Date, but in no event for longer than
seven days, in order that the required changes, if any, in the Registration
Statement and the Prospectus or any other documents or arrangements may be
effected. Any action taken under this paragraph shall not relieve any
defaulting Underwriter from liability in respect of any such default of any such
Underwriter under this Agreement. The term "Underwriter" as used in this
Agreement includes, for all purposes of this Agreement, any party not listed in
Schedule I hereto who, with your approval and the approval of the Company,
purchases Shares which a defaulting Underwriter agreed, but failed or refused,
to purchase.
Any notice under this Section 10 may be given by telegram, telecopy or
telephone but shall be subsequently confirmed by letter.
11. TERMINATION OF AGREEMENT. This Agreement shall be subject to
termination in your absolute discretion, without liability on the part of any
Underwriter to the Company, by notice to the Company, if prior to the Closing
Date or any Option Closing Date (if different from the Closing Date and then
only as to the Additional Shares), as the case may be, (i) trading in securities
generally on the New York Stock Exchange, the American Stock Exchange or the
Nasdaq National Market shall have been suspended or materially limited, (ii) a
general moratorium on commercial banking activities in New York shall have been
declared by either federal or state authorities, or (iii) there shall have
occurred any outbreak or escalation of hostilities or other international or
domestic calamity, crisis or change in political, financial or economic
conditions, the effect of which on the financial markets of the United States is
such as to make it, in your judgment, impracticable or inadvisable to commence
or continue the offering of the Shares at the offering price to the public set
forth on the cover page of the Prospectus or to enforce contracts for the resale
of the Shares by the Underwriters. Notice of such termination may be given by
telegram, telecopy or telephone and shall be subsequently confirmed by letter.
20
<PAGE>
12. INFORMATION FURNISHED BY THE UNDERWRITERS. The statements set forth
in the last paragraph on the cover page, the stabilization legend on the inside
front cover page and the statements in the first and third paragraphs under the
caption "Underwriting" in any Prepricing Prospectus and in the Prospectus
constitute the only information furnished by or on behalf of the Underwriters
through you as such information is referred to in Sections 6(b) and 7 hereof.
13. MISCELLANEOUS. Except as otherwise provided in Sections 5, 10 and 11
hereof, notice given pursuant to any provision of this Agreement shall be in
writing and shall be delivered (i) if to the Company, at the office of the
Company at 3353 Peachtree Road, N.E., Suite 1000, Atlanta, Georgia, Attention:
Larry G. Gerdes, President and Chief Executive Officer, with a copy to Smith,
Gambrell & Russell, 3343 Peachtree Road, N.E., Suite 1800, Atlanta, Georgia
30326, Attention: Helen T. Ferraro, Esq., or (ii) if to you, as Representatives
of the several Underwriters, care of Smith Barney Inc., 388 Greenwich Street,
New York, New York 10013, Attention: Manager, Investment Banking Division, with
a copy to Dewey Ballantine, 1301 Avenue of the Americas, New York, New York
10019, Attention: Frederick W. Kanner, Esq.
This Agreement has been and is made solely for the benefit of the
several Underwriters, the Company, its directors, its officers who sign the
Registration Statement and the controlling persons referred to in Section 7
hereof and, to the extent provided herein, their respective successors and
assigns and no other person shall acquire or have any right under or by virtue
of this Agreement. Neither the term "successor" nor the term "successors and
assigns" as used in this Agreement shall include a purchaser from any
Underwriter of any of the Shares in his status as such purchaser.
14. APPLICABLE LAW; COUNTERPARTS. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed within the State of New York.
This Agreement may be signed in various counterparts which together
constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
21
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
between the Company and the several Underwriters.
Very truly yours,
TRANSCEND SERVICES
By: /s/ Larry G. Gerdes
---------------------------------------
Larry G. Gerdes
President and Chief Executive Officer
Confirmed as of the date first
above-mentioned on behalf of
themselves and the other several
Underwriters named in Schedule I
hereto.
Smith Barney Inc.
Dain Bosworth Incorporated
As Representatives of the Several Underwriters
By: Smith Barney Inc.
By:
--------------------------
Managing Director
22
<PAGE>
SCHEDULE I
TRANSCEND SERVICES, Inc.
Number of
Underwriter Firm Shares
- ----------- -----------
Smith Barney Inc......................
Dain Bosworth Incorporated............
-----------
Total...................
===========
23
<PAGE>
NUMBER SHARES
TR 0777 TRANSCEND
- ------- SERVICES, INC. -------------
CUSIP 893929 10 9
INCORPORATED UNDER THE LAWS OF THE SEE REVERSE SIDE FOR
STATE OF DELAWARE CERTAIN DEFINITIONS
THIS IS TO CERTIFY That
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK,
$.01 PAR VALUE PER SHARE, OF
- ---------------------------- TRANSEND SERVICES, INC. --------------------------
transferable only on the books of the Corporation in person or by attorney upon
surrender of this Certificate properly endorsed.
This Certificate is not valid unless countersigned and registered by the
Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and signatures of its duly
authorized officers.
Dated:
TRANSCEND SERVICES, INC.
CORPORATE
SEAL
DELAWARE
/s/ David W. Murphy /s/ Larry Gerdes
- -------------------------------- -------------------------------
SECRETARY PRESIDENT
Countersigned and Registered:
FIRST INTERSTATE Bank of California
Transfer Agent and Registrar
By
---------------------------------------
Authorized Signature
<PAGE>
TRANSCEND SERVICES, INC.
The Corporation is authorized to issue Common Stock and Preferred Stock. The
Board of Directors of the Corporation has authority to fix the number of shares
and the designation of any series of Preferred Stock and to determine or alter
the rights, preferences, privileges, and restrictions granted to or imposed upon
any unissued series of Preferred Stock.
This certificate and the shares represented hereby shall be subject to all of
the provisions of the Certificate of Incorporation of this Corporation and of
the amendments thereto, by all of which the holder by acceptance hereof is
bound. The Corporation will furnish without charge to the holders hereof upon
request a statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights as established, from time to time, by the Certificate of
Incorporation of the Corporation and by any certificate of designation,and the
number of shares constituting each such class and series. Any such request
should be made at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of survivorship
and not as tenants in common
UNIF GIFT MIN ACT-- Custodian
------------------- ---------------------
(Cust) (Minor)
under Uniform Gifts to Minors
Act
--------------------------
(State)
UNIF TRF MIN ACT -- Custodian (until age )
-------------- -----
(Cust)
under Uniform Transfers
--------------
(Minor)
to Minors Act
----------------------
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received, hereby sell, assign and transfer unto
-----------------------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
| |
- --------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
- ------------------------------------------------------------------------
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- -------------------------------------------------------------------- Attorney
to transfer the said Stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated: Signatures(s):
---------------------- ---------------------------------
-----------------------------------------------
NOTICE: The signature to this assignment must
correspond with the name as written upon the face
of the certificate, in every particular, without
alteration or enlargement or any change whatever.
Signature(s) Guarantee:
--------------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
May 30, 1996
Board of Directors
Transcend Services, Inc.
3353 Peachtree Road, N.E.
Suite 1000
Atlanta, Georgia 30326
Re: Transcend Services, Inc.
Registration Statement on Form S-3
Shares of Common Stock
Gentlemen:
We have acted as counsel for Transcend Services, Inc. (the "Company") in
connection with the proposed public offering of the shares of its Common Stock
covered by the above-described Registration Statement.
In connection therewith, we have examined the following:
(1) The Certificate of Incorporation of the Company, certified by the
Secretary of State of the State of Delaware;
(2) The Bylaws of the Company, certified as complete and correct by the
Secretary of the Company;
(3) The minute book of the Company, certified as correct and complete by
the Secretary of the Company; and
(4) Certificate of Good Standing with respect to the Company, issued by the
Delaware Secretary of State.
Based upon such examination and upon examination of such other instruments
and records as we have deemed necessary, we are of the opinion that:
(A) The Company has been duly incorporated under the laws of the State of
Delaware and is validly existing and in good standing under the laws of
that state.
(B) The 3,450,000 shares of Common Stock covered by the Registration
Statement have been legally authorized and when issued in accordance
with the terms described in said Registration Statement, will be validly
issued, fully paid and nonassessable.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and to the reference to this firm under the caption "Legal Matters"
in the Prospectus. In giving this consent, we do not thereby admit that we
come within the category of persons whose consent is required under Section 7
of the Securities Act of 1933, or the rules and regulations of the Securities
and Exchange Commission thereunder.
Sincerely,
Smith, Gambrell & Russell
/s/ Helen T. Ferraro
_____________________________________
Helen T. Ferraro
HTF:wp
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our firm included in or made a part of this
registration statement.
Arthur Andersen LLP
Atlanta, Georgia
May 29, 1996
<PAGE>
STATE OF GEORGIA
COUNTY OF FULTON
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Donald L. Lucas, a Director of
TRANSCEND SERVICES, INC., a Delaware corporation, do constitute and appoint
Larry G. Gerdes and David W. Murphy my true and lawful attorneys-in-fact, each
with full power of substitution, for me in any and all capacities, to sign,
pursuant to the requirements of the Securities Act of 1933, a Registration
Statement on Form S-3 for TRANSCEND SERVICES, INC., and to file the same with
the Securities and Exchange Commission, together with all exhibits thereto and
other documents in connection therewith, and to sign on my behalf and in my
stead, in any and all capacities, any amendments to said Registration
Statement, incorporating such changes as said attorneys-in-fact deem
appropriate, hereby ratifying and confirming all that said attorneys-in-fact,
or their substitute or substitutes, may do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 30th day of
April, 1996.
/s/ Donald L. Lucas
_____________________________________
[name]
ACKNOWLEDGMENT
BEFORE me this 30th day of April, 1996, came Donald L. Lucas, personally
known to me, who in my presence did sign and seal the above and foregoing
Power of Attorney and acknowledged the same as his true act and deed.
/s/ Jennifer Kirk
_____________________________________
NOTARY PUBLIC
State of Georgia
My Commission Expires:
12-29-99
<PAGE>
STATE OF GEORGIA
COUNTY OF FULTON
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, George B. Caldwell, a Director of
TRANSCEND SERVICES, INC., a Delaware corporation, do constitute and appoint
Larry G. Gerdes and David W. Murphy my true and lawful attorneys-in-fact, each
with full power of substitution, for me in any and all capacities, to sign,
pursuant to the requirements of the Securities Act of 1933, a Registration
Statement on Form S-3 for TRANSCEND SERVICES, INC., and to file the same with
the Securities and Exchange Commission, together with all exhibits thereto and
other documents in connection therewith, and to sign on my behalf and in my
stead, in any and all capacities, any amendments to said Registration
Statement, incorporating such changes as said attorneys-in-fact deem
appropriate, hereby ratifying and confirming all that said attorneys-in-fact,
or their substitute or substitutes, may do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 30th day of
April, 1996.
/s/ George B. Caldwell
_____________________________________
[name]
ACKNOWLEDGMENT
BEFORE me this 30th day of April, 1996, came George B. Caldwell, personally
known to me, who in my presence did sign and seal the above and foregoing
Power of Attorney and acknowledged the same as his true act and deed.
/s/ Jennifer Kirk
_____________________________________
NOTARY PUBLIC
State of Georgia
My Commission Expires:
12-29-99
<PAGE>
STATE OF GEORGIA
COUNTY OF FULTON
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Walter S. Huff, Jr., a Director of
TRANSCEND SERVICES, INC., a Delaware corporation, do constitute and appoint
Larry G. Gerdes and David W. Murphy my true and lawful attorneys-in-fact, each
with full power of substitution, for me in any and all capacities, to sign,
pursuant to the requirements of the Securities Act of 1933, a Registration
Statement on Form S-3 for TRANSCEND SERVICES, INC., and to file the same with
the Securities and Exchange Commission, together with all exhibits thereto and
other documents in connection therewith, and to sign on my behalf and in my
stead, in any and all capacities, any amendments to said Registration
Statement, incorporating such changes as said attorneys-in-fact deem
appropriate, hereby ratifying and confirming all that said attorneys-in-fact,
or their substitute or substitutes, may do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 30th day of
April, 1996.
/s/ Walter S. Huff, Jr.
_____________________________________
[name]
ACKNOWLEDGMENT
BEFORE me this 30th day of April, 1996, came Walter S. Huff, Jr., personally
known to me, who in my presence did sign and seal the above and foregoing
Power of Attorney and acknowledged the same as his true act and deed.
/s/ Jennifer Kirk
_____________________________________
NOTARY PUBLIC
State of Georgia
My Commission Expires:
12-29-99
<PAGE>
STATE OF GEORGIA
COUNTY OF FULTON
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Charles E. Thoele, a Director of
TRANSCEND SERVICES, INC., a Delaware corporation, do constitute and appoint
Larry G. Gerdes and David W. Murphy my true and lawful attorneys-in-fact, each
with full power of substitution, for me in any and all capacities, to sign,
pursuant to the requirements of the Securities Act of 1933, a Registration
Statement on Form S-3 for TRANSCEND SERVICES, INC., and to file the same with
the Securities and Exchange Commission, together with all exhibits thereto and
other documents in connection therewith, and to sign on my behalf and in my
stead, in any and all capacities, any amendments to said Registration
Statement, incorporating such changes as said attorneys-in-fact deem
appropriate, hereby ratifying and confirming all that said attorneys-in-fact,
or their substitute or substitutes, may do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 30th day of
April, 1996.
/s/ Charles E. Thoele
_____________________________________
[name]
ACKNOWLEDGMENT
BEFORE me this 30th day of April, 1996, came Charles E. Thoele, personally
known to me, who in my presence did sign and seal the above and foregoing
Power of Attorney and acknowledged the same as his true act and deed.
/s/ Jennifer Kirk
_____________________________________
NOTARY PUBLIC
State of Georgia
My Commission Expires:
12-29-99
