<PAGE>
SCHEDULE 14A
Information Required in Proxy Statement
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant X
-----
Filed by a Party other than the Registrant _______
Check the appropriate box:
[___] Preliminary Proxy Statement
[___] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ X ] Definitive Proxy Statement
---
[___] Definitive Additional Materials
[___] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
TRANSCEND SERVICES, INC.
----------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
______________________________________________________________________
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate line):
[ X ] No Fee Required.
---
[___] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
1. Title of each class of securities to which transaction applies:
_________________________________________________________________
2. Aggregate number of securities to which transaction applies:
_________________________________________________________________
3. Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
_________________________________________________________________
4. Proposed maximum aggregate value of transactions:
_________________________________________________________________
5. Total fee paid:
_________________________________________________________________
[___] Fee paid previously with preliminary materials.
[___] Check if any part of the fee is offset as provided by Exchange Act
Rule 0-11 (a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
l. Amount Previously Paid:
_________________________________________________________________
2. Form, Schedule or Registration Statement No.:
_________________________________________________________________
3. Filing Party:
_________________________________________________________________
4. Date Filed:
_________________________________________________________________
<PAGE>
TRANSCEND SERVICES, INC.
3353 PEACHTREE ROAD, N.E., SUITE 1000
ATLANTA, GEORGIA 30326
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 29, 1997
To the Stockholders:
The annual meeting of stockholders (the "Annual Meeting") of Transcend
Services, Inc. will be held on April 29, 1997 at the Grand Hyatt Atlanta
(formerly Hotel Nikko) , 3300 Peachtree Road, Atlanta, Georgia 30305 at 10:00
a.m. local time for the following purposes:
1. To elect a Board of Directors consisting of five members to hold
office until the next annual meeting of stockholders or until their
successors are elected and qualified.
2. To approve certain amendments to the Transcend Services, Inc. 1992
Stock Option Plan, As Amended and Restated, including, among other
things, amendments to expand the class of persons eligible to
participate in the Plan, all as set forth in Exhibit A to the Proxy
Statement dated March 31, 1997.
3. To ratify the appointment of Arthur Andersen LLP as independent public
accountants to audit the accounts of the Company and its subsidiary
for the year ending December 31, 1997.
4. To transact such other business as may properly come before the Annual
Meeting or any postponement or adjournment thereof.
Only stockholders of record at the close of business on March 1, 1997 shall
be entitled to notice of, and to vote at, the Annual Meeting or any adjournment
thereof.
A Proxy Statement and a proxy solicited by the Board of Directors are
enclosed herewith. You are cordially invited to attend the Annual Meeting.
Whether or not you plan to attend the Annual Meeting, please complete, sign,
date and mail the enclosed proxy card promptly in the enclosed postage-paid
envelope. If you attend the meeting, you may, if you wish, withdraw your proxy
and vote in person.
By order of the Board of Directors,
/s/ David W. Murphy
DAVID W. MURPHY
Secretary
Atlanta, Georgia
March 31, 1997
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN
PERSON, YOU ARE URGED TO COMPLETE, SIGN, DATE AND PROMPTLY MAIL THE ENCLOSED
PROXY IN THE ACCOMPANYING POSTAGE PAID ENVELOPE. IF YOU ATTEND THE MEETING, YOU
MAY REVOKE THE PROXY AND VOTE YOUR SHARES IN PERSON.
<PAGE>
TRANSCEND SERVICES, INC.
3353 Peachtree Road, N.E., Suite 1000
Atlanta, Georgia 30326
PROXY STATEMENT
For Annual Meeting of Stockholders To be Held April 29, 1997
GENERAL
This Proxy Statement and the accompanying form of Proxy are being furnished
to the stockholders of Transcend Services, Inc. (the "Company" or "Transcend")
on or about March 31, 1997 in connection with the solicitation of proxies by the
Board of Directors of the Company for use at the Annual Meeting of Stockholders
to be held on April 29, 1997 at the Grand Hyatt Atlanta (formerly Hotel Nikko),
3300 Peachtree Road, Atlanta, Georgia 30305 at 10:00 a.m. local time and any
adjournment thereof. Any stockholder who executes and delivers a proxy may
revoke it at any time prior to its use by (i) giving written notice of
revocation to the Secretary of the Company; (ii) executing a proxy bearing a
later date; or (iii) appearing at the meeting and voting in person. The address
of the principal executive offices of the Company is 3353 Peachtree Road, N.E.,
Suite 1000, Atlanta, Georgia 30326 and the Company's telephone number is (404)
364-8000.
Unless otherwise specified, all shares represented by effective proxies
will be voted in favor of (i) election of the five nominees as Directors; (ii)
the approval of certain amendments to the Company's 1992 Stock Option Plan, As
Amended and Restated, including, among other things, amendments to expand the
class of persons eligible to participate in the Plan, all as set forth in
Exhibit A to this Proxy Statement dated March 31, 1997; and, (iii) the
ratification of the selection of Arthur Andersen LLP to serve as the independent
public accountants for the Company for fiscal 1997. The Board of Directors does
not know of any other business to be brought before the meeting, but as to any
such other business, proxies will be voted upon any such matters in accordance
with the best judgement of the person or persons acting thereunder as to what is
in the best interests of the Company.
The cost of soliciting proxies will be borne by the Company. In addition to
use of the mail, proxies may be solicited in person or by telephone or telegram
by Directors and officers of the Company who will not receive additional
compensation for such services. Brokerage houses, nominees, custodians and
fiduciaries will be requested to forward soliciting material to beneficial
owners of stock held of record by them, and the Company will reimburse such
persons for their reasonable expenses in doing so.
Only holders of record of outstanding shares of Common Stock of the Company
at the close of business on March 1, 1997 are entitled to notice of, and to vote
at the meeting. Each stockholder is entitled to one vote for each share held on
the record date. There were 19,495,202 shares of Common Stock outstanding and
entitled to vote on March 1, 1997.
When a quorum is present at the meeting, the vote of the holders of a
majority of the stock having voting power present in person or by proxy shall
decide the action proposed in each matter listed in the accompanying Notice of
Annual Meeting of Stockholders except the election of Directors, who are elected
by a plurality of the votes of the shares present in person or by proxy and
entitled to vote. Abstentions and broker "non-votes" will be counted as present
in determining whether the quorum requirement is satisfied. A "non-vote" occurs
when a nominee holding shares for a beneficial owner votes on one proposal
pursuant to discretionary authority or instructions from the beneficial owner,
but does not vote on another proposal because the nominee has not received
instruction from the beneficial owner, and does not have discretionary power. An
abstention from voting by a stockholder on a proposal has the same effect as a
vote "Against" such proposal. Broker "non-votes" are not counted for purposes of
determining whether a proposal has been approved.
3
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth, as of March 1, 1997, certain information
with respect to all stockholders known to Transcend to beneficially own more
than five percent of the Company's Common Stock, and information with respect to
Transcend Common Stock beneficially owned by each director of Transcend, each
nominee, the executive officers included in the Summary Compensation Table set
forth under the caption "Executive Compensation" and all directors and executive
officers of Transcend as a group. Except as otherwise indicated, the
stockholders listed in the table have sole voting and investment powers with
respect to the Common Stock owned by them.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
NAME AND ADDRESS BENEFICIAL PERCENT OF
OF BENEFICIAL OWNER OWNERSHIP/(1)/ CLASS/(1)/
------------------- -------------- ---------------
<S> <C> <C>
Gerdes Huff Investments............................ 3,500,001/(2)/ 17.953%
3353 Peachtree Road, N.E, Suite 1030
Atlanta, Georgia 30326
Donald L. Lucas.................................... 532,145/(3)/ 2.729%
Larry G. Gerdes.................................... 4,688,001/(4)/ 24.047%
3353 Peachtree Road, N.E, Suite 1000
Atlanta, Georgia 30326
George B. Caldwell................................. 112,767/(5)/ *%
Walter S. Huff, Jr................................. 4,824,765/(6)/ 24.748%
3353 Peachtree Road, N.E, Suite 1000
Atlanta, Georgia 30326
Charles E. Thoele.................................. 64,180/(7)/ *%
Julian L. Cohen.................................... 32,034/(8)/ *%
G. Scott Dillon.................................... 7,750/(9)/ *%
David W. Murphy.................................... 31,146/(10)/ *%
All Directors and Officers as a group (8 persons).. 6,760,753/(11)/ 34.679%
</TABLE>
- -------------------
* Represents less than 1%
/(1)/ "Beneficial Ownership" includes shares for which an individual, directly
or indirectly, has or shares voting or investment power or both and also
includes shares of Common Stock underlying options and warrants to
purchase Common Stock which are exercisable within sixty days of the date
hereof. Beneficial ownership as reported in the above table has been
determined in accordance with Rule 13d-3 of the Securities Exchange Act
of 1934. The percentages are based upon 19,495,202 shares outstanding as
of March 1, 1997, except for certain parties who hold presently
exercisable options or warrants to purchase Common Stock. The percentages
for those parties who hold presently exercisable options or warrants are
based upon the sum of 19,495,202 shares plus the number of shares subject
to presently exercisable options or warrants held by them, as indicated
in the following
4
<PAGE>
notes. Unless otherwise indicated, each person has sole voting and
dispositive power with respect to all shares listed opposite his name.
/(2)/ Such shares are owned of record by Gerdes Huff Investments, a general
partnership the sole general partners of which are Messrs. Gerdes and
Huff. As a result, each of Messrs. Gerdes and Huff are deemed the
beneficial owner of all of such shares.
/(3)/ Includes 410,664 shares held by the Donald L. Lucas and Lygia S. Lucas
Trust dated December 3, 1984, of which Mr. Donald L. Lucas is trustee;
35,000 shares held by the Donald L. Lucas Profit Sharing Trust of which
Mr. Lucas is Successor Trustee; 21,481 shares held by the Donald L. Lucas
Remuneration Account dated July 7, 1993 and 65,000 shares which Mr. Lucas
has the right to acquire pursuant to presently exercisable stock options.
Excludes certain shares and shares underlying warrants with respect to
which Mr. Lucas disclaims beneficial ownership which were purchased by
the Richard M. Lucas Cancer Foundation in the Company's private placement
dated September 5, 1996 and 71,500 shares which may be acquired upon the
conversion of an 8% Convertible Debenture also held by the Richard M.
Lucas Cancer Foundation, of which Mr. Lucas is the Chairman.
/(4)/ Includes 3,500,001 shares held by Gerdes Huff Investments, a general
partnership of which Mr. Gerdes is a general partner; 93,600 shares held
by Mr. Gerdes' spouse; 94,155 shares held by Mr. Gerdes as custodian for
his minor children; and 616,000 shares purchasable pursuant to presently
exercisable stock options.
/(5)/ Includes 22,522 shares subject to presently exercisable warrants to
purchase Common Stock and 16,000 shares which Mr. Caldwell has the right
to acquire pursuant to presently exercisable stock options.
/(6)/ Includes 3,500,001 shares held by Gerdes Huff Investments, a general
partnership of which Mr. Huff is a general partner; 62,650 shares held by
Laumar Corporation which is wholly owned by Mr. Huff; 100,000 shares held
by Laumar Investment Partnership which is wholly owned by Mr. Huff;
28,000 shares purchasable pursuant to presently exercisable options;
225,225 shares subject to presently exercisable warrants to purchase
Common Stock and 56,300 shares held by the Larry G. Gerdes Trust of which
Mr. Huff is the trustee. Excludes 57,200 shares with respect to which Mr.
Huff disclaims beneficial ownership and which may be acquired upon the
conversion of an 8% Convertible Debenture held by the Walter S. Huff, Jr.
Charitable Foundation, of which Mr. Huff's adult children are trustees.
/(7)/ Includes 11,261 shares subject to presently exercisable warrants to
purchase Common Stock and 28,000 shares purchasable pursuant to presently
exercisable stock options.
/(8)/ Mr. Cohen's employment with the Company terminated in November, 1996.
/(9)/ Includes 250 shares held by Mr. Dillon as custodian for his minor
children; 7,500 shares purchasable pursuant to presently exercisable
options.
/(10)/ Includes 27,500 shares purchasable pursuant to presently exercisable
options.
/(11)/ Includes 788,000 shares subject to presently exercisable stock options
and 259,008 shares subject to presently exercisable warrants.
5
<PAGE>
AGENDA ITEM ONE
ELECTION OF DIRECTORS
The Bylaws of Transcend currently provide that the Board of Directors shall
consist of not less than one director, subject to increase or decrease in such
number within legal limits by action of the Board of Directors or stockholders.
There are presently five directors. Each of the nominees presently serves as a
director of Transcend. Directors shall be elected to serve until the next
annual meeting of stockholders or until their successors are elected and
qualified.
Each of the nominees has consented to being named in this Proxy Statement
and to serve as a director of the Company if elected. In the event that any
nominee withdraws, or for any reason is unable to serve as a director, the
proxies will be voted for such other person as may be designated by the Board of
Directors as substitute nominee, but in no event will proxies be voted for more
than five nominees. Management of the Company has no reason to believe that any
nominee will not continue to be a candidate or will not serve if elected.
Each of the following persons has been nominated by management for election
to the Board of Directors to succeed themselves for a term of one year and until
their successors are elected and qualified:
DONALD L. LUCAS................ Mr. Lucas (age 67) 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 25 years. Mr. Lucas also serves on the
boards of directors of Amata Communications
Corporation; Cadence Design Systems, Inc.;
Coulter Pharmaceutical, Inc.; Macromedia,
Inc.; Oracle Corporation; Racotek, Inc. and
Tricord Systems, Inc.
LARRY G. GERDES................ Mr. Gerdes (age 48) 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 and Aksys, Ltd. and
Delphi Information Systems, Inc.
GEORGE B. CALDWELL............. Mr. Caldwell (age 66)is presently the
Chairman of The Collier Company, a healthcare
consulting company in Park Ridge, Illinois.
He served as President and Chief Executive
Officer and President Emeritus of the
Lutheran General Health Care System in Park
Ridge, Illinois, from 1979 to 1995. 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 Chairman of The Hunter Group and a
Director and Chairman of the Executive
Committee of MMI Companies.
WALTER S. HUFF, JR. ........... Mr. Huff (age 62) 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 from 1986 until 1989. Since
1990, Mr. Huff has been a private investor.
6
<PAGE>
CHARLES E. THOELE.............. Mr. Thoele (age 61) 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 a Director of
HBO & Company.
No director or executive officer of Transcend is related to any other director
or executive officer of Transcend.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE ABOVE NOMINEES.
SECTION 16(A) BENEFICIAL OWNERSHIP COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, executive officers and persons who own more than 10% of the
outstanding Common Stock of the Company to file with the Securities and Exchange
Commission reports of changes in ownership of the Common Stock of the Company
held by such persons. Officers, directors and greater than 10% stockholders are
also required to furnish the Company with copies of all forms they file under
this regulation. To the Company's knowledge, based solely on a review of the
copies of such reports furnished to the Company and representations that no
other reports were required, during the year ended December 31, 1996, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10% stockholders were complied with except Todd Mann, an executive
officer of the Company, failed to file his Initial Statement of Beneficial
Ownership of Securities on Form 3 within ten days of becoming an executive
officer of the Company.
Although it is not the Company's obligation to make filings pursuant to
Section 16 of the Securities Exchange Act of 1934, the Company has adopted a
policy requiring all Section 16 reporting persons to report monthly to the
Assistant Secretary of the Company as to whether any transactions in the
Company's securities occurred during the previous month.
MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
The Company's Board of Directors has two standing committees - the Audit
and Finance Committee and the Stock Option and Compensation Committee. The Board
of Directors does not have a standing nominating committee, such function being
reserved to the full Board of Directors. The Audit and Finance Committee (the
"Audit Committee") of the Board of Directors, comprised of Messrs. Lucas and
Huff, reviews Transcend's audit procedures and reports from Transcend's
independent public accountants. The Stock Option and Compensation Committee (the
"Compensation Committee"), comprised of Messrs. Huff and Thoele, acts as
administrator of Transcend's stock option plan and makes recommendations
concerning the establishment of additional employee benefit plans and
compensation for Transcend's executive officers. The Audit and Finance Committee
held two meetings in the twelve months ended December 31, 1996. The Stock Option
and Compensation Committee held two meetings in the twelve months ended December
31, 1996.
The Board of Directors held six meetings and acted by Unanimous Consent on
fifteen occasions during the twelve months ended December 31, 1996. During
fiscal 1996, all directors attended at least 75% of the total number of meetings
of the Board of Directors and committees on which he served.
7
<PAGE>
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- ----------------------------------------------------------
<S> <C> <C>
Larry G. Gerdes.................. 48 President, Chief Executive Officer and Director
G. Scott Dillon.................. 46 Executive Vice President Outsourcing Services
Todd S. Mann 43 Executive Vice President Services Group;
President and CEO Sullivan Health Management Services,
Inc.
David W. Murphy.................. 39 Executive Vice President Finance, Chief Financial Officer,
Secretary and Treasurer
</TABLE>
Executive officers are chosen by and serve at the discretion of the Board
of Directors of the Company. Executive officers will devote their full time to
the affairs of the Company. See "Election of Directors" for information with
respect to Larry G. Gerdes.
MR. DILLON has served as the Company's Executive Vice President Outsourcing
Services since December 1996 and prior to that served as 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 healthcare
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. MANN joined the Company in August 1996 as President and CEO of its
Sullivan Health Management Services division. In December 1996, he was named
Executive Vice President Services Group of Transcend with added responsibilities
for its consulting services, inclusive of its Data Delivery Center initiative.
From 1985 until joining Transcend, Mr. Mann served as Senior Vice President of
International Banking Technologies, which is recognized as creating the concept
of placing full-service bank branches in supermarkets, an $80.0 million company
Mr. Mann helped start in 1985.
MR. MURPHY has served as the Company's Executive Vice President Finance and
Chief Financial Officer since December 1996 and prior to that served as 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.
8
<PAGE>
EXECUTIVE COMPENSATION
The table below provides certain summary information for the fiscal years
ended December 31, 1996, 1995 and 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 whose total annual salary and bonus
exceeded $100,000 during the year ended December 31, 1996 (the "Named Executive
Officers.")
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
SECURITIES
ANNUAL COMPENSATION UNDERLYING
---------------------------------------
NAME AND PRINCIPAL POSITION YEAR(1) SALARY($) BONUS($) OPTIONS/SAR'S(#)
- --------------------------- ------- --------- -------- -----------------
<S> <C> <C> <C> <C>
Larry G. Gerdes........................ 1996 $210,115 $ -- --
President and Chief Executive 1995 205,376 -- --
Officer 1994 116,700 -- --
Julian L. Cohen (2).................... 1996 $205,000 -- --
Chief Operating Officer 1995 193,756 -- 45,000
1994 $39,600 -- 100,000
G. Scott Dillon (3).................... 1996 $191,932 -- --
Executive Vice President Outsourcing.. 1995 59,599 -- 60,000
Services 1994 -- -- --
David W. Murphy........................ 1996 $120,000 $ -- --
Executive Vice President Finance, 1995 100,130 22,675 40,000
Chief Financial Officer, 1994 28,385 -- 20,000
Treasurer and Secretary
</TABLE>
- --------
(1) The fiscal year ended December 31, 1994 was for a seven month
period.
(2) Mr. Cohen's employment with the Company was terminated in November 1996.
(3) The 1996 compensation listed includes $32,182 in commissions paid based on
achieving certain 1996 sales objectives.
COMPENSATION OF DIRECTORS
The Board commenced paying cash fees to directors who are not executive
officers of Transcend in fiscal 1996 in the amount of $8,000 per annum. In
addition, each person who first becomes a non-employee director is granted, as
of the date such person becomes a director of Transcend, an option to purchase
10,000 shares of Transcend's Common Stock. Each non-employee director also will
be granted an option to purchase 6,000 shares of the Transcend's Common Stock,
except the Chairman who will be granted an option to purchase 9,000 shares, upon
election or re-election at the annual stockholders' meeting provided they have
served on the board a minimum of six months.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors is currently comprised
of Walter S. Huff, Jr. and Charles E. Thoele. None of the members of the
Compensation Committee served as an officer or employee of the Company or any of
its subsidiaries during fiscal 1996.
On September 5, 1996, the Company raised $2.4 million in a private
placement of Common Stock and warrants to purchase Common Stock. A total of
522,000 shares of Common Stock were sold at a price of $4.44 per share and a
total of 522,000 warrants were sold at a price of $0.25 per warrant to 20
investors. Certain Directors of the Company and parties affiliated with
Directors of the Company purchased shares and warrants in this offering
including Walter S. Huff, Jr. who purchased 225,225 shares and warrants to
purchase an additional 225,225 shares and Charles E. Thoele who purchased 11,261
shares and warrants to purchase an additional 11,261 shares. The $4.44 price
represents the ten day average of the closing price of the Company's Common
Stock prior to the board
9
<PAGE>
meeting approving the private placement. The securities issued in the private
placement were issued in reliance on certain exemptions from registration under
federal and state securities laws. The warrants have a five-year term and are
exercisable at a price of $4.44 per share, are redeemable by the Company at any
time with thirty days notice (during which time the holder may exercise the
warrants) at an exercise price of $4.44 and are non-transferrable. The shares of
Common Stock underlying the warrants and the Common Stock issued in the private
placement carry piggy-back registration rights, subject to certain limitations,
in the event the Company proposes to register the sale of any of its securities
for its own account or for the account of its shareholders.
STOCK OPTIONS
No options were granted to the Named Executive Officers during fiscal 1996.
The following table presents information regarding options exercised by the
Named Executive Officers during fiscal 1996 and the value of options outstanding
at December 31, 1996.
AGGREGATED OPTION EXERCISES IN FISCAL 1996 AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED OPTIONS
----------------------------
AT FISCAL YEAR END
------------------
NUMBER VALUE OF
OF SECURITIES UNEXERCISED (1)
UNDERLYING IN-THE-MONEY OPTIONS
SHARES EXERCISED AT FY-END ($)
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............ 100,000 $256,200 616,000 / -- $2,011,200/ --
Julian L. Cohen (2)........ 63,500 341,800 -- / -- -- / --
G. Scott Dillon............ 7,500 15,000 7,500 / 45,000 $ 13,125/ $ 78,750
David W. Murphy............ -- -- 20,000 / 40,000 $ 56,875/ $103,125
</TABLE>
- --------
(1) Dollar values calculated by determining the difference between the fair
market value of the underlying securities at December 31, 1996 ($5.25 per
share) and the aggregate exercise price of the options.
(2) All unexercised options held by Mr. Cohen were canceled upon Mr. Cohen's
departure from the Company in November, 1996.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information regarding transactions between the Company and either
Walter S. Huff, Jr. or Charles E. Thoele, see "Executive Compensation --
Compensation Committee Interlocks and Insider Participation."
In September 1994, the Company loaned the sum of $80,000 to Julian L.
Cohen, the former 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.
The note was 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
Restated, and the shares of Common Stock underlying such rights. On November 8,
1996, Mr. Cohen repaid the $80,000 outstanding through the exercise of 33,500
options. The Company waived the payment of interest on this Note.
On September 5, 1996, the Company raised $2.4 million in a private
placement of Common Stock and warrants to purchase Common Stock. A total of
522,000 shares of Common Stock were sold at a price of $4.44 per share and a
total of 522,000 warrants were sold at a price of $0.25 per warrant to 20
investors. Certain Directors of the Company and parties affiliated with
Directors of the Company purchased shares and warrants in this offering
including George B. Caldwell who purchased 22,522 shares and warrants to
purchase an additional 22,522 shares, and the Richard M. Lucas Cancer
Foundation, of which Mr. Donald L. Lucas is Chairman, which purchased 50,675
shares and warrants to purchase an additional 50,675 shares. The $4.44 price
represents the ten day average of the closing price of the Company's Common
Stock prior to the board meeting approving the private placement. The
10
<PAGE>
securities issued in the private placement were issued in reliance on certain
exemptions from registration under federal and state securities laws. The
warrants have a five-year term and are exercisable at a price of $4.44 per
share, are redeemable by the Company at any time with thirty days notice (during
which time the holder may exercise the warrants) at an exercise price of $4.44
and are non-transferrable. The shares of Common Stock underlying the warrants
and the Common Stock issued in the private placement carry piggy-back
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.
Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, that might incorporate future filings,
including this Proxy Statement, in whole or in part, the following Report of
Compensation Committee on Executive Compensation and the Stockholder Return
Performance Graph shall not be incorporated by reference into any such filings.
REPORT OF COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
During fiscal 1996, the Compensation Committee of the Board of Directors was
comprised of two non-employee members of the Board, Walter S. Huff, Jr. and
Charles E. Thoele. The Compensation Committee establishes the general
compensation policy for all executive officers of the Company and administers
the incentive plans, including the 1992 Stock Option Plan, as Amended and
Restated and the bonus program for executive officers. The Compensation
Committee also is responsible for reviewing executive officer compensation
levels and evaluating management performance. The discussion set forth below is
a report submitted by the Compensation Committee regarding the Company's
compensation policies and programs for executive officers for 1996.
COMPENSATION COMMITTEE PHILOSOPHY
The Company's executive compensation program is designed to reward
outstanding performance and results. The Compensation Committee believes the
Company must pay competitively to attract, motivate and retain qualified
executives. Moreover, in order to align their interest with the stockholders of
the Company and maximize stockholder value, the Compensation Committee also
believes that the Chief Executive Officer and the Company's other executive
officers should be significantly influenced by Transcend's as well as individual
performance.
In support of this philosophy, the executive compensation program is
designed to award performance that is directly relevant to the Company's short-
term and long-term success. As such, the Company attempts to provide both short-
term and long-term incentive compensation that varies based on corporate and
individual performance.
To accomplish these objectives, the Compensation Committee has structured
the executive compensation program with three primary underlying components:
base salary, performance incentives and long-term incentives (such as stock
options). The following sections describe these elements of compensation and
discuss how each component relates to the Company's overall compensation
philosophy.
BASE SALARY PROGRAM
The Company's base salary program is based on a philosophy of providing
base pay levels that are competitive with similarly situated companies in the
healthcare industry. The Company periodically reviews its executive pay levels
to assure consistencies with the external market. Annual salary adjustments are
based on several factors including the general level of market salary increases,
individual performance and long-term value to the Company, competitive base
salary levels and the Company's overall financial and operating results.
PERFORMANCE BONUSES
Performance bonuses are intended to (i) reward executive officers based on
Company and individual performance, (ii) motivate executive officers, and (iii)
provide pay-for-performance cash compensation opportunities to executive
officers of the Company. Accordingly, a portion of the executives' compensation
is
11
<PAGE>
contingent upon corporate performance and adjusted where appropriate, based on
an executive's performance against personal performance objectives. In 1996, all
of the executive officers of the Company were eligible for bonuses; however, in
light of the Company's overall performance, no bonuses were awarded to the
executive officers during fiscal 1996.
LONG-TERM INCENTIVES
Long-term incentives are designed to focus the efforts of executive
officers on the long-term goals of the Company and to maximize total return to
the stockholders of the Company. The Compensation Committee has relied solely on
stock option awards to provide long-term incentive opportunities. Stock options
align the interest of executive officers with the stockholders of the Company by
providing value to the executive officers through stock price appreciation only.
Stock options issued by the Company generally have a ten year term before
expiration, are exercisable over a number of years from the date of grant and
executives must be employed by the Company at the time of vesting in order to
exercise the options. The Compensation Committee believes that dependence on
stock options for a portion of executives' compensation more closely aligns such
executives' interests with those of the Company's stockholders, since the
ultimate value of such compensation is linked directly to stock price.
FISCAL 1996 ACTIONS
The compensation for the Chief Executive Officer for fiscal 1996 was
determined in the manner described above and no particular quantitative measures
were used by the Compensation Committee in determining his compensation except
as so described.
In fiscal 1996 none of the executive officers of the Company, except for
Mr. Mann, were granted any additional stock option awards. Upon his joining the
Company in August, 1996, Mr. Mann was granted an option to purchase 40,000
shares of Common Stock as part of his compensation package. The number of
options granted was initially determined by negotiation with Mr. Gerdes and was
approved by the Compensation Committee. The stock options were granted at fair
market value on the date of grant.
The Compensation Committee continually evaluates the Company's compensation
policies and procedures with respect to executives. Although the Compensation
Committee believes that current compensation policies have been successful in
aligning the financial interests of executive officers with those of the
Company's stockholders and with Company performance, it continues to examine
what modifications, if any, should be implemented to further link executive
compensation with both individual and Company performance.
Walter S. Huff, Jr.
Charles E. Thoele
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<PAGE>
STOCKHOLDER RETURN PERFORMANCE GRAPH
Set forth below is a line graph comparing the percentage change in the
cumulative total stockholder return on the Company's Common Stock against the
cumulative total return of the Nasdaq Composite Index and the Nasdaq Health
Services Index for the period commencing on December 31, 1991 and ending
December 31, 1996. The graph assumes that the value of the investment in the
Company's Common Stock in each index was $100 on December 31, 1991. The Company
has not paid any cash dividends.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURNS
Prepared by the Center for Research in Security Prices
[GRAPH APPEARS HERE]
COMPARISON OF FIVE YEAR CUMULATIVE RETURN
AMONG TRANSCEND NASDAQ INDEX AND NASDAQ INDEX
--------- ------ ------
SERVICES STOCKMARKET HEALTH SERVICES
INC
<TABLE>
<CAPTION>
Measurement period TRANSCEND NASDAQ STOCK NASDAQ HEALTH
--------- ------------ -------------
(Fiscal year Covered) Index Index
- --------------------- --------- ------------ -------------
<S> <C> <C> <C>
Measurement PT -
12/31/91 $ 100 $ 100 $ 100
----- ------ ------
FYE 12/31/92 $ 28.6 $ 116.4 $ 103.6
----- ------ ------
FYE 12.31.93 $ 24.0 $ 133.6 $ 119.5
----- ------ ------
FYE 12/31/94 $ 13.0 $ 130.6 $ 128.2
----- ------ ------
FYE 12/31/95 $ 44.2 $ 184.7 $ 162.9
----- ------ ------
FYE 12/31/96 $ 40.4 $ 227.2 $ 163.1
----- ------ ------
</TABLE>
NOTES
A. The lines represent monthly index levels derived from compounded daily
returns that include all dividends.
B. The indexes are reweighed daily, using the market capitalization on
the previous trading day.
C. If the monthly interval, based on the fiscal year-end, is not a
trading day, the preceding trading day is used.
D. The index level for all series was set to $100.00 on December 31,
1991.
13
<PAGE>
AGENDA ITEM TWO
PROPOSAL TO AMEND 1992 STOCK OPTION PLAN
In March 1992, the Company adopted the 1992 Stock Option Plan, as Amended
and Restated (the "Plan"). The primary purpose of the Plan is to advance the
interests of the Company and its stockholders by affording selected employees
and directors who are not employed by the Company ("Non-Employee Directors") an
opportunity to acquire or increase their proprietary interests in the Company
through the grant of stock options. Under the Plan, the Company may grant both
incentive stock options as defined in Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code") and nonqualified stock options.
There are currently approximately 750 employees and four Non-Employee
Directors eligible for participation in the Plan. As of March 27, 1997, the
market value of the Common Stock of the Company underlying the options which may
be granted under the Plan was $4.50 per share.
As of March 26, 1997, the Company had outstanding options to purchase
shares of Common Stock pursuant to the Plan as follows: (i) Larry G. Gerdes
(President and Chief Executive Officer): 616,000 shares ; (ii) G. Scott Dillon
(Executive Vice President Outsourcing): 77,500 shares; (iii) David W. Murphy
(Executive Vice President Finance, Chief Financial Officer, Treasurer and
Secretary): 70,000 shares; (iv) Todd S. Mann (Executive Vice President Services
Group; President and Chief Executive Officer of Sullivan Health Management
Services, Inc.): 40,000 shares; (v) all current executive officers as a group:
803,500 shares; (vi) all current directors who are not executive officers as a
group: 137,000 shares; (vii) each nominee for election as a director (Larry G.
Gerdes: 616,000 shares; Donald L. Lucas: 65,000 shares; George B. Caldwell:
16,000 shares; Walter S. Huff, Jr.: 28,000 shares; and Charles E. Thoele: 28,000
shares) and (viii) all employees, including all current officers who are not
executive officers, as a group: 159,680 shares.
THE PROPOSED AMENDMENTS
Class of Persons Eligible to Participate in the Plan. On March 11, 1997,
----------------------------------------------------
the Board of Directors of the Company adopted an amendment to the Plan to expand
the classification of persons eligible for the grant of options thereunder to
include consultants and advisors rendering services to the Company as the
committee administering the Plan shall determine from time to time. The proposed
expansion of the class of persons eligible to receive options under the Plan
will allow the Company to provide compensation in the form of stock options, in
lieu of cash, to consultants and advisors provided that the Committee determines
that bona fide services are rendered by such persons. As of the date of this
Proxy Statement, no options have been granted, subject to stockholder approval
of the proposed amendments, to any consultants or advisors.
Plan Administration Committee. In order to conform the Plan to amendments
-----------------------------
made to Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the
"Act"), the proposed amendments to the Plan would require the committee
administering the Plan to include no fewer than two (2) members of the Board of
Directors, each of whom are "Non-Employee Directors" within the meaning of Rule
16b-3 under the Act, thereby qualifying grants made pursuant to the Plan under
Rule 16b-3 of the Act. Rule 16b-3 provides that the award of an equity security
of an issuer pursuant to a transaction which is qualified under Rule 16b-3 is
exempt from the short swing trading liability of Section 16(b) of the Act.
Section 16(b) provides, in pertinent part, that in order to prevent the unfair
use of information which may have been obtained by a director, an officer (which
term is more specifically defined in the regulations), or any person who owns
more than 10% of the equity securities of an issuer whose securities are
registered under Section 12 of the Act, any profit realized by such a person
from any purchase and sale, or any sale and purchase, of any equity security of
such issuer within any period of less than six months shall inure to and be
recoverable by the issuer, irrespective of any intention on the part of such
director, officer or 10% stockholder. The proposed amendment to the Plan is
intended to ensure that grants and awards under the Plan continue to qualify for
exemptive treatment under Section 16(b).
Previously, in order for a plan that is administered by a committee to
qualify under Rule 16b-3, the committee was required to be made up of two or
more "disinterested persons," where a disinterested person generally included an
individual that had not, except in certain limited circumstances, during the one
year prior to service as an administrator of a plan, been granted or awarded
equity securities pursuant to any plan of the Company. Rule 16b-3 has been
amended, however, requiring that when a plan is administered by a committee, for
transactions to qualify under Rule
14
<PAGE>
16b-3, the persons administering the Plan must be "Non-Employee Directors." The
term "Non-Employee Directors" (which term is more specifically defined in the
regulations) generally includes a director who is not an officer of, or
otherwise currently employed by the Company, does not receive greater than a
certain amount of compensation for services rendered as a consultant or in any
capacity other than as a director and is not a party to certain business
relationships or transactions with the Company. Accordingly, the proposed
amendments to the Plan would clarify that the committee administering the plan
is to be made up of Non-Employee Directors and that the definition of a Non-
Employee Director, as it relates to members of the committee, shall have the
meaning set forth in Rule 16b-3 under the Act.
The proposed amendments to the Plan also permit the Board of Directors of
the Company to administer the Plan in the event that the Committee consists of
individuals who do not satisfy the definition of a "Non-Employee Director."
Prior to the proposed amendments, the Board of Directors was permitted to
administer the Plan only in the event that the Board consisted of two or fewer
members or if the Board did not appoint a Committee. The proposed amendment
would ensure that the Plan has an administering body by enabling the Board of
Directors of the Company to administer the Plan in the event that the members of
the Committee do not qualify as "Non-Employee Directors" within the meaning of
Rule 16b-3.
A copy of the proposed amendments to the Plan are attached to this Proxy
Statement as Exhibit A and are incorporated herein by reference. The Board of
Directors of the Company recommends that stockholders vote FOR the foregoing
amendments. The amendments must be approved by a majority of all votes present
at the meeting and entitled to vote on the matter.
DESCRIPTION OF THE PLAN
General. The Plan is administered by the Stock Option and Compensation
-------
Committee (the "Compensation Committee") of the Board of Directors. The maximum
number of shares of Common Stock reserved and made available for sale under the
Plan is 2,000,000, although the Plan provides for adjustment of the number of
shares issuable thereunder in certain events such as mergers, consolidations,
recapitalizations, stock splits, stock dividends and similar events. In the
event of dissolution or liquidation of the Company or a merger or combination in
which the Company is not a surviving corporation (other than with a wholly owned
subsidiary), each option granted under the Plan shall terminate but the optionee
shall have the right immediately prior thereto to exercise his option to the
extent it is then presently exercisable.
The Board may at any time, upon recommendation of the Compensation
Committee, terminate the Plan. The Board may also amend the Plan, provided,
however, that without approval of the stockholders of the Company, the Board may
not adopt any amendment which would (i) increase the number of shares issuable
pursuant to the Plan (except as contemplated in the immediately preceding
paragraph); (ii) materially increase the benefits accruing to participants in
the Plan; or (iii) materially modify the requirements as to eligibility to
participate in the Plan. Notwithstanding the foregoing, the Board shall not
terminate, amend or modify the Plan in any manner so as to affect the price of
shares subject to an option without the consent of the optionee.
No option is transferable otherwise than by will or the laws of descent and
distribution. During the lifetime of an optionee, an option is exercisable only
by the optionee.
Options are exercisable upon notice of exercise and payment in full of the
option exercise price in cash. In addition, to the extent provided in the stock
option agreement, in lieu of cash, the optionee may deliver shares of Common
Stock owned by him having a fair market value equal to the option exercise price
or a combination of cash and shares.
Employee Options. Under the terms of the Plan, the 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 Compensation Committee has
authority to interpret the Plan with respect to employee options.
15
<PAGE>
The Compensation Committee also determines whether an option is an
incentive stock option or a nonqualified stock option. The price per share of
stock subject to an incentive stock option must equal the fair market value
thereof on the date of grant. The price per share of stock subject to a
nonqualified stock option shall be determined by the 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
nonqualified stock options. The 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 expires within five
years.
In the event of termination by reason of death or disability, an option may
be exercised, to the extent exercisable at the time of death or disability, by
the optionee or his legatees or personal representatives within twelve months
following such termination. In all other events of termination, the Plan
provides that the option may be exercised beyond such date only to the extent
provided in the stock option agreement but not beyond the earlier of the
expiration date of the option or twelve months from the date of termination.
Non-Employee Director Options. The Plan provides for non-discretionary or
-----------------------------
automatic grants of options to Non-Employee Directors. Each Non-Employee
Director serving on the Board on the effective date of the Plan, March 16, 1992,
received an option to purchase 10,000 shares of Common Stock, except that the
Chairman of the Board received an option to purchase 20,000 shares. Each Non-
Employee Director appointed or newly elected to the Board in the future will
also receive an option to purchase 10,000 shares. In addition, on the date of
each annual meeting of stockholders of the Company, each Non-Employee Director
elected to the Board who has served on the Board for at least six months prior
thereto will receive an option to purchase 6,000 shares except for the Chairman
who shall receive an option to purchase 9,000 shares. 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 stockholders 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. 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 twelve months from the date of termination.
FEDERAL INCOME TAX CONSEQUENCES
Incentive Stock Options. All incentive stock options granted or to be
-----------------------
granted under the Plan which are designated as incentive stock options are
intended to be incentive stock options as defined in Section 422 of the Code.
Under the provisions of Section 422, neither the holder of an incentive
stock option nor the Company will recognize income, gain, deduction or loss upon
the grant or exercise of an incentive stock option. An optionee will be taxed
only when the stock acquired upon exercise of his or her incentive stock option
is sold or otherwise disposed of in a taxable transaction. If at the time of
such sale or disposition the optionee has held the shares for the required
holding period (two years from the date the option was granted and one year from
the date of the transfer of the shares to the optionee), the optionee will
recognize long-term capital gain or loss, as the case may be, based upon the
difference between his or her exercise price and the net proceeds of the sale.
However, if the optionee disposes of the shares before the end of such holding
period, the optionee will recognize ordinary income on such disposition in an
amount equal to the lesser of:
(a) the gain on the sale or other disposition; or
(b) the amount by which the fair market value of the shares on the date of
exercise exceeded the option exercise price, with any excess gain being capital
gain, long-term or short-term, depending on whether or not the shares had
previously been held for more than one year on the date of sale or other taxable
disposition.
The foregoing discussion and the reference to capital gain or loss
treatment therein assume that the option shares are a capital asset in the hands
of the optionee. A sale or other disposition which results in the recognition of
ordinary income to the optionee will also result in a corresponding income tax
deduction for the Company.
16
<PAGE>
The Plan permits an optionee to pay all or part of the purchase price for
shares acquired pursuant to exercise of an incentive stock option by
transferring to the Company other shares of the Company's Common Stock owned by
the optionee. Section 422 of the Code provides that an option will continue to
be treated as an incentive stock option even if an optionee exercises such
incentive stock option with previously acquired stock of the corporation
granting the option. Accordingly, except as noted below with respect to certain
"statutory option stock," an optionee who exercises an incentive stock option in
whole or in part by transferring to the Company shares of the Company's Common
Stock will recognize no gain or loss upon such exercise. The optionee's basis in
the shares so acquired will be equal to the optionee's cost basis in the shares
surrendered (plus, in the case of payment of the purchase price in a combination
of cash and surrendered shares, the amount of any cash paid).
Section 424(c)(3) of the Code provides that if "statutory option stock" is
transferred in connection with the exercise of an incentive stock option, and if
the holding period requirements under Section 422(a)(1) of the Code are not met
with respect to such statutory option stock before such transfer, then ordinary
income will be recognized as a result of the transfer of statutory option stock.
However, the incentive stock option stock acquired through the exchange of
statutory option stock will still qualify for favorable tax treatment under
Section 422 of the Code.
Incentive stock options offer two principal tax benefits: (1) the
possibility of converting ordinary income into capital gain to the extent of the
excess of fair market value over option price at the time of exercise, and (2)
the deferral of recognition of gain until disposition of the stock acquired upon
the exercise of the option.
At present, the maximum tax rate on capital gains is 28%, while the maximum
tax rate on ordinary income is 39.6%. Thus, the conversion of ordinary income
into capital gain produces some tax benefit for certain taxpayers. However, the
benefit of income deferral generally provided by incentive stock options is
reduced for some taxpayers since the excess of the fair market value of shares
acquired through the exercise of an incentive stock option over the exercise
price is taken into account in computing an individual taxpayer's alternative
minimum taxable income. Thus, the exercise of an incentive stock option could
result in the imposition of an alternative minimum tax liability.
In general, an option granted under the Plan which is designated as an
incentive stock option will be taxed as described above. However, in some
circumstances an option which is designated as an incentive stock option will be
treated as a nonqualified stock option and the holder taxed accordingly. For
example, a change in the terms of an option which gives the employee additional
benefits may be treated as the grant of a new option. Unless all the criteria
for treatment as an incentive stock option are met on the date the "new option"
is considered granted (such as the requirement that the exercise price of the
option be not less than the fair market value of the stock as of the date of the
grant), the option will be treated and taxed as a nonqualified stock option.
Nonqualified Stock Options. All options granted or to be granted under the
--------------------------
Plan which do not qualify as incentive stock options are non-statutory options
not entitled to special tax treatment under Section 422 of the Code.
A participant in the Plan will recognize taxable income upon the grant of a
nonqualified stock option only if such option has a readily ascertainable fair
market value as of the date of the grant. In such a case, the recipient will
recognize taxable ordinary income in an amount equal to the excess of the fair
market value of the option as of such date over the price, if any, paid for such
option. No income would then be recognized on the exercise of the option, and
when the shares obtained through the exercise of the option are disposed of in a
taxable transaction, the resulting gain or loss would be capital gain or loss
(assuming the shares are a capital asset in the hands of the optionee). However,
under the applicable Treasury Regulations, the nonqualified stock options issued
under the Plan will not have a readily ascertainable fair market value unless at
the time such options are granted similar options of the Company are actively
traded on an established market. The Company presently has no such actively
traded options.
Upon the exercise of a non-statutory option not having a readily
ascertainable fair market value, the optionee recognizes ordinary income in an
amount equal to the excess of the fair market value of the shares on the date of
exercise over the option exercise price for those shares. The Company is not
entitled to an income tax deduction with respect to the grant of a non-statutory
stock option or the sale of stock acquired pursuant thereto. The Company
generally is permitted a deduction equal to the amount of ordinary income the
optionee is required to recognize as a result of the exercise of a non-statutory
stock option.
17
<PAGE>
The Plan permits the Compensation Committee to allow an optionee to pay all
or part of the purchase price for shares acquired pursuant to an exercise of a
non-statutory option by transferring to the Company other shares of the
Company's Common Stock owned by the optionee. If an optionee exchanges
previously acquired Common Stock pursuant to the exercise of a nonqualified
stock option, the Internal Revenue Service has ruled that the optionee will not
be taxed on the unrealized appreciation of the shares surrendered in the
exchange. In other words, the optionee is not taxed on the difference between
his or her cost basis for the old shares and their fair market value on the date
of the exchange, even though the previously acquired shares are valued at the
current market price for purposes of paying all or part of the option price.
General. The Plan is not qualified under Section 401(a) of the Code and is
-------
not subject to the provisions of the Employee Retirement Income Security Act of
1974.
The preceding discussion is based upon federal tax laws and regulations in
effect on the date of this Proxy Statement, which are subject to change, and
upon an interpretation of the statutory provisions of the Code, its legislative
history and related income tax regulations. Furthermore, the foregoing is only
a general discussion of the federal income tax consequences of the Plan and does
not purport to be a complete description of all federal income tax aspects of
the Plan. Option holders may also be subject to state and local taxes in
connection with the grant or exercise of options granted under the Plan and the
sale or other disposition of shares acquired upon exercise of the options. Each
individual receiving a grant of options should consult with his or her personal
tax advisor regarding federal, state and local consequences of participating in
the Plan.
18
<PAGE>
AGENDA ITEM THREE
APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP has served as the independent public accountants for
the fiscal year ended December 31, 1996, and upon the recommendation of the
Audit Committee, the Transcend Board has selected Arthur Andersen LLP as the
Company's independent public accountants for the fiscal year ending December 31,
1997. The Board of Directors recommends that such appointment be ratified.
Representatives of Arthur Andersen LLP are expected to be present at the
meeting and shall have the opportunity to make a statement, if they desire to do
so, and respond to appropriate questions.
PROPOSALS BY STOCKHOLDERS
Proposals by stockholders intended to be presented at the 1998 Transcend
annual meeting (to be held in the Spring of 1998) must be forwarded in writing
and received at the principal executive office of Transcend no later than
December 1, 1997 directed to the attention of the Secretary, for consideration
for inclusion in the Transcend's proxy statement for the annual meeting of
stockholders to be held in 1998. Any such proposals must comply in all
respects with the rules and regulations of the Securities and Exchange
Commission.
ANNUAL REPORT ON FORM 10-K
Additional information concerning the Company, including financial
statements of the Company, is provided in the Company's Form 10-K for the fiscal
year ended December 31, 1996, that accompanies this Proxy Statement. Copies of
exhibits and basic documents filed with the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996, as filed with the Securities and
Exchange Commission, are available to stockholders who make written request
therefor to the Company's Secretary, 3353 Peachtree Road, N.E., Suite 1000,
Atlanta, Georgia 30326.
OTHER MATTERS
The Board of Directors is not aware of any other matters to be presented
for action at the Annual Meeting. If any other matter should come before the
Annual Meeting, it is the intention of the persons named in the accompanying
proxy to vote on such matter in accordance with their best judgment of what is
in the best interests of the Company.
By Order of the Board of Directors
Donald L. Lucas, Chairman of the Board
Atlanta, Georgia
March 31, 1997
19
<PAGE>
EXHIBIT A
AMENDMENT NO. 3
1992 STOCK OPTION PLAN, AS AMENDED AND RESTATED
TRANSCEND SERVICES, INC.
WHEREAS, the Board of Directors of Transcend Services, Inc. (the
"Corporation") has previously adopted, and the stockholders of the Corporation
have approved, the 1992 Stock Option Plan, as Amended and Restated (the "Plan"),
pursuant to which options to purchase stock of the Corporation may be issued to
eligible directors and employees of the Corporation;
WHEREAS, the Board of Directors of the Corporation deems it desirable to
amend the Plan so as to expand the class of persons eligible for the granting of
options under the Plan to include consultants and advisors; and
WHEREAS, the Board of Directors of the Corporation deems it desirable to
further amend the Plan so as to conform the Plan to recent amendments made to
Rule 16b-3 under the Securities Exchange Act of 1934, as amended.
NOW, THEREFORE, the Plan is amended upon the terms, and subject to the
conditions, set forth herein:
ARTICLE I.
Amendments to Plan
1.1 Paragraph (d) of Section 1.1 of the Plan shall be amended by deleting
paragraph (d) in its entirety and substituting the following new paragraph
therefore:
"Committee" shall mean a committee designated by the Board, which
shall consist of no fewer than two members of the Board, each of whom shall
be a "Non-Employee Director" within the meaning of Rule 16b-3 under the
Securities Exchange Act of 1934, as amended. Should the Board consist of
only two or fewer than two members or should the Committee at any time
consist of an individual who does not meet the definition of a "Non-
Employee Director" within the meaning of Rule 16b-3 under the Securities
Exchange Act of 1934, as amended or if the Board should not designate the
Committee, the references herein to the Committee shall be deemed to mean
the Board."
1.2 Paragraph (h) of Section 1.1 of the Plan shall be amended by adding
the following sentence immediately following the first sentence:
"Solely as it relates to participation in this Plan, the term
"Employee" shall also include consultants, and advisors as determined from
time to time by the Committee provided that bona fide services shall be
rendered to the Company or its Subsidiaries by such consultants and
advisors and such services may not be in connection with the offer or sale
of securities in a capital-raising transaction."
1.3 Paragraph (k) of Section 1.1 of the Plan shall be amended by adding
the following new sentence immediately following the first sentence:
"As it relates to members of the Committee as such term is defined in
this Section 1.1, the term "Non-Employee Director" shall have the meaning
set forth in Rule 16b-3 under the Securities Exchange Act of 1934, as
amended."
A-1
<PAGE>
ARTICLE II.
Effective Date of Amendments
2.1 The amendments effected hereby shall be effective for options granted
under the Plan on or after the date this amendment is approved by the Board of
Directors of the Company, but subject to approval of a majority of the shares of
Common Stock of the Company entitled to vote thereon and represented in person
and by proxy at a meeting of stockholders at which a quorum is present. In the
event stockholder approval of adoption of this amendment is not obtained within
twelve months of the date this amendment is approved by the Board of Directors
of the Company, then any option granted in the intervening period to consultants
or advisors who are not otherwise officers, directors or employees of the
Company or any subsidiary of the Company, shall be void.
A-2
<PAGE>
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PROXY
PROXY SOLICITED BY THE BOARD OF DIRECTORS
OF TRANSCEND SERVICES, INC.
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 29,1997
The undersigned hereby appoints Larry G. Gerdes and David W. Murphy, or
either of them, with full power of substitution as proxies and
attorneys-in-fact, to represent and to vote, as designated on the reverse
hereof, the common stock of the undersigned at the Annual Meeting of
Stockholders of the Company to be held on April 29, 1997, at the Grand Hyatt,
Atlanta, Georgia, at 10:00 a.m. and any adjournment thereof, on the matters set
forth below:
1. To elect five Directors for a term of one year and until their successors
are elected and qualified:
[_] FOR All Nominees Listed Below (except as instructed below).
George B. Caldwell, Larry G. Gerdes, Walter S. Huff, Jr., Donald L.
Lucas, Charles E. Thoele
[_] WITHHOLD AUTHORITY To vote for all Nominees listed below
___________________________________________________________
2. To approve certain amendments to the 1992 Stock Option Plan of Transcend
Services, Inc., including the expansion of the class of eligible
participants, as set forth in Appendix I to the Proxy Statement dated March
21, 1997.
[_] FOR [_] AGAINST [_] ABSTAIN
3. To ratify the appointment of Arthur Andersen LLP as independent public
accountants.
[_] FOR [_] AGAINST [_] ABSTAIN
4. In their discretion, upon such other matter or matters as may properly come
before the meeting or any adjournment thereof.
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<PAGE>
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The shares represented by this proxy card will be voted as directed above. IF
NO DIRECTION IS GIVEN AND THE PROXY CARD IS VALIDLY EXECUTED, THE SHARES WILL BE
VOTED FOR ALL LISTED PROPOSALS. IN THEIR DISCRETION, THE PROXY HOLDERS ARE
AUTHORIZED TO VOTE UPON SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE
MEETING.
_________________________________
Signature of Stockholder
_________________________________
Signature of Stockholder
Dated: __________________________
IMPORTANT: Sign exactly as your
name appears above. Give full
title of executor, administrator,
trustee, guardian, etc. Joint
owners should each sign
personally.
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