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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------- ---------------
Commission File Number 0-18217
TRANSCEND SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0378756
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
3353 PEACHTREE ROAD, N.E., SUITE 1000, ATLANTA, GEORGIA 30326
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (404) 364-8000
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of the Registrant's common stock
as of the latest practicable date.
Class Outstanding at May 12, 1997
----- ---------------------------
Common Stock, $.01 par value 20,104,002
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INDEX
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
December 31, 1996 and March 31, 1997........... 3
Consolidated Statements of Operations for the
Three Months Ended March 31, 1996 and 1997..... 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1996 and 1997..... 5
Notes to Consolidated Financial Statements..... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.. 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................ 17
Item 2. Changes in Securities............................ 18
Item 6. Exhibits......................................... 19
SIGNATURES................................................. 20
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRANSCEND SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------ ---------
1996 1997
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents.................................... $ 1,660,000 $ 625,000
Accounts receivable, net of allowance for doubtful
accounts of $147,000 and $90,000 in 1996
and 1997, respectively.................................... 3,594,000 3,647,000
Other........................................................ 543,000 555,000
------------ ------------
Total current assets......................................... 5,797,000 4,827,000
------------ ------------
NET ASSETS RELATED TO DISCONTINUED
OPERATIONS................................................... 2,577,000 2,584,000
SECURITIES OF AMHEALTH......................................... 350,000 350,000
EQUIPMENT and LEASEHOLD IMPROVEMENTS, net...................... 2,434,000 2,291,000
DEPOSITS AND OTHER ASSETS...................................... 158,000 156,000
GOODWILL AND OTHER INTANGIBLE ASSETS, net...................... 4,828,000 4,709,000
------------ ------------
Total assets................................................. $ 16,144,000 $ 14,917,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current maturities of long term debt and note payable........ $ 2,226,000 $ 2,202,000
Accounts payable............................................. 1,989,000 1,194,000
Accrued compensation and employee benefits................... 1,702,000 1,804,000
Other accrued liabilities.................................... 1,318,000 965,000
Deferred income taxes........................................ 113,000 113,000
------------ ------------
Total current liabilities.................................... 7,348,000 6,278,000
------------ ------------
CONVERTIBLE DEBENTURES......................................... 2,000,000 2,000,000
------------ ------------
LONG TERM DEBT, net of current maturities...................... 284,000 258,000
------------ ------------
DEFERRED INCOME TAXES.......................................... 541,000 541,000
------------ ------------
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value; 21,000,000 shares
authorized; none outstanding................................. -- --
Common stock, $.01 par value, 30,000,000 shares
authorized, 19,469,000 shares and 19,495,000
shares issued and outstanding as of December 31, 1996, and
March 31, 1997, respectively................................. 194,000 195,000
Additional paid-in capital................................... 19,931,000 19,937,000
Retained deficit............................................. (14,154,000) (14,292,000)
------------ ------------
Total shareholders' equity................................ 5,971,000 5,840,000
------------ ------------
Total liabilities and shareholders' equity................ $ 16,144,000 $ 14,917,000
============ ============
</TABLE>
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The accompanying notes are an integral part of these consolidated balance
sheets.
3
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TRANSCEND SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31,
----------------------------
1996 1997
---- ----
(UNAUDITED)
NET REVENUE................................. $ 8,688,000 $ 9,958,000
DIRECT COSTS................................ 7,260,000 8,305,000
----------- -----------
Gross profit............................... 1,428,000 1,653,000
MARKETING AND SALES EXPENSES................ 641,000 416,000
GENERAL AND ADMINISTRATIVE EXPENSES......... 1,122,000 1,133,000
AMORTIZATION EXPENSE........................ 145,000 119,000
----------- -----------
Loss from Operations....................... (480,000) (15,000)
OTHER INCOME (EXPENSE):
Interest income............................ 9,000 7,000
Interest expense........................... (52,000) (96,000)
Other...................................... -- --
----------- -----------
(43,000) (89,000)
----------- -----------
LOSS BEFORE PROVISION FOR INCOME TAXES AND
DISCONTINUED OPERATIONS................... (523,000) (104,000)
PROVISION FOR INCOME TAXES.................. -- --
----------- -----------
LOSS BEFORE DISCONTINUED OPERATIONS......... (523,000) (104,000)
LOSS FROM DISCONTINUED OPERATIONS........... (129,000) (34,000)
----------- -----------
NET LOSS.................................... $ (652,000) $ (138,000)
=========== ===========
NET LOSS PER COMMON SHARE:
BEFORE DISCONTINUED OPERATIONS.............. $ (0.03) $ (0.01)
DISCONTINUED OPERATIONS..................... (0.01) (0.00)
----------- -----------
NET LOSS.................................... $ (0.04) $ (0.01)
=========== ===========
Weighted average common shares outstanding.. 18,447,000 19,494,000
=========== ===========
- -------------------
The accompanying notes are an integral part of these consolidated statements.
4
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TRANSCEND SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1996 1997
---- ----
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: $ (652,000) $ (138,000)
Net Loss.....................................................................
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................... 322,000 380,000
Loss related to Discontinued Operations..................................... 129,000 34,000
Changes in assets and liabilities, net of acquisitions:
Accounts receivable......................................................... 217,000 (53,000)
Prepaid expenses............................................................ (416,000) (12,000)
Deposits and other assets................................................... 27,000 2,000
Accounts payable............................................................ (95,000) (796,000)
Accrued liabilities......................................................... 446,000 (250,000)
Other....................................................................... (30,000) --
---------- -----------
Total adjustments............................................................ 600,000 (695,000)
Net Cash used in continuing operations....................................... (52,000) (833,000)
Net Cash used in discontinued operations..................................... (122,000) (40,000)
---------- -----------
Net Cash used in operating activities........................................ (174,000) (873,000)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................................ (297,000) (118,000)
---------- -----------
Net Cash used in investing activities........................................ (297,000) (118,000)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on short-term debt............................................... (100,000) --
Repayments on line of credit agreement...................................... -- (25,000)
Principal payments long-term debt........................................... (24,000) (26,000)
Proceeds - Stock options and other issuances................................ 157,000 7,000
---------- -----------
Net cash provided by (used in) financing activities.......................... 33,000 (44,000)
---------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS.................................... (438,000) (1,035,000)
CASH AND CASH EQUIVALENTS, at beginning of period............................ 1,117,000 1,660,000
---------- -----------
CASH AND CASH EQUIVALENTS, at end of period.................................. $ 679,000 $ 625,000
========== ===========
</TABLE>
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The accompanying notes are an integral part of these consolidated statements.
5
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TRANSCEND SERVICES, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1997
(1) The unaudited financial information furnished herein in the opinion of
management reflects all adjustments which are necessary to fairly state the
Company's financial position, the results of its operations and its cash flows.
For further information refer to the combined financial statements and footnotes
thereto included in the Company's Form 10-K for the year ended December 31,
1996. Footnote disclosure which would substantially duplicate the disclosure
contained in those documents has been omitted.
(2) Net loss per common share has been computed based on the weighted number
of the Company's common shares and common share equivalents (dilutive stock
options) outstanding. The common stock equivalents related to stock options
were not included in the computation due to their antidilutive effect. Fully
diluted net loss per share has not been presented since it is not materially
different from primary net loss per share.
(3) During the first quarter of 1997, the Financial Accounting Standards Board
(FASB) issued Statement 128, Earnings per Share. This statement sets out new
guidelines for the calculation and presentation of earnings per share. The
following tables represents a reconciliation of basic and diluted weighted
average shares and a pro forma calculation of earnings per share using the
guidelines of SFAS #128.
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
--------------------------
1996 1997
---- ----
<S> <C> <C>
Basic weighted average shares outstanding 18,447,000 19,494,000
Shares of common stock assumed issued upon exercise of
stock options using the "treasury stock" method as it applies
to the computation of diluted earnings per share. -0- -0-
Diluted weighted average shares outstanding 18,447,000 19,494,000
----------- -----------
Net earnings used in the computation of basis and
diluted earnings per share $ (652,000) $ (138,000)
=========== ===========
Earnings per share:
Basic $ (0.04) $ (0.01)
Diluted $ (0.04) $ (0.01)
</TABLE>
6
<PAGE>
Subsequent Event
On April 16, 1997, the Company acquired 100% of the capital stock of DocuMedX,
Inc., a Washington corporation, under the pooling of interests method of
accounting. The company issued 608,800 shares of Transcend Common Stock at the
time of acquisition and signed Non-Compete Agreements with certain of the former
owners of DocuMedX, Inc.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained in this filing are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995, such
as statements relating to financial results and plans for future business
development activities, and are thus prospective. Such forward-looking
statements are subject to risks, uncertainties and other factors which could
cause actual results to differ materially from future results expressed or
implied by such forward-looking statements. Potential risks and uncertainties
include, but are not limited to, economic conditions, competition and other
uncertainties detailed from time to time in the Company's Securities and
Exchange Commission filings.
Transcend Services Inc. (the "Company" or "Transcend") is a healthcare
services company focused on the emerging field of healthcare information
management ("HIM") services to hospitals and other associated healthcare
providers. The Company provides a range of HIM services, including: (i) contract
management ("outsourcing") of the healthcare information or medical records
function, as well as the admissions function; (ii) transcription of physicians'
dictated medical notes; and (iii) consulting services relating to medical
records and reimbursement coding. As of March 31, 1997, the Company operated, on
a contract management basis, the medical records and certain other HIM functions
of 19 general acute care hospitals located in twelve 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, 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 two of the 19 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 150 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 medical records
departments of 19 hospitals ranging in bed size from 56 beds to 541 beds, with
the average contract size of approximately $1.3 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 at the present time 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,
8
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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 to achieve profitability.
The Company is experimenting with an alternative volume-based pricing
structure, based upon a hospital's activity levels such as weighted average
number of annual patient discharges, or a "per member per month" ("PMPM")
capitated pricing option similar to current pricing mechanisms used by managed
healthcare groups. As of March 31, 1997, the Company had signed one contract
based on a volume oriented pricing structure tied to weighted annual patient
discharges. There is an opportunity to realize higher margins on an activity-
based pricing structure. The principal advantage of a volume-based pricing
mechanism is that as a hospital's volume of business increases, the Company's
revenues will increase at a faster rate than operating expenses. However, if a
customer's business volume decreases, the Company's revenues will also decrease
at a faster rate than its operating expenses. The Company is also considering
pricing its contract management contracts, where possible, to provide for more
contingency sharing of either (i) the one-time cash flow savings that the
Company generates for its contract management customers through a reduction in
gross days receivables outstanding by processing bills being delayed in the
medical records department and/or (ii) increased revenues realized by hospital
customers as a result of the Company's favorable impact (through enhanced coder
and physician training) on the hospital's Case Mix Index (a measurement of the
hospital's severity/acuity level for DRG reimbursements under Medicare). Of its
19 contracts as of March 31, 1997, only one contract was priced under a
contingency sharing arrangement.
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, 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 healthcare case management services primarily on an hourly basis.
The Company continues to focus on developing its first Data Delivery Center
("DDC"), a centralized, remote center to initially support and at some point
replace entirely some of the critical functions being performed on site in a
medical records department through the off-site, electronic processing of health
information. Working in partnership with the Brady Group (Austin, Texas),
Network Imaging, Inc. and Health Information Enterprises (Atlanta, Georgia), the
Company is close to completing Phase I of its first DDC which is designed
specifically to allow for the off-site, electronic processing for coding and DRG
optimization applications. The Company expects to have the DDC completed and
ready for testing by the end of May, 1997, and have two of its contract
management (outsourced) hospitals converted over to the DDC for coding by the
end of this summer.
RESULTS OF OPERATIONS - GENERAL
The Company's loss from operations for the quarter ended March 31, 1997 was
$15,000. The Company's major reorganization, initiated in July/August 1996,
resulted in significant cost reductions and helped the Company achieve a near
break-even result from continuing operations. Management believes that it would
have achieved operating profitability in the first quarter of 1997 if not for
the
9
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continued operating losses being generated by the Company's case management
business operated through its wholly-owned subsidiary, Sullivan Health
Management ("Sullivan"). Sullivan realized a first quarter 1997 operating loss
of $234,000, which marked an improvement over Sullivan's operating loss of
$354,000 in the fourth quarter of 1996. The Company is focused on improving
Sullivan's operations as well as increasing the Company's revenues from contract
management and other services and effectively managing its costs in order to
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 increase profit margins.
The Company will also be required to procure 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.
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
Total revenues for the Company increased to $9,958,000 for the quarter ended
March 31, 1997 from $8,688,000 for the quarter ended March 31, 1996, an increase
of 14.6%. Contract management revenues were the largest single service class
revenue source for the Company in each of these three month periods,
representing 57.4% of total revenues in the 1997 quarter and 61.0% in the 1996
quarter. Contract management revenues increased to $5,717,000 in the quarter
ended March 31, 1997 from $5,297,000 in the comparable 1996 quarter, an increase
of 7.9%. Medical transcription revenues were the second largest source of
revenues for the Company for the quarters ended March 31, 1997 and 1996,
representing 35.5% of total revenues in the 1997 quarter and 23.0% of total
revenues in the 1996 quarter. Medical transcription revenues grew to $3,539,000
for the quarter ended March 31, 1997 from $2,001,000 for the quarter ended March
31, 1996, an increase of 76.9%. Consulting and coding revenues represented 1.5%
of the Company's total revenues for the period ending March 31, 1997 and 2.5% of
the Company's total revenues for the period ending March 31, 1996. Consulting
and coding revenues decreased $71,000 or 32.4% to $148,000 for the quarter ended
March 31, 1997 from $219,000 for the quarter ended March 31, 1996. This is due
primarily to a drop-off in consulting revenues that are recognized as
implementation fees related to the signing of new contract management accounts.
In the first quarter ended March 31, 1997, the Company signed no new contract
management accounts. Case management revenues represented 5.6% of the Company's
total revenues in the quarter ended March 31, 1997 as compared with 13.5% of
total revenues in the quarter ended March 31, 1996. Case management revenues
decreased to $554,000 in the quarter ended March 31, 1997 from $1,171,000 in the
quarter ended March 31, 1996, a decrease of 52.7% due to the loss of several key
customer accounts at Sullivan.
The increase in total revenues for the quarter ended March 31, 1997 is
primarily attributable to (i) the increased contract management outsourcing
revenues of approximately $420,000 attributable to a net increase of three
contracts signed since March 31, 1996 and (ii) increased medical transcription
operations revenues of approximately $850,000 resulting from four transcription
contracts signed after March 31, 1996 and increased transcription production for
existing customers. The increased total revenues were offset by the decrease in
case management revenues generated by Sullivan of approximately $617,000
resulting from the loss of several key accounts over the 1996 fiscal year. In
August, 1996, the Company hired an experienced sales and operations manager to
serve as President of Sullivan and lead a re-building effort now underway to
increase sales and improve the operations of Sullivan. Sullivan experienced a
net loss from continuing operations of $234,000 for the three month period ended
March 31, 1997 compared to net income from continuing operations of $33,000 for
the quarter ended March 31, 1996.
10
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Gross profit as a percentage of revenues increased 15.8% to $1,653,000 for the
quarter ended March 31, 1997 from $1,428,000 in the first quarter of the prior
year. Gross profit as a percentage of revenues increased to 16.6% for the
quarter ended March 31, 1997 from 16.4% for the quarter ended March 31, 1996.
This increase was primarily attributable to the contract management outsourcing
division which expanded its gross margin to 16.9% in the quarter ended March 31,
1997 from 16.6% in the first quarter ended March 31, 1996. The medical
transcription business expanded its gross margin to 18.5% in the quarter ended
March 31, 1997, from 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 negatively impacted in the 1997 to 1996 quarter comparison by
the decrease in case management's (Sullivan's) gross margin to 8.8% for the
quarter ended March 31, 1997 from 27.2% for the quarter ended March 31, 1996.
This decline in case management gross margin was the result of a higher case
management operating cost structure in place while revenues declined.
Sullivan's cost structure has been restructured to more closely match its
revenue stream going forward.
Marketing and sales expenses decreased 35.1% to $416,000 in the quarter ended
March 31, 1997 from $641,000 in the same prior year period and decreased as a
percentage of revenues to 4.2% for the quarter ended March 31, 1997 from 7.4%
for the quarter ended March 31, 1996. This decrease is a result of the
restructuring and internal reorganization efforts begun in late 1996. With much
of the Company's investment in a national sales force, telemarketing and
marketing/advertising programs now in place, the Company anticipates that sales
and marketing expenses, as a percentage of revenues, will stabilize as revenues
increase.
General and administrative expenses remained relatively constant at $1,133,000
for the quarter ended March 31, 1997, up less than 1% from the $1,122,000
incurred in the same prior year period. Corporate general and administrative
expenses decreased as a percentage of revenues to 11.4% for the quarter ended
March 31, 1997 from 12.9% in the first quarter of the prior year. General and
administrative expenses declined as a percentage of revenues due primarily to
the Company's reorganization and restructuring undertaken in July and August,
1996, resulting in a reduction and stabilization in these expenses while
revenues increased.
The Company's loss from operations decreased to $15,000 for the quarter ended
March 31, 1997 from $480,000 in the first quarter of the prior year period.
This $15,000 quarterly loss compares to an operating loss of $229,000 for the
quarter ended December 31, 1996 and an operating loss of $3,758,000 for the
quarter ended September 30, 1996.
Amortization expenses decreased to $119,000 for the quarter ended March 31,
1997 from $145,000 in March 31, 1996, reflecting the impact of the 1993
acquisition of dataLogix, Inc. being fully amortized.
Other expenses increased to $89,000 for the quarter ended March 31, 1997 as
compared to $43,000 for the quarter ended March 31, 1996, primarily due to the
impact of interest expense incurred in connection with the Company's borrowings
against its working capital line of credit established April 30, 1996, totaling
$2,094,000 as of March 31, 1997.
The Company's loss before discontinued operations decreased to $104,000 for
the quarter ended
11
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March 31, 1997 from $523,000 for the quarter ended March 31, 1996. The Company's
reorganization has resulted in a more streamlined management, sales and
implementation effort and has lowered the Company's overall selling, general,
administrative and operating costs.
The Company's loss from discontinued operations of $34,000 and $129,000 for
the quarters ended March 31, 1997 and March 31, 1996, respectively, is due to
legal expenses incurred in connection with the Lawsuit (hereinafter defined).
See Part II, Item 1. Legal Proceedings.
DISCONTINUED OPERATIONS
At March 31, 1997, the net assets related to the discontinued operations of
the Company's healthcare subsidiaries, First Western Health Corporation ("First
Western") and Veritas Healthcare Management ("Veritas"), both of which ceased
operations as of April 30, 1993, totaled $2,584,000, consisting of $5,912,000 of
gross accounts receivable offset by $3,328,000 in collection liabilities. In
October 1995, the Company sold approximately 38% of the gross accounts
receivable to a third party with which the Company has also contracted with to
service and manage the remaining accounts receivable balance for a set fee. The
net assets from the discontinued operations represent reimbursements that are
owed the Company by certain insurance companies for applicant medical/legal
evaluation services provided by FWHC Medical Group, Inc. and Veritas Medical
Group, Inc., two managed medical groups associated with the Company's former
subsidiaries, First Western and Veritas. The applicant/legal evaluation
services were provided to injured California workers who, under Section 4620 of
the California Labor Code (the "California Code"), are entitled to
"medical/legal" testimony from a physician of his or her choosing in order to
provide medical evidence that he or she is entitled to benefits under
California's workers' compensation system. Under section 4621 of the California
Code, employers are responsible for paying the employees' costs of such
medical/legal expenses that are reasonably, actually and necessarily incurred
and payment for such costs must be made or objected to within 60 days of receipt
of the billing from the provider. Notwithstanding the requirement for prompt
payment and objection, many insurance companies fail to pay promptly.
In the event of non-payment, a lien is filed with the California Workers'
Compensation Appeals Board ("WCAB"), after which the medical/legal provider is
known as a "lien claimant." In connection with the accounts receivable owed the
Company, liens have been filed with the WCAB for all $5,912,000 of the gross
accounts receivable outstanding as of March 31, 1997. While liens are supposed
to be paid immediately, lien claimants are not entitled to a determination as to
the collectibility on the lien until there has been an administrative court
hearing on the employee's underlying case. Accordingly, if an insurer fails to
pay a medical/legal provider's bill as required and continues to dispute payment
after the filing of a lien, the provider may have to wait years until the
injured worker's health status reaches the point that entitlement to benefits
may be determined. In addition, even after an employee's entitlement to
benefits has been determined, backlogs in the system often create delays of
several years before an order for payment can be obtained. The situation is
analogous to the several years or longer that it often takes in the civil court
system to obtain judgement after filing an action. Although it may take a number
of years, the Company does not believe that there is any dispute as to the
Company's ability to attempt collection on the liens and expects to collect the
accounts receivable from discontinued operations over the next several years
under the provisions of the sale and service agreement that the Company has
entered into with the third party for servicing and managing the remaining
accounts receivable balance. During the three months ended March 31, 1997, the
Company collected approximately $30,000 on the receivables and wrote off
approximately $51,000. As a further
12
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delay to the Company obtaining an order of payment, four insurers that are
defendants in the Lawsuit (see "Item 1. Legal Proceedings.") have obtained stays
of the proceedings before the WCAB, pending resolution of the Lawsuit. Such
stays relate to the collection of $5,519,000 of the total gross receivables.
Although over 93% of the accounts receivable are subject to the stays of
proceedings, the Company believes that it will be able to collect such accounts
as the stays of proceedings only impact the timing of the Company's collection,
not the insurance companies' legal obligation to pay for the services rendered.
In estimating net accounts receivable, the Company believes that it has made
adequate provisions as to the estimated amount of gross receivables that the
Company can expect to collect upon resolution by the California WCAB of the
collectibility of the disputed receivables. 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 the assets and
liabilities of its wholly-owned subsidiary, Occu-Care, Inc., which operated
industrial medical clinics, to AmHealth, Inc. ("AmHealth") for a 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. The Company initially
recorded these notes as one note due for $2,050,000, which was the Company's
estimate of fair market value (using a discounted cash flow approach). AmHealth
defaulted on a December 1, 1995 mandatory redemption of a portion this
obligation.
For the first six to nine months of 1996, AmHealth tried repeatedly to sell
its operating facilities to several third parties with no success. Throughout
this time period, AmHealth's northern California clinics continued to lose money
from operations while its southern California clinics were profitable and cash
flow positive. It was only after AmHealth's failed attempt to sell all of its
operations to CORE Inc., a public company, in July, 1996, that the Company
decided to write-down its debt due from AmHealth by $1.7 million (in September,
1996) as the CORE transaction would have resulted in the Company realizing the
full value of its receivable due from AmHealth ($2.9 million inclusive of
accrued interest).
In November, 1996, AmHealth had its four Northern California operating
entities (three clinics and its Employee Services Division) foreclosed on by the
senior secured creditors. The operations were turned over to the senior secured
creditors and the outstanding receivables for the four entities are now being
collected by the creditor who had the first lien position on all of the
outstanding accounts receivable. There remain five clinics under AmHealth
ownership in Southern California, all of which are generating operating profits
according to AmHealth officials. AmHealth is in the process of trying to sell
the remaining clinics and use the proceeds from the sale to negotiate a final
payout - at a substantially lower level than the current principal amount of
debt outstanding - to all of AmHealth's creditors. As of March 31, 1997, with
all of the information the Company has received from AmHealth regarding the
likelihood of a final payment and the potential amount of that payment, the
Company believes the carrying value of the AmHealth receivable is valued
correctly as it is stated on the Company's March 31, 1997 balance sheet.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flows from continuing operations required the use of cash
of $1,396,000 in 1996. For the quarter ended March 31, 1997, cash flows from
continuing operations used $833,000,
13
<PAGE>
primarily to pay down accounts payable balances and other accrued liabilities.
Cash has been used to fund the Company's operating losses and make necessary
capital investments. See "Consolidated Statements of Cash Flows."
Discontinued operations used cash of $1,745,000 in 1996 and used cash of
$40,000 in the first quarter of 1997. This is a net cash total that includes
cash contributed from discontinued operations (through the collection of
accounts receivable) of $30,000 and cash expenditures of $36,000 for collection
costs and other discontinued operations liabilities and $34,000 for legal fees
and expenses incurred in connection with the Company's civil lawsuit filed
against certain insurance carriers in the Superior Court in California. "See
Part II, Item 1. Legal Proceedings." The accounts receivable from the
discontinued operations represent reimbursements that are owed the Company by
certain insurance companies for applicant medical/legal evaluation services
provided by FWHC Medical Group, Inc. and Veritas Medical Group, Inc., two
managed medical groups associated with the Company's former subsidiaries, First
Western and Veritas. The gross receivables, however, are subject to liens
before the WCAB, an administrative body charged with determining an insurance
company's liability for the payment of medical-legal evaluation services. The
Company expects to collect the accounts receivable from discontinued operations
over the next several years under the provisions of the sale and service
agreement that the Company has entered into with a third party for servicing and
managing the remaining accounts receivable balance. In estimating net accounts
receivable, the Company believes that it has made adequate provisions as to the
estimated amount of gross receivables that the Company can expect to collect
upon resolution by the California WCAB of the collectibility of the disputed
portion of the receivables. 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 assets.
The Company's working capital position improved during the quarter ended March
31, 1997, from a deficit position of $1,551,000 at December 31, 1996 to a
deficit position of $1,451,000 at March 31, 1997. The Company's negative
working capital position is primarily the result of the Company having to
increase its short-term debt in 1996 (i.e., working capital credit facility
provided by Silicon Valley Bank) by $2.1 million to help finance the Company's
losses from continuing and discontinued (i.e., lawsuit fees and expenses)
operations. Although the Company has historically realized a negative cash
flow, the Company's accounts receivables turn faster than related payables,
allowing the Company to operate and grow its business. Under the terms of its
contract management fixed-fee pricing schedules, the Company receives the annual
fee in monthly payments in advance (due on the first day of the month), prior to
actually incurring any of the month's fixed and/or variable operating expenses.
This results in accounts receivables for contract management turning in
approximately seven days. The Company also receives an up-front implementation
fee prior to incurring any costs associated with the actual start-up of a
contract management site.
The Company's cash flows from investing activities used cash of $1,411,000 in
1996. For the quarter ended March 31, 1997, the Company's principal use of
cash for investing purposes was for capital expenditures in the amount of
$118,000. In 1996, the Company invested $1,338,000 in capital expenditures,
primarily in its medical transcription division for digital dictation equipment
and related technology investments. In early 1997, the Company made a
commitment to fund its first Data Delivery Center ("DDC"). The total capital
expenditure of approximately $400,000 that the Company anticipates it will incur
in connection with its first DDC is expected to be financed through either the
working capital and capital expenditure facilities with Coast Business Credit
described below or another third
14
<PAGE>
party financing relationship.
In 1995 the Company expended $1,232,000 in cash to acquire the medical
transcription businesses of International Dictating Services, Inc. and Medical
Transcription of Atlanta, Inc. 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.
Cash flows from financing activities provided cash of $5,095,000 in 1996.
For the quarter ended March 31, 1997, financing activities used cash of $44,000.
For the quarter, the Company's principal uses of cash for financing have been
payments under the line of credit and long-term debt. The Company's primary
sources of cash over the past several years have been (i) proceeds from
borrowings under a line of credit facility (April, 1996); (ii) proceeds from the
issuance of convertible debentures (August, 1995); (iii) proceeds from the
issuance of common stock and warrants through a private placement in September,
1996 and (iv) proceeds from the exercise of incentive stock options.
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, California). The aggregate
credit available (under both facilities) was $5.75 million. The banking
facilities were secured by all of the Company's assets. One of the facilities
was a $5.0 million working capital credit line under which the Company could
borrow a certain percentage of its accounts receivable balance, subject to an
initial cap of $3.0 million that was to be removed if the Company realized net
income of at least $50,000 in the quarter ended September 30, 1996. Because the
Company recognized a loss in the third quarter as well as the fourth quarter of
1996, this facility remained capped at $3.0 million. The second facility was a
$750,000 term facility set up to help the Company meet any of its capital
investment requirements which included the purchase of computers and
transcription related equipment. This term note was subject to an initial cap of
$250,000, with the cap being removed during such periods that the Company
maintained a minimum debt service ratio of 1.5 to 1.0, where debt service was
defined as earnings before interest and taxes plus depreciation and
amortization, divided by total interest plus the current portion of long-term
debt. As of March 31, 1997 the Company was not maintaining the required debt
service ratio, therefore, the cap of $250,000 remained in place on this term
facility. As of March 31, 1997 total borrowings under both facilities totaled
$2,094,000. The stated interest rate on the working capital facility was prime
plus 0.5% (or 9.0%) and the stated interest rate on the term loan was prime plus
1.0% (or 9.5%). Both of these facilities were due to mature on April 30, 1997.
Due to the Company's financial losses, the Company's borrowing capacity was
capped at the $2,094,000 level of debt throughout the first quarter of 1997.
The Company had been in negotiations with Silicon Valley to re-define all of its
major financial covenants and establish new borrowing capabilities with Silicon
Valley East as a result of its third and fourth quarter losses (inclusive of all
one-time, non-recurring balance sheet adjustments).
On April 3, 1997, the Company closed on a new credit facility with Coast
Business Credit, a California-based asset based lender (and a division of
Southern Pacific Thrift and Loan Association) to
15
<PAGE>
provide the Company a $4.7 million working capital facility and a $300,000
capital expenditure facility to be effective (funding capability) immediately.
The working capital facility has been used to pay off Silicon Valley in full.
These new Coast facilities do not contain any financial covenants and are based
on a funding formula (for determining funding limits) as follows: 1.5 times
monthly contractual contract management revenues, plus 80% of all medical
transcription receivables under 90 days (aging) under the working capital
facility; up to $300,000 on new capital expenditures under the capital
expenditure facility. Based on current monthly contractual contract management
revenues and 80% of all medical transcription receivables under 90 days as of
March 31, 1997, this would provide the Company with a current funding capacity
of approximately $3.5 million. These facilities have a term of two years and are
priced at prime plus 2.25% declining to prime plus 1.75% upon two consecutive
quarters of achievement and ongoing maintenance of debt service coverage of not
less than 1.5 times measured on an EBITA basis including all principal and
interest (excluding depreciation). These facilities are secured by a first
security interest on all Company assets.
The Company anticipates that cash on hand, together with internally generated
funds, cash collected from discontinued operations and cash available under its
new credit facilities with Coast Business Credit, should be sufficient to
finance continuing operations, make capital investments in the normal and
ordinary course of its business, and fund the out-of-pocket expenses and certain
legal fees of its civil litigation action against certain insurance carriers for
1997. The Company will continue to pursue various alternatives to allow for the
effective use of cash (i.e., leasing for capital asset funding). This should
help the Company to (i) continue its growth, (ii) achieve operating
profitability and positive cash flow from operations during 1997, and (iii)
continue to fund the out-of-pocket expenses and certain legal fees to be
incurred in connection with its civil litigation 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.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. 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 former healthcare subsidiaries,
First Western Health Corporation and Veritas Healthcare Management, and the
physician-owned medical groups, FWHC Medical Group, Inc. and Veritas Medical
Group, Inc., which had contracts with the healthcare 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,
which was subsequently amended to name 16 defendants (including State
Compensation Insurance Fund, Continental Casualty Company, California
Compensation Insurance Company, Zenith National Insurance Corporation and
Pacific Rim Assurance Company). The action seeks $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
healthcare 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 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 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. 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.
On March 21, 1997, the Los Angeles County Superior Court sustained the
defendant insurance companies' demurrer to the Third Amended and Supplemental
Complaint of the Company and certain of its subsidiaries, without leave to
further amend the complaint. The Court determined in such ruling that exclusive
jurisdiction with respect to the claims contained in the Lawsuit resides with
the California Workers' Compensation Appeals Board and that the Superior Court
of the State of California is an improper forum. The Company has been advised
by counsel that there is no remedy for the damages claimed in the Lawsuit from
the California Workers' Compensation Appeals Board. A final order dismissing
the Lawsuit will be entered by the Court, and the Company will appeal the ruling
in the California Court of Appeals. There can be no assurance that the Company
will be successful
17
<PAGE>
appealing such dismissal. By stipulation, the carriers' cross-complaints against
the plaintiffs were stayed pending resolution of the plaintiffs' appeal. The
Company believes that the trial court's ruling, if upheld by the appellate
court, also would result in dismissal of the cross-complaints. There can be no
assurance, however, that such cross complaints would be dismissed. 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 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 1996, the Company expensed approximately $1,582,000 of legal expenses
incurred in connection with the Lawsuit. For the quarter ended March 31, 1997,
the Company expensed approximately $34,000 of legal expenses connected with the
lawsuit. Pursuant to an agreement with its legal counsel retained in connection
with the lawsuit, with respect to any future expenses related to the lawsuit
incurred at the trial court level, commencing in December 1996, the company is
only responsible for out-of-pocket expenses and the payment to its legal counsel
of a percentage of any recovery awarded in the lawsuit. With respect to the
appeal of the Superior Court's March 21, 1997 ruling in the lawsuit, the Company
is only responsible for out-of-pocket expenses and, pursuant to an agreement
with its counsel, an immaterial amount of legal fees to be incurred in
connection with the appeal.
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.
ITEM 2. CHANGES IN SECURITIES
On April 3, 1997, the Company issued a warrant to purchase shares of its
Common Stock to Coast Business Credit ("Coast"), a California-based asset-based
lender (and a division of Southern Pacific Thrift and Loan Association), in
connection with the credit facilities the Company established with Coast. The
Warrant entitles the holder to purchase an aggregate of 15,000 shares of the
Company's Common Stock subject to certain adjustments, at an exercise price of
$4.625 per share. The Warrant is presently exercisable and expires not later
than April 3, 1999. In connection with the Company's borrowings under the credit
facilities, on April 3, 1997 the Company also issued a promissory note to Coast
in the principle amount of $300,000.
In connection with a merger with DocuMedX, Inc. ("DocuMedX"), a medical
transcription service company with offices in Seattle, Washington and Portland,
Oregon, on April 16, 1996 the Company issued an aggregate of 608,800 shares of
Common Stock to four shareholders of DocuMedX in exchange for their shares of
the common stock of DocuMedX.
18
<PAGE>
The issuance of the Securities described above was made in reliance on the
exemption from registration provided by Section 4(2) and Regulation D of the
Securities Act of 1933 as transactions by an issuer not involving a public
offering. Offers and sales were made without any public solicitation and the
Securities bear a restrictive legend. No underwriter was involved in the
transaction and no commissions were paid.
ITEM 6. EXHIBITS. The following exhibits are filed herewith:
(a) 2.6 Agreement and Plan of Merger among Transcend Services,
Inc., DocuMedX, Inc. and Terri Kaminski, John Kaminski,
Amie Clark, Nancy Gartner, Greg Hammock, and Barbara
Shelman dated April 16, 1997.
10.12 Loan and Security Agreement dated April 3, 1997 between
the Company and Coast Business Credit.
10.13 Schedule to Loan and Security Agreement dated April 3,
1997 between the Company and Coast Business Credit.
10.14 First Amendment dated April 15, 1997 to Loan and Security
Agreement dated April 3, 1997 between the Company and
Coast Business Credit.
10.15 Secured Promissory Note to Coast Business Credit dated
April 3, 1997 in the principal amount of $300,000.
11 Computation of Per Share Earnings
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
The following report on Form 8-K was filed during the quarter ended
March 31, 1997: Form 8-K dated January 28, 1997 (reporting developments in the
Lawsuit).
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TRANSCEND SERVICES, INC.
May 14, 1997 By: /s/ Larry G. Gerdes
-------------------------------------
Larry G. Gerdes,
President and Chief Executive Officer
May 14, 1997 By: /s/ David W. Murphy
-------------------------------------
David W. Murphy
Executive Vice President, Finance and
Chief Financial Officer (Principal
Financial and Accounting Officer)
20
<PAGE>
================================================================================
AGREEMENT AND PLAN OF MERGER
AMONG:
TRANSCEND SERVICES, INC., A DELAWARE CORPORATION,
DOCUMEDX, INC., A WASHINGTON CORPORATION,
AND
TERRI KAMINSKI, JOHN KAMINSKI,
AMIE CLARK, NANCY GARTNER, GREG HAMMOCK, AND BARBARA SHELMAN
DATED AS OF APRIL 16, 1997
_________________________
================================================================================
<PAGE>
SCHEDULES
---------
Schedule 2.1 - Due Incorporation and Qualification
Schedule 2.2 - Outstanding Capital Stock
Schedule 2.3 - Options or Other Rights
Schedule 2.5 - Articles of Incorporation and By-Laws
Schedule 2.7 - Authority of the Company and the Shareholders
Schedule 2.8 - Financial Statements
Schedule 2.10 - Recent Developments
Schedule 2.11 - Litigation
Schedule 2.12 - Taxes
Schedule 2.13 - Title to Properties; Assets Complete
Schedule 2.14 - Compliance with Laws
Schedule 2.15 - Contracts, Etc.
Schedule 2.17 - Fixed Assets
Schedule 2.18 - Trade Names and Other Intangibles
Schedule 2.19 - Customers
Schedule 2.21 - Employee Manual
Schedule 2.22 - Officers, Directors and Key Employees
Schedule 2.24 - Franchises and Licenses
Schedule 2.25 - Transactions with Affiliated Parties
Schedule 2.26 - Bank Accounts and Powers of Attorney
Schedule 2.27 - Changes Prior to Closing Date
Schedule 3.2 - Certificate of Incorporation and By-Laws
Schedule 3.3 - Authority of Transcend
Schedule 3.4 - Transcend Material Changes
LIST OF EXHIBITS
----------------
Exhibit A-1 - Employment Agreement (Terri Kaminski)
Exhibit A-2 - Employment Agreement (John Kaminski)
Exhibit B - Form of Non-Compete Agreement
Exhibit C - Form of Subscription Agreement
Exhibit D - Form of Pledge Agreement
Exhibit E-1 - $88,100.00 Promissory Note
Exhibit E-2 - $20,000.00 Promissory Note
Exhibit E-3 - $104,301.00 Promissory Note
[THE COMPANY AGREES TO FURNISH SUPPLEMENTALLY A COPY OF ANY OMITTED SCHEDULE TO
THE COMMISSION UPON REQUEST.]
i
<PAGE>
AGREEMENT AND PLAN OF MERGER
----------------------------
THIS AGREEMENT AND PLAN OF MERGER ("AGREEMENT") is made and entered into as of
---------
April 16, 1997, by and among: TRANSCEND SERVICES, INC., a Delaware corporation
("TRANSCEND"); DOCUMEDX, INC., a Washington corporation (the "COMPANY"); and
--------- -------
TERRI KAMINSKI and JOHN KAMINSKI (the "MAJORITY SHAREHOLDERS") and Amie Clark,
---------------------
Nancy Gartner, Greg Hammock and Barbara Shelman (the "MINORITY SHAREHOLDERS"),
---------------------
residents of the State of Washington, all of whom are shareholders of the
Company (collectively the "SHAREHOLDERS").
------------
RECITALS
A. Transcend and the Company intend to effect a merger of the Company into
Transcend in accordance with this Agreement, the Delaware General Corporation
Law and the Washington Business Corporation Act (the "MERGER"). Upon
------
consummation of the Merger, the Company will cease to exist, and Transcend will
continue to exist as the surviving corporation of the Merger.
B. It is intended that the Merger qualify as a tax-free reorganization within
the meaning of Section 368(a)(1)(a) of the Internal Revenue Code of 1986, as
amended (the "CODE").
----
C. This Agreement has been adopted and approved by the respective boards of
directors of Transcend and the Company.
D. The capitalization of the Company consists of 2,000,000 authorized shares
of the voting common stock, having no par value, of which 1,000,000 shares are
issued and outstanding (the "COMPANY COMMON STOCK").
--------------------
AGREEMENT
The parties to this Agreement agree as follows:
SECTION 1. DESCRIPTION OF TRANSACTION
1.1 MERGER OF THE COMPANY INTO TRANSCEND. Upon the terms and subject to the
conditions set forth in this Agreement, at the Effective Time (as defined in
Section 1.3), the Company shall be merged with and into Transcend, and the
separate existence of the Company shall cease. Transcend will continue as the
surviving corporation in the Merger (the "SURVIVING CORPORATION").
---------------------
1.2 EFFECT OF MERGER. The Merger shall have the effects set forth in this
Agreement and in the applicable provisions of the Delaware General Corporation
Law and the Washington Business Corporation Act.
<PAGE>
1.3 CLOSING; EFFECTIVE TIME. The consummation of the transactions
contemplated by this Agreement (the "CLOSING") shall take place at the offices
-------
of Reaugh Fischnaller & Oettinger, P.S., 3000 Westin Building, 2001 6th Avenue,
Seattle, Washington 98121-2573, at 10:00 a.m., local time, on April 16, 1997
(the "CLOSING DATE"). Contemporaneously with or as promptly as practicable
------------
after the Closing, properly executed certificates of merger for the merger of
the Company into Transcend, conforming to the requirements of the Delaware
General Corporation Law and the Washington Business Corporation Act, shall be
filed with the Secretaries of State of the States of Delaware and Washington.
The Merger shall take effect at the time the last such certificate of merger is
filed with the Secretaries of State of the States of Delaware and Washington
(the "EFFECTIVE TIME").
--------------
1.4 CERTIFICATE OF INCORPORATION AND BYLAWS; DIRECTORS AND OFFICERS. Unless
the parties agree otherwise prior to the Effective Time:
(a) the Certificate of Incorporation of Transcend shall continue as the
Certificate of Incorporation of the Surviving Corporation;
(b) the Bylaws of Transcend shall continue as the Bylaws of the Surviving
Corporation; and
(c) the directors and officers of Transcend shall continue as the directors
and officers of the Surviving Corporation.
1.5 CONVERSION OF SHARES. Subject to Section 1.6(b), at the Effective Time,
by virtue of the Merger and without any further action on the part of Transcend,
the Company, or any Shareholder, all shares of Company Common Stock owned by
each Shareholder and outstanding immediately prior to the Effective Time shall
be canceled and retired and converted into such Shareholder's right to receive
the following (i) number of shares of the common stock of Transcend, $.01 par
value ("TRANSCEND COMMON STOCK"), (ii) amount of cash ("CASH CONSIDERATION"),
---------------------- ------------------
and (iii) face amount of a promissory note, in substantially the form of
Exhibit E-1 attached hereto (in the case of Nancy Gartner) or aggregate face
amount of promissory notes, in substantially the forms of Exhibits E-2 and E-3
attached hereto (in the case of Greg Hammock) ("NOTES CONSIDERATION"):
-------------------
Transcend
Shareholder Common Stock Cash Notes
- ----------- ------------ ---- -----
Terri Kaminski 254,885 shares None None
John Kaminski 254,885 shares None None
Amie Clark 66,463 shares None None
Barbara Shelman 32,567 shares None None
Nancy Gartner None $50,000 $ 88,100
Greg Hammock None 20,000 124,301
-------------- ------ -------
2
<PAGE>
Totals 608,800 shares $70,000 $212,401
-------------- ------- --------
1.6 EXCHANGE OF CERTIFICATES.
(a) At the Closing, each Shareholder shall surrender such Shareholder's
respective stock certificate(s) for Company Common Stock to the Surviving
Corporation, together with such transmittal documents as the Surviving
Corporation may reasonably require, and the Surviving Corporation shall deliver
to such Shareholder the certificates of Transcend Common Stock, if any, and Cash
Consideration, if any, to be delivered to such Shareholder at Closing pursuant
to Section 1.7.
(b) Transcend shall be entitled to deduct and withhold from any
consideration payable or otherwise deliverable to any holder or former holder of
Company Common Stock pursuant to this Agreement such amounts as Transcend may be
required to deduct or withhold therefrom under the Code or under any provision
of state, local or foreign tax law. To the extent such amounts are so deducted
or withheld, such amounts shall be treated for all purposes under this Agreement
as having been paid to the party to whom such amounts would otherwise have been
paid.
1.7 MERGER CONSIDERATION. The aggregate consideration to be paid by
Transcend to the Shareholders in consideration of the Merger, subject to the
Post-Closing Adjustment as provided in Section 1.8, shall be 608,800 shares of
Transcend Common Stock, $70,000 in Cash Consideration and $212,401 in Notes
Consideration (the "MERGER CONSIDERATION").
--------------------
1.8 POST-CLOSING ADJUSTMENT. To the extent the Company's net assets as of
the close of business on the Closing Date is less than $70,000, the
consideration for the Merger shall be adjusted downward dollar for dollar by the
amount of such shortfall ("POST-CLOSING ADJUSTMENT"). For purposes of the Post-
-----------------------
Closing Adjustment, the "net assets" of the Company as of the close of business
on the Closing Date shall mean the sum of all cash, accounts receivable,
recoverable deposits and fixed assets, minus the sum of all accounts payable,
-----
accrued payroll expenses, loans payable and accumulated depreciation on fixed
assets. In the event of any such adjustment, the Shareholders shall, at the
Shareholders' option, deliver to Transcend cash or shares of Transcend Common
Stock (valued at the same price per share as was applicable on the Closing Date,
regardless of fluctuation in market price subsequent to the Closing Date) in
amounts equal to the Post-Closing Adjustment, within ten (10) days following
final determination of net assets pursuant to Section 1.9.
1.9 DETERMINATION OF NET ASSETS. The Company's net assets as of the close
of business on the Closing Date shall be determined by Transcend's independent
certified public accountants within 120 days following the Closing Date (the
"NET ASSET DETERMINATION"). Within five (5) business days after receiving the
- ------------------------
Net Asset Determination, Transcend shall deliver same to the Shareholders. If
the Shareholders do not deliver a list of written objections to the Net Asset
Determination ("OBJECTION NOTICE") to Transcend within 30 days following
----------------
delivery to the Shareholders, the Net Asset Determination shall become final and
binding upon the parties. If the Shareholders deliver
3
<PAGE>
an Objection Notice (the "OBJECTING SHAREHOLDERS") within such 30 day period,
----------------------
the parties will endeavor to reconcile any differences and agree upon a final
Net Asset Determination. If the parties are unable to agree upon a final Net
Asset Determination within 30 days following delivery of the Objection Notice,
at the request of either the Surviving Corporation or any of the Objecting
Shareholders the outstanding matters shall be submitted for resolution by a
mutually acceptable accounting firm of recognized national standing with offices
in the Atlanta area. If the parties are unable to agree upon a mutually
acceptable accounting firm, one will be selected at random from a list of the 6
largest Atlanta offices of certified public accounting firms having no prior
relationship with Transcend, the Company, the Surviving Corporation or the
Shareholders. The group of the Objecting Shareholders who have not agreed upon
the Net Asset Determination and the Surviving Corporation shall each bear 50% of
the fees and expenses of the accounting firm so selected. Such accounting firm
shall promptly prepare a final Net Asset Determination, and its conclusions
shall be final and binding upon each of the parties to this Agreement.
1.10 TAX CONSEQUENCES. For federal income tax purposes, the Merger is
intended to constitute a reorganization within the meaning of Section
368(a)(1)(a) of the Code. The parties to this Agreement hereby adopt this
Agreement as a "plan of reorganization" within the meaning of Sections 1.368-
2(g) and 1.368-3(a) of the United States Treasury Regulations.
1.11 FURTHER ACTION. If, at any time after the Effective Time, any further
action is determined by Transcend to be necessary or desirable to carry out the
purposes of this Agreement or to vest Transcend or the Surviving Corporation
with full right, title and possession of and to all rights and property of the
Company, the officers and directors of Transcend shall be fully authorized (in
the name of the Company and otherwise) to take such action.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
As an inducement to Transcend to enter into this Agreement and to consummate
the transactions contemplated hereby, and with the knowledge that Transcend
shall rely thereon, the Company and the Majority Shareholders, jointly and
severally, represent to Transcend, the Minority Shareholders, jointly and
severally, represent, to the extent of their information and belief, to
Transcend, and the Company and the Shareholders, jointly and severally, warrant
to Transcend, the following (both as of the Closing Date and as of the date
hereof):
2.1 DUE INCORPORATION AND QUALIFICATION. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Washington, and has the corporate power and lawful authority to carry on its
business as now being conducted, and to own or lease and operate its properties
and assets as now owned, leased or operated by it. The Company is duly
qualified or otherwise authorized as a foreign corporation to transact business
and is in good standing in each jurisdiction set forth on Schedule 2.1 annexed
hereto, which are the only jurisdictions in which such qualification or
authorization is required by law. Except as set forth on Schedule 2.1 annexed
hereto, the Company does not file and is not required to file franchise, income
or other tax returns in any other jurisdiction based upon the ownership or use
of property therein or
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the conduct of business or derivation of income therefrom. The Company does not
own or lease property or maintain any resident employee in any jurisdiction
other than the jurisdictions set forth on Schedule 2.1 annexed hereto.
2.2 OUTSTANDING CAPITAL STOCK. The title, par value, number of authorized
shares and number of issued and outstanding shares of each class of capital
stock of the Company are set forth on Schedule 2.2 annexed hereto. No other
class of capital stock of the Company is authorized or outstanding. All of the
issued and outstanding shares of Company Common Stock are duly authorized and
are validly issued, fully paid and non-assessable.
2.3 OPTIONS OR OTHER RIGHTS. Except as described in Schedule 2.3, there is
no outstanding right, subscription, warrant, conversion right, call, unsatisfied
preemptive right, commit ment, option or other agreement or right of any kind
pursuant to which any person or entity has the right or option to purchase or
otherwise to receive from the Company any shares of Company Common Stock or any
shares of the capital stock or any other security of the Company and there is no
outstanding security of any kind convertible into or redeemable or exchangeable
for any shares of the capital stock or any other security of the Company. There
is no shareholders' agreement, voting trust or similar agreement or arrangement
to which the Company or any Shareholder is a party which affects or restricts in
any way the Shareholders' rights and obligations with respect to the Company
Common Stock.
2.4 SUBSIDIARIES AND INVESTMENTS. The Company has no subsidiaries and does
not own, directly or indirectly, any capital stock or other equity or ownership
or proprietary interest in, or have any investment in, any other corporation,
partnership, association, trust, joint venture or other entity.
2.5 ARTICLES OF INCORPORATION AND BY-LAWS. Schedule 2.5 annexed hereto
contains true and complete copies of the Articles of Incorporation of the
Company, including all amendments thereto (certified by the Secretary of State
of its jurisdiction of incorporation), and By-laws of the Company, including all
amendments thereto (certified by its corporate secretary), as in effect on the
date hereof, and such By-Laws and Articles of Incorporation will not be amended,
rescinded or otherwise modified between the date hereof and the Closing Date.
2.6 BOOKS AND RECORDS. The corporate minute books, stock certificate books,
stock registers and other corporate records of the Company are true, correct and
complete in all material respects. The corporate minute books of the Company
contain materially true and complete records of all meetings, and consents in
lieu of meetings, of the Board of Directors and Stockholders of the Company
since its incorporation. All actions reflected in said books and records were
duly and validly taken in material compliance with the laws of the state of
incorporation of the Company. None of the Company's records, systems, controls,
data or information are recorded, stored, maintained or operated by, or
otherwise are wholly or partly dependent upon or held by, any person or entity
or media (including any electronic, mechanical or photographic process) which
are not under the exclusive ownership and direct control of the Company
(including for purposes of this paragraph, its employees) including all means of
access.
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2.7 AUTHORITY OF THE COMPANY AND THE SHAREHOLDERS. This Agreement has
been approved by all necessary action on the part of the Board of Directors and
Shareholders of the Company. The Company and each Shareholder has full power
and legal capacity to execute and deliver this Agreement and the other
agreements required to be executed and delivered by the Company or such
Shareholder hereunder (this Agreement and such other agreements being herein
called the "COMPANY DOCUMENTS") and to carry out the transactions contemplated
-----------------
hereby. The Company Documents are valid and binding agreements of the Company
and each Shareholder enforceable against the Company and such Shareholder in
accordance with their respective terms, subject to applicable bankruptcy,
insolvency and similar laws affecting creditor's rights generally as well as
general principles of equity. Except as described in Schedule 2.7 annexed
hereto, no consent, authorization or approval of, or declaration, filing or
registration with, any governmental or regulatory authority, or any consent,
authorization or approval of any other third party, is necessary in order to
enable the Company or any Shareholder to enter into and perform the Company's or
such Shareholder's obligations under the Company Documents, and neither the
execution and delivery of the Company Documents nor the consummation of the
transactions contemplated thereby will:
(a) conflict with, require any consent under, result in the violation
of, or constitute a breach of any provision of the Articles of Incorporation or
By-Laws of the Company;
(b) conflict with, require any consent under, result in the violation
of, constitute a breach of, permit the termination of or accelerate the
performance required on the part of the Company or any Shareholder by the terms
of, any evidence of indebtedness, lease (of real or personal property) or
material agreement to which the Company or any Shareholder is a party, in each
case with or without notice or lapse of time or both, or permit the termination
of any such material agreement by another person;
(c) result in the creation or imposition of any security interest,
lien, charge or other encumbrance upon, or restriction on the use of, any
property or assets of the Company or Company Common Stock under any agreement or
commitment to which the Company or any Shareholder is bound;
(d) accelerate, or constitute an event entitling, or which would, on
notice or lapse of time or both, entitle the holder of any indebtedness of the
Company or any Shareholder to accelerate the maturity of any such indebtedness;
(e) conflict with or result in the breach or violation of any writ,
judgment, order, injunction, decree or award of any court or governmental body
or agency or arbitration tribunal that is binding on the Company or any
Shareholder;
(f) constitute a violation by the Company or any Shareholder of any
statute, law or regulation of any jurisdiction; or
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(g) violate or cause any revocation of or limitation on any Permit (as
defined in Section 2.24 hereof).
2.8 FINANCIAL STATEMENTS. The Company has heretofore furnished Transcend
with (a) true and complete copies of the balance sheets and related statements
of income of the Company as of and for the fiscal years ended on December 31,
1995 and December 31, 1996, internally prepared by the Company's certified
public accountant; and (b) internally prepared balance sheet and related
statement of income of the Company as of and for the quarter ended March 31,
1997 (the "BALANCE SHEET DATE") (hereinafter, the financial statements referred
------------------
to in subsections (a) and (b), are referred to as the "FINANCIAL STATEMENTS").
--------------------
Copies of such Financial Statements have been annexed hereto as Schedule 2.8
with ten pages of initialed addenda. The Financial Statements have been
prepared in accordance with generally accepted accounting principles,
consistently applied (except that the interim Financial Statements are subject
to normal and year-end adjustments, which will not, individually or in the
aggregate, be material in magnitude). Except as disclosed in Schedule 2.12, the
Financial Statements fairly present the financial condition of the Company at
the dates thereof and, except as indicated therein, reflect all claims against,
and all debts and liabilities of the Company, fixed or contingent, as at the
dates thereof, and the related statements of income, fairly present the results
of the operations of the Company for the periods indicated.
2.9 NO UNDISCLOSED LIABILITIES. Except as reflected and reserved against
in the Financial Statements or otherwise disclosed on the schedules attached
hereto, as of the Balance Sheet Date the Company did not have any liabilities or
obligations (whether long term or current and whether accrued, absolute or
contingent) and, except for liabilities and obligations incurred since the
Balance Sheet Date in the ordinary course of business and disclosed to Transcend
in writing as of the Closing Date, the Company will not have any liabilities or
obligations (whether long term or current and whether accrued, absolute or
contingent) which, individually or in the aggregate, are material.
2.10 RECENT DEVELOPMENTS. Except as described on Schedules 2.10 or 2.12
annexed hereto, since the Balance Sheet Date there has not been, and to the
knowledge of the Company or the Shareholders, no fact or condition exists, which
might reasonably be expected to cause (a) any adverse change in the assets or
liabilities, business, results of operations, condition (financial or otherwise)
or prospects of the Company, other than immaterial changes in the ordinary
course of business, (b) any notice of termination of any material agreement
given by a third party to the Company or any relinquishment by the Company of
any rights of material value, or any material adverse change in the relations of
the Company with its key employees, lessors, customers, suppliers, or others
having business relations with the Company, (c) any claim against the Company
for, or any liability incurred by the Company in respect of, any damages or
alleged damages for any actual or alleged negligence or other tort, breach of
contract or violation of property rights in excess of $10,000, (d) any capital
expenditure or commitment therefor by the Company in excess of $10,000, (e) any
indebtedness incurred by the Company for borrowed money which would result in
the Company being indebted at the Closing Date in an amount exceeding its
indebtedness for borrowed money on the Balance Sheet Date or any commitment of
the Company to borrow or lend
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money, (f) any increase in the compensation paid or payable, to any of the
Company's employees other than normal merit increases consistent with past
Company practice which do not exceed 5% of the applicable employee's previous
compensation, (g) any change in the Company's accounting methods, principles, or
practices, (h) any change in the capital stock of the Company or any dividend
paid or declared with respect to such capital stock, or (i) any other event or
circumstance which has materially and adversely affected the business of the
Company or the operation thereof.
2.11 LITIGATION. Except as described in Schedule 2.11 annexed hereto,
there is no action, suit, proceeding at law or in equity by any person or
entity, or any arbitration, or any administrative or other proceeding by or
before any governmental or other instrumentality or agency, pending, or, to the
knowledge of the Company or any Shareholder, threatened, against or affecting
the Company, any Shareholder, or any of their respective properties, assets or
rights, and neither the Company nor any Shareholder knows of any valid basis for
any such action, proceeding or investigation. Neither the Company nor any
Shareholder is subject to any judgment, order, award or decree entered in any
lawsuit or proceeding which may have an adverse effect on any of the operations
or business practices of the Company or on its ability to acquire any property
or conduct business in any area.
2.12 TAXES. Except as disclosed in Schedule 2.12 annexed hereto, the
Company has filed or has caused to be filed, within the times and in the manner
prescribed by law, all federal, state, local, foreign and other income,
estimated, import, sales, use, license, franchise, gross receipts, excise, real
and personal property, employment and payroll-related, and other tax returns and
tax reports ("TAX RETURNS") which are or were required to be filed by, or with
-----------
respect to, the business and assets of the Company. Such Tax Returns are true,
correct and complete, reflect accurately all liability for taxes of the Company
for the periods covered thereby, all amounts shown as owing thereon or otherwise
due from or payable by the Company have been fully paid or adequately disclosed
and fully provided for by adequate reserves on the books and on the Financial
Statements of the Company, and as of the Closing Date all Tax Returns required
to be filed by the Company prior to such date will have been filed and all
amounts shown as owing thereon will have been paid or disclosed to Transcend in
writing. Except as described in Schedule 2.12, there has been no prior
examination or investigation of any Tax Return of the Company and no such
examination or inves tigation is in progress, and neither the Company nor any
Shareholder has knowledge of any events or circumstances which could lead to an
examination or investigation of any Tax Return. Except as described on Schedule
2.12 annexed hereto, there are no outstanding agreements or waivers in effect
with respect to any Tax Returns including any agreements or waivers extending
the statutory period of limitation applicable to any Tax Return or permitting
the deferral of the assessment or payment of any taxes now due to be paid or
assessed to any future period.
2.13 TITLE TO PROPERTIES; ASSETS COMPLETE. The Company has good, valid
and marketable title to all of its material properties and assets (tangible and
intangible), including without limitation, all properties and assets shown on
the Financial Statements as of the Balance Sheet Date and all properties and
assets purchased or acquired by the Company since the Balance Sheet Date; in
each case subject to no encumbrance, lien, charge or other restriction of any
kind, except for (a) liens reflected on the Financial Statements, (b) liens for
current taxes, assessments or governmental
8
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charges or levies on property not yet due or delinquent, and (c) liens described
on Schedule 2.13 attached hereto (liens of the type described in (a), (b) and
(c) above being sometimes described as "PERMITTED LIENS"). Except for the
---------------
property referenced in Schedule 2.7 and any additional leased or licensed
property subject to real and personal property leases or software licenses or
agreements described in Schedule 2.13, the Company owns outright, and is in
exclusive possession of, all assets, properties or rights currently used in the
business of the Company or necessary for the operation of the Company's business
as currently conducted.
2.14 COMPLIANCE WITH LAWS. The Company is not in violation of any
applicable order, judgment, injunction, award or decree of any court or
governmental or regulatory body or agency, or arbitration tribunal. Except as
described on Schedule 2.14 or as qualified or limited on Schedule 2.12 annexed
hereto, the Company is not in violation of any federal, state, local or foreign
law, ordinance, rule, directive, or regulation, or any other requirement of any
governmental or regulatory body or agency, court or arbitrator applicable to the
business of the Company. Without limiting the generality of the foregoing,
except as described on Schedule 2.14 annexed hereto, (a) there is not pending,
or, to the knowledge of the Company or any Shareholder, threatened, any
notification of any governmental or regulatory body, agency or authority that
the Company is or was not in compliance with applicable laws and regulations
respecting employment and employment practices, occupational safety and health
laws and regulations, and neither the Company nor any Shareholder knows of any
basis therefor, and (b) the Company has not received any such notification of
past violations of such laws or regulations that can reasonably be expected to
result in future claims against the Company, and neither the Company nor any
Shareholder knows of any basis therefor.
2.15 CONTRACTS, ETC. In addition to the matters disclosed in Schedules 2.7
and 2.13, Schedule 2.15 attached hereto consists of a true and complete list of
all other material written contracts, agreements and other instruments to which
the Company is a party or by which it or its assets or properties are bound or
which are necessary for the Company to conduct its business as presently
conducted (the "CONTRACTS"), including but not limited to all customer
---------
contracts, real and personal property leases, maintenance contracts and software
agreements. Unless attached to Schedule 2.13 or Schedule 2.15, the Company has
previously delivered to Transcend a true and complete copy of each Contract.
All of the Contracts are valid and binding upon the Company and the other
parties thereto, are in full force and effect and enforceable in accordance with
their terms, and neither the Company nor, to the knowledge of the Company or any
Shareholder, any other party to any such Contract has breached any provision of,
or is in default in any respect under, the terms thereof. Unless disclosed in
Schedule 2.10, neither the Company nor, to the knowledge of the Company or any
Shareholder, any other party to any Contract intends during the initial term of
such Contract to terminate, materially reduce or materially modify the terms of
any of its obligations or commitments thereunder, and neither the Company nor
any Shareholder has any reason to believe that any party to a Contract is likely
to terminate, materially reduce or materially modify the terms of any of its
obligations or commitments thereunder. Neither the Company nor any Shareholder
has received any payment from any contracting party in connection with or as an
inducement for entering into any Contract, or other agreement or instrument,
except for payment for actual services rendered or to be rendered by the Company
consistent with amounts historically charged for such
9
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services.
2.16 ACCOUNTS AND NOTES RECEIVABLE. All accounts and notes receivable
reflected on the Financial Statements, and all accounts and notes receivable
arising subsequent to the Balance Sheet Date, have arisen in the ordinary course
of business of the Company, represent valid obligations due to the Company and,
subject only to the reserve for bad debts shown on the Company's books and
records and computed in a manner consistent with past practice, are collectible
in the ordinary course of business of the Company in the aggregate recorded
amounts thereof in accordance with their terms and in any event not later than
90 days from the Closing Date. None of such notes and accounts receivable or
other debts is or will at the Closing Date be subject to any counterclaim or
set-off except to the extent of the aforementioned reserve, or is or at the
Closing will be subject to any lien, claim, encumbrance, charge or restriction
whatsoever. There has been no material change since the Balance Sheet Date in
the amount of accounts receivable or other debts due the Company or the reserves
for bad debts relating thereto from that reflected in the Financial Statements.
2.17 FIXED ASSETS. Schedule 2.17 annexed hereto contains a complete and
accurate list of all machinery, equipment, tools, furniture, leasehold
improvements, trade fixtures, vehicles, struc tures, or any related capitalized
items and other tangible property material to the operation of the business of
the Company (the "FIXED ASSETS") and all such Fixed Assets are reflected in the
------------
Financial Statements (except any such tangible property acquired since the
Balance Sheet Date by the Company). Since the Balance Sheet Date the Company
has not disposed of any Fixed Assets except in the ordinary course of the
Company's business. The Fixed Assets are in good operating condition and
repair, subject to normal wear and tear from normal use thereof, and the Company
has not received notice that any of the Fixed Assets or the Company's use
thereof is in violation of any existing law or any building, zoning, health,
fire, safety or other ordinance, code or regulation.
2.18 TRADE NAME AND OTHER INTANGIBLES. Except for shrink-wrap licenses
for the use of third-party off-the-shelf software, Schedule 2.18 annexed hereto
contains a complete and accurate list of all patents, patent rights, licenses,
trademarks, trademark rights, trade names, trade name rights, service marks,
service mark rights, and copyrights ("INTELLECTUAL PROPERTY") which are either
---------------------
(a) wholly or partly owned or licensed by the Company, or (b) used in the
conduct of the business of the Company. Except as described on Schedule 2.18
annexed hereto, no person or entity, other than the Company, has any rights
under or in respect of, and to the knowledge of the Company and the
Shareholders, no person is infringing or otherwise acting adversely with respect
to, the Company's rights under or in respect of the Intellectual Property, and
the Company is the exclusive owner of such rights, and there is no claim for
damages or any proceeding pending or, to the knowledge of the Company or any
Shareholder, threatened, with respect thereto. Except as previously and
specifically disclosed in writing by the Company to Transcend, the Company is
not infringing or otherwise acting adversely to the right of any person under or
in respect to Intellectual Property, and there is no claim for damages or any
proceeding pending, or, to the knowledge of the Company or any Shareholder,
threatened, with respect thereto.
2.19 CUSTOMERS. Schedule 2.19 annexed hereto contains a complete and
accurate list of any customer or client which purchased during the last fiscal
year of the Company $5,000 or more
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in services from the Company. Except as set forth on Schedule 2.19, and to the
knowledge of the Company and the Shareholders, the Company enjoys good relations
with all customers listed on Schedule 2.19, and except as listed on Schedule
2.19 and Schedule 2.10, no customer listed on Schedule 2.19 has notified the
Company or any Shareholder of such customer's intention to terminate or
materially reduce use of the Company's services, and neither the Company nor any
Shareholder has any reason to believe any such customer is likely to terminate
the services of the Company on account of the transactions contemplated
hereunder.
2.20 LABOR RELATIONS; EMPLOYEES. Other than amounts which have not yet
become payable in accordance with the Company's customary practices, which will
be paid in a timely manner, (a) the Company has paid in full to its full and
part-time employees all wages, salaries, commissions, bonuses and other direct
compensation for all services performed by them to date, and (b) the Company has
paid, or will pay in a timely manner, all severance pay, if any, and benefits,
FICA, withholding taxes and vacation pay, if any, for all of its employees and
is not subject to any claim for non-payment or non-performance of any of the
foregoing. Pay periods end on the 8th and 23rd days of each month with payment
made on the 15th and last day of the month. The Financial Statements do not
reflect the accrual of wages, salaries, commissions, bonuses or other
compensation, however described, which accrued from the 24th through the end of
the month. In addition, severance pay, employee benefits, vacation pay, and
sick pay are not reflected on the Financial Statements. By the first sentence
of this paragraph, neither the Company nor the Shareholders undertake to
discharge or satisfy any such accruals which are not due and payable before
Closing, and such obligations which become due and payable after Closing are the
obligation of solely the Surviving Corporation, subject to the Shareholders'
obligations with respect to any breaches of warranty and/or representation
relating to the information with respect to such obligations set forth in
Schedule 2.8 including the Financial Statements and addenda annexed. The
Company is in compliance with all federal, state and local laws and regulations
respecting employment and employment practices, terms and conditions of
employment and wages and hours. The Company has not improperly characterized as
an independent contractor or consultant any individual who should have been
treated as an employee of the Company for tax withholding or any other purpose.
No employees of the Company are subject to any collective bargaining agreement.
2.21 EMPLOYEE BENEFIT PLANS.
(a) All Employee Benefit Plans (as defined below) of the Company have
been maintained in substantial compliance with the requirements of the Code and
ERISA (as defined below) and any regulations issued thereunder, including the
provisions of Part 6 of Title 1 of ERISA and Section 4980B of the Code to the
extent applicable.
(b) the Company does not maintain, contribute to, and is not obligated
to contribute to any pension plan subject to the provisions of Title IV of ERISA
(including any multiemployer plan).
(c) As of Closing, none of the assets of the Company will be subject
to any liens arising under ERISA or the Code, and the Company will not have any
liability in respect of any Employee Benefit Plan for which the Surviving
Corporation will be liable.
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(d) There is no written or oral employment agreement with any employee
or agent of the Company that is not terminable at will and without penalty, and
the Company has previously delivered to Transcend copies of all of its Employee
Benefit Plans and employee policy manuals of the Company, whether or not
delivered to any employee.
For purposes of this Agreement, the term "EMPLOYEE BENEFIT PLANS" shall mean all
----------------------
pension, retirement, profit sharing, deferred compensation, stock ownership,
stock purchase, stock option, restricted stock, bonus, severance or termination
pay, payroll practice, vacation, medical, hospital, life, health, accident,
disability, death, or other employee benefit plans or arrangements, including
(without limitation) any pension plan (within the meaning of Section 3(2) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and any
-----
welfare plan (within the meaning of Section 3(1) of ERISA), whether funded or
unfunded, whether formal or informal, whether written or unwritten, and whether
legally binding or not, covering any present or former employees, consultants,
officers or directors of the Company or to which the Company is or was a party
or bound or by which the Company otherwise may have any liability to any present
or former employee, consultant, officer or director of the Company.
2.22 OFFICERS, DIRECTORS AND KEY EMPLOYEES. Schedule 2.22 describes the
name and total annual compensation (and benefit costs) from the Company of each
officer and director of the Company. Similar information has been previously
furnished to Transcend for each other employee of the Company. Other than as
disclosed in Schedule 2.10, the Company has not made a commit ment or agreement
to increase the compensation. The Company has not made a commitment or
agreement to modify the conditions or terms of employment of any employee. No
employee has communicated to the Company or to any of its officers or directors
that such person intends to cancel or otherwise terminate such person's
relationship with the Company as a result of the consummation of the
transactions contemplated hereby.
2.23 RESTRICTIVE DOCUMENTS. Neither the Company nor any Shareholder is
subject to, or a party to, any charter, by-law, mortgage, lien, lease, license,
permit, agreement, contract, instrument, law, rule, ordinance, regulation,
order, judgment or decree, or any other restriction of any kind, unless
disclosed in this Agreement, including its annexed schedules, which materially
and adversely affects the business practices, operations or condition of the
Company or any of its assets or property, or which would prevent consummation of
the transactions contemplated by this Agreement, compliance by the Company with
the terms, conditions and provisions hereof, or the continued operation of the
Surviving Corporation's business after the Closing Date on substantially the
same basis as heretofore operated by the Company or which would restrict the
ability of the Surviving Corporation to acquire any property or conduct business
in any area.
2.24 FRANCHISES AND LICENSES. With the exception of those matters
addressed in Schedule 2.12, the Company possesses all franchises, concessions,
permits, licenses, orders, and other governmental authorizations and approvals
("PERMITS") required to permit the Company to carry on its business as it is
-------
presently being conducted. All such Permits described on Schedule 2.24
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annexed hereto, are in the name of the Company and are in full force and effect,
and no modification, termination, suspension or cancellation of any of them is
threatened. No such Permits prevent or prohibit the consummation of the
transactions contemplated hereby without modification thereof and without the
consent of the issuing authority but all such Permits may require reissuance
after notification to the issuing governmental authority after Closing.
2.25 TRANSACTIONS WITH AFFILIATED PARTIES. Except as described on Schedule
2.25 annexed hereto no Shareholder, nor any member of any Shareholder's
immediate family, nor any company or other entity controlled by any of the
foregoing (collectively "AFFILIATES" or individually an "AFFILIATE"): (a) has
---------- ---------
any ownership interest, directly or indirectly, in any competitor, supplier or
customer of the Company, (b) has any outstanding loan to or receivable in either
event to or from the Company, or (c) is a party to or has any interest in any
contract or agreement with the Company.
2.26 BANK ACCOUNTS AND POWERS OF ATTORNEY. Schedule 2.26 annexed hereto
contains an accurate and complete list showing (a) the name and address of each
bank in which the Company has an account or safe deposit box, the number of any
such account or any such box and the names of all persons authorized to draw
thereon or to have access thereto, and (b) the names of all persons, if any,
holding powers of attorney from the Company and a summary statement of the terms
thereof.
2.27 NO CHANGES PRIOR TO CLOSING DATE. During the period from the Balance
Sheet Date to and including the Closing Date, except as expressly contemplated
hereby or as described on Schedule 2.27, the Company will not have (a) incurred
any liability or obligation of any nature (whether accrued, absolute, contingent
or otherwise), except in the ordinary course of business, (b) permitted any of
its assets to be subjected to any mortgage, pledge, lien, security interest,
encumbrance, restriction or charge of any kind, (c) sold, transferred or
otherwise disposed of any assets except product inventory sold in the ordinary
course of business, (d) made any capital expenditure or commitment therefor, (e)
declared or paid any dividend or made any distribution on any shares of its
capital stock, or redeemed, purchased or otherwise acquired any shares of its
capital stock or granted or canceled any option, warrant or other right to
purchase or acquire any such shares, (f) made any bonus or profit sharing
distribution or similar payment of any kind, (g) increased its indebtedness for
borrowed money, or made any loan to any person, (h) except in the ordinary
course of business, consistent with past practices of the Company, made or
permitted any amendment or termination of any contract, agreement or license to
which the Company is a party or by which it or any of its assets and properties
are subject or bound, (i) entered into any agreement or arrangement granting any
preferential rights to purchase any of the Company's assets or properties or
requiring the consent of any party to the transfer and assignment of any of the
Company's assets or properties, (j) written off as uncollectible any notes or
accounts receivable, except write-offs in the ordinary course of business
charged to applicable reserves, none of which individually or in the aggregate
is material to the Company, (k) granted any increase in the rate of wages,
salaries, bonuses or other remuneration of any executive employee or other
employees, except in the ordinary course of business, (l) canceled or waived any
claims or rights of substantial value, (m) made any change in any method of
accounting or auditing practice, (n) otherwise conducted its business or entered
into any transaction, except in the usual and ordinary manner and in the
ordinary course of its business,
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or (o) agreed, whether or not in writing, to do any of the foregoing.
2.28 DISCLOSURE. Neither this Agreement, nor any Schedule, Exhibit or
certificate delivered in accordance with the terms hereof by or on behalf of the
Company or the Shareholders, or by any of the Company's directors or officers,
in connection with the transactions contemplated hereby, contains or will
contain any untrue statement of a material fact, or omits or will omit any
statement of a material fact necessary in order to make the statements contained
herein or therein not misleading. There is no fact known to the Company or any
Shareholder which materially and adversely affects the business, prospects
(financial or otherwise) or financial condition of the Company or its respective
properties or assets, which has not been set forth in this Agreement or in the
Schedules or Exhibits or certificates furnished in connection with the
transactions contemplated by this Agreement.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF TRANSCEND
As an inducement to the Company and the Shareholders to enter into this
Agreement and to consummate the transactions contemplated hereby, and with the
knowledge that the Company and the Shareholders shall rely thereon, Transcend
represents and warrants to the Company and the Shareholders the following (both
as of the Closing Date and as of the date hereof):
3.1 INCORPORATION AND QUALIFICATION. Transcend is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and has the corporate power and lawful authority to carry on its
business as now being conducted, and to own, lease and operate its properties
and assets as now owned, leased or operated by it. Transcend is duly qualified
or otherwise authorized to transact business and is in good standing in each
jurisdiction in which failure to be so qualified or authorized would have a
material adverse effect upon the business or assets of Transcend.
3.2 CERTIFICATE OF INCORPORATION AND BY-LAWS. Schedule 3.2 annexed hereto
contains true and complete copies of the Certificate of Incorporation of
Transcend, including all amendments thereto (certified by the Secretary of State
of Delaware), and By-Laws of Transcend, including all amendments thereto
(certified by its corporate Secretary), as in effect on the date hereof and such
By-Laws and Certificate of Incorporation will not be amended, rescinded or
otherwise modified between the date hereof and the Closing Date.
3.3 AUTHORITY OF TRANSCEND. Transcend has full power and legal capacity
to execute and deliver this Agreement and the other agreements required to be
executed and delivered by it hereunder (this Agreement and such other agreements
being herein called the "TRANSCEND DOCUMENTS") and to carry out the transactions
-------------------
contemplated hereby. The execution, delivery and
14
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performance of the Transcend Documents by Transcend have been duly authorized by
all necessary action on the part of Transcend. The Transcend Documents are
valid and binding agreements of Transcend enforceable against Transcend in
accordance with their respective terms, subject to applicable bankruptcy,
insolvency and similar laws affecting creditors' rights generally as well as
general principles of equity. Except as set forth in Schedule 3.3 annexed
hereto, no consent, authorization or approval of, or declaration, filing or
registration with, any governmental or regulatory authority, or any consent,
authorization or approval of any third party, is necessary in order to enable
Transcend to enter into and perform its obligations under the Transcend
Documents, and neither the execution and delivery of the Transcend Documents nor
the consummation of the transactions contemplated thereby will:
(a) conflict with, require any consent under, result in the violation
of, or constitute a breach of any provision of the Certificate of Incorporation
or By-Laws of Transcend;
(b) conflict with, require any consent under, result in the violation
of, constitute a breach of, or accelerate the performance required on the part
of Transcend by the terms of, any evidence of indebtedness or material agreement
to which Transcend is a party, in each case with or without notice or lapse of
time or both, or permit the termination of any such agreement by another person;
(c) result in the creation or imposition of any security interest,
lien, charge or other encumbrance upon, or restriction on the use of, any
property or assets of Transcend under any agreement or commitment to which
Transcend is bound;
(d) accelerate, constitute an event entitling, or which would, on
notice or lapse of time or both, entitle the holder of any indebtedness of
Transcend to accelerate the maturity of such indebtedness;
(e) conflict with or result in the breach of or violation of any writ,
judgment, order, injunction, decree or award of any court or governmental body
or agency or arbitration tribunal that is binding on Transcend; or
(f) constitute a violation by Transcend of any statute, law, or
regulation of any jurisdiction.
3.4 SEC FILINGS; FINANCIAL STATEMENTS.
(a) Transcend has delivered to the Company accurate and complete
copies (excluding copies of exhibits) of each report, registration statement (on
a form other than Form S-8) and definitive proxy statement filed by Transcend
with the United States Securities and Exchange Commission ("SEC") between
---
January 1, 1996, and the date of this Agreement (the "TRANSCEND SEC DOCUMENTS").
-----------------------
As of the time it was filed with the SEC (or, if amended or superseded by a
filing prior to the date of this Agreement, then on the date of such filing):
(i) each of the Transcend
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SEC Documents complied in all material respects with the applicable requirements
of the Securities Act of 1933 or the Exchange Act of 1934 (as the case may be);
and (ii) none of the Transcend SEC Documents contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(b) The consolidated financial statements contained in the Transcend
SEC Documents: (i) complied as to form in all material respects with the
published rules and regulations of the SEC applicable thereto; (ii) were
prepared in accordance with generally accepted accounting principles applied on
a consistent basis throughout the periods covered, except as may be indicated in
the notes to such financial statements and (in the case of unaudited statements)
as permitted by Form 10-Q of the SEC, and except that unaudited financial
statements may not contain footnotes and are subject to normal and recurring
year-end audit adjustments (which will not, individually or in the aggregate, be
material in magnitude); and (iii) fairly present the consolidated financial
position of Transcend as of the respective dates thereof and the consolidated
results of operations of Transcend for the periods covered thereby.
(c) Except as otherwise disclosed in the Transcend SEC documents or in
Schedule 3.4 attached hereto, since March 31, 1997, there has been no material
adverse change in the assets or liabilities, business, results of operations,
condition or prospects of Transcend.
3.5 VALID ISSUANCE. The Transcend Common Stock to be issued as Merger
Consideration will, when issued in accordance with the provisions of this
Agreement, be validly issued, fully paid and nonassessable.
3.6 PENDING ACTIONS. There are no actions, suits, claims or proceedings
pending, or to the knowledge of Transcend, threatened, against Transcend at law
or in equity or by any governmental agency or instrumentality, domestic or
foreign, which materially adversely affect or are likely to materially adversely
affect, (a) Transcend's financial condition, (b) Transcend's right or ability
to carry on its business substantially as now conducted, considering such
condition and business as being the condition and business of Transcend and its
subsidiary companies taken as a whole, or (c) Transcend's ability to consummate
the Merger and to perform its obligations to be performed hereunder.
3.7 RESTRICTIVE DOCUMENTS. Except as otherwise disclosed in the Transcend
SEC Documents, Transcend is not subject to, or a party to, any charter, by-law,
mortgage, lien, lease, license, permit, agreement, contract, instrument, law,
rule, ordinance, regulation, order, judgment or decree, or any other restriction
of any kind, which adversely affects the business practices, operations or
condition of Transcend or any of its assets or property, or which would prevent
consummation of the transactions contemplated by this Agreement, compliance by
Transcend with the terms, conditions and provisions hereof, or the continued
operation of the Surviving Corporation's business after the Closing Date on
substantially the same basis as heretofore operated by Transcend.
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SECTION 4. COVENANTS TO BE PERFORMED PRIOR TO THE CLOSING
The Company and the Shareholders covenant and agree that between the date
hereof and the Closing Date:
4.1 OPERATION IN ORDINARY COURSE. From the date hereof to the Closing
Date, the Shareholders shall cause the Company to, and the Company shall, (a)
conduct its business only in the ordinary course and in substantially the same
manner as conducted at the date hereof, (b) use its reasonable best efforts to
preserve its business organization intact and to retain the services of its
present officers, key employees, purchasing and sales personnel and
representatives, (c) use its reasonable best efforts to preserve favorable
relations with its employees, customers, suppliers and others having business
relations with it, (d) use its reasonable best efforts to comply with all laws,
ordinances and regulations applicable to it in the conduct of its business, (e)
not enter into, amend in any material respect or terminate any lease, contract
or agreement, and (f) conduct its business in such a manner that the
representations and warranties contained in Section 2 shall continue to be true
and correct on and as of the Closing Date as if made on and as of the Closing
Date.
4.2 NOTICE OF EVENTS. The Company and the Shareholders shall promptly
notify Transcend of (a) any event, condition or circumstance occurring from the
date hereof through the Closing Date that would constitute a violation or breach
of this Agreement, (b) any event, occur rence, transaction or other item which
would have been required to have been disclosed on any Schedule or statement
delivered hereunder, had such event, occurrence, transaction or item existed on
the date hereof, other than items arising in the ordinary course of business
which would not render any representation or warranty of the Company or the
Shareholders misleading, and (c) any lawsuits, claims, proceedings or
investigations which after the date hereof are threatened or commenced against
the Company or any officer, director, employee, consultant, agent or Shareholder
with respect to the affairs of the Company.
4.3 EXCLUSIVE DEALING. During the period from the date of this Agreement
to the Closing Date, the Shareholders shall not take, and the Shareholders shall
cause the Company to refrain from taking, any action to directly or indirectly
encourage, initiate or engage in discussions or negotiations with, or provide
any information to, any corporation, partnership, person, or other entity or
group, other than Transcend, the Company's landlords or other third party
expressly approved in writing by Transcend, concerning the merger of the Company
with any other entity, the purchase and sale of the assets and properties of the
Company, the purchase and sale of Company Common Stock, or any transaction
similar to the foregoing involving the Company.
4.4 EXAMINATIONS AND INVESTIGATIONS. Prior to the Closing Date, the
Company shall permit Transcend, through its employees and representatives,
including, without limitation, its counsel, Smith, Gambrell & Russell, LLP, and
Transcend's accountants, to make such investigation of the assets, properties,
business and operations of the Company, and such examination of the books,
records and financial condition of the Company as Transcend wishes. Any such
investigation
17
<PAGE>
and examination shall be conducted at reasonable times and under reasonable
circumstances and the Shareholders shall cause the Company to cooperate fully
therein. No investigation by Transcend shall diminish or obviate any of the
representations, warranties, covenants or agreements of the Company or the
Shareholders under this Agreement, or Transcend's rights under Section 8 of this
Agreement. If this Agreement terminates, Transcend, its employees and
representatives shall keep confidential and shall not use in any manner any
information or documents obtained from the Company concerning its assets,
properties, business and operations, including without limitation its customers
and employees, unless readily ascertainable from public or published
information, or trade sources, or subsequently developed by Transcend
independent of any investigation of the Company, or received from a third party
not under an obligation to the Company or the Shareholders to keep such
information confidential. If this Agreement terminates, any documents obtained
from the Company or the Shareholders shall be returned.
4.5 AFFILIATE INDEBTEDNESS OWED TO THE COMPANY. At or prior to the
Closing, the Shareholders shall, and shall cause each Affiliate to, pay to the
Company any amounts owed by such person to the Company and any amounts owed by
the Shareholders or any such Affiliate to any other person if such indebtedness
is guaranteed by, or secured by any of the assets or properties of the Company.
4.6 AFFILIATE INDEBTEDNESS OWED BY THE COMPANY. Any and all indebtedness
of the Company to the Shareholders, and any Affiliate and any director, officer
or employee of any of the foregoing (including all intercompany accounts) shall
be repaid or contributed to the capital of the Company as of the Closing Date.
4.7 ACCOUNTING TREATMENT OF TRANSACTION. The Shareholders shall cause the
Company to take, and the Company shall take, all actions necessary or
appropriate in or to qualify the Merger for "pooling of interests" treatment for
financial accounting purposes.
SECTION 5. CONDITIONS PRECEDENT TO THE OBLIGATION OF TRANSCEND TO CLOSE
The obligation of Transcend to enter into and complete the Merger is
subject, at Transcend's option, to the fulfillment on or prior to the Closing
Date of the following conditions, any one or more of which may be waived by
Transcend only in writing:
5.1 REPRESENTATIONS AND COVENANTS. The representations and warranties of
Transcend, the Company and the Shareholders contained in this Agreement shall be
true in all material respects on and as of the Closing Date with the same force
and effect as though made on and as of the Closing Date. The Company and the
Shareholders shall have performed and complied in all material respects with all
covenants and agreements required by this Agreement to be performed or complied
with by the Company and the Shareholders on or prior to the Closing Date. The
Company and the Shareholders shall deliver to Transcend a certificate dated the
Closing Date to such effect signed by an executive officer of the Company and
each Shareholder.
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5.2 LITIGATION. No action, suit or proceeding shall have been instituted
before any court or governmental or regulatory body, or instituted or threatened
by any governmental or regulatory body, to restrain, modify or prevent the
carrying out of the transactions contemplated by this Agreement or to seek
damages or a discovery order in connection with such transactions, or that has
or could reasonably be expected to have, in the opinion of Transcend, a
materially adverse effect on the assets, properties, business, operations or
financial condition of the Company.
5.3 GOVERNMENTAL PERMITS AND APPROVALS. All permits and approvals from
any governmental or regulatory body required for the lawful consummation of the
Closing and as required from requisite Delaware authorities and from the
Corporations Division of the Secretary of State of Washington for the continued
operation of the business of the Surviving Corporation shall have been obtained.
5.4 THIRD PARTY CONSENTS. All consents, permits, waivers and approvals
from parties to material contracts or other agreements with the Company or the
Shareholders, including, without limitation, the leases between the Company and
those lessors identified on Schedule 2.7 (the "LEASES"), that may be required in
------
connection with the performance by the Company or the Shareholders of their
respective obligations under this Agreement or the continuance of such contracts
or other agreements with the Surviving Corporation without material modification
after the Closing shall have been obtained (with satisfactory written evidence
thereof, and in recordable form where necessary, to be furnished to Transcend at
the Closing), provided that no such consent otherwise required pursuant to this
Section 5.4 shall be required in connection with any Lease of premises in the
event that the owner of such premises shall have agreed to enter into, with the
Surviving Corporation, contemporaneously with the Closing, a lease of such
premises satisfactory to Transcend in its sole discretion.
5.5 NO MATERIAL ADVERSE CHANGE. Prior to the Closing Date, there shall be
no material adverse change in the assets or liabilities, the business or
condition, (financial or otherwise) of the Company, its employees or customers
regardless of reason, including, but not limited, to those changes that are as a
result of any legislative or regulatory change, revocation of any license or
rights to do business, fire, explosion, accident, casualty, labor trouble,
flood, riot, storm, condemnation or act of God or other public force or
otherwise. The Company shall have delivered to Transcend a certificate, dated
the Closing Date, to such effect except for legislative and regulatory changes
enacted or promulgated by states other than Washington and Oregon.
5.6 EMPLOYMENT AGREEMENTS. Transcend and Terri Kaminski shall have
executed an Employment Agreement in substantially the form of Exhibit A-1 and
Transcend and John Kaminski shall have executed an Employment Agreement in
substantially the form of Exhibit A-2.
5.7 NON-COMPETE AGREEMENT. Simultaneously with the Closing of the
transactions contemplated hereby, each of the Shareholders shall have executed
and delivered to Transcend a Non-Competition Agreement in substantially the form
attached as Exhibit B hereto, with such variations as shall have been agreed to
by Transcend and each such Shareholder.
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5.8 SUBSCRIPTION AGREEMENT. Simultaneously with the Closing of the
transactions contemplated hereby, each of the Shareholders (other than Nancy
Gartner and Greg Hammock) shall have executed and delivered to Transcend a
Subscription Agreement in substantially the form attached as Exhibit C hereto.
5.9 GOOD STANDING CERTIFICATES, ETC. The Company and the Shareholders
shall have delivered all certified resolutions, certificates, documents or
instruments with respect to the Company's corporate existence and authority as
Transcend may have reasonably requested prior to the Closing Date.
5.10 PLEDGE AGREEMENTS. Simultaneously with the Closing of the
transactions contemplated hereby, each Shareholder (other than Nancy Gartner and
Greg Hammock) shall have executed and delivered to Transcend a Pledge Agreement
in substantially the form attached as Exhibit D, whereby such Shareholder grants
to Transcend a security interest in the following numbers of shares of Transcend
Common Stock:
Shareholder Number of Shares
----------- ----------------
Terri Kaminski 25,488
John Kaminski 25,488
Barbara Shelman 3,256
Amie Clark 6,646
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Total 60,878
------
SECTION 6. CONDITIONS PRECEDENT TO THE OBLIGATION OF THE COMPANY AND THE
SHAREHOLDERS TO CLOSE
The obligation of the Company and the Shareholders to enter into and
complete the Merger is subject, at the Shareholders' option, to the fulfillment
of the following conditions, any one or more of which may be waived by the
Shareholders only in writing:
6.1 REPRESENTATIONS AND COVENANTS. The representations and warranties of
Transcend contained in this Agreement shall be true in all material respects on
and as of the Closing Date with the same force and effect as though made on and
as of the Closing Date. Transcend shall have performed and complied with in all
material respects all covenants and agreements required by this Agreement to be
performed or complied with by them on or prior to the Closing Date. Transcend
shall deliver to the Shareholders a certificate dated the Closing Date to such
effect signed by an executive officer of Transcend.
6.2 LITIGATION. No action, suit or proceeding shall have been instituted
before any court or governmental or regulatory body, or instituted or threatened
by any governmental or regulatory body, to restrain, modify or prevent the
carrying out of the transactions contemplated hereby, or to seek damages or a
discovery order in connection with such transaction, or that has or could
20
<PAGE>
reasonably be expected to have, in the opinion of the Shareholders, a materially
adverse effect on the assets, properties, business, operations or financial
condition of Transcend.
6.3 GOVERNMENTAL PERMITS AND APPROVALS. All permits and approvals from
any governmental or regulatory body required for the lawful consummation of the
Closing and the continued operation of the business of the Surviving Corporation
shall have been obtained.
6.4 RESOLUTIONS. There shall have been delivered to the Shareholders a
copy of the resolutions duly adopted by the board of directors of Transcend,
certified accurate by an executive officer of Transcend as of the Closing Date,
authorizing and approving the execution and delivery by Transcend of this
Agreement, and the consummation by Transcend of the transactions contemplated
hereby.
6.5 GOOD STANDING CERTIFICATES, ETC. Transcend shall have delivered all
such certified resolutions, certificates, documents or instruments with respect
to the corporate existence and authority of Transcend as Shareholders' various
counsel may have reasonably requested prior to the Closing Date.
6.6 EMPLOYMENT AGREEMENTS. Transcend and Terri Kaminski shall have
executed an Employment Agreement in substantially the form of Exhibit A-1 and
Transcend and John Kaminski shall have executed an Employment Agreement in
substantially the form of Exhibit A-2.
6.7 NON-COMPETE AGREEMENTS. Simultaneously with the Closing of the
transactions contemplated hereby, Transcend shall have executed and delivered to
each Shareholder a Non-Competition Agreement in substantially the form attached
as Exhibit B, with such variations as shall have been agreed to by Transcend and
each such Shareholder.
6.8 NO MATERIAL ADVERSE CHANGE. Prior to the Closing Date, there shall be
no material adverse change in the assets or liabilities, the business or
condition (financial or otherwise), of Transcend, its employees or customers
regardless of reason, including, but not limited to those changes that are as a
result of any legislative or regulatory change, revocation of any license or
rights to do business, fire, explosion, accident, casualty, labor trouble,
flood, riot, storm, condemnation or act of God or public force or otherwise.
Transcend shall have delivered to the Company a certificate dated the Closing
Date to such effect.
SECTION 7. ACTIONS TO BE TAKEN AT THE CLOSING
The following actions shall be taken at the Closing, each of which shall be
conditioned on completion of all the others and all of which shall be deemed to
have taken place simultaneously:
7.1 MERGER CONSIDERATION. Transcend (i) shall deliver to each
Shareholder the shares of Transcend Common Stock, if any, to be issued at
Closing to such Shareholder in accordance with the terms of Sections 1.5 and 1.7
of this Agreement, (ii) shall deliver to such Shareholder the Note
Consideration, if any, to be issued at Closing to such Shareholder in accordance
with the terms of Sections 1.5 and 1.7 of this Agreement, (iii) shall pay to
such Shareholder by cashier's check or by
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wire transfer the Cash Consideration, if any, payable at Closing to such
Shareholder in accordance with the terms of Sections 1.5 and 1.7 of this
Agreement, and (iv) shall pay to such Shareholder by cashier's check or by wire
transfer the cash payment (aggregating $49,866.66 for all Shareholders) due such
Shareholder at Closing under the Non-Competition Agreements.
7.2 OPINION OF COUNSEL TO THE SHAREHOLDERS. The Shareholders shall
deliver to Transcend an opinion of Reaugh Fischnaller & Oettinger, P.S., counsel
to the Company and the Majority Shareholders, dated the Closing Date, in form
and substance reasonably satisfactory to counsel for Transcend.
7.3 OPINION OF COUNSEL TO TRANSCEND. Transcend shall deliver to the
Company and the Shareholders an opinion of Smith, Gambrell & Russell, LLP,
counsel to Transcend, dated the Closing Date, in form and substance reasonably
satisfactory to the various counsel for the Shareholders.
7.4 CLOSING CERTIFICATE OF THE COMPANY AND THE SHAREHOLDERS. The Company
and the Shareholders shall deliver to Transcend a closing certificate signed by
the Company and the Shareholders, dated the Closing Date, in a form reasonably
satisfactory to Transcend.
7.5 CLOSING CERTIFICATE OF TRANSCEND. Transcend shall deliver to the
Shareholders a closing certificate signed by executive officers of Transcend,
dated the Closing Date, in a form reasonably satisfactory to the Shareholders.
7.6 OTHER DOCUMENTS AND CERTIFICATES. Transcend, the Company and the
Shareholders shall deliver certificates, agreements, permits, approvals and
other documents reasonably requested by counsel for such other parties to
satisfy, or to evidence the satisfaction of, as the case may be, the conditions
precedent to Closing set forth in Sections 5 and 6.
7.7 CERTIFICATES OF MERGER. The parties shall execute, deliver and cause
to be filed certificates of merger as contemplated in Section 1.3 hereof.
SECTION 8. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION
8.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All of the
representations and warranties of the Company, the Shareholders and Transcend
contained in this Agreement shall survive the Closing for a period of one year
from the Closing Date, with the following exceptions:
(a) the representations and warranties of the Company and the
Shareholders in Sections 2.1, 2.2, 2.3 and 2.7, and of Transcend in Sections
3.1, 3.2, 3.3 and 3.5 shall survive indefinitely; and
(b) the representations and warranties of the Company and the
Shareholders in Sections 2.12, 2.20 and 2.21 shall survive until 90 days
following expiration of the statutes of limitation applicable to any third party
claim (including claims of government agencies) alleging
22
<PAGE>
facts which would constitute a breach of such representations and warranties.
The expiration of a representation or warranty pursuant to the foregoing shall
not affect any claim for breach of such representation, provided the party
--------
making such claim has given good faith notice of such claim in accordance with
this Section 8 prior to the date of expiration.
8.2 SHAREHOLDERS' INDEMNITY AGREEMENT. Subject to the provisions of
Section 8.4 hereof, the Shareholders, jointly and severally, shall defend,
indemnify and hold harmless Transcend and the Surviving Corporation (and their
respective directors, officers, employees, agents, affiliates, successors and
assigns) from and against any and all direct or indirect requests, demands,
claims, payments, defenses, obligations, recoveries, deficiencies, fines,
penalties, interest, assessments, actions, liens, causes of action, suits,
proceedings, judgments, losses, damages (including without limitation punitive,
exemplary or consequential damages, lost income and profits, interruptions of
business and diminution in the value of the Surviving Corporation), liabilities,
costs, and expenses of any kind (including without limitation (i) interest,
penalties and reasonable attorneys' fees and expenses, (ii) attorneys' fees and
expenses necessary to enforce their rights to indemnification hereunder, and
(iii) consultants' fees and other costs of defending or investigating any claim
hereunder), and interest on any amount payable as a result of the foregoing,
whether accrued, absolute, contingent, known, unknown, or otherwise as of the
Closing Date or thereafter asserted against, imposed upon or incurred by
Transcend, the Surviving Corporation or any of their respective directors,
officers, employees, agents, affiliates, successors or assigns (a "LOSS OF
-------
TRANSCEND") by reason of, resulting from, arising out of, based upon, awarded or
- ---------
asserted against in respect of or otherwise in respect of:
(a) any breach of any representation or warranty contained in this
Agreement or any misrepresentation in or omission on the part of the Company or
any Shareholder contained in any certificate furnished or to be furnished to
Transcend by the Company or any Shareholder pursuant to this Agreement;
(b) any breach or nonfulfillment on the part of the Company or any
Shareholder of any covenant contained in this Agreement;
(c) the failure of the Surviving Corporation to collect any accounts
receivable of the Company existing on the Closing Date, net of the reserve for
bad debts, if any, set forth in the Financial Statements, within 180 days
following the Closing Date; provided that upon receipt of full payment from the
--------
Shareholders, the Surviving Corporation shall reassign to the Shareholders any
such account receivable;
(d) any federal, state, local or foreign taxes, including any interest
and penalties thereon, due from the Company or the Shareholders with respect to
any period prior to the Closing Date, other than amounts accrued therefor on the
Financial Statements, including amounts due, if any, with respect to the
transactions contemplated herein; or
(e) the failure of the Northwest Region Division of the Surviving
Corporation to generate a net operating contribution, before taxes, interest,
one time new customer charges,
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depreciation, legal and accounting fees, capital equipment purchases, and
relocation charges, for the period commencing on April 1, 1997, and continuing
through and including July 31, 1997 (the "NORTHWEST REGION NET OPERATING
------------------------------
CONTRIBUTION"), of at least the amount by which the sum paid by Transcend at
- ------------
Closing to satisfy the Company's indebtedness to U.S. Bank of Washington exceeds
the sum of $250,000 (such excess referred to herein as the "EXCESS BANK CLOSING
-------------------
PAYMENT").
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8.3 INDEMNITY AGREEMENT OF TRANSCEND AND THE SURVIVING CORPORATION.
Transcend and the Surviving Corporation shall indemnify and hold harmless the
Shareholders (and their respective successors and assigns) from and against any
and all direct or indirect requests, demands, claims, payments, defenses,
obligations, recoveries, deficiencies, fines, penalties, interest, assessments,
actions, liens, causes of action, suits, proceedings, judgments, losses, damages
(including without limitation punitive, exemplary or consequential damages and
lost income and profits and interruptions of business), liabilities, costs, and
expenses of any kind (including without limitation (a) interest, penalties and
reasonable attorneys' fees and expenses, (b) attorneys' fees and expenses
necessary to enforce their rights to indemnification hereunder, and (c)
consultants' fees and other costs of defending or investigating any claim
hereunder, and interest on any amount payable as a result of the foregoing)
whether accrued, absolute, contingent, known, unknown or otherwise as of the
Closing Date or thereafter asserted against, imposed upon or incurred by the
Shareholders or their respective successors, representatives or assigns, (a
"LOSS OF SHAREHOLDERS") by reason of, resulting from, arising out of, based
- ---------------------
upon, awarded or asserted against in respect of or otherwise in respect of any
breach of any representation or warranty or nonfulfillment of any covenant or
agreement on the part of Transcend or the Surviving Corporation contained in
this Agreement, or any misrepresentation in or omission from or nonfulfillment
of any covenant on the part of Transcend or the Surviving Corporation contained
in any certificate furnished or to be furnished to the Shareholders by Transcend
or the Surviving Corporation pursuant to this Agreement.
8.4 INDEMNIFICATION PROCEDURE.
(a) Upon obtaining knowledge thereof, the party to be indemnified
hereunder (the "INDEMNITEE") shall promptly notify the indemnifying party
----------
hereunder (the "INDEMNITOR") in writing of any damage, claim, loss, liability or
----------
expense or other matter which the Indemnitee has determined has given or could
give rise to a claim for which indemnification rights are granted hereunder
(such written notice referred to as the "NOTICE OF CLAIM"). The Notice of Claim
---------------
shall specify, in all reasonable detail, the nature and estimated amount of any
such claim giving rise to a right of indemnification, to the extent the same can
reasonably be estimated. Any failure on the part of an Indemnitee to give
timely notice to the Indemnitor of a claim shall not affect the right of the
Indemnitee to obtain indemnification from the Indemnitor with respect to such
claim unless the Indemnitor is actually harmed by such failure to timely notify,
and only to the extent of such actual harm.
(b) With respect to any matter set forth in a Notice of Claim relating
to a third party claim the Indemnitor shall defend, in good faith and at its
expense, any such claim or demand, and the Indemnitee, at its expense, shall
have the right to participate in the defense of any such third party claim. So
long as Indemnitor is defending, in good faith, any such third party claim, the
Indemnitee shall not settle or compromise such third party claim. The
Indemnitee shall make
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available to the Indemnitor or its representatives all records and other
materials reasonably required by them for use in contesting any third party
claim and shall cooperate fully with the Indemnitor in the defense of all such
claims. If the Indemnitor does not defend any such third party claim or if the
Indemnitor does not provide the Indemnitee with prompt and reasonable assurances
that the Indemnitor will satisfy the third party claim, the Indemnitee may, at
its option, elect to defend any such third party claim, at the Indemnitor's
expense. An Indemnitor may not settle or compromise any claim without obtaining
a full and unconditional release of the Indemnitee, unless the Indemnitee
consents in writing to such settlement or compromise. Notwithstanding the
foregoing, if there is a reasonable probability that a third party claim for
which Transcend and the Surviving Corporation has indemnification rights against
the Shareholders hereunder will materially and adversely affect Transcend or the
Surviving Corporation other than as a result of money damages or other payments,
Transcend or the Surviving Corporation shall be entitled to conduct the defense
of such claim at the Shareholders' expense.
8.5 SET-OFF. Transcend and the Surviving Corporation shall have the right
to set-off and apply against all amounts due and owing any Shareholder under
this Agreement and the Non-competition Agreement with such Shareholder all sums
in respect of which such Shareholder may be liable pursuant to Section 8.2
hereof, such right of set-off to be in addition to and not in lieu of or an
election against any and all other remedies available to Transcend and the
Surviving Corporation under this Agreement or at law or in equity.
8.6 LIMITATIONS ON INDEMNIFICATION.
(a) Notwithstanding the provisions of Section 8 of this Agreement,
neither party (with Transcend and the Surviving Corporation being considered one
party and the Shareholders being considered the other party) shall be entitled
to claim, receive or collect, and the other party shall not be obligated to pay
or defend against, any Loss of Transcend (in the case of Transcend and the
Surviving Corporation) or any Loss of Shareholders (in the case of the
Shareholders), except to the extent that the Loss of Transcend or Loss of
Shareholders, as the case may be, exclusive in either case of the costs and
expenses of collection, including attorneys' fees and expenses, exceeds $10,000
(the "BASKET"), at which time the aggrieved party shall be entitled to claim,
------
receive or collect, and the other party shall be obligated to pay or defend
against, all Losses of Transcend or Losses of Shareholders, as the case may be,
back to the first dollar of the Basket. Thereafter, the Basket shall no longer,
as to claims made by such aggrieved party, apply, and Losses of Transcend or
Losses of Shareholders, as the case may be, may be asserted as they are incurred
without reference to the Basket; provided, however, that the limitation
contained in this paragraph (a) shall not apply to any Loss of Transcend arising
by reason of the circumstances set forth in Section 8.2 (e) above, it being the
understanding and agreement of the parties that the Shareholders' obligation
under said Section 8.2 (e) hereof shall be to pay the Surviving Corporation,
subject only to the limitation with respect to Minority Shareholders set forth
in paragraph (b) of this Section 8.6, the amount, if any, by which the Excess
Bank Closing Payment exceeds the Northwest Region Net Operating Contribution.
(b) The liability of each Minority Shareholder under this Section 8
shall be limited to an amount equal to the aggregate sum of the Cash
Consideration, the face amount of the
25
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Notes Consideration and shares of Transcend Common Stock (valued at the same
price per share as was applicable on the Closing Date, regardless of fluctuation
in market price subsequent to the Closing Date) paid or payable, whether or not
due, to such Minority Shareholder by Transcend or the Surviving Corporation
pursuant to this Agreement and the Non-competition Agreement with such Minority
Shareholder, plus the costs and expenses of collection from or enforcement
against such Minority Shareholder, including attorneys' fees and expenses.
SECTION 9. TERMINATION OF AGREEMENT
9.1 TERMINATION. This Agreement may be terminated prior to the Closing as
follows:
(a) at the election of the Company, if any one or more of the
conditions to the obligations of Transcend to close has not been fulfilled as of
the Closing Date, or if Transcend has breached any representation, warranty,
covenant or agreement contained in this Agreement;
(b) at the election of Transcend, if any one or more of the conditions
to its obligations to close has not been fulfilled as of the Closing Date, or if
the Company or the Shareholders have breached any representation, warranty,
covenant or agreement contained in this Agreement;
(c) at the election of the Company or Transcend, if any legal
proceeding is commenced or threatened by any governmental or regulatory body or
other person directed against the consummation of the Closing or any other
transaction contemplated under this Agreement and either the Company or
Transcend, as the case may be, reasonably and in good faith deem it impractical
or inadvisable to proceed in view of such legal proceeding or threat thereof; or
(d) at any time on or prior to the Closing Date, by mutual written
consent of the parties hereto.
9.2 SURVIVAL. If this Agreement is terminated pursuant to Section 9.1,
this Agreement shall become void and of no further force and effect, except for
the provisions of Section 4.4 relating to the obligation of Transcend to keep
certain information confidential, Section 10.1 (relating to publicity), Section
10.4 (relating to expenses), and Section 10.5 (relating to indemnification of
brokerage), and none of the parties hereto shall have any liability in respect
of such termination, except that any party shall be liable to the extent that
failure to satisfy the conditions of Sections 5, 6 or 7 results from such
party's acting in bad faith or from the intentional or willful violation of the
representations, warranties, covenants or agreements of such party under this
Agreement.
SECTION 10. MISCELLANEOUS
10.1 PUBLICITY. Except as otherwise required by law or stock exchange
rules, prior to Closing none of the parties hereto shall issue any press release
or make any other public statement, in each case relating to or in connection
with or arising out of this Agreement or the matters
26
<PAGE>
contained herein, without obtaining the prior written approval of all parties
hereto as to the contents and manner of presentation and publication thereof.
10.2 KNOWLEDGE. Where any representation or warranty contained in this
Agreement is expressly qualified by reference to the knowledge, information or
belief of the Company or the Shareholders, the Company and the Majority
Shareholders confirm that such party has made due and diligent inquiry as to the
matters that are the subject of such representations and warranties.
10.3 GENDER. All pronouns and any variations thereof refer to the
masculine, feminine or neuter, singular or plural, as the identity of the person
or persons may require.
10.4 EXPENSES. The parties hereto shall pay their own respective
expenses, including the fees and disbursements of their respective counsel in
connection with the negotiation, preparation and execution of this Agreement
and the consummation of the transactions contemplated hereby ("MERGER
------
EXPENSES"). The Company shall pay the Merger Expenses of the Company and the
- --------
Shareholders up to $16,500. Any Merger Expenses of the Company or the
Shareholders in excess of such $16,500 limit shall be borne exclusively by the
Shareholders.
10.5 BROKERAGE COMMISSIONS AND FINDER'S FEES. Each of the parties
represents and warrants to the others that such party has not hired, retained or
dealt with any broker, finder or investment banker or in connection with the
transactions contemplated by this Agreement, and will defend, indemnify and hold
the other parties harmless from and against any and all claims for finder's fees
or brokerage or other commissions which may at any time be asserted against any
of such other parties founded upon a claim which is inconsistent with the
aforesaid representation and warranty of the indemnifying party, together with
any and all losses, damages, costs and expenses (including reasonable attorneys'
fees) relating to such claims or arising therefrom or incurred by the
indemnified party in connection with the enforcement of this indemnification
provision.
10.6 ENTIRE AGREEMENT. This Agreement, including all schedules and
exhibits hereto, constitutes the entire agreement of the parties with respect to
the subject matter hereof, supersedes all prior agreements, negotiations or
letters of intent, and may not be modified, amended or terminated except by a
written instrument specifically referring to this Agreement signed by each of
the parties hereto.
10.7 WAIVERS AND CONSENTS. All waivers and consents given hereunder shall
be in writing. No waiver by any party hereto of any breach or anticipated
breach of any provision hereof by any other party shall be deemed a waiver of
any other contemporaneous, preceding or succeeding breach or anticipated breach,
whether or not similar, on the part of the same or any other party.
10.8 NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed to have been given only if and when (i) personally
delivered or (ii) three (3) business days after mailing, postage prepaid, by
certified mail or (iii) when delivered (as evidenced by a receipt) by a
nationally recognized overnight delivery service, or (iv) by facsimile (as
evidenced by written confirmation of transmission and receipt) addressed in each
case as follows:
27
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(a) If to the Company or the Majority Shareholders:
10305 Manitou Beach Road
Bainbridge Island, Washington 98110
with a copy in like manner to:
Reaugh Fischnaller & Oettinger, P.S.
2001 6th Avenue, Suite 3000
Seattle, Washington 98121-2573
Attention: Richard Oettinger, Esq.
If to the Minority Shareholders:
Amie Clark
5605 Kootenai
Boise, Idaho 83705
Nancy Gartner
1923 SW 368th Place
Federal Way, Washington 98003
Greg Hammock
4808 D Street NE
Auburn, Washington 98002
Barbara Shelman
50 Oak Park Drive SW
Tacoma, Washington 98499
(b) If to Transcend or the Surviving Corporation, to:
Transcend Services, Inc.
3353 Peachtree Road, N.E.
Suite 1000
Atlanta, Georgia 30326
with a copy in like manner to:
28
<PAGE>
Smith, Gambrell & Russell, LLP
3343 Peachtree Road
Suite 1800
Atlanta, Georgia 30326
Attention: Richard G. Greenstein, Esq.
Each party may change its address for the giving of notices and communications
to it, and/or copies thereof, by written notice to the other parties in
conformity with the foregoing.
10.9 RIGHTS OF THIRD PARTIES. All conditions of the obligations of the
parties hereto, and all undertakings herein, are solely and exclusively for the
benefit of the parties hereto, the Surviving Corporation and their respective
successors and assigns, and no other person or entity shall have standing to
require satisfaction of such conditions or to enforce such undertakings in
accordance with their terms, or be entitled to assume that any party hereto will
refuse to consummate the purchase and sale contemplated hereby in the absence of
strict compliance with any or all thereof, and no other person or entity shall,
under any circumstances, be deemed a beneficiary of such conditions or
undertakings, any or all of which may be freely waived in whole or in part, by
mutual consent of the parties hereto at any time, if in their sole discretion
they deem it desirable to do so.
10.10 HEADINGS. The Table of Contents and Section headings contained in
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement.
10.11 GOVERNING LAW. The interpretation and construction of this
Agreement, and all matters relating hereto, shall be governed by the laws of
the state of Georgia.
10.12 JURISDICTION. Any judicial proceeding brought against any of the
parties to this Agreement on any dispute arising out of this Agreement or any
matter related hereto may be brought, at the election of the party bringing the
proceeding, in the courts of either Georgia or Washington, or in the United
States District Court for either the Northern District of Georgia or the Western
District of Washington, and, by execution and delivery of this Agreement, each
of the parties to this Agreement accepts for himself, herself or itself the
exclusive jurisdiction of the aforesaid courts, and irrevocably agrees to be
bound by any judgment rendered thereby in connection with this Agreement.
10.13 PARTIES IN INTEREST. After the Closing, Transcend and the Surviving
Corporation may transfer and assign this Agreement and all other agreements and
instruments to be entered into at the Closing, and its rights hereunder and
thereunder to any purchaser of, or other successor to, the business or assets of
the Surviving Corporation. Except as expressly stated above, this Agreement may
not be transferred, assigned, pledged or hypothecated by any party hereto, other
than by operation of law or with the consent of the other parties. This
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective heirs, executors, administrators, successors and
permitted assigns.
29
<PAGE>
10.14 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, all of which taken together shall constitute one instrument.
10.15 SEVERABILITY. In case any provision in this Agreement shall be held
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions hereof will not in any way be affected or impaired
thereby.
10.16 ARBITRATION.
(a) Any controversy or claim arising out of or relating to this
Agreement, the agreements to be entered into between or among the parties hereto
pursuant to this Agreement or the transactions contemplated hereby and thereby,
shall be submitted to and be finally resolved by arbitration in Minneapolis,
Minnesota, pursuant to the provisions of the United States Arbitration Act (9
U.S.C. (S) 1 et seq.), to be conducted by the American Arbitration Association
("AAA"), in accordance with the AAA's Commercial Arbitration Rules then in
effect. Each party hereby irrevocably agrees that service of process, summons,
notices or other communications related to the arbitration procedure shall be
deemed served and accepted by the other party if given in accordance with
Section 10.8. The arbitrators shall render a judgment of default against any
party who fails to appear in a properly noticed arbitration proceeding. The
arbitration shall be conducted by a panel of three arbitrators selected pursuant
to AAA Rules. Any award or decision rendered in such arbitration shall be final
and binding on both parties, and judgment may be entered thereon in any court of
competent jurisdiction if necessary.
(b) Notwithstanding subsection (a) above to the contrary, any party
may seek temporary or preliminary injunctive relief against the other party in
any court or proper jurisdiction as defined in Section 10.12 hereof with respect
to any and all preliminary injunctive or restraining procedures pertaining to
this Agreement or the breach thereof, pending the outcome of any arbitration
proceeding.
IN WITNESS WHEREOF, the parties have executed this Agreement under seal as of
the date first above written.
Transcend:
---------
TRANSCEND SERVICES, INC.
By: /s/ David W. Murphy
-------------------
Title: CFO
[CORPORATE SEAL]
Company:
-------
30
<PAGE>
DOCUMEDX, INC.
By: /s/ Terri Kaminski
------------------
Title: President
By: /s/ John Kaminski
-----------------
Title: Secretary
Shareholders:
------------
MAJORITY SHAREHOLDERS
/s/ Terri Kaminski (L.S.)
------------------
Terri Kaminski
/s/ John Kaminski (L.S.)
-----------------
John Kaminski
MINORITY SHAREHOLDERS
/s/ Amie Clark, by Terri Kaminski (L.S.)
---------------------------------
Amie Clark, by Terri Kaminski,
her attorney-in-fact
/s/ Nancy Gartner (L.S.)
---------------------------------
Nancy Gartner
/s/ Greg Hammock (L.S.)
---------------------------------
Greg Hammock
/s/ Barbara Shelman (L.S.)
---------------------------------
Barbara Shelman
31
<PAGE>
- --------------------------------------------------------------------------------
COAST
LOAN AND SECURITY AGREEMENT
BORROWER: TRANSCEND SERVICES, INC.
ADDRESS: 3353 PEACHTREE ROAD, N.E., SUITE 1000
ATLANTA, GEORGIA 30326
DATE: APRIL 3, 1997
THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between COAST
BUSINESS CREDIT, a division of Southern Pacific Thrift & Loan Association
("Coast"), a California corporation, with offices at 12121 Wilshire Boulevard,
Suite 1111, Los Angeles, California 90025, and the borrower named above (the
"Borrower"), whose chief executive office is located at the above address
("Borrower's Address"). The Schedule to this Agreement (the "Schedule") shall
for all purposes be deemed to be a part of this Agreement, and the same is an
integral part of this Agreement. (Definitions of certain terms used in this
Agreement are set forth in Section 8 below.)
1. LOANS.
1.1 LOANS. Coast will make loans to Borrower (the "Loans"), in amounts
determined by Coast in its good faith discretion, up to the amounts (the "Credit
Limit") shown on the Schedule, provided no Default or Event of Default has
occurred and is continuing.
1.2 INTEREST. All Loans and all other monetary Obligations shall bear
interest at the rate shown on the Schedule, except where expressly set forth to
the contrary in this Agreement. Interest shall be payable monthly, on the last
day of the month. Interest may, in Coast's discretion, be charged to Borrower's
loan account, and the same shall thereafter bear interest at the same rate as
the other Loans. Regardless of the amount of Obligations that may be
outstanding from time to time, Borrower shall pay Coast minimum monthly interest
during the term of this Agreement with respect to the Loans in the amount set
forth on the Schedule (the "Minimum Monthly Interest").
1.3 FEES. Borrower shall pay Coast the fee(s) shown on the Schedule, which
are in addition to all interest and other sums payable to Coast and are not
refundable.
1.4 [INTENTIONALLY OMITTED]
2. SECURITY INTEREST.
2.1 SECURITY INTEREST. To secure the payment and performance of all of the
Obligations when due, Borrower hereby grants to Coast a security interest in all
of Borrower's interest in the following, whether now owned or hereafter
acquired, and wherever located: All Receivables, Inventory, Equipment, and
General Intangibles, including, without limitation, all of Borrower's Deposit
Accounts, and all money, and all property now or at any time in the future in
Coast's possession (including claims and credit balances), and all proceeds of
any of the foregoing (including proceeds of any insurance policies, proceeds of
proceeds, and claims against third parties), all products of any of the
foregoing, and all books and records
1
<PAGE>
related to any of the foregoing (all of the foregoing, together with all other
property in which Coast may now or in the future be granted a lien or security
interest, is referred to herein, collectively, as the "Collateral").
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER. In order to
induce Coast to enter into this Agreement and to make Loans, Borrower represents
and warrants to Coast as follows, and Borrower covenants that the following
representations will continue to be true, and that Borrower will at all times
comply with all of the following covenants:
3.1 CORPORATE EXISTENCE AND AUTHORITY. Borrower, if a corporation, is and
will continue to be, duly organized, validly existing and in good standing under
the laws of the jurisdiction of its incorporation. Borrower is and will
continue to be qualified and licensed to do business in all jurisdictions in
which any failure to do so would have a material adverse effect on Borrower.
The execution, delivery and performance by Borrower of this Agreement, and all
other documents contemplated hereby (i) have been duly and validly authorized,
(ii) are enforceable against Borrower in accordance with their terms (except as
enforcement may be limited by equitable principles and by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to creditors'
rights generally), and (iii) do not violate Borrower's articles or certificate
of incorporation, or Borrower's by-laws, or any law or any material agreement or
instrument which is binding upon Borrower or its property, and (iv) do not
constitute grounds for acceleration of any material indebtedness or obligation
under any material agreement or instrument which is binding upon Borrower or its
property.
3.2 NAME; TRADE NAMES AND STYLES. The name of Borrower set forth in the
heading to this Agreement is its correct name. Listed on the Schedule are all
prior names of Borrower and all of Borrower's present and prior trade names.
Borrower shall give Coast 30 days' prior written notice before changing its name
or doing business under any other name. Borrower has complied, and will in the
future comply, with all laws relating to the conduct of business under a
fictitious business name.
3.3 PLACE OF BUSINESS; LOCATION OF COLLATERAL. The address set forth in the
heading to this Agreement is Borrower's chief executive office. In addition,
Borrower has places of business and Collateral is located only at the locations
set forth on the Schedule. Borrower will give Coast at least 30 days prior
written notice before opening any additional place of business, changing its
chief executive office, or moving any of the Collateral to a location other than
Borrower's Address or one of thelocations set forth on the Schedule.
3.4 TITLE TO COLLATERAL; PERMITTED LIENS. Borrower is now, and will at all
times in the future be, the sole owner of all the Collateral, except for items
of Equipment which are leased by Borrower. The Collateral now is and will
remain free and clear of any and all liens, charges, security interests,
encumbrances and adverse claims, except for Permitted Liens. Coast now has, and
will continue to have, a first-priority perfected and enforceable security
interest in all of the Collateral, subject only to the Permitted Liens, and
Borrower will at all times defend Coast and the Collateral against all claims of
others. None of the Collateral now is or will be affixed to any real property
in such a manner, or with such intent, as to become a fixture. Borrower is not
and will not become a lessee under any real property lease pursuant to which the
lessor may obtain any rights in any of the Collateral and no such lease now
prohibits, restrains, impairs or will prohibit, restrain or impair Borrower's
right to remove any Collateral from the leased premises. Whenever any
Collateral is located upon premises in which any third party has an interest
(whether as owner, mortgagee, beneficiary under a deed of trust, lien or
otherwise), Borrower shall, whenever requested by Coast, use its best efforts to
cause such third party to execute and deliver to Coast, in form acceptable to
Coast, such waivers and subordinations as Coast shall specify, so as to ensure
that Coast's rights in the Collateral are, and will continue to be, superior to
the rights of any such third party. Borrower will keep in full force and
effect, and will comply with all the terms of, any lease of real property where
any of the Collateral now or in the future may be located.
3.5 MAINTENANCE OF COLLATERAL. Borrower will maintain the Collateral in good
working condition, and Borrower will not use the Collateral for any unlawful
purpose. Borrower will immediately advise Coast in writing of any material loss
or damage to the Collateral.
3.6 BOOKS AND RECORDS. Borrower has maintained and will maintain at
Borrower's Address complete and accurate books and records, comprising an
accounting system in accordance with generally accepted accounting principles.
3.7 FINANCIAL CONDITION, STATEMENTS AND REPORTS. All financial statements
now or in the future delivered to Coast have been, and will be, prepared in
conformity with generally accepted accounting principles (except, in the case of
unaudited financial statements, for the absence of footnotes and subject to
normal year-end adjustments) and now and in the future will fairly reflect the
financial condition of Borrower on a consolidated basis, at the times and for
the periods therein stated. Between the last date
2
<PAGE>
covered by any such statement provided to Coast and the date hereof, there has
been no material adverse change in the financial condition or business of
Borrower. Borrower is now and will continue to be solvent.
3.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. Borrower has timely
filed, and will timely file, all tax returns and reports required by foreign,
federal, state and local law, and Borrower has timely paid, and will timely pay,
all foreign, federal, state and local taxes, assessments, deposits and
contributions now or in the future owed by Borrower. Borrower may, however,
defer payment of any contested taxes, provided that Borrower (i) in good faith
contests Borrower's obligation to pay the taxes by appropriate proceedings
promptly and diligently instituted and conducted, (ii) notifies Coast in writing
of the commencement of, and any material development in, the proceedings, and
(iii) posts bonds or takes any other steps required to keep the contested taxes
from becoming a lien upon any of the Collateral. As of the date hereof,
Borrower is unaware of any claims or adjustments proposed for any of Borrower's
prior tax years which could result in additional taxes becoming due and payable
by Borrower. Borrower has paid, and shall continue to pay all amounts necessary
to fund all present and future pension, profit sharing and deferred compensation
plans in accordance with their terms, and Borrower has not and will not withdraw
from participation in, permit partial or complete termination of, or permit the
occurrence of any other event with respect to, any such plan which could result
in any liability of Borrower, including any liability to the Pension Benefit
Guaranty Corporation or its successors or any other governmental agency.
Borrower shall, at all times, utilize the services of an outside payroll service
providing for the automatic deposit of all payroll taxes payable by Borrower.
3.9 COMPLIANCE WITH LAW. Borrower has complied, and will comply, in all
material respects, with all provisions of all material foreign, federal, state
and local laws and regulations relating to Borrower, including, but not limited
to, those relating to Borrower's ownership of real or personal property, the
conduct and licensing of Borrower's business, and environmental matters.
3.10 LITIGATION. Except as disclosed in the Schedule, there is no claim,
suit, litigation, proceeding or investigation pending or (to best of Borrower's
knowledge) threatened by or against or affecting Borrower in any court or before
any governmental agency (or any basis therefor known to Borrower) which may
result, either separately or in the aggregate, in any material adverse change in
the financial condition or business of Borrower, or in any material impairment
in the ability of Borrower to carry onits business in substantially the same
manner as it is now being conducted. Borrower will promptly inform Coast in
writing of any claim, proceeding, litigation or investigation in the future
threatened or instituted by or against Borrower involving any single claim of
Fifty Thousand Dollars ($50,000) or more, or involving One Hundred Thousand
Dollars ($100,000) or more in the aggregate.
3.11 USE OF PROCEEDS. All proceeds of all Loans shall be used for working
capital purposes only including the refinancing of Borrower's obligations to
Silicon Valley Bank. Borrower agrees that the proceeds of the Loans shall not
be used to fund either stock or asset acquisitions of other entities, without
the express written consent of Coast. Borrower is not purchasing or carrying
any "margin stock" (as defined in Regulation G of the Board of Governors of the
Federal Reserve System) and no part of the proceeds of any Loan will be used to
purchase or carry any "margin stock" or to extend credit to others for the
purpose of purchasing or carrying any "margin stock."
4. RECEIVABLES.
4.1 REPRESENTATIONS RELATING TO RECEIVABLES. Borrower represents and
warrants to Coast as follows: Each Receivable with respect to which Loans are
requested by Borrower shall, on the date each Loan is requested and made,
represent an undisputed bona fide existing unconditional obligation of the
Account Debtor created by the sale, delivery, and acceptance of goods or the
rendition of services in the ordinary course of Borrower's business.
4.2 REPRESENTATIONS RELATING TO DOCUMENTS AND LEGAL COMPLIANCE. Borrower
represents and warrants to Coast as follows: All statements made and all unpaid
balances appearing in all invoices, instruments and other documents evidencing
the Receivables are and shall be true and correct and all such invoices,
instruments and other documents and all of Borrower's books and records are and
shall be genuine and in all respects what they purport to be. All sales and
other transactions underlying or giving rise to each Receivable shall fully
comply with all applicable laws and governmental rules and regulations. All
signatures and endorsements on all documents, instruments, and agreements
relating to all Receivables are and shall be genuine, and all such documents,
instruments and agreements are and shall be legally enforceable in accordance
with their terms.
4.3 SCHEDULES AND DOCUMENTS RELATING TO RECEIVABLES. Borrower shall deliver
to Coast transaction reports and loan requests, schedules of Receivables, and
schedules of collections, all on Coast's standard forms; provided, however, that
Borrower's failure to execute and deliver the
3
<PAGE>
same shall not affect or limit Coast's security interest and other rights in all
of Borrower's Receivables, nor shall Coast's failure to advance or lend against
a specific Receivable affect or limit Coast's security interest and other rights
therein. Loan requests received after 10:30 AM Pacific Time will not be
considered by Coast until the next Business Day. Together with each such
schedule, or later if requested by Coast, Borrower shall furnish Coast with
copies (or, at Coast's request, originals) of all contracts, orders, invoices,
and other similar documents, and all original shipping instructions, delivery
receipts, bills of lading, and other evidence of delivery, for any goods the
sale or disposition of which gave rise to such Receivables, and Borrower
warrants the genuineness of all of the foregoing. Borrower shall also furnish to
Coast an aged accounts receivable trial balance in such form and at such
intervals as Coast shall request. In addition, Borrower shall deliver to Coast
the originals of all instruments, chattel paper, security agreements, guarantees
and other documents and property evidencing or securing any Receivables, upon
receipt thereof and in the same form as received, with all necessary
endorsements, all of which shall be with recourse. Borrower shall also provide
Coast with copies of all credit memos as and when requested by Coast.
4.4 COLLECTION OF RECEIVABLES. Borrower shall have the right to collect all
Receivables, unless and until an Event of Default has occurred. Borrower shall
hold all payments on, and proceeds of, Receivables in trust for Coast, and
Borrower shall deliver all such payments and proceeds to Coast within one
Business Day after receipt by Borrower, in their original form, duly endorsed to
Coast, to be applied to the Obligations in such order as Coast shall determine.
Coast may, in its discretion, require that all proceeds of Collateral be
deposited by Borrower into a lockbox account, or such other "blocked account" as
Coast may specify, pursuant to a blocked account agreement in such form as Coast
may specify. Coast or its designee may, at any time, notify Account Debtors
that Coast has been granted a security interest in the Receivables.
4.5. REMITTANCE OF PROCEEDS. All proceeds arising from the disposition of
any Collateral shall be delivered to Coast within one Business Day after receipt
by Borrower, in their original form, duly endorsed to Coast, to be applied to
the Obligations in such order as Coast shall determine. Borrower agrees that it
will not commingle proceeds of Collateral with any of Borrower's other funds or
property, but will hold such proceeds separate and apart from such other funds
and property and in an express trust for Coast. Nothing in this Section limits
the restrictions on disposition of Collateral set forth elsewhere in this
Agreement.
4.6 DISPUTES. Borrower shall notify Coast promptly of all disputes or claims
relating to Receivables. Borrower shall not forgive (completely or partially),
compromise or settle any Receivable for less than payment in full, or agree to
do any of the foregoing, except that Borrower may do so, provided that: (i)
Borrower does so in good faith, in a commercially reasonable manner, in the
ordinary course of business, and in arm's length transactions, which are
reported to Coast on the regular reports provided to Coast; (ii) no Default or
Event of Default has occurred and is continuing; and (iii) taking into account
all such discounts settlements and forgiveness, the total outstanding Loans will
not exceed the Credit Limit. Coast may, at any time after the occurrence of an
Event of Default, settle or adjust disputes or claims directly with Account
Debtors for amounts and upon terms which Coast considers advisable in its
reasonable credit judgment and, in all cases, Coast shall credit Borrower's loan
account with only the net amounts received by Coast in payment of any
Receivables.
4.7 RETURNS. Provided no Event of Default has occurred and is continuing, if
any Account Debtor returns any Inventory to Borrower in the ordinary course of
its business, Borrower shall promptly determine the reason for such return and
promptly issue a credit memorandum to the Account Debtor in the appropriate
amount. In the event any attempted return occurs after the occurrence of any
Event of Default, Borrower shall (i) hold the returned Inventory in trust for
Coast, (ii) segregate all returned Inventory from all of Borrower's other
property, (iii) conspicuously label the returned Inventory as subject to Coast's
security interest, and (iv) immediately notify Coast of the return of any
Inventory, specifying the reason for such return, the location and condition of
the returned Inventory, and on Coast's request deliver such returned Inventory
to Coast.
4.8 VERIFICATION. Coast may, from time to time, verify directly with the
respective Account Debtors the validity, amount and other matters relating to
the Receivables, by means of mail, telephone or otherwise, either in the name of
Borrower or Coast or such other name as Coast may choose.
4.9 NO LIABILITY. Coast shall not under any circumstances be responsible or
liable for any shortage or discrepancy in, damage to, or loss or destruction of,
any goods, the sale or other disposition of which gives rise to a Receivable, or
for any error, act, omission, or delay of any kind occurring in the settlement,
failure to settle, collection or failure to collect any Receivable, or for
settling any Receivable in good faith for less than the full amount thereof, nor
shall Coast be deemed to be responsible for any of Borrower's obligations under
any
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contract or agreement giving rise to a Receivable. Nothing herein shall,
however, relieve Coast from liability for its own gross negligence or willful
misconduct.
5. ADDITIONAL DUTIES OF THE BORROWER.
5.1 FINANCIAL AND OTHER COVENANTS; CONDITIONS PRECEDENT. Borrower shall at
all times comply with the financial and other covenants set forth in this
Agreement. The obligation of Coast to make the initial Loans hereunder is
subject to the fulfillment, to the satisfaction of Coast and its counsel, of
each of the conditions as set forth in the Schedule as of the date of initial
funding of the Receivable Loans hereunder.
5.2 INSURANCE. Borrower shall, at all times insure all of the tangible
personal property Collateral and carry such other business insurance, with
insurers reasonably acceptable to Coast, in such form and amounts as Coast may
reasonably require, and Borrower shall provide evidence of such insurance to
Coast, so that Coast is satisfied that such insurance is, at all times, in full
force and effect. All liability insurance policies of Borrower shall name Coast
as an additional insured, and all property casualty and related insurance
policies of Borrower shall name Coast as a loss payee thereon and Borrower shall
cause a lenders loss payee endorsement to be delivered to Coast in form
reasonably acceptable to Coast. Upon receipt of the proceeds of any such
insurance, Coast shall apply such proceeds in reduction of the Obligations as
Coast shall determine in its sole discretion, except that, provided no Default
or Event of Default has occurred and is continuing, Coast shall release to
Borrower insurance proceeds with respect to Equipment totaling less than One
Hundred Thousand Dollars ($100,000), which shall be utilized by Borrower for the
replacement of the Equipment with respect to which the insurance proceeds were
paid. Coast may require reasonable assurance that the insurance proceeds so
released will be so used. If Borrower fails to provide or pay for any
insurance, Coast may, but is not obligated to, obtain the same at Borrower's
expense. Borrower shall promptly deliver to Coast copies of all reports made to
insurance companies.
5.3 REPORTS. Borrower, at its expense, shall provide Coast with the written
reports set forth in the Schedule, and such other written reports with respect
to Borrower (including budgets, sales projections, operating plans and other
financial documentation), as Coast shall from time to time reasonably specify.
5.4 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At reasonable times, and on one
Business Day's notice, Coast, or its agents, shall have the right to inspect,
audit and copyBorrower's books and records and the Collateral (the "Audits").
Coast shall take reasonable steps to keep confidential all confidential
information obtained in any Audit, but Coast shall have the right to disclose
any such information to its auditors, regulatory agencies, and attorneys, and
pursuant to any subpoena or other legal process. The Audits shall be at
Borrower's expense and the charge for the Audits shall be Seven Hundred Fifty
Dollars ($750) per person per day (or such higher amount as shall represent
Coast's then current standard charge for the same), plus reasonable out of
pocket expenses. Borrower will not enter into any agreement with any accounting
firm, service bureau or third party to store Borrower's books or records at any
location other than Borrower's Address, without first notifying Coast of the
same and obtaining the written agreement from such accounting firm, service
bureau or other third party to give Coast the same rights with respect to access
to books and records and related rights as Coast has under this Loan Agreement.
5.5 NEGATIVE COVENANTS. Borrower shall not, without Coast's prior written
consent, do any of the following:
(i) merge or consolidate with another corporation or entity, except in a
transaction in which (A) the shareholders of the Borrower hold at least 50% of
the common stock and all other capital stock of the surviving corporation
immediately after such merger or consolidation, and (B) the Borrower is the
surviving corporation;
(ii) acquire any assets, except (A) in the ordinary course of business, or
(B) in a transaction or a series of transactions not involving the payment of
an aggregate amount in excess of Fifty Thousand Dollars ($50,000);
(iii) enter into any other transaction outside the ordinary course of
business;
(iv) sell or transfer any Collateral, except for the sale of finished
Inventory in the ordinary course of Borrower's business, and except for the sale
of obsolete or unneeded Equipment in the ordinary course of business;
(v) store any Inventory or other Collateral with any warehouseman or other
third party;
(vi) sell any Inventory on a sale-or-return, guaranteed sale, consignment,
or other contingent basis;
(vii) make any loans of any money or other assets, except (A) advances to
customers or suppliers in the ordinary course of business, (B) travel advances,
employee
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relocation loans and other employee loans and advances in the ordinary
course of business, and (C) loans to employees, officers and directors for the
purpose of purchasing equity securities of the Borrower;
(viii) incur any debts, outside the ordinary course of business, which
would have a material, adverse effect on Borrower or on the prospect of
repayment of the Obligations;
(ix) guarantee or otherwise become liable with respect to the obligations
of another party or entity;
(x) pay or declare any dividends on Borrower's stock (except for dividends
payable solely in stock of Borrower);
(xi) redeem, retire, purchase or otherwise acquire, directly or indirectly,
any of Borrower's stock, except that Borrower may repurchase stock owned by
employees, directors and consultants of Borrower pursuant to terms of
employment, consulting or other stock restriction agreements at such time as any
such employee, director or consultant terminates his or her affiliation with the
Borrower, for an aggregate purchase price not to exceed One Hundred Thousand
Dollars ($100,000) in any fiscal year;
(xii) make any change in Borrower's capital structure which would have a
material adverse effect on Borrower or on the prospect of repayment of the
Obligations; or
(xiii) dissolve or elect to dissolve.
Transactions permitted by the foregoing provisions of this Section are only
permitted if no Default or Event of Default would occur as a result of such
transaction.
5.6 LITIGATION COOPERATION. Should any third-party suit or proceeding be
instituted by or against Coast with respect to any Collateral or relating to
Borrower, Borrower shall, without expense to Coast, make available Borrower and
its officers, employees and agents and Borrower's books and records, to the
extent that Coast may deem them reasonably necessary in order to prosecute or
defend any such suit or proceeding.
5.7 INDEMNITY. Borrower hereby agrees to indemnify Coast and hold Coast
harmless from and against any and all claims, debts, liabilities, demands,
obligations, actions, causes of action, penalties, reasonable costs and expenses
(including reasonable attorneys' fees), of every nature, character and
description, which Coast may sustain orincur based upon or arising out of any of
the Obligations, any actual or alleged failure to collect and pay over any
withholding or other tax relating to Borrower or its employees, any relationship
or agreement between Coast and Borrower, any actual or alleged failure of Coast
to comply with any writ of attachment or other legal process relating to
Borrower or any of its property, or any other matter, cause or thing whatsoever
occurred, done, omitted or suffered to be done by Coast relating to Borrower or
the Obligations (except any such amounts sustained or incurred as the result of
the gross negligence or willful misconduct of Coast). Notwithstanding any
provision in this Agreement to the contrary, the indemnity agreement set forth
in this Section shall survive any termination of this Agreement and shall for
all purposes continue in full force and effect.
5.8 FURTHER ASSURANCES. Borrower agrees, at its expense, on request by
Coast, to execute all documents and take all actions, as Coast, may deem
reasonably necessary or useful in order to perfect and maintain Coast's
perfected security interest in the Collateral, and in order to fully consummate
the transactions contemplated by this Agreement.
6. TERM.
6.1 MATURITY DATE. This Agreement shall continue in effect until the
maturity date set forth on the Schedule (the "Maturity Date"); provided that the
Maturity Date shall automatically be extended, and this Agreement shall
automatically and continuously renew, for successive additional terms of one
year each, unless one party gives written notice to the other, not less than
sixty days prior to the next Maturity Date, that such party elects to terminate
this Agreement effective on the next Maturity Date.
6.2 EARLY TERMINATION. This Agreement may be terminated prior to the
Maturity Date as follows: (i) by Borrower, effective upon ninety (90) days
prior written notice of termination given by Borrower to Coast; or (ii) by Coast
at any time after the occurrence of an Event of Default, without notice,
effective immediately. If this Agreement is terminated by Borrower or by Coast
under this Section 6.2, Borrower shall pay to Coast a termination fee (the
"Early Termination Fee") in the amount shown on the Schedule. The Early
Termination Fee shall be due and payable on the effective date of termination
and thereafter shall bear interest at a rate equal to the rate applicable to the
Loans.
6.3 PAYMENT OF OBLIGATIONS. On the Maturity Date or on any earlier effective
date of termination, Borrower shall pay and perform in full all Obligations,
whether evidenced
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by installment notes or otherwise, and whether or not all or any part of such
Obligations are otherwise then due and payable. Notwithstanding any termination
of this Agreement, all of Coast's security interests in all of the Collateral
and all of the terms and provisions of this Agreement shall continue in full
force and effect until all Obligations have been paid and performed in full;
provided that, without limiting the fact that Loans are subject to the
discretion of Coast, Coast may, in its sole discretion, refuse to make any
further Loans after termination. No termination shall in any way affect or
impair any right or remedy of Coast, nor shall any such termination relieve
Borrower of any Obligation to Coast, until all of the Obligations have been paid
and performed in full. Upon payment and performance in full of all the
Obligations and termination of this Agreement, Coast shall promptly deliver to
Borrower termination statements, requests for reconveyance and such other
documents as may be required to fully terminate Coast's security interests.
7. EVENTS OF DEFAULT AND REMEDIES.
7.1 EVENTS OF DEFAULT. The occurrence of any of the following events shall
constitute an "Event of Default" under this Agreement, and Borrower shall give
Coast immediate written notice thereof: (a) any material warranty,
representation, statement, report or certificate made or delivered to Coast by
Borrower or any of Borrower's officers, employees or agents, now or in the
future, shall be untrue or misleading in a material respect; or (b) Borrower
shall fail to pay when due any Loan or any interest thereon or any other
monetary Obligation; or (c) the total Loans and other Obligations outstanding at
any time shall exceed the Credit Limit; or (d) Borrower shall fail to deliver
the proceeds of Collateral to Coast as provided in Section 4.5 above, or shall
fail to give Coast access to its books and records or Collateral as provided in
Section 5.4 above, or shall breach any negative covenant set forth in Section
5.5 above; or (e) Borrower shall fail to comply with the financial covenants (if
any) set forth in the Schedule or shall fail to perform any other non-monetary
Obligation which by its nature cannot be cured; or (f) Borrower shall fail to
perform any other non-monetary Obligation, which failure is not cured within
fifteen (15) Business Days after the date due, provided that, (i) such failure
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is not intentional, (ii) such non-monetary Obligation is capable of being
performed by Borrower in accordance with its terms, and (iii) such non-monetary
Obligation has not been breached more than once by Borrower during the
immediately preceding twelve (12) months; or (g) any levy, assessment,
attachment, seizure, lien or encumbrance (other than a Permitted Lien) is made
on all or any part of the Collateral which is not cured within 10 days after the
occurrence of the same; or (h) any default or event ofdefault occurs under any
obligation secured by a Permitted Lien, which is not cured within any applicable
cure period or waived in writing by the holder of the Permitted Lien; or (i)
Borrower breaches any material contract or obligation, which has or may
reasonably be expected to have a material adverse effect on Borrower's business
or financial condition; or (j) dissolution, termination of existence, insolvency
or business failure of Borrower; or appointment of a receiver, trustee or
custodian, for all or any part of the property of, assignment for the benefit of
creditors by, or the commencement of any proceeding by Borrower under any
reorganization, bankruptcy, insolvency, arrangement, readjustment of debt,
dissolution or liquidation law or statute of any jurisdiction, now or in the
future in effect; or (k) the commencement of any proceeding against Borrower or
any guarantor of any of the Obligations under any reorganization, bankruptcy,
insolvency, arrangement, readjustment of debt, dissolution or liquidation law or
statute of any jurisdiction, now or in the future in effect, which is not cured
by the dismissal thereof within 30 days after the date commenced; or (l)
revocation or termination of, or limitation or denial of liability upon, any
guaranty of the Obligations or any attempt to do any of the foregoing, or
commencement of proceedings by any guarantor of any of the Obligations under any
bankruptcy or insolvency law; or (m) revocation or termination of, or limitation
or denial of liability upon, any pledge of any certificate of deposit,
securities or other property or asset of any kind pledged by any third party to
secure any or all of the Obligations, or any attempt to do any of the foregoing,
or commencement of proceedings by or against any such third party under any
bankruptcy or insolvency law; or (n) Borrower makes any payment on account of
any indebtedness or obligation which has been subordinated to the Obligations,
other than as permitted in the applicable subordination agreement, or if any
Person who has subordinated such indebtedness or obligations terminates or in
any way limits his subordination agreement; or (o) there shall be a change in
the record or beneficial ownership of an aggregate of more than 20% of the
outstanding shares of stock of Borrower, in one or more transactions, compared
to the ownership of outstanding shares of stock of Borrower in effect on the
date hereof, without the prior written consent of Coast; or (p) Borrower shall
generally not pay its debts as they become due, or Borrower shall conceal,
remove or transfer any part of its property, with intent to hinder, delay or
defraud its creditors, or make or suffer any transfer of any of its property
which may be fraudulent under any bankruptcy, fraudulent conveyance or similar
law; or (q) there shall be a material adverse change in Borrower's business or
financial condition; or (r) Coast, acting in good faith and in a commercially
reasonable manner, deems itself insecure because of the occurrence of an event
prior
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to the effective date hereof of which Coast had no knowledge on the effective
date or because of the occurrence of an event on or subsequent to the effective
date. Coast in its reasonable discretion may cease making any Loans hereunder
during any of the above cure periods, and thereafter if an Event of Default has
occurred.
7.2 REMEDIES. Upon the occurrence, and during the continuance, of any Event
of Default, Coast, at its option, and without notice or demand of any kind (all
of which are hereby expressly waived by Borrower), may do any one or more of the
following: (a) Cease making Loans or otherwise extending credit to Borrower
under this Agreement or any other document or agreement; (b) Accelerate and
declare all or any part of the Obligations to be immediately due, payable, and
performable, notwithstanding any deferred or installment payments allowed by any
instrument evidencing or relating to any Obligation; (c) Take possession of any
or all of the Collateral wherever it may be found, and for that purpose Borrower
hereby authorizes Coast without judicial process to enter onto any of Borrower's
premises without interference to search for, take possession of, keep, store, or
remove any of the Collateral, and remain on the premises or cause a custodian to
remain on the premises in exclusive control thereof, without charge for so long
as Coast deems it reasonably necessary in order to complete the enforcement of
its rights under this Agreement or any other agreement; provided, however, that
should Coast seek to take possession of any of the Collateral by Court process,
Borrower hereby irrevocably waives: (i) any bond and any surety or security
relating thereto required by any statute, court rule or otherwise as an incident
to such possession; (ii) any demand for possession prior to the commencement of
any suit or action to recover possession thereof; and (iii) any requirement that
Coast retain possession of, and not dispose of, any such Collateral until after
trial or final judgment; (d) Require Borrower to assemble any or all of the
Collateral and make it available to Coast at places designated by Coast which
are reasonably convenient to Coast and Borrower, and to remove the Collateral to
such locations as Coast may deem advisable; (e) Complete the processing,
manufacturing or repair of any Collateral prior to a disposition thereof and,
for such purpose and for the purpose of removal, Coast shall have the right to
use Borrower's premises, vehicles, hoists, lifts, cranes, equipment and all
other property without charge; (f) Sell, lease or otherwise dispose of any of
the Collateral, in its condition at the time Coast obtains possession of it or
after further manufacturing, processing or repair, at one or more public and/or
private sales, in lots or in bulk, for cash, exchange or other property, or on
credit, and to adjourn any such sale from time to time without notice other than
oral announcement at the timescheduled for sale. Coast shall have the right to
conduct such disposition on Borrower's premises without charge, for such time or
times as Coast deems reasonable, or on Coast's premises, or elsewhere and the
Collateral need not be located at the place of disposition. Coast may directly
or through any affiliated company purchase or lease any Collateral at any such
public disposition, and if permissible under applicable law, at any private
disposition. Any sale or other disposition of Collateral shall not relieve
Borrower of any liability Borrower may have if any Collateral is defective as to
title or physical condition or otherwise at the time of sale; (g) Demand payment
of, and collect any Receivables and General Intangibles comprising Collateral
and, in connection therewith, Borrower irrevocably authorizes Coast to endorse
or sign Borrower's name on all collections, receipts, instruments and other
documents, to take possession of and open mail addressed to Borrower and remove
therefrom payments made with respect to any item of the Collateral or proceeds
thereof, and, in Coast's sole discretion, to grant extensions of time to pay,
compromise claims and settle Receivables and the like for less than face value;
(h) Offset against any sums in any of Borrower's general, special or other
Deposit Accounts with Coast; and (i) Demand and receive possession of any of
Borrower's federal and state income tax returns and the books and records
utilized in the preparation thereof or referring thereto. All reasonable
attorneys' fees, expenses, costs, liabilities and obligations incurred by Coast
with respect to the foregoing shall be due from the Borrower to Coast on demand.
Coast may charge the same to Borrower's loan account, and the same shall
thereafter bear interest at the same rate as is applicable to the Loans. Without
limiting any of Coast's rights and remedies, from and after the occurrence of
any Event of Default, the interest rate applicable to the Obligations shall be
increased by an additional three percent per annum.
7.3 STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS. Borrower and Coast
agree that a sale or other disposition (collectively, "sale") of any Collateral
which complies with the following standards will conclusively be deemed to be
commercially reasonable: (a) Notice of the sale is given to Borrower at least
seven (7) days prior to the sale, and, in the case of a public sale, notice of
the sale is published at least ten (10) days before the sale in a newspaper of
general circulation in the county where the sale is to be conducted; (b) Notice
of the sale describes the collateral in general, non-specific terms; (c) The
sale is conducted at a place designated by Coast, with or without the Collateral
being present; (d) The sale commences at any time between 8:00 a.m. and 6:00
p.m; (e) Payment of the purchase price in cash or by cashier's check or wire
transfer is required; (f) With respect to any sale of any of the Collateral,
Coast may (but is not
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obligated to) direct any prospective purchaser to ascertain directly from
Borrower any and all information concerning the same. Coast shall be free to
employ other methods of noticing and selling the Collateral, in its discretion,
if they are commercially reasonable.
7.4 POWER OF ATTORNEY. Upon the occurrence, and during the continuance, of
any Event of Default, without limiting Coast's other rights and remedies,
Borrower grants to Coast an irrevocable power of attorney coupled with an
interest, authorizing and permitting Coast (acting through any of its employees,
attorneys or agents) at any time, at its option, but without obligation, with or
without notice to Borrower, and at Borrower's expense, to do any or all of the
following, in Borrower's name or otherwise, but Coast agrees to exercise the
following powers in a commercially reasonable manner: (a) Execute on behalf of
Borrower any documents that Coast may, in its sole discretion, deem advisable in
order to perfect and maintain Coast's security interest in the Collateral, or in
order to exercise a right of Borrower or Coast, or in order to fully consummate
all the transactions contemplated under this Agreement, and all other present
and future agreements; (b) Execute on behalf of Borrower any document
exercising, transferring or assigning any option to purchase, sell or otherwise
dispose of or to lease (as lessor or lessee) any real or personal property which
is part of Coast's Collateral or in which Coast has an interest; (c) Execute on
behalf of Borrower, any invoices relating to any Receivable, any draft against
any Account Debtor and any notice to any Account Debtor, any proof of claim in
bankruptcy, any Notice of Lien, claim of mechanic's, materialman's or other
lien, or assignment or satisfaction of mechanic's, materialman's or other lien;
(d) Take control in any manner of any cash or non-cash items of payment or
proceeds of Collateral; endorse the name of Borrower upon any instruments, or
documents, evidence of payment or Collateral that may come into Coast's
possession; (e) Endorse all checks and other forms of remittances received by
Coast; (f) Pay, contest or settle any lien, charge, encumbrance, security
interest and adverse claim in or to any of the Collateral, or any judgment based
thereon, or otherwise take any action to terminate or discharge the same; (g)
Grant extensions of time to pay, compromise claims and settle Receivables and
General Intangibles for less than face value and execute all releases and other
documents in connection therewith; (h) Pay any sums required on account of
Borrower's taxes or to secure the release of any liens therefor, or both; (i)
Settle and adjust, and give releases of, any insurance claim that relates to any
of the Collateral and obtain payment therefor; (j) Instruct any third party
having custody or control of any books or records belonging to, or relating to,
Borrower to give Coast the same rights of access andother rights with respect
thereto as Coast has under this Agreement; and (k) Take any action or pay any
sum required of Borrower pursuant to this Agreement and any other present or
future agreements. Any and all reasonable sums paid and any and all reasonable
costs, expenses, liabilities, obligations and attorneys' fees incurred by Coast
with respect to the foregoing shall be added to and become part of the
Obligations, and shall be payable on demand. Coast may charge the foregoing to
Borrower's loan account and the foregoing shall thereafter bear interest at the
same rate applicable to the Loans. In no event shall Coast's rights under the
foregoing power of attorney or any of Coast's other rights under this Agreement
be deemed to indicate that Coast is in control of the business, management or
properties of Borrower.
7.5 APPLICATION OF PROCEEDS. All proceeds realized as the result of any sale
of the Collateral shall be applied by Coast first to the reasonable costs,
expenses, liabilities, obligations and attorneys' fees incurred by Coast in the
exercise of its rights under this Agreement, second to the interest due upon any
of the Obligations, and third to the principal of the Obligations, in such order
as Coast shall determine in its sole discretion. Any surplus shall be paid to
Borrower or other persons legally entitled thereto; Borrower shall remain liable
to Coast for any deficiency. If, Coast, in its sole discretion, directly or
indirectly enters into a deferred payment or other credit transaction with any
purchaser at any sale of Collateral, Coast shall have the option, exercisable at
any time, in its sole discretion, of either reducing the Obligations by the
principal amount of purchase price or deferring the reduction of the Obligations
until the actual receipt by Coast of the cash therefor.
7.6 REMEDIES CUMULATIVE. In addition to the rights and remedies set forth in
this Agreement, Coast shall have all the other rights and remedies accorded a
secured party under the California Uniform Commercial Code and under all other
applicable laws, and under any other instrument or agreement now or in the
future entered into between Coast and Borrower, and all of such rights and
remedies are cumulative and none is exclusive. Exercise or partial exercise by
Coast of one or more of its rights or remedies shall not be deemed an election,
nor bar Coast from subsequent exercise or partial exercise of any other rights
or remedies. The failure or delay of Coast to exercise any rights or remedies
shall not operate as a waiver thereof, but all rights and remedies shall
continue in full force and effect until all of the Obligations have been fully
paid and performed.
8. DEFINITIONS. As used in this agreement, the following terms have the
following meanings:
9
<PAGE>
"Account Debtor" means the obligor on a Receivable.
--------------
"Affiliate" means, with respect to any Person, a relative, partner,
---------
shareholder, director, officer, or employee of such Person, or any parent or
subsidiary of such Person, or any Person controlling, controlled by or under
common control with such Person.
"Business Day" means a day on which Coast is open for business.
------------
"Code" means the Uniform Commercial Code as adopted and in effect in the
----
State of California from time to time.
"Collateral" has the meaning set forth in Section 2.1 above.
----------
"Default" means any event which with notice or passage of time or both,
-------
would constitute an Event of Default.
"Deposit Account" has the meaning set forth in Section 9105 of the Code.
---------------
"Eligible Receivables" means Receivables arising in the ordinary course of
--------------------
Borrower's business from the sale of goods or rendition of services, which
Coast, in its good faith business judgment, shall deem eligible for borrowing,
based on such considerations as Coast may from time to time deem appropriate.
"Equipment" means all of Borrower's present and hereafter acquired
---------
machinery, molds, machine tools, motors, furniture, equipment, furnishings,
fixtures, trade fixtures, motor vehicles, tools, parts, dyes, jigs, goods and
other tangible personal property (other than Inventory) of every kind and
description used in Borrower's operations or owned by Borrower and any interest
in any of the foregoing, and all attachments, accessories, accessions,
replacements, substitutions, additions or improvements to any of the foregoing,
wherever located.
"Event of Default" means any of the events set forth in Section 7.1 of this
----------------
Agreement.
"General Intangibles" means all general intangibles of Borrower, whether
-------------------
now owned or hereafter created or acquired by Borrower, including, without
limitation, all choses in action, causes of action, corporate or other business
records, Deposit Accounts, inventions, designs, drawings, blueprints, patents,
patent applications, trademarks and the goodwill of the business
symbolizedthereby, names, trade names, trade secrets, goodwill, copyrights,
registrations, licenses, franchises, customer lists, security and other
deposits, rights in all litigation presently or hereafter pending for any cause
or claim (whether in contract, tort or otherwise), and all judgments now or
hereafter arising therefrom, all claims of Borrower against Coast, rights to
purchase or sell real or personal property, rights as a licensor or licensee of
any kind, royalties, telephone numbers, proprietary information, purchase
orders, and all insurance policies and claims (including without limitation life
insurance, key man insurance, credit insurance, liability insurance, property
insurance and other insurance), tax refunds and claims, computer programs,
discs, tapes and tape files, claims under guaranties, security interests or
other security held by or granted to Borrower, all rights to indemnification and
all other intangible property of every kind and nature (other than Receivables).
"Inventory" means all of Borrower's now owned and hereafter acquired goods,
---------
merchandise or other personal property, wherever located, to be furnished under
any contract of service or held for sale or lease (including without limitation
all raw materials, work in process, finished goods and goods in transit, and
including without limitation all farm products), and all materials and supplies
of every kind, nature and description which are or might be used or consumed in
Borrower's business or used in connection with the manufacture, packing,
shipping, advertising, selling or finishing of such goods, merchandise or other
personal property, and all warehouse receipts, documents of title and other
documents representing any of the foregoing.
"Maximum Dollar Amount" has the meaning set forth in Section 1 of the
---------------------
Schedule.
"Obligations" means all present and future Loans, advances, debts,
-----------
liabilities, obligations, guaranties, covenants, duties and indebtedness at any
time owing by Borrower to Coast, whether evidenced by this Agreement or any note
or other instrument or document, whether arising from an extension of credit,
opening of a letter of credit, banker's acceptance, loan, guaranty,
indemnification or otherwise, whether direct or indirect (including, without
limitation, those acquired by assignment and any participation by Coast in
Borrower's debts owing to others), absolute or contingent, due or to become due,
including, without limitation, all interest, charges, expenses, fees, attorney's
fees, expert witness fees, audit fees, letter of credit fees, collateral
monitoring fees, closing fees, facility fees, termination fees, minimum interest
charges and any other sums chargeable to Borrower under this Agreement or under
any other present
10
<PAGE>
or future instrument or agreement between Borrower and Coast.
"Permitted Liens" means the following: (i) purchase money security
---------------
interests in specific items of Equipment; (ii) leases of specific items of
Equipment; (iii) liens for taxes not yet payable; (iv) additional security
interests and liens consented to in writing by Coast, which consent shall not be
unreasonably withheld; (v) security interests being terminated substantially
concurrently with this Agreement; (vi) liens of materialmen, mechanics,
warehousemen, carriers, or other similar liens arising in the ordinary course of
business and securing obligations which are not delinquent; (vii) liens incurred
in connection with the extension, renewal or refinancing of the indebtedness
secured by liens of the type described above in clauses (i) or (ii) above,
provided that any extension, renewal or replacement lien is limited to the
property encumbered by the existing lien and the principal amount of the
indebtedness being extended, renewed or refinanced does not increase; (viii)
liens in favor of customs and revenue authorities which secure payment of
customs duties in connection with the importation of goods; (ix) purchase money
security interests and liens of lessors under capitalized leases so long as such
security interest or lien secures only the purchase price of the purchased or
leased asset; and (x) those liens set forth on Exhibit "A" attached hereto and
incorporated herein by this reference. Coast will have the right to require, as
a condition to its consent under clause (iv) above, that the holder of the
additional security interest or lien sign an intercreditor agreement on Coast's
then standard form, acknowledge that the security interest is subordinate to the
security interest in favor of Coast, and agree not to take any action to enforce
its subordinate security interest so long as any Obligations remain outstanding,
and that Borrower agree that any uncured default in any obligation secured by
the subordinate security interest shall also constitute an Event of Default
under this Agreement.
"Person" means any individual, sole proprietorship, partnership, joint
------
venture, trust, unincorporated organization, association, corporation,
government, or any agency or political division thereof, or any other entity.
"Receivables" means all of Borrower's now owned and hereafter acquired
-----------
accounts (whether or not earned by performance), letters of credit, contract
rights, chattel paper, instruments, securities, documents and all other forms of
obligations at any time owing to Borrower, all guaranties and other security
therefor, all merchandise returned to or repossessed by Borrower, and all rights
of stoppage in transit and all other rights or remedies of anunpaid vendor,
lienor or secured party.
Other Terms. All accounting terms used in this Agreement, unless otherwise
-----------
indicated, shall have the meanings given to such terms in accordance with
generally accepted accounting principles, consistently applied. All other terms
contained in this Agreement, unless otherwise indicated, shall have the meanings
provided by the Code, to the extent such terms are defined therein.
9. GENERAL PROVISIONS.
9.1 INTEREST COMPUTATION. In computing interest on the Obligations, all
checks, wire transfers and other items of payment received by Coast (including
proceeds of Receivables and payment of the Obligations in full) shall be deemed
applied by Coast on account of the Obligations three Business Days after receipt
by Coast of immediately available funds, and, for purposes of the foregoing, any
such funds received after 10:30 AM Pacific time on any day shall be deemed
received on the next Business Day. Coast shall not, however, be required to
credit Borrower's account for the amount of any item of payment which is
unsatisfactory to Coast in its sole discretion, and Coast may charge Borrower's
loan account for the amount of any item of payment which is returned to Coast
unpaid.
9.2 APPLICATION OF PAYMENTS. All payments with respect to the Obligations
may be applied, and in Coast's sole discretion reversed and re-applied, to the
Obligations, in such order and manner as Coast shall determine in its sole
discretion.
9.3 CHARGES TO ACCOUNTS. Coast may, in its discretion, require that Borrower
pay monetary Obligations in cash to Coast, or charge them to Borrower's loan
account, in which event they will bear interest at the same rate applicable to
the Loans. Coast may also, in its discretion, charge any monetary Obligations
to Borrower's Deposit Accounts maintained with Coast.
9.4 MONTHLY ACCOUNTINGS. Coast shall provide Borrower monthly with an
account of advances, charges, expenses and payments made pursuant to this
Agreement. Such account shall be deemed correct, accurate and binding on
Borrower and an account stated (except for reverses and reapplications of
payments made and corrections of errors discovered by Coast), unless Borrower
notifies Coast in writing to the contrary within thirty days after each account
is rendered, describing the nature of any alleged errors or omissions.
9.5 NOTICES. All notices to be given under this Agreement shall be in
writing and shall be given either
11
<PAGE>
personally or by reputable private delivery service or by regular first-class
mail, or certified mail return receipt requested, addressed to Coast or Borrower
at the addresses shown in the heading to this Agreement, or at any other address
designated in writing by one party to the other party. Notices to Coast shall be
directed to the Commercial Finance Division, to the attention of the Division
Manager or the Division Credit Manager. All notices shall be deemed to have been
given upon delivery in the case of notices personally delivered, or at the
expiration of one Business Day following delivery to the private delivery
service, or two Business Days following the deposit thereof in the United States
mail, with postage prepaid.
9.6 SEVERABILITY. Should any provision of this Agreement be held by any
court of competent jurisdiction to be void or unenforceable, such defect shall
not affect the remainder of this Agreement, which shall continue in full force
and effect.
9.7 INTEGRATION. This Agreement and such other written agreements, documents
and instruments as may be executed in connection herewith are the final, entire
and complete agreement between Borrower and Coast and supersede all prior and
contemporaneous negotiations and oral representations and agreements, all of
which are merged and integrated in this Agreement. There are no oral
-----------------
understandings, representations or agreements between the parties which are not
- -------------------------------------------------------------------------------
set forth in this Agreement or in other written agreements signed by the parties
- --------------------------------------------------------------------------------
in connection herewith.
- -----------------------
9.8 WAIVERS. The failure of Coast at any time or times to require Borrower
to strictly comply with any of the provisions of this Agreement or any other
present or future agreement between Borrower and Coast shall not waive or
diminish any right of Coast later to demand and receive strict compliance
therewith. Any waiver of any default shall not waive or affect any other
default, whether prior or subsequent, and whether or not similar. None of the
provisions of this Agreement or any other agreement now or in the future
executed by Borrower and delivered to Coast shall be deemed to have been waived
by any act or knowledge of Coast or its agents or employees, but only by a
specific written waiver signed by an authorized officer of Coast and delivered
to Borrower. Borrower waives demand, protest, notice of protest and notice of
default or dishonor, notice of payment and nonpayment, release, compromise,
settlement, extension or renewal of any commercial paper, instrument, account,
General Intangible, document or guaranty at any time held by Coast on which
Borrower is or may in any way be liable, and notice of any action taken by
Coast, unless expresslyrequired by this Agreement.
9.9 NO LIABILITY FOR ORDINARY NEGLIGENCE. Neither Coast, nor any of its
directors, officers, employees, agents, attorneys or any other Person affiliated
with or representing Coast shall be liable for any claims, demands, losses or
damages, of any kind whatsoever, made, claimed, incurred or suffered by Borrower
or any other party through the ordinary negligence of Coast, or any of its
directors, officers, employees, agents, attorneys or any other Person affiliated
with or representing Coast, but nothing herein shall relieve Coast from
liability for its own gross negligence or willful misconduct.
9.10 AMENDMENT. The terms and provisions of this Agreement may not be waived
or amended, except in a writing executed by Borrower and a duly authorized
officer of Coast.
9.11 TIME OF ESSENCE. Time is of the essence in the performance by Borrower
of each and every obligation under this Agreement.
9.12 ATTORNEYS FEES, COSTS AND CHARGES. Borrower shall reimburse Coast for
all reasonable attorneys' fees and all filing, recording, search, title
insurance, appraisal, audit, and other reasonable costs incurred by Coast,
pursuant to, or in connection with, or relating to this Agreement (whether or
not a lawsuit is filed), including, but not limited to, any reasonable
attorneys' fees and costs Coast incurs in order to do the following: prepare and
negotiate this Agreement and the documents relating to this Agreement; obtain
legal advice in connection with this Agreement or Borrower; enforce, or seek to
enforce, any of its rights; prosecute actions against, or defend actions by,
Account Debtors; commence, intervene in, or defend any action or proceeding;
initiate any complaint to be relieved of the automatic stay in bankruptcy; file
or prosecute any probate claim, bankruptcy claim, third-party claim, or other
claim; examine, audit, copy, and inspect any of the Collateral or any of
Borrower's books and records; protect, obtain possession of, lease, dispose of,
or otherwise enforce Coast's security interest in, the Collateral; and otherwise
represent Coast in any litigation relating to Borrower. If either Coast or
Borrower files any lawsuit against the other predicated on a breach of this
Agreement, the prevailing party in such action shall be entitled to recover its
reasonable costs and attorneys' fees, including (but not limited to) reasonable
attorneys' fees and costs incurred in the enforcement of, execution upon or
defense of any order, decree, award or judgment. Borrower shall also pay Coast's
standard charges for returned checks and for wire transfers, in effect from time
to time. All attorneys' fees, costs and charges to which
12
<PAGE>
Coast may be entitled pursuant to this Paragraph may be charged by Coast to
Borrower's loan account and shall thereafter bear interest at the same rate as
the Loans.
9.13 BENEFIT OF AGREEMENT. The provisions of this Agreement shall be binding
upon and inure to the benefit of the respective successors, assigns, heirs,
beneficiaries and representatives of Borrower and Coast; provided, however, that
Borrower may not assign or transfer any of its rights under this Agreement
without the prior written consent of Coast, and any prohibited assignment shall
be void. No consent by Coast to any assignment shall release Borrower from its
liability for the Obligations.
9.14 PUBLICITY. Coast is hereby authorized, at its expense, to issue
appropriate press releases and to cause a tombstone to be published announcing
the consummation of this transaction and the aggregate amount thereof.
9.15 JOINT AND SEVERAL LIABILITY. If Borrower consists of more than one
Person, their liability shall be joint and several, and the compromise of any
claim with, or the release of, any Borrower shall not constitute a compromise
with, or a release of, any other Borrower.
9.16 LIMITATION OF ACTIONS. Any claim or cause of action by Borrower against
Coast, its directors, officers, employees, agents, accountants or attorneys,
based upon, arising from, or relating to this Loan Agreement, or any other
present or future document or agreement, or any other transaction contemplated
hereby or thereby or relating hereto or thereto, or any other matter, cause or
thing whatsoever, occurred, done, omitted or suffered to be done by Coast, its
directors, officers, employees, agents, accountants or attorneys, shall be
barred unless asserted by Borrower by the commencement of an action or
proceeding in a court of competent jurisdiction by the filing of a complaint
within one year after the first act, occurrence or omission upon which such
claim or cause of action, or any part thereof, is based, and the service of a
summons and complaint on an officer of Coast, or on any other person authorized
to accept service on behalf of Coast, within thirty (30) days thereafter.
Borrower agrees that such one-year period is a reasonable and sufficient time
for Borrower to investigate and act upon any such claim or cause of action. The
one-year period provided herein shall not be waived, tolled, or extended except
by the written consent of Coast in its sole discretion. This provision shall
survive any termination of this Loan Agreement or any other present or future
agreement.
9.17 PARAGRAPH HEADINGS; CONSTRUCTION. Paragraph headings are only used in
this Agreement for convenience. Borrower and Coast acknowledge that the headings
maynot describe completely the subject matter of the applicable paragraph, and
the headings shall not be used in any manner to construe, limit, define or
interpret any term or provision of this Agreement. The term "including",
whenever used in this Agreement, shall mean "including (but not limited to)".
This Agreement has been fully reviewed and negotiated between the parties and no
uncertainty or ambiguity in any term or provision of this Agreement shall be
construed strictly against Coast or Borrower under any rule of construction or
otherwise.
9.18 GOVERNING LAW; JURISDICTION; VENUE. This Agreement and all acts and
transactions hereunder and all rights and obligations of Coast and Borrower
shall be governed by the laws of the State of California. As a material part of
the consideration to Coast to enter into this Agreement, Borrower (i) agrees
that all actions and proceedings relating directly or indirectly to this
Agreement shall, at Coast's option, be litigated in courts located within
California, and that the exclusive venue therefor shall be Los Angeles County;
(ii) consents to the jurisdiction and venue of any such court and consents to
service of process in any such action or proceeding by personal delivery or any
other method permitted by law; and (iii) waives any and all rights Borrower may
have to object to the jurisdiction of any such court, or to transfer or change
the venue of any such action or proceeding.
13
<PAGE>
9.19 MUTUAL WAIVER OF JURY TRIAL. BORROWER AND COAST EACH HEREBY WAIVE THE
RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF,
OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE
INSTRUMENT OR AGREEMENT BETWEEN COAST AND BORROWER, OR ANY CONDUCT, ACTS OR
OMISSIONS OF COAST OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES,
AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH COAST OR BORROWER, IN ALL
OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
BORROWER:
- ---------
TRANSCEND SERVICES, INC., A DELAWARE CORPORATION
BY /s/ DAVID W. MURPHY
-------------------------------------------
PRESIDENT OR VICE PRESIDENT
BY /s/ JENNIFER KIRK
-------------------------------------------
SECRETARY OR ASS'T SECRETARY
COAST:
- ------
COAST BUSINESS CREDIT, A DIVISION OF
SOUTHERN PACIFIC THRIFT & LOAN ASSOCIATION
BY /s/ ROBERT PETE
-----------------------------------------
TITLE PRESIDENT OR VICE PRESIDENT
--------------------------------------
14
<PAGE>
- --------------------------------------------------------------------------------
COAST
SCHEDULE TO
LOAN AND SECURITY AGREEMENT
BORROWER: TRANSCEND SERVICES, INC. ("BORROWER")
ADDRESS: 3353 PEACHTREE ROAD, N.E.
SUITE 1000
ATLANTA, GEORGIA 30326
DATE: APRIL 3, 1997
This Schedule forms an integral part of the Loan and Security Agreement between
Coast Business Credit, a division of Southern Pacific Thrift & Loan Association,
and the above-borrower of even date.
================================================================================
1. CREDIT LIMIT
(Section 1.1):
Loans in a total amount at any time outstanding not to exceed FIVE
MILLION DOLLARS ($5,000,000) at any one time outstanding (the "Maximum
Dollar Amount") consisting of Outsourcing Contract Loans (as hereinafter
defined), Transcription Services Receivable Loans (as hereinafter
defined) and Capital Expenditure Loans (as hereinafter defined).
A. Outsourcing Contract Loans and Transcription Services Receivable
----------------------------------------------------------------
Loans: Outsourcing Contract Loans and Transcription Services Receivable
-----
Loans in an aggregate amount outstanding at any one time not to exceed
(i) the Maximum Dollar Amount less the aggregate outstanding amount of
the Capital Expenditure Loans, or (ii) the sum of (a) and (b) below:
(a) Loans (the "Outsourcing Contract Loans") during any given calendar
month in an amount not to exceed one and one-half (1.5) times the
net amount of Borrower's average monthly Recurring Automatic
Payments (as defined in Section 8 of this Schedule) for the
preceding three (3) calendar months; provided, however, if
-------- -------
Borrower's Consolidated Tangible Net Worth is equal to or greater
than Five Million Dollars ($5,000,000), then commencing five (5)
Business Days after receipt and satisfactory review by Coast of the
internally prepared monthly financial statements of Borrower
reporting such Consolidated Tangible Net Worth, the advance rate for
Outsourcing Contract Loans shall increase from one and one-half
(1.5) to two (2) times the net amount
<PAGE>
of Borrower's average monthly Recurring Automatic Payments for the
preceding three calendar months; provided further, however, if
-------- ------- -------
Borrower fails to maintain Consolidated Tangible Net Worth of at
least Five Million Dollars ($5,000,000), then the advance rate for
Outsourcing Contract Loans shall be reduced to one and one-half
(1.5) times the net amount of Borrower's average monthly Recurring
Automatic Payments for the preceding three (3) calendar months,
subject to further upward or downward adjustment from time to time
as provided in this subsection (i). Notwithstanding the foregoing,
the advance rate in effect for Outsourcing Contract Loans shall be
decreased by ten basis points (0.10) for each ten percent (10%)
decrease in the Recurring Automatic Payments compared on a month-to-
month basis; plus
----
(b) Loans (the "Transcription Services Receivable Loans") in an amount
not to exceed eighty percent (80%) of the net amount of the Eligible
Transcription Services Receivables (as defined in Section 8 of this
Schedule).
B. Capital Expenditure Loans: Loans (the "Capital Expenditure Loans")
-------------------------
to facilitate Borrower's acquisition of Equipment for use in expanding
Borrower's operations, each of which shall be in a principal amount of
not less than Fifty Thousand Dollars ($50,000) and all of which shall
not exceed an aggregate amount of THREE HUNDRED THOUSAND DOLLARS
($300,000) at any one time outstanding, as follows:
(i) upon Borrower presenting to Coast, in form and substance reasonably
acceptable to Coast, invoices for the specific items of used
Equipment to be acquired and financed hereunder, Coast will advance
to Borrower up to seventy percent (70%) of the fair market value of
the used Equipment (as determined by Coast in its good faith
judgement), net of any ancillary costs or expenses associated with
the acquisition of such Equipment, including, but not limited to,
sales tax, installation and delivery charges, brokerage commissions
and other costs and expenses; and
(ii) upon Borrower presenting to Coast, in form and substance reasonably
acceptable to Coast, invoices for the specific items of new
Equipment to be acquired and financed hereunder, Coast will advance
to Borrower up to eighty percent (80%) of the purchase price of the
new Equipment, net of any ancillary costs or expenses associated
with the acquisition of such Equipment, including, but not limited
to, sales tax, installation and delivery charges, brokerage
commissions and other costs and expenses;
2
<PAGE>
provided, that, Coast, in its sole discretion, may require an
-------- ----
appraisal of the liquidation value of such acquired Equipment upon
the first anniversary of this Agreement and every six (6) months
thereafter at Borrower's sole expense. If at the time of such
appraisal, the advances made under the Capital Expenditure Loan
facility is greater than eighty percent (80%) of the appraised
liquidation value of such acquired Equipment, Borrower shall pay to
Coast within ten (10) Business Days an amount necessary to decrease
the principal amount outstanding under the Capital Expenditure Loan
facility to eighty percent (80%) of the appraised liquidation value
of such acquired Equipment.
Each Capital Expenditure Loan shall be evidenced by and
repayable in accordance with the terms of that certain Secured
Promissory Note (Capital Expenditure Loan) of even date herewith,
executed by Borrower to the order of Coast (the "Secured Promissory
Note"). The Secured Promissory Note shall provide for monthly
payments of interest only for the first ninety (90) days followed by
a forty-eight (48) month amortization of equal monthly payments of
principal together with interest, with all amounts due and payable
at the end of the initial term hereof, unless this Agreement is
sooner terminated pursuant to the terms hereof. Obligations owing
under the Secured Promissory Note shall constitute Obligations and
shall be secured by all of the Collateral.
================================================================================
2. INTEREST.
INTEREST RATE
(Section 1.2):
A rate equal to the "Prime Rate" plus the Applicable Margin,
calculated on the basis of a 360-day year for the actual number of
days elapsed. The interest rate applicable to all Loans shall be
adjusted monthly as of the first day of each month, and the interest
to be charged for each month shall be based on the highest "Prime
Rate" in effect during said month. "Prime Rate" means the actual
"Reference Rate" or the substitute therefor of the Bank of America
NT & SA whether or not that rate is the lowest interest rate charged
by said bank. If the Prime Rate, as defined, is unavailable, "Prime
Rate" shall mean the highest of the prime rates published in the
Wall Street Journal on the first business day of the month, as the
base rate on corporate loans at large U.S. money center commercial
banks.
MINIMUM MONTHLY
INTEREST
(Section 1.2):
An amount per month equal to forty percent (40%) of the product of
the Maximum Dollar Amount times the monthly average of the Prime
Rates
3
<PAGE>
plus the Applicable Margins in effect for the month of determination
of the Minimum Monthly Interest.
================================================================================
3. FEES
(Section 1.3): Origination Fee:
(i) a fee of Twenty-Five Thousand Dollars ($25,000) payable on
the first anniversary of this Agreement in the event that the
value of each warrant to acquire shares of Borrower's common
stock granted to Coast by the Warrant is not at least $2.00 above
the Warrant exercise price per share as measured by the average
daily closing price for Borrower's shares of common stock for the
month of December 1997 as determined by Coast; and
(ii) an additional fee of Twenty-Five Thousand Dollars ($25,000)
payable on the second anniversary of this Agreement in the event
that the value of each warrant to acquire shares of Borrower's
common stock granted to Coast by the Warrant is not at least
$4.00 above the Warrant exercise price per share as measured by
the average daily closing price for Borrower's shares of common
stock for the month of December 1998 as determined by Coast.
The Origination Fee, if earned, shall be due and payable
notwithstanding the earlier termination of this Agreement for
whatever reason.
Facility Fee:
Three Thousand Dollars ($3,000), per calendar quarter, payable on
the first Business Day of each quarter (pro rated for any partial
quarter at the beginning of the term of this Agreement).
================================================================================
4. MATURITY DATE
(Section 6.1):
April 3, 1999, subject to automatic renewal as provided in
Section 6.1 above, and early termination as provided in Section
6.2 above.
RENEWAL FEE
Borrower shall pay to Coast upon the renewal of this Agreement,
as provided in Section 6.1 above, a renewal fee in an amount
equal to one-half of one percent (0.5%) of the Maximum Dollar
Amount.
EARLY TERMINATION FEE
(Section 6.2):
An amount equal to (a) three percent (3%) of the Maximum Dollar
Amount, if such early termination occurs on or prior to the six
month anniversary of the date hereof; or (b) two percent (2%) of
the Maximum Dollar Amount, if such early termination occurs after
the six month anniversary of the date hereof but on or prior to
the twelve month
4
<PAGE>
anniversary of the date hereof; or (c) one percent (1%) of the
Maximum Dollar Amount if such early termination occurs after the
twelve month anniversary of the date hereof but prior to the
Maturity Date.
================================================================================
5. REPORTING.
(Section 5.3):
Borrower shall provide Coast with the following:
1. Monthly Receivable agings of Borrower and monthly Receivable
agings of its subsidiaries, on an unconsolidated basis, aged
by invoice date, within ten (10) days after the end of each
calendar month.
2. Monthly accounts payable agings of Borrower, aged by invoice
date, and outstanding or held check registers within ten (10)
days after the end of each calendar month.
3. Monthly internally prepared financial statements on a
consolidated basis, as soon as available, and in any event
within thirty (30) days after the end of each calendar month.
4. Quarterly internally prepared financial statements filed on
form 10Q with the Securities Exchange Commission pursuant to
the Securities Exchange Act of 1934, as soon as available,
and in any event within forty-five (45) days after the end of
each fiscal quarter of Borrower.
5. Separate customer lists of Borrower and its subsidiaries,
including each customer name, address, and phone number on a
quarterly basis.
6. Annual financial statements filed on form 10K with the
Securities Exchange Commission pursuant to the Securities
Exchange Act of 1934, as soon as available, and in any event
within ninety (90) days following the end of Borrower's
fiscal year, certified by independent certified public
accountants acceptable to Coast.
7. All Hospital Management Outsourcing Contracts entered into by
Borrower after the date hereof.
8. All contracts governing or relating to Borrower's provision
of transcription services entered into by Borrower after the
date hereof.
================================================================================
5
<PAGE>
6. BORROWER INFORMATION:
PRIOR NAMES OF
BORROWER
(Section 3.2): First Western Health Corporation; TriCare, Inc.; and
Bottomley & Associates
PRIOR TRADE NAMES
OF BORROWER
(Section 3.2): None
EXISTING TRADE
NAMES OF BORROWER
(Section 3.2): Express Medical Transcription; Griener Medical
Transcription; and Medical Transcription of Atlanta
OTHER LOCATIONS
AND ADDRESSES
(Section 3.3): See Exhibit 3.3.
MATERIAL ADVERSE
LITIGATION
(Section 3.10): None other than as disclosed in Borrower's form 10K
filed with the Securities Exchange Commission for the
year ending December 1, 1996.
================================================================================
7. CONDITIONS PRECEDENT
(Section 5.1): 1. Borrower shall have excess borrowing availability of
not less than Five Hundred Thousand Dollars
($500,000), after giving effect to the initial
advances hereunder, the payment of accounts payable to
a level and condition acceptable to Coast, and the
payment of all book overdrafts;
2. Borrower shall have no payable account on which
payment has been due for ninety (90) days or more from
the invoice date;
3. All taxes of the Borrower are current;
4. The Consolidated Tangible Net Worth equals at least
Two Million Dollars ($2,000,000);
5. Borrower shall have provided Coast with a business
plan, in form and substance acceptable to Coast;
6
<PAGE>
6. Coast shall have received and reviewed to its
satisfaction, all existing Hospital Management
Outsourcing Contracts; and
7. Coast shall have received and reviewed to its
satisfaction, all existing contracts for transcription
services.
================================================================================
8. ADDITIONAL DEFINITIONS
(Section 8): "Applicable Margin" means a percentage per annum
-----------------
determined by reference to the applicable Debt Service
Coverage Ratio as set forth below:
Debt Service Coverage Ratio Applicable Margin
--------------------------- -----------------
1.5:1.0 or greater 1.75%
less than 1.5:1.0 2.25%
provided, however, that during the period from the date
-------- -------
hereof to five (5) Business Days after the receipt and
satisfactory review by Coast, pursuant to Section 5 of
this Schedule, of the quarterly internally prepared
financial statement of Borrower for the fiscal quarter
ending March 31, 1997, the Applicable Margin shall be two
and one-quarter percent (2.25%); provided further, that
-------- -------
after the occurrence and during the continuance of a
Default or an Event of Default, the Applicable Margin
shall be two and one-quarter percent (2.25%); and provided
--------
further, that no reduction in the Applicable Margin shall
-------
be made until the required Debt Service Coverage Ratio for
such reduced Applicable Margin has been maintained by the
Borrower for two (2) consecutive fiscal quarters.
Notwithstanding the foregoing, if the Consolidated
Tangible Net Worth is less than One Million Seven Hundred
Fifty Thousand Dollars ($1,750,000) for any one fiscal
quarter, then the Applicable Margin shall increase to two
and one-half percent (2.5%) and shall remain at such
percent until the Consolidated Tangible Net Worth equals
or is greater than One Million Seven Hundred Fifty
Thousand Dollars ($1,750,000).
For purposes of this Agreement, any change in the
Applicable Margin based upon a change in the Debt Service
Coverage Ratio or the Consolidated Tangible Net Worth
shall be effective five (5) Business Days after the
receipt and satisfactory review by Coast of the quarterly
internally prepared financial statements of the Borrower
reflecting such change.
7
<PAGE>
"Capital Expenditure Loan Notes" has the meaning set
------------------------------
forth in Section 1 of this Schedule.
"Consolidated Tangible Net Worth" at any date of
-------------------------------
determination, means Borrower's tangible net worth on a
consolidated basis as determined in accordance with
generally accepted accounting principles, consistently
applied.
"Debt Service Coverage Ratio" at any date of
---------------------------
determination, means EBITDA, minus the unfinanced portion
-----
of capital expenditures, divided by the sum of (i) total
-------
interest expense of the Borrower for such period
(including the interest portion on all capitalized
leases), (ii) cash dividends or other cash distributions
on the capital stock of Borrower actually paid during such
period, (iii) regularly scheduled principal payments on
all indebtedness of the Borrower whether paid or not paid
during such period (provided that the maturity date of any
revolving credit facility shall not be considered a
regularly scheduled principal payment until such time as
the revolving credit facility is terminated, whether at
maturity, upon default or otherwise in accordance with its
terms), and (iv) taxes accrued for the period less
deferred tax expense for the period.
"EBITDA" for any fiscal period of Borrower, means the
------
consolidated pre-tax net income of Borrower for such
fiscal period, plus (i) total interest expense and (ii)
depreciation, amortization and other non-cash items to the
extent deducted in the calculation of pre-tax income, and
minus non-recurring miscellaneous income and expenses, all
calculated on a consolidated basis in accordance with
generally accepted accounting principles, consistently
applied.
"Eligible Hospital Management Outsourcing Contracts"
--------------------------------------------------
means Hospital Management Outsourcing Contracts which (a)
are complete and fully executed; (b) provide for a fixed
annual fee payable to Borrower in twelve (12) monthly
installments; (c) have a term of at least two (2) years
for those Hospital Management Outsourcing Contracts in
effect as of the date hereof or a term which expires after
the termination of this Loan Agreement for those Hospital
Management Outsourcing Contracts entered into by Borrower
after the date hereof, provided, however, Borrower may
-------- -------
request and Coast may agree in its reasonable discretion
that a Hospital Management Outsourcing Contract with a
shorter term be included as an Eligible Hospital
Management Outsourcing Contract; and (d) Coast, in its
good faith business judgment, shall deem eligible for
borrowing.
8
<PAGE>
"Eligible Transcription Services Receivables" means
-------------------------------------------
Eligible Receivables of Borrower arising from contracts
with hospitals or associated healthcare providers for the
transcription of physician dictated medical notes on a
transaction basis; provided, that, Eligible Transcription
-------- ----
Services Receivables shall not include receivables on
which the account debtor has failed to pay such receivable
within a period of ninety (90) days after the invoice
date.
"Hospital Management Outsourcing Contracts" means
-----------------------------------------
contracts for Borrower's healthcare information management
services to hospitals and other healthcare providers for
the contract management of their healthcare information,
medical records or admissions departments, including case
management, cost containment and rehabilitation services
to the insurance and risk management industry.
"Outsourcing Contract Loans" has the meaning set
--------------------------
forth in Section 1 of this Schedule.
"Recurring Automatic Payments" means monthly automatic
----------------------------
payments payable to Borrower one month in advance of
services to be performed and arising from Eligible
Hospital Management Outsourcing Contracts and does not
include (i) fees for optimization, physician education or
case mix index improvement services performed by Borrower
or (ii) one-time fees of any kind, including, but not
limited to, implementation fees, indoctrination fees,
"clean-up" fees, initiation fees, cancellation fees or
termination fees.
"Secured Promissory Note" has the meaning set forth
-----------------------
in Section 1 of the Schedule.
"Transcription Services Receivable Loans" has the
---------------------------------------
meaning set forth in Section 1 of this Schedule.
"Warrant" means that certain Stock Purchase Warrant of
-------
Borrower, of even date herewith, granting Coast the right
to acquire up to 15,000 shares of the common stock of
Borrower at an initial exercise price of $4 5/8 per share.
================================================================================
9
<PAGE>
BORROWER: COAST:
- -------- -----
TRANSCEND SERVICES, INC., COAST BUSINESS CREDIT, a division of
a Delaware corporation Southern Pacific Thrift & Loan
Association
By /s/ David W. Murphy By /s/ Robert Pete
----------------------------------- -----------------------------------
President or Vice President President or Vice President
By /s/ Jennifer Kirk By
----------------------------------- -----------------------------------
Secretary or Assistant Secretary Secretary or Assistant Secretary
10
<PAGE>
EXHIBIT 3.3
-----------
Other Locations and Addresses of Borrower:
- -----------------------------------------
1. 2471 Chancery Place
Marietta, Georgia 30066
2. 13 A Street
Burlington, Massachusetts 01803
3. 125 Fairfield Way, Suite 340
Bloomingdale, Illinois 60102
4. 3796 Olentangy River Road
Columbus, Ohio 43214
5. 1789 South Braddock Avenue, Suite 210
Pittsburgh, Pennsylvania 15218
6. 9437 South Union Square
Sandy, Utah 84070
7. 733 East Chapman Avenue
Fullerton, California 92831
11
<PAGE>
FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT
----------------------------------------------
THIS FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT (this "Amendment"), dated
---------
as of April 15, 1997, is entered into by and between TRANSCEND SERVICES, INC., a
Delaware corporation ("Borrower") and COAST BUSINESS CREDIT, a division of
--------
Southern Pacific Thrift & Loan Association, a California corporation ("Coast"),
-----
in light of the following facts:
RECITALS
--------
10.17 Borrower and Coast are parties to that certain Loan and Security
Agreement (the "Loan Agreement") and that certain letter agreement setting forth
--------------
the conditions subsequent to the closing of the loans contemplated by the Loan
Agreement (the "Conditions Subsequent Letter"), each dated as of April 3, 1997.
----------------------------
10.18 Borrower and Coast desire to (i) amend the Loan Agreement to clarify
the provisions relating to Minimum Monthly Interest and the applicable
interest rate upon the occurrence of an Event of Default; and (ii) amend the
Conditions Subsequent Letter to set forth certain leased locations for which
landlord waivers must be obtained before Coast will make the initial advances
contemplated by the Loan Agreement.
10.19 Borrower and Coast are willing to amend the Loan Agreement and
Condition Subsequent Letter under the terms and conditions set forth in this
Amendment. Borrower is entering into this Amendment with the understanding and
agreement that, except as specifically provided herein, none of Coast's rights
or remedies as set forth in the Loan Agreement is being waived or modified by
the terms of this Amendment.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
herein contained, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
(a) Defined Terms. Any and all initially capitalized terms set forth in
-------------
this Amendment without definition shall have the respective meanings assigned
thereto in the Loan Agreement.
12
<PAGE>
(b) Minimum Monthly Interest. The second paragraph of Section 2 of the
------------------------
Schedule to the Loan Agreement entitled "Minimum Monthly Interest (Section 1.2)"
is hereby amended to read in its entirety as follows:
"An amount per month equal to forty percent (40%) of the product of the
Maximum Dollar Amount times the Prime Rate plus the Applicable Margin in
effect for the month of determination of the Minimum Monthly Interest."
(c) Event of Default Interest Rate.
------------------------------
(a) The last sentence of Section 7.2 of the Loan Agreement is hereby
amended to read in its entirety as follows:
"Without limiting any of Coast's rights and remedies, from and after the
occurrence of any Event of Default, the interest rate applicable to the
Obligations shall be increased by an additional three percent (3%) per annum
above the Prime Rate plus the Applicable Margin in effect for the month of
determination of such interest rate."
(b) The following is hereby deleted from the first paragraph of the
definition of "Applicable Margin" in Section 8 of the Schedule to the Loan
Agreement:
"provided further, that after the occurrence and during the continuance of a
----------------
Default or an Event of Default, the Applicable Margin shall be two and one-
quarter percent (2.25%);"
(c) The following is hereby added to the end of the second paragraph of
the definition of "Applicable Margin" in Section 8 of the Schedule to the Loan
Agreement:
"and after the occurrence and during the continuance of any Event of
Default, the Applicable Margin shall be two and one-half percent (2.5%),
plus any increase pursuant to Section 7.2 of the Loan Agreement."
(d) Landlord Waivers. Condition (iii) contained in the Condition
----------------
Subsequent Letter is hereby amended to read in its entirety as follows:
"Coast shall not be obligated to make (A) the initial Loans under the Loan
Agreement until Coast has received a landlord waiver, in form and substance
acceptable to Coast, for the location at 3353 Peachtree Road, Suite #1000,
Atlanta, Georgia and (B) advances under the Capital Expenditure Loan facility
until Coast has received landlord waivers, in form and substance acceptable to
13
<PAGE>
Coast, for each of those locations (including without limitation, any
hospitals or medical centers) for which Equipment acquired with the Capital
Expenditure Loans will be located. Within sixty (60) days after the date
hereof, Borrower will use its best efforts to deliver to Coast landlord
waivers, in form and substance acceptable to Coast, for any other location at
which Borrower maintains Collateral, and to the extent Borrower is unable to
deliver such landlord waivers, Coast may establish borrowing availability
reserves in its good faith discretion."
(e) Effectiveness of this Amendment. Coast must have received this
-------------------------------
Amendment fully executed in a sufficient number of counterparts for distribution
to Coast and Borrower, before this Amendment is effective and before Coast is
required to extend any credit to Borrower as provided for by the Loan Agreement.
(f) Representations and Warranties. The Borrower represents and warrants
------------------------------
as follows:
(a) Authority. The Borrower has the requisite corporate power and authority to
---------
execute and deliver this Amendment and to perform its obligations hereunder
and under the Loan Agreement, and any other agreement entered into in
connection with the Loan Agreement (collectively, the "Loan Documents") to
--------------
which it is a party. The execution, delivery and performance by the Borrower of
this Amendment and the performance by Borrower of each Loan Document (as amended
or modified hereby) to which it is a party have been duly approved by all
necessary corporate action of the Borrower and no other corporate proceedings on
the part of the Borrower are necessary to consummate such transactions.
(b) Enforceability. This Amendment has been duly executed and delivered by
--------------
the Borrower. This Amendment and each Loan Document (as amended or modified
hereby) is the legal, valid and binding obligation of the Borrower hereto or
thereto, enforceable against the Borrower in accordance with its terms, and is
in full force and effect.
(c) Representations and Warranties. The representations and warranties
------------------------------
contained in each Loan Document (other than any such representations or
warranties that, by their terms, are specifically made as of a date other than
the date hereof) are correct on and as of the date hereof as though made on and
as of the date hereof.
7. Choice of Law. The validity of this Amendment, its construction,
-------------
interpretation and enforcement, and the rights of the parties hereunder, shall
be
14
<PAGE>
determined under, governed by, and construed in accordance with the internal
laws, of the State of
California governing contracts only to be performed in that State.
8. Counterparts. This Amendment may be executed in any number of counterparts
------------
and by different parties and separate counterparts, each of which when so
executed and delivered, shall be deemed an original, and all of which, when
taken together, shall constitute but one and the same instrument. Delivery of
an executed counterpart of a signature page to this Amendment by telefacsimile
shall be effective as delivery of a manually executed counterpart of this
Amendment.
9. Reference to and Effect on the Loan Documents.
---------------------------------------------
(a) Upon and after the effectiveness of this Amendment, each reference in
the Loan Agreement to "this Agreement", "hereunder", "hereof" or words of like
import referring to the Loan Agreement, and each reference in the other Loan
Documents to "the Loan Agreement", "thereof" or words of like import referring
to the Loan Agreement, shall mean and be a reference to the Loan Agreement as
modified and amended hereby.
(b) Except as specifically amended above, the Loan Agreement and all other
Loan Documents, are and shall continue to be in full force and effect and are
hereby in all respects ratified and confirmed and shall constitute the legal,
valid, binding and enforceable obligations of Borrower to Coast.
(c) To the extent that any terms and conditions in any of the Loan
Documents shall contradict or be in conflict with any terms or conditions of the
Loan Agreement, after giving effect to this Amendment, such terms and conditions
are hereby deemed modified or amended accordingly to reflect the terms and
conditions of the Loan Agreement as modified or amended hereby.
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment by their
respective duly authorized officers as of the date first above written.
TRANSCEND SERVICES, INC.,
a Delaware corporation
By: /s/ David W. Murphy
-----------------------------------
President or Vice President
By: /s/ Jennifer Kirk
-----------------------------------
Secretary or Ass't Secretary
COAST BUSINESS CREDIT,
a division of Southern Pacific Thrift & Loan
Association
By: /s/ Robert Pete
--------------------------------------
President or Vice President
By:
-------------------------------------
Secretary or Ass't Secretary
16
<PAGE>
SECURED PROMISSORY NOTE
(Capital Expenditure Loans)
Los Angeles, California
$300,000 April 3, 1997
FOR VALUE RECEIVED, the undersigned ("Borrower") promises to pay to
the order of Coast Business Credit, a division of Southern Pacific Thrift & Loan
Association ("Coast"), at 12121 Wilshire Boulevard, Suite 1111, Los Angeles,
California, or at such other address as the holder of this Note shall direct,
the principal sum of Three Hundred Thousand Dollars ($300,000), or such lesser
sum as may be advanced from time to time hereunder, which said sum shall be
advanced to Borrower in increments of at least Fifty Thousand Dollars ($50,000)
each, based upon an advance rate of eighty percent (80%) of the cost of new
equipment acquired by Borrower (less any and all sales taxes and installation
charges) and seventy percent (70%) of the fair market value, as determined by
Coast, of used equipment, acquired by Borrower (less any and all sales taxes and
installation charges). At the time of each advance hereunder, the aggregate of
the then outstanding principal balance, if any, shall be added to the new
advance and the total aggregate balance of both shall be amortized over forty-
eight (48) months, and the amount of said installments, rounded to the nearest
One Hundred Dollars ($100), shall be payable in consecutive monthly payments (or
earlier, as hereinafter referred to) on the last day of each month commencing
ninety (90) days following the initial advance and each such subsequent advance
hereunder, and continuing on the last day of each succeeding month until April
1, 1999. The entire remaining unpaid principal balance of this Note, plus any
and all accrued and unpaid interest, shall be due and payable on the earlier of:
(i) April 3, 1999, or (ii) the date the Loan and Security Agreement between the
Borrower and Coast dated of even date herewith (the "Loan Agreement") terminates
by its terms or is terminated by either party in accordance with its terms. All
capitalized terms used herein and not otherwise defined herein shall have the
meaning ascribed to them in the Loan Agreement.
This Note shall bear interest on the unpaid principal balance hereof
from time to time outstanding at a rate equal to the Interest Rate as defined
and set forth in the Loan Agreement. Accrued interest shall be payable monthly,
in addition to the principal payments provided above, commencing on the last day
of the first full calendar month following the initial advance and each
subsequent advance hereunder, and continuing on the last day of each succeeding
month.
In addition to the payments of principal and interest as provided
above, Borrower shall pay to Coast within ten (10) Business Days of the
appraisal of the equipment acquired by Borrower (as required under the Loan
Agreement), an
17
<PAGE>
amount, if necessary, to decrease the outstanding principal amount of this Note
to eighty percent (80%) of the appraised liquidation value of such acquired
Equipment.
Principal of, and interest on, and any other payment made pursuant to
this Note shall be payable in lawful money of the United States of America. If a
payment hereunder becomes due and payable on a Saturday, Sunday or legal
holiday, the due date thereof shall be extended to the next succeeding business
day, and interest shall be payable thereon during such extension.
In the event any payment of principal or interest on this Note is not
paid in full when due, or if any other default or event of default occurs and
the applicable cure periods have expired under the Loan Agreement or any other
present or future instrument, document, or agreement between Borrower and Coast,
Coast may, at its option, at any time thereafter, declare the entire unpaid
principal balance of this Note plus all accrued interest to be immediately due
and payable, without notice or demand. Without limiting the foregoing, and
without limiting Coast's other rights and remedies, in the event any installment
of principal or interest is not paid in full on or before the date due, Borrower
agrees that it would be impracticable or extremely difficult to fix the actual
damages resulting therefrom to Coast, and therefore the Borrower agrees
immediately to pay to Coast an amount equal to five percent (5%) of the
installment (or portion thereof) not paid, as liquidated damages, to compensate
Coast for the internal administrative expenses in administering the default.
The acceptance of any installment of principal or interest by Coast after the
time when it becomes due, as herein specified, shall not be held to establish a
custom, or to waive any rights of Coast to enforce payment when due of any
further installments or any other rights, nor shall any failure or delay to
exercise any rights be held to waive the same.
All payments hereunder are to be applied first to costs and fees
referred to hereunder, second to the payment of accrued interest and the
remaining balance to the payment of principal. Any principal prepayment
hereunder shall be applied against principal payments in the inverse order of
maturity. Coast shall have the continuing and exclusive right to apply or
reverse and reapply any and all payments hereunder in its sole discretion.
Borrower agrees to pay all costs and expenses (including without
limitation attorney's fees) incurred by Coast in connection with or related to
this Note, or its enforcement, whether or not suit be brought. Except as
expressly provided to the contrary in the Loan Agreement, Borrower hereby
further waives presentment, demand for payment, notice of dishonor, notice of
nonpayment, protest, notice of protest, and any and all other notices and
demands in connection with the delivery, acceptance, performance, default, or
enforcement of this Note.
18
<PAGE>
This Note is secured by the Loan Agreement and all other present and
future security agreements between Borrower and Coast. Nothing herein shall be
deemed to limit any of the terms or provisions of the Loan Agreement, or any
other present or future document, instrument or agreement, between Borrower and
Coast, and all of Coast's rights and remedies hereunder and thereunder are
cumulative.
In the event any one or more of the provisions of this Note shall for
any reason be held to be invalid, illegal or unenforceable, the same shall not
affect any other provision of this Note and the remaining provisions of this
Note shall remain in full force and effect.
No waiver or modification of any of the terms or provisions of this
Note shall be valid or binding unless set forth in a writing signed by a duly
authorized officer of Coast, and then only to the extent therein specifically
set forth.
COAST AND BORROWER EACH HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY
ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELYING TO: (i)
THIS NOTE; OR (ii) ANY OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN
COAST AND BORROWER; OR (iii) ANY CONDUCT, ACTS OR OMISSIONS OF COAST OR BORROWER
OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER
PERSONS AFFILIATED WITH COAST OF BORROWER.
19
<PAGE>
This Note is payable in, and shall be governed by the internal laws,
of the State of California.
TRANSCEND SERVICES, INC.,
a Delaware corporation
By /s/ Larry G. Gerdes By David W. Murphy
-------------------- ------------------
President Secretary
20
<PAGE>
THREE MONTHS ENDED
MARCH 31
1996 1997
---- ----
LOSS BEFORE DISCONTINUED OPERATIONS $(523,000) $(104,000)
LOSS FROM DISCONTINUED OPERATIONS (129,000) (34,000)
---------- ----------
NET LOSS $(652,000) $(138,000)
========== ==========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 18,447,000 19,494,000
========== ==========
LOSS PER COMMON SHARE AND
COMMON SHARE EQUIVALENT
Continuing Operations $(0.03) $(0.01)
Discontinued Operations (0.01) (0.00)
------ ------
NET LOSS PER COMMON SHARE AND
COMMON SHARE EQUIVALENT $(0.04) $(0.01)
======= =======
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF TRANSCEND SERVICES, INC. FOR THE THREE MONTHS ENDED
MARCH 31,1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 625
<SECURITIES> 0
<RECEIVABLES> 3,737
<ALLOWANCES> (90)
<INVENTORY> 0
<CURRENT-ASSETS> 4,827
<PP&E> 4,592
<DEPRECIATION> (2,301)
<TOTAL-ASSETS> 14,917
<CURRENT-LIABILITIES> 6,278
<BONDS> 0
0
0
<COMMON> 195
<OTHER-SE> 5,645
<TOTAL-LIABILITY-AND-EQUITY> 14,917
<SALES> 0
<TOTAL-REVENUES> 9,958
<CGS> 8,305
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,668
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (96)
<INCOME-PRETAX> (104)
<INCOME-TAX> 0
<INCOME-CONTINUING> (104)
<DISCONTINUED> (34)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (138)
<EPS-PRIMARY> ($0.01)
<EPS-DILUTED> ($0.01)
</TABLE>
