<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
[_] Definitive Proxy Statement Rule 14a-6(e)(2))
[X] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
TRANSCEND SERVICES, INC.
------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
Payment of Filing Fee (Check the appropriate box):
[X] No Filing Fee Required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
--------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
--------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
--------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
--------------------------------------------------------------------------
(5) Total fee paid:
--------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
--------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
--------------------------------------------------------------------------
(3) Filing Party:
--------------------------------------------------------------------------
(4) Date Filed:
--------------------------------------------------------------------------
Notes:
<PAGE>
TRANSCEND SERVICES, INC.
3353 PEACHTREE ROAD, N.E., SUITE 1000
ATLANTA, GEORGIA 30326
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held on April 28, 1998
To the Stockholders:
The annual meeting of stockholders (the "Annual Meeting") of Transcend
Services, Inc. will be held on April 28, 1998 at The Buckhead Club, 3343
Peachtree Road, 18th Floor, Atlanta, Georgia 30326 at 10:00 a.m. local time for
the following purposes:
1. To elect a Board of Directors consisting of six members to hold office
until the next annual meeting of stockholders or until their successors are
elected and qualified.
2. To approve an amendment to the Company's 1992 Stock Option Plan, as
amended, to increase the number of shares for issuance under such Plan by
750,000 shares from 2,000,000 shares to 2,750,000 shares.
3. To ratify the appointment of Arthur Andersen LLP as independent public
accountants to audit the accounts of the Company and its subsidiary for the
year ending December 31, 1998.
4. To transact such other business as may properly come before the Annual
Meeting or any postponement or adjournment thereof.
Only stockholders of record at the close of business on March 9, 1998 shall be
entitled to notice of, and to vote at, the Annual Meeting or any adjournment
thereof.
A Proxy Statement and a proxy solicited by the Board of Directors are enclosed
herewith. You are cordially invited to attend the Annual Meeting. Whether or
not you plan to attend the Annual Meeting, please complete, sign, date and mail
the enclosed proxy card promptly in the enclosed postage-paid envelope. If you
attend the meeting, you may, if you wish, withdraw your proxy and vote in
person.
By order of the Board of Directors,
/s/ Doug Shamon
------------------------
DOUG SHAMON
Secretary
Atlanta, Georgia
March 27, 1998
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN
PERSON, YOU ARE URGED TO COMPLETE, SIGN, DATE AND PROMPTLY MAIL THE ENCLOSED
PROXY IN THE ACCOMPANYING POSTAGE PAID ENVELOPE. IF YOU ATTEND THE MEETING, YOU
MAY REVOKE THE PROXY AND VOTE YOUR SHARES IN PERSON.
<PAGE>
TRANSCEND SERVICES, INC.
3353 Peachtree Road, N.E., Suite 1000
Atlanta, Georgia 30326
PROXY STATEMENT
For Annual Meeting of Stockholders To be Held April 28, 1998
GENERAL
This Proxy Statement and the accompanying form of Proxy are being furnished to
the stockholders of Transcend Services, Inc. (the "Company" or "Transcend") on
or about March 27, 1998 in connection with the solicitation of proxies by the
Board of Directors of the Company for use at the Annual Meeting of Stockholders
to be held on April 28, 1998 at The Buckhead Club, 18th Floor, 3343 Peachtree
Road, Atlanta, Georgia 30326 at 10:00 a.m. local time and any adjournment
thereof. Any stockholder who executes and delivers a proxy may revoke it at any
time prior to its use by (i) giving written notice of revocation to the
Secretary of the Company; (ii) executing a proxy bearing a later date; or (iii)
appearing at the meeting and voting in person. The address of the principal
executive offices of the Company is 3353 Peachtree Road, N.E., Suite 1000,
Atlanta, Georgia 30326 and the Company's telephone number is (404) 836-8000.
Unless otherwise specified, all shares represented by effective proxies will
be voted in favor of (i) election of the six nominees as Directors; (ii) the
approval of an amendment to the Company's 1992 Stock Option Plan, as amended,
to increase the number of shares for issuance under such Plan by 750,000 shares
from 2,000,000 shares to 2,750,000 shares; (iii) the ratification of the
selection of Arthur Andersen LLP to serve as the independent public accountants
for the Company for fiscal 1998 and; iv) the transaction of such other business
as may properly come before the Annual Meeting or any postponement or
adjournment thereof. The Board of Directors does not know of any other
business to be brought before the meeting, but as to any such other business,
proxies will be voted upon any such matters in accordance with the best
judgement of the person or persons acting thereunder as to what is in the best
interests of the Company.
The cost of soliciting proxies will be borne by the Company. In addition to
use of the mail, proxies may be solicited in person or by telephone or telegram
by Directors and Officers of the Company who will not receive additional
compensation for such services. Brokerage houses, nominees, custodians and
fiduciaries will be requested to forward soliciting material to beneficial
owners of stock held of record by them, and the Company will reimburse such
persons for their reasonable expenses in doing so.
Holders of record of outstanding shares of both Common Stock of the Company
and Series A Preferred Stock at the close of business on March 9, 1998 are
entitled to notice of and to vote at the meeting. Each stockholder of common
stock is entitled to one vote for each share held on the record date. Each
stockholder of Series A Preferred Stock shall be entitled to 7.4 votes per share
on each preferred share held. There were 20,567,739 shares of Common Stock
outstanding and entitled to vote on March 9, 1998 and 212,800 shares of Series A
Preferred Stock outstanding and entitled to vote on March 9, 1998.
When a quorum is present at the meeting, the affirmative vote of the holders
of a majority of the shares having voting power present in person or by proxy
shall decide the action proposed in each matter listed in the accompanying
Notice of Annual Meeting of Stockholders except the election of Directors, who
are elected by a plurality of the votes of the shares present in person or by
proxy and entitled to vote. Abstentions and broker "non-votes" will be counted
as present in determining whether the quorum requirement is satisfied. A "non-
vote" occurs when a nominee holding shares for a beneficial owner votes on one
proposal pursuant to discretionary authority or instructions from the beneficial
owner, but does not vote on another proposal because the nominee has not
received instruction from the beneficial owner, and does not have discretionary
power. An abstention from voting by a stockholder on a proposal has the same
effect as a vote against such proposal. Broker "non-votes" are not counted for
purposes of determining whether a proposal has been approved.
3
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth, as of March 9, 1998, certain information with
respect to all stockholders known to Transcend to beneficially own more than
five percent of the Company's Common Stock, and information with respect to
Transcend Common Stock beneficially owned by each Director of Transcend, each
nominee, the Executive Officers included in the Summary Compensation Table set
forth under the caption "Executive Compensation" and all directors and executive
officers of Transcend as a group. Except as otherwise indicated, the
stockholders listed in the table have sole voting and investment powers with
respect to the Common Stock owned by them.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
NAME AND ADDRESS BENEFICIAL PERCENT OF
OF BENEFICIAL OWNER OWNERSHIP/(1)/ CLASS/(1)/
------------------- -------------- ----------
<S> <C> <C>
Gerdes Huff Investments................ 3,500,001/(2)/ 17.02%
3353 Peachtree Road, N.E, Suite 1030
Atlanta, Georgia 30326
Donald L. Lucas........................ 615,219/(3)/ 2.97%
Larry G. Gerdes........................ 4,776,889/(4)/ 22.9%
3353 Peachtree Road, N.E, Suite 1000
Atlanta, Georgia 30326
B. Frederick Becker.................... 9,457/(5)/ *%
George B. Caldwell..................... 133,581/(6)/ *%
Walter S. Huff, Jr..................... 5,112,061/(7)/ 24.2%
3353 Peachtree Road, N.E, Suite 1000
Atlanta, Georgia 30326
Charles E. Thoele...................... 84,994/(8)/ *%
E. Leo Cooper.......................... 7,500/(9)/ *%
G. Scott Dillon........................ 30,250/(10)/ *%
Todd S. Mann........................... 11,498/(11)/ *%
David W. Murphy........................ 50,727/(12)/ *%
Douglas A. Shamon..................... 17,833/(13)/ *%
All Directors and Officers as a group.. 7,350,008/(14)/ 33.74%
-------------------------
</TABLE>
* Represents less than 1%
/(1)/ "Beneficial Ownership" includes shares for which an individual,
directly or indirectly, has or shares voting or investment power or
both and also includes shares of Common Stock underlying options and
warrants to purchase Common Stock which are exercisable within sixty
days of the date hereof. Beneficial ownership as reported in the above
table has been determined in accordance with Rule 13d-3 of the
Securities Exchange Act of 1934. The percentages are based upon
20,567,739 shares outstanding as of March 9, 1998, except for certain
parties who hold presently exercisable options, convertible preferred
stock or warrants to purchase Common Stock. The percentages for those
4
<PAGE>
parties who hold presently exercisable options, convertible preferred
stock or warrants are based upon the sum of 20,567,739 shares plus the
number of shares subject to presently exercisable options or warrants
held by them, as indicated in the following notes. Unless otherwise
indicated, each person has sole voting and dispositive power with
respect to all shares listed opposite his name.
/(2)/ Such shares are owned of record by Gerdes Huff Investments, a general
partnership the sole general partners of which are Messrs. Gerdes and
Huff. As a result, each of Messrs. Gerdes and Huff are deemed the
beneficial owner of all of such shares.
/(3)/ Includes 410,664 shares held by the Donald L. Lucas and Lygia S. Lucas
Trust dated December 3, 1984, of which Mr. Donald L. Lucas is trustee;
35,000 shares held by the Donald L. Lucas Profit Sharing Trust of which
Mr. Lucas is Successor Trustee; 21,481 shares held by the Donald L.
Lucas Remuneration Account dated July 7, 1993; 74,074 shares held by
the Donald L. Lucas, SUCC TTEE Donald L. Lucas Profit Sharing Trust
which may be by acquired in connection with the Company's November 1997
offering of Series A Convertible Preferred Stock; and 65,000 shares
which Mr. Lucas has the right to acquire pursuant to presently
exercisable stock options. Excludes certain shares and shares
underlying warrants with respect to which Mr. Lucas disclaims
beneficial ownership which were purchased by the Richard M. Lucas
Cancer Foundation, of which Mr. Lucas is the Chairman, in the Company's
private placement dated September 5, 1996; 71,500 shares which may be
acquired upon the conversion of an 8% Convertible Debenture also held
by the Richard M. Lucas Cancer Foundation and 74,074 shares, also held
by the Richard M. Lucas Cancer Foundation, which may be acquired in
connection with the Company's November 1997 offering of Series A
Convertible Preferred Stock.
/(4)/ Includes 3,500,001 shares held by Gerdes Huff Investments, a general
partnership of which Mr. Gerdes is a general partner; 93,600 shares
held by Mr. Gerdes' spouse; 94,155 shares held by Mr. Gerdes as
custodian for his minor children; 50,000 shares held by the Gerdes
Family Partnership LP of which Mr. Gerdes is the General Partner; and
88,888 shares which may be acquired in connection with the Company's
November 1997 offering of Series A Convertible Preferred Stock; and
222,396 shares purchasable pursuant to presently exercisable stock
options.
/(5)/ Includes 8,857 shares held by The Becker Family Foundation; 200 shares
held by Mr. Becker's spouse and 300 shares held by Mr. Becker's minor
children. Excludes 444,444 shares which may be acquired by MMI
Companies, Inc., of which Mr. Becker is Chairman and Chief Executive
Officer and to which Mr. Becker disclaims beneficial ownership, in
connection with the Company's November 1997 offering of Series A
Convertible Preferred Stock. Voting and investment power related to
such shares rests with the investment committee of the board of
directors of MMI Companies, Inc., of which Mr. Becker is not a member.
/(6)/ Includes 22,522 shares subject to presently exercisable warrants to
purchase Common Stock; 14,814 shares which may be acquired in
connection with the Company's November 1997 offering of Series A
Convertible Preferred Stock; and 22,000 shares which Mr. Caldwell has
the right to acquire pursuant to presently exercisable stock options.
Excludes 444,444 shares which may be acquired by MMI Companies, Inc.,
of which Mr. Caldwell is a member of the board of directors and to
which Mr. Caldwell disclaims beneficial ownership, in connection with
the Company's November 1997 offering of Series A Convertible Preferred
Stock. Voting and investment power related to such shares rests with
the investment committee of the board of directors of MMI Companies,
Inc., of which Mr. Caldwell is not a member.
/(7)/ Includes 3,500,001 shares held by Gerdes Huff Investments, a general
partnership of which Mr. Huff is a general partner; 162,650 shares held
by Laumar Investors Limited Partnership, a limited partnership of which
Mr. Huff is the General Partner; 34,000 shares purchasable pursuant to
presently exercisable options; 225,225 shares subject to presently
exercisable warrants to purchase Common Stock; 56,300 shares held by
the Larry G. Gerdes Trust of which Mr. Huff is the trustee; and 296,296
shares held by Laumar Investors Limited Partnership of which Mr. Huff
is the General Partner. Excludes 57,200 shares with respect to which
Mr. Huff disclaims beneficial ownership and which may be acquired upon
the conversion of an 8% Convertible Debenture held by the Walter S.
Huff, Jr. Charitable Foundation, of which Mr. Huff's adult children are
trustees.
/(8)/ Includes 11,261 shares subject to presently exercisable warrants to
purchase Common Stock; 14,814 shares which may be acquired in
connection with the Company's November 1997 offering of Series A
Convertible Preferred Stock; and 34,000 shares purchasable pursuant to
presently exercisable stock options.
/(9)/ Includes 7,500 shares purchasable pursuant to presently exercisable
options.
/(10)/ Includes 250 shares held by Mr. Dillon as custodian for his minor
children and 30,000 shares purchasable pursuant to presently
exercisable options.
/(11)/ Include 10,750 shares purchasable pursuant to presently exercisable
options.
5
<PAGE>
/(12)/ Includes 45,500 shares purchasable pursuant to presently exercisable
options.
/(13)/ Includes 3,000 shares held by Mr. Shamon's minor children.
/(14)/ Includes 471,146 shares subject to presently exercisable stock options
and 259,008 Shares subject to presently exercisable warrants and
488,886 shares subject to presently exercisable Series A Convertible
Preferred Stock.
6
<PAGE>
AGENDA ITEM ONE
ELECTION OF DIRECTORS
The Bylaws of Transcend currently provide that the Board of Directors shall
consist of not less than one Director, subject to increase or decrease in such
number within legal limits by action of the Board of Directors or Stockholders.
There are presently six Directors. Each of the nominees presently serves as a
Director of Transcend. Directors shall be elected to serve until the next
annual meeting of stockholders or until their successors are elected and
qualified.
Each of the nominees has consented to being named in this Proxy Statement and
to serve as a Director of the Company if elected. In the event that any nominee
withdraws, or for any reason is unable to serve as a Director, the proxies will
be voted for such other person as may be designated by the Board of Directors as
substitute nominee, but in no event will proxies be voted for more than six
nominees. Management of the Company has no reason to believe that any nominee
will not continue to be a candidate or will not serve if elected.
Each of the following persons has been nominated by management for election to
the Board of Directors to succeed themselves for a term of one year and until
their successors are elected and qualified:
DONALD L. LUCAS......... Mr. Lucas (age 68) has served as a director of the
Company since December 1985 and has served as Chairman
since August 1989. Mr. Lucas has been a venture
capitalist for more than 35 years. Mr. Lucas also
serves on the board of directors of Cadence Design
Systems, Inc.; Coulter Pharmaceutical, Inc.;
Macromedia, Inc.; Oracle Corporation; and Tricord
Systems, Inc.
B. FREDERICK BECKER..... Mr. Becker (age 51) has served as a director of the
Company since December 1997. Mr. Becker has been
Chairman and Chief Executive Officer of MMI Companies,
Inc., a company engaged in the business of healthcare
risk management for more than 20 years, since joining
MMI Companies in 1985. Mr. Becker was initially Vice
President, then President and CEO of Ideal Mutual
Insurance Company and Optimum Companies from 1982
through 1984; and President of McDonough Caperton
Benefits Group from 1977 to 1982. Mr. Becker has also
served as Assistant Tax Commissioner and Workers'
Compensation Commissioner for the State of West
Virginia from 1974 to 1977, following his experience as
a practicing lawyer in Pennsylvania.
GEORGE B. CALDWELL...... Mr. Caldwell (age 67) has served as a director of the
Company since May 1995. Since 1989, Mr. Caldwell has
served as the Chairman of the Collier Company, a
healthcare consulting company in Chicago, Illinois.
Prior to 1989, Mr. Caldwell served as President and
Chief Executive Officer of Lutheran General
HealthSystem in Park Ridge, Illinois from 1979 to 1989;
and as President and Chief Executive Officer of The
Greater Southeast Community Hospital Foundation of
Washington, D.C. from 1972 to 1979. From 1961 to 1972,
Mr. Caldwell served as President and Chief Executive
Officer of Lake Forest Hospital, Lake Forest, Illinois.
Mr. Caldwell is a Director of MMI Companies, Inc.
LARRY G. GERDES......... Mr. Gerdes (age 49) has served as a director of the
Company since June 1985 and as its President and Chief
Executive Officer since May 1993. From 1991 to 1993,
Mr. Gerdes was a private investor and from May 1992
until the Merger, Mr. Gerdes was the Chairman of the
Board of Directors of the former Transcend Services,
Inc. For the five years prior to 1991, Mr. Gerdes held
7
<PAGE>
various executive positions with HBO & Company, a
provider of information services to the healthcare
industry, including Chief Financial Officer and
Executive Vice President. Mr. Gerdes also serves as a
Director of Delphi Information Systems, Inc.
WALTER S. HUFF, JR...... Mr. Huff (age 63) has served as a director of the
Company since October 1993. Mr. Huff was the founder of
HBO & Company, a provider of information services to
the healthcare industry and served as its Chairman from
1974 until 1990 and Chief Executive Officer from 1974
to 1984 and from 1986 until 1989. Since 1990, Mr. Huff
has been a private investor.
CHARLES E. THOELE....... Mr. Thoele (age 62) has served as a director of the
Company since October 1993. Mr. Thoele has been a
consultant to Sisters of Mercy Health Systems since
February 1991. From 1986 to February 1991, he served as
a director and the Chief Operating Officer of Sisters
of Mercy Health Systems. Mr. Thoele is currently
Chairman of the Catholic Hospital Association.
No Director or Executive Officer of Transcend is related to any other Director
or Executive Officer of Transcend.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE ABOVE NOMINEES.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, executive officers and persons who own more than 10% of the
outstanding Common Stock of the Company to file with the Securities and Exchange
Commission reports of changes in ownership of the Common Stock of the Company
held by such persons. Officers, directors and greater than 10% stockholders are
also required to furnish the Company with copies of all forms they file under
this regulation. To the Company's knowledge, based solely on a review of the
copies of such reports furnished to the Company and representations that no
other reports were required, during the year ended December 31, 1997, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10% stockholders were complied with.
Although it is not the Company's obligation to make filings pursuant to
Section 16 of the Securities Exchange Act of 1934, the Company has adopted a
policy requiring all Section 16 reporting persons to report monthly to the
Assistant Secretary of the Company as to whether any transactions in the
Company's securities occurred during the previous month.
MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
The Company's Board of Directors has two standing committees: the Audit and
Finance Committee and the Stock Option and Compensation Committee. The Board of
Directors does not have a standing Nominating Committee, such function being
reserved to the full Board of Directors. The Audit and Finance Committee (the
"Audit Committee") of the Board of Directors, comprised of Messrs. Lucas and
Caldwell, reviews Transcend's audit procedures and reports from Transcend's
independent public accountants. The Stock Option and Compensation Committee
(the "Compensation Committee"), comprised of Messrs. Becker, Huff and Thoele,
acts as administrator of Transcend's stock option plan and makes recommendations
concerning the establishment of additional employee benefit plans and
compensation for Transcend's executive officers. The Audit and Finance
Committee held three meetings in the twelve months ended December 31, 1997. The
Stock Option and Compensation Committee held one meeting and acted on six times
by Unanimous Consent in the twelve months ended December 31, 1997.
The Board of Directors held five meetings and acted by Unanimous Consent on
twelve occasions during the twelve months ended December 31, 1997. During
fiscal 1997, each Director attended 100% of the total number of meetings of the
Board of Directors and committees on which he served.
8
<PAGE>
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Larry G. Gerdes.......................................... 49 President, Chief Executive Officer and Director
E. Leo Cooper............................................ 52 Executive Vice President, Sales & Marketing
Todd S. Mann............................................. 44 Executive Vice President, Implementation and Engineering;
President and CEO Transcend Case Management Services,
Inc.
David W. Murphy.......................................... 40 Executive Vice President, Transcription
Douglas A. Shamon....................................... 36 Executive Vice President, Chief Financial Officer;
Secretary and Treasurer
</TABLE>
Executive officers are chosen by and serve at the discretion of the Board of
Directors of the Company. Executive officers will devote their full time to the
affairs of the Company. See "Election of Directors" for information with
respect to Larry G. Gerdes.
Mr. Cooper joined Transcend in January 1997 from First Image, a First Data
Corporation company where he served in the positions of Executive Vice President
of Sales and Executive Vice President General Manager of the Data Output
Division from January 1993 to January 1997. Mr. Cooper was responsible for
outsourcing services such as microfilm; CD Rom; laser printing and printing of
statements. Prior to First Data, Mr. Cooper served as Senior Vice President,
Sales for International Banking Technologies ("IBT") from 1989 to 1992. IBT
was acquired by First Data Corporation. From 1982 to 1987, Mr. Cooper was with
Recognition Equipment, Inc. in the positions of District Sales Manager, Regional
Sales Manager and Vice President, National Sales Manager. Prior to REI, Mr.
Cooper spent eleven years with Xerox Corporation in a number of field and staff
senior management positions.
Mr. Mann has served as Executive Vice President - Implementation and
Engineering since October, 1997. He joined the Company in August 1996 as
President and CEO of its wholly owned Transcend Case Management Services, Inc.
division. In December 1996, he was named Executive Vice President - Services
Group of Transcend with added responsibilities for its consulting services, and
its Information Delivery Center. From 1985 until joining Transcend, Mr. Mann
served as Senior Vice President of International Banking Technologies, which is
recognized as creating the concept of placing full-service bank branches in
supermarkets, a company Mr. Mann helped start in 1985.
Mr. Murphy has served as Executive Vice President Transcription since May
1997. Mr. Murphy joined the Company in September 1994 as Vice-President of
Acquisitions and served as Chief Financial Officer from May 1995 to July 1997.
Prior to joining the Company, Mr. Murphy was a founder and General Partner of an
investment company, Spectra Partners, Inc., from 1988 to 1994. Prior to 1988,
Mr. Murphy served in various financial, operating and mergers and acquisition
positions with companies such as Hutchinson SA (France) from 1984 to 1988, First
Boston in 1983 and International Paper Company from 1980 to 1982.
Mr. Shamon joined the Company in July, 1997 as its Executive Vice President
and Chief Financial Officer. In September, 1997, Mr. Shamon was named Executive
Vice President, Chief Financial Officer, Secretary and Treasurer. Prior to
joining Transcend Services, Inc., Mr. Shamon spent the past five years at
Medaphis Corporation, most recently as Executive Vice President/Chief Financial
Officer in the Physician Services Division. Mr. Shamon has also held senior
financial management positions in the Hospital Division at Medaphis. Mr.
Shamon, who is also a CPA, began his career in public accounting with positions
at Peat, Marwick Mitchell & Company and Arthur Andersen & Co.
9
<PAGE>
EXECUTIVE COMPENSATION
The table below provides certain summary information for the fiscal years
ended December 31, 1997, 1996 and 1995 concerning compensation paid or accrued
by the Company to or on behalf of the Company's Chief Executive Officer and the
other executive officers of the Company whose total annual salary and bonus
exceeded $100,000 during the year ended December 31, 1997 (the "Named Executive
Officers.")
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION SECURITIES
-------------------------------- UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS/SAR'S(#)
- --------------------------- ---- -------- -------- ----------------
<S> <C> <C> <C> <C>
Larry G. Gerdes.................. 1997 $ 220,089 $ -- --
President and Chief Executive 1996 210,115 -- --
Officer 1995 205,376 -- --
E. Leo Cooper.................... 1997 $ 176,678 $ -- 80,000
Executive Vice President, Sales &
Marketing
G. Scott Dillon.................. 1997 $ 186,786 $ 30,000
Executive Vice President, 1996 191,932 -- --
Outsourcing Services 1995 59,599 -- 60,000
Todd S. Mann..................... 1997 $ 168,989 $ -- 23,000
Executive Vice President, 1996 38,809 -- 40,000
Installation and Engineering
David W. Murphy.................. 1997 $ 141,333 $ -- 20,000
Executive Vice President, 1996 120,000 -- 10,000
Transcription 1995 100,130 22,675 40,000
Douglas A. Shamon (1)............ 1997 $ 60,229 $ -- 75,000
Executive Vice President, Chief
Financial Officer, Secretary
- --------
</TABLE>
(1) Mr. Shamon joined the Company in July, 1997.
Option/SAR Grants in Last Fiscal Year
The following table sets forth information regarding individual grants of
options for Transcend Common Stock during the twelve months ended December 31,
1997 to each of the executive officers named in the Summary Compensation Table
above. All such grants were made pursuant to the Transcend Services, Inc. 1992
Stock Option Plan, as amended (the "1992 Stock Option Plan"). In accordance
with the rules of the Commission, the table sets forth the hypothetical gains or
"option spreads" that would exist for the options at the end of their respective
ten-year terms based on assumed annualized rates of compound stock price
appreciation of 5% and 10% from the dates the options were granted to the end of
the respective option terms. Actual gains, if any, on option exercises are
dependent on the future performance of Transcend Common Stock and overall market
condition. There can be no assurance that the potential realizable values shown
in this table will be achieved.
10
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
-------------------------------------
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT
% OF TOTAL ASSUMED ANNUAL RATES
NUMBER OF OPTIONS/SAR'S OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION
UNDERLYING EMPLOYEES EXERCISE OR FOR OPTION TERM (3)
OPTIONS/SAR'S IN FISCAL BASE PRICE EXPIRATION -------------------
Name GRANTED (#) (1) YEAR (2) ($/SHARE) DATE 5% 10%
- ---- --------------- -------- --------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
E. Leo Cooper(4)............ 30,000 11.8% $4.375 02/20/07 $27,923 $59,325
5,000 $2.375 06/24/07 $ 2,559 $ 5,511
15,000 $2.875 10/27/07 $ 9,294 $20,014
30,000 $2.375 12/29/07 $15,355 $33,067
G. Scott Dillon(5)......... 25,000 4.4% $4.875 01/02/07 $26,265 $56,562
5,000 $2.750 05/08/07 $ 2,963 $ 6,381
Todd S. Mann(6)............ 3,000 3.4% $2.750 05/08/07 $ 1,778 $ 3,829
20,000 $2.375 06/24/07 $62,474 $78,945
David W. Murphy(7)......... 2,000 2.9% $2.750 05/08/07 $ 1,185 $ 2,553
18,000 $2.375 12/29/07 $ 9,213 $19,840
Douglas A. Shamon(8)....... 50,000 11.0% $2.0938 06/23/07 $22,561 $48,587
25,000 $2.375 12/29/07 $12,796 $27,556
- ---------------
</TABLE>
(1) Stock options are granted with an exercise price equal to the fair market
value of the Transcend Common Stock on date of grant.
(2) Transcend granted options to purchase 679,378 shares to all directors,
officers, and employees in the twelve months ended December 31, 1997.
(3) The 5% and 10% assumed rates of annual compound stock appreciation are
mandated by rules of the Commission and do not represent Transcend's
estimate or projection of future prices for Transcend Common Stock.
(4) Mr. Cooper was granted 30,000 options on February 20, 1997; 5,000 options
on June 24, 1997; 15,000 options on October 27, 1997 and 30,000 options on
December 29, 1997 which vest annually in equal increments over the
following four years.
(5) Mr. Dillon was granted 25,000 options on January 2, 1997 and 5,000 options
on May 8, 1997 which vest annually in equal increments over the following
four years.
(6) Mr. Mann was granted 3,000 options on May 8, 1997 and 20,000 options on
June 24, 1997 which vest annually in equal increments over the following
four years.
(7) Mr. Murphy was granted 2,000 options on May 8, 1997 and 18,000 options on
December 29, 1997 which vest annually in equal increments over the
following four years.
(8) Mr. Shamon was granted 50,000 options on June 23, 1997 which vest annually
in equal increments over the following four years; however, should there be
a change in control of the Company, 50% of all outstanding options will
immediately vest. Mr. Shamon was granted 25,000 options on December 29,
1997 which vest annually in equal increments over the following four years.
The following table presents information regarding options exercised by the
Named Executive Officers during fiscal 1997 and the value of options outstanding
at December 31, 1997.
AGGREGATED OPTION EXERCISES IN FISCAL 1997 AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED OPTIONS
----------------------------
AT FISCAL YEAR END
------------------
NUMBER VALUE OF
OF SECURITIES UNEXERCISED (1)
UNDERLYING IN-THE-MONEY OPTIONS
SHARES EXERCISED AT FY-END ($)
ACQUIRED VALUE OPTIONS AT FY-END IN-THE-MONEY
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ------------- ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Larry G. Gerdes............ 393,604 $101,943 222,396 / -0- $89,045 / -
</TABLE>
- ----
(1) Dollar values calculated by determining the difference between the fair
market value of the underlying securities at December 31, 1997 ($2.47 per
share) and the aggregate exercise price of the options.
11
<PAGE>
COMPENSATION OF DIRECTORS
The Board payed cash fees to directors who are not executive officers of
Transcend in fiscal 1997 in the amount of $8,000 per annum. In addition, each
person who first becomes a non-employee director is granted, as of the date such
person becomes a director of Transcend, an option to purchase 10,000 shares of
Transcend's Common Stock.
Each non-employee director also will be granted an option to purchase 6,000
shares of the Transcend's Common Stock, except the Chairman, who will be granted
an option to purchase 9,000 shares, upon election or re-election at the annual
stockholders' meeting provided they have served on the board a minimum of six
months.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Stock Option and Compensation Committee of the Board of Directors for 1997
was comprised of Walter S. Huff, Jr. and Charles E. Thoele. None of the members
of the Stock Option and Compensation Committee served as an officer or employee
of the Company or any of its subsidiaries during fiscal 1997.
On November 14, 1997, the Company raised approximately $5.3 million in cash
through a private placement of 212,800 shares of newly issued Series A
Convertible Preferred Stock (the "Preferred Stock"). The Preferred Stock has a
$.01 par value, $25.00 stated value, and a dividend of 9% payable quarterly.
The shares of Preferred Stock are convertible into shares of Common Stock at any
time at the option of the holder at a conversion price of $3.375 per share.
Laumar Investors Limited Partnership, of which Walter S. Huff, Jr. is the
limited partner, purchased 296,296 shares and Charles E. Thoele purchased
14,814 shares in the Series A Convertible Preferred Stock offering.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information regarding transactions between the Company and either Walter
S. Huff, Jr. or Charles E. Thoele, see "Executive Compensation -- Compensation
Committee Interlocks and Insider Participation."
In addition to Messrs. Huff and Thoele, certain other Directors and other
related parties acquired shares in the November 1997 issuance of Series A
Convertible Preferred Stock. Mr. Gerdes acquired 88,888 shares; Mr. Caldwell
acquired 14,814 shares; MMI Companies, Inc., of which Mr. Becker is Chairman of
the Board and Mr. Caldwell is a Director and to which Messrs. Becker and
Caldwell disclaim beneficial ownership, acquired 444,444 shares; and Richard M.
Lucas Cancer Foundation, of which Mr. Lucas is the Chairman and to which Mr.
Lucas disclaims any beneficial ownership, acquired 74,074 shares.
Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, that might incorporate future filings,
including this Proxy Statement, in whole or in part, the following Report of
Compensation Committee on Executive Compensation and the Stockholder Return
Performance Graph shall not be incorporated by reference into any such filings.
12
<PAGE>
REPORT OF STOCK OPTION AND COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
During fiscal 1997, the Stock Option and Compensation Committee of the Board
of Directors was comprised of two non-employee members of the Board, Walter S.
Huff, Jr. and Charles E. Thoele. The Stock Option and Compensation Committee
establishes the general compensation policy for all executive officers of the
Company and administers the incentive plans, including the 1992 Stock Option
Plan, as Amended and Restated and the bonus program for executive officers. The
Stock Option and Compensation Committee also is responsible for reviewing
executive officer compensation levels and evaluating management performance. The
discussion set forth below is a report submitted by the Stock Option and
Compensation Committee regarding the Company's compensation policies and
programs for executive officers for 1997.
STOCK OPTION AND COMPENSATION COMMITTEE PHILOSOPHY
The Company's executive compensation program is designed to reward outstanding
performance and results. The Stock Option and Compensation Committee believes
the Company must pay competitively to attract, motivate and retain qualified
executives. Moreover, in order to align their interest with the stockholders
of the Company and maximize stockholder value, the Stock Option and Compensation
Committee also believes that the Chief Executive Officer and the Company's other
executive officers should be significantly influenced by Transcend's as well as
individual performance.
In support of this philosophy, the executive compensation program is designed
to reward performance that is directly relevant to the Company's short-term and
long-term success. As such, the Company attempts to provide both short-term and
long-term incentive compensation that varies based on corporate and individual
performance.
To accomplish these objectives, the Stock Option and Compensation Committee
has structured the executive compensation program with three primary underlying
components: base salary, performance incentives and long-term incentives (such
as stock options). The following sections describe these elements of
compensation and discuss how each component relates to the Company's overall
compensation philosophy.
BASE SALARY PROGRAM
The Company's base salary program is based on a philosophy of providing base
pay levels that are competitive with similarly situated companies in the
healthcare industry. The Company periodically reviews its executive pay levels
to assure consistencies with the external market. Annual salary adjustments are
based on several factors including the general level of market salary increases,
individual performance and long-term value to the Company, competitive base
salary levels and the Company's overall financial and operating results.
PERFORMANCE BONUSES
Performance bonuses are intended to (i) reward executive officers based on
Company and individual performance, (ii) motivate executive officers, and (iii)
provide pay-for-performance cash compensation opportunities to executive
officers of the Company. Accordingly, a portion of the executives' compensation
is contingent upon corporate performance and adjusted where appropriate, based
on an executive's performance against personal performance objectives. In 1997,
all of the executive officers of the Company were eligible for bonuses; however,
in light of the Company's overall performance, no bonuses were awarded to the
executive officers during fiscal 1997.
LONG-TERM INCENTIVES
Long-term incentives are designed to focus the efforts of executive officers
on the long-term goals of the Company and to maximize total return to the
stockholders of the Company. The Stock Option and Compensation Committee has
relied solely on stock option awards to provide long-term incentive
opportunities. Stock options align the interest of executive officers with the
stockholders of the Company by providing value to the executive officers through
stock price appreciation only. Stock options issued by the Company generally
have a ten year term before expiration, are exercisable over a number of years
from the date of grant and executives must be employed by the Company at the
time of vesting in order to exercise the options. The Stock Option and
Compensation Committee believes that dependence on stock options for a portion
13
<PAGE>
of executives' compensation more closely aligns such executives' interests with
those of the Company's stockholders, since the ultimate value of such
compensation is linked directly to stock price.
FISCAL 1997 ACTIONS
The compensation for the Chief Executive Officer for fiscal 1997 was
determined in the manner described above and no particular quantitative measures
were used by the Stock Option and Compensation Committee in determining his
compensation except as so described.
In fiscal 1997 the following executive officers of the Company were granted
incentive stock options. The stock options were granted at fair market value on
the date of grant.
<TABLE>
<CAPTION>
Number of
Executive Officer Options Granted
----------------- ---------------
<S> <C>
E. Leo Cooper.................... 80,000
G. Scott Dillon.................. 30,000
Todd S. Mann..................... 23,000
David W. Murphy.................. 20,000
Douglas A. Shamon................ 75,000
</TABLE>
On January 22, 1998, and March 25, 1998, special grants of stock options to
certain executive officers were granted at an exercise price equal to the fair
market value on the date of grant and approved by the Stock Option and
Compensation Committee, subject to the availability of options under the Plan.
These options provide for a seven year cliff vesting that is accelerated if the
market price of Transcend's stock equals or exceeds $15.00 per share for twenty
(20) consecutive trading days before April 1, 2000. These grants were intended
to incent management to make meaningful and rapid improvements in the operating
results of the Company. Option grants are as follows:
<TABLE>
<CAPTION>
Number of
Executive Officer Options Granted
----------------- ---------------
<S> <C>
Larry G. Gerdes.................. 22,000
E. Leo Cooper.................... 17,000
Todd S. Mann..................... 17,000
David W. Murphy.................. 17,000
Douglas A. Shamon................ 17,000
------
90,000
</TABLE>
The Stock Option and Compensation Committee continually evaluates the
Company's compensation policies and procedures with respect to executives.
Although the Stock Option and Compensation Committee believes that current
compensation policies have been successful in aligning the financial interests
of executive officers with those of the Company's stockholders and with Company
performance, it continues to examine what modifications, if any, should be
implemented to further link executive compensation with both individual and
Company performance.
Walter S. Huff, Jr.
Charles E. Thoele
14
<PAGE>
STOCKHOLDER RETURN PERFORMANCE GRAPH
Set forth below is a line graph comparing the percentage change in the
cumulative total stockholder return on the Company's Common Stock against the
cumulative total return of the Nasdaq Composite Index and the Nasdaq Health
Services Index for the period commencing on December 31, 1992 and ending
December 31, 1997. The graph assumes that the value of the investment in the
Company's Common Stock in each index was $100 on December 31, 1992. The Company
has not paid any cash dividends.
<TABLE>
[GRAPH APPEARS HERE]
Prepared by the Center for Research in Security Prices
COMPARISON OF FIVE YEAR CUMULATIVE RETURN
AMONG TRANSCEND, NASDAQ INDEX AND NASDAQ HEALTH SERVICES INDEX
<CAPTION>
Measurement period TRANSCEND NASDAQ NASDAQ HEALTH SERVICES
(Fiscal Year Covered) INDEX STOCK INDEX
- --------------------- -------- -------- --------
<S> <C> <C> <C>
Measurement PT -
12/31/92 $ 100 $ 100 $ 100
FYE 12/31/93 $ 84.0 $ 114.8 $ 115.4
FYE 12/31/94 $ 95.4 $ 112.2 $ 123.8
FYE 12/31/95 $ 154.6 $ 158.7 $ 157.2
FYE 12/31/96 $ 141.2 $ 195.2 $ 157.3
FYE 12/31/97 $ 66.4 $ 239.5 $ 160.3
</TABLE>
NOTES:
A. The lines represent monthly index levels derived from compounded daily
returns that include all dividends.
B. The indexes are reweighed daily, using the market capitalization on the
previous trading day.
C. If the monthly interval, based on the fiscal year-end, is not a trading
day, the preceding trading day is used.
D. The index level for all series was set to $100.00 on December 31, 1992.
15
<PAGE>
AGENDA ITEM TWO
PROPOSAL TO INCREASE NUMBER OF SHARES FOR ISSUANCE
UNDER 1992 STOCK OPTION PLAN, AS AMENDED
FROM 2,000,000 SHARES TO 2,750,000 SHARES
In March 1992, the Company adopted the 1992 Stock Option Plan, as Amended and
Restated (the "Plan"). The primary purpose of the Plan is to advance the
interests of the Company and its stockholders by affording selected employees
and directors who are not employed by the Company ("Non-Employee Directors") an
opportunity to acquire or increase their proprietary interests in the Company
through the grant of stock options. Under the Plan, the Company may grant both
incentive stock options as defined in Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code") and nonqualified stock options.
As of March 1, 1998, the Company had outstanding options to purchase shares of
Common Stock pursuant to the Plan as follows: (i) Larry G. Gerdes (President and
Chief Executive Officer): 222,396 shares; (ii) E. Leo Cooper (Executive Vice
President, Sales and Marketing): 80,000 shares; (iii) David W. Murphy
(Executive Vice President, Transcription): 90,000 shares; (iv) Todd S. Mann
(Executive Vice President Installation and Engineering; President and Chief
Executive Officer of Transcend Case Management Services, Inc.): 63,000 shares;
(v) Doug Shamon (Executive Vice President, Chief Financial Officer): 75,000
shares (vi) all current executive officers as a group: 530,396 shares; (vi) all
current directors who are not executive officers as a group: 165,000 shares;
(vii) each nominee for election as a director (Larry G. Gerdes: 222,396 shares;
Donald L. Lucas: 65,000 shares; B. Frederick Becker: 10,000 shares; George B.
Caldwell: 22,000 shares; Walter S. Huff, Jr.: 34,000 shares; and Charles E.
Thoele: 34,000 shares) and (viii) all employees, including all current officers
who are not executive officers, as a group: 533,000 shares.
On January 22, 1998, and March 25, 1998, special grants of stock options to
certain executive officers were granted at an exercise price equal to the fair
market value on the date of grant and approved by the Stock Option and
Compensation Committee, subject to the availability of options under the Plan.
These options provide for a seven year cliff vesting that is accelerated if the
market price of Transcend's stock equals or exceeds $15.00 per share for twenty
(20) consecutive trading days before April 1, 2000. These grants were intended
to incent management to make meaningful and rapid improvements in the operating
results of the Company. Option grants are as follows:
<TABLE>
<CAPTION>
Number of
Executive Officer Options Granted
----------------- ---------------
<S> <C>
Larry G. Gerdes.......... 22,000
E. Leo Cooper............ 17,000
Todd S. Mann............. 17,000
David W. Murphy.......... 17,000
Douglas A. Shamon........ 17,000
------
90,000
</TABLE>
THE PROPOSED AMENDMENT
The Board of Directors believes it to be in the best interest of the Company
and its stockholders to increase the number of shares available for issuance
pursuant to the exercise of options granted under the Plan. As of March 9,
1998, there remained 11,997 shares available for option grants under the Plan.
On December 29, 1997, the Board of Directors approved, subject to stockholder
approval at the Annual Meeting of Stockholders, an amendment to the Plan to
increase the number of shares available for issuance under the plan by 750,000
shares, from 2,000,000 shares to 2,750,000 shares. The proposed increase in the
number of authorized shares would ensure the uninterrupted continuation of the
Plan.
There are currently approximately 800 employees and six Non-Employee Directors
eligible for participation in the Plan. As of March 9, 1998, the market value
of the Common Stock of the Company underlying the options which have been or may
be granted under the Plan was $3.125 per share, or $8,593,750 in the aggregate,
assuming approval of the amendment.
A copy of the proposed amendment to the Plan is attached to this Proxy
Statement as Exhibit A and incorporated herein by reference. The Board of
Directors of the Company recommends that stockholders vote FOR the foregoing
16
<PAGE>
amendment. The amendment must be approved by a majority of all votes present
and represented in person or by proxy at the meeting and entitled to vote on the
matter.
DESCRIPTION OF THE PLAN
General. The Plan is administered by the Stock Option and Compensation
-------
Committee of the Board of Directors (the "Committee"). Presently, the maximum
number of shares of Common Stock reserved and made available for sale under the
Plan is 2,000,000.
The Plan provides for adjustment of the number of shares issuable thereunder
in certain events such as mergers, consolidations, recapitalizations, stock
splits, stock dividends and similar events. In the event of dissolution or
liquidation of the Company or a merger or combination in which the Company is
not a surviving corporation (other than with a wholly owned subsidiary), each
option granted under the Plan shall terminate but the optionee shall have the
right immediately prior thereto to exercise his option to the extent it is then
presently exercisable.
The Board may at any time, upon recommendation of the Committee, terminate the
Plan. The Board may also amend the Plan, provided, however, that without
approval of the stockholders of the Company, the Board may not adopt any
amendment which would (i) increase the number of shares issuable pursuant to the
Plan (except as contemplated in the immediately preceding paragraph); (ii)
materially increase the benefits accruing to participants in the Plan; or (iii)
materially modify the requirements as to eligibility to participate in the Plan.
Notwithstanding the foregoing, the Board shall not terminate, amend or modify
the Plan in any manner so as to affect the price of shares subject to an option
without the consent of the optionee.
No option is transferable otherwise than by will or the laws of descent and
distribution. During the lifetime of an optionee, an option is exercisable only
by the optionee.
Options are exercisable upon notice of exercise and payment in full of the
option exercise price in cash. In addition, to the extent provided in the stock
option agreement, in lieu of cash, the optionee may deliver shares of Common
Stock owned by him having a fair market value equal to the option exercise price
or a combination of cash and shares.
Employee Options. Under the terms of the Plan, the Committee may determine
----------------
the employees to whom options will be granted, the time or times of exercise,
the number of shares subject to an option and the terms and conditions of each
stock option agreement. The Committee has authority to interpret the Plan with
respect to employee options.
The Committee also determines whether an option is an incentive stock option
or a non-qualified stock option. The price per share of stock subject to an
incentive stock option must equal the fair market value thereof on the date of
grant. The price per share of stock subject to a non-qualified stock option
shall be determined by the Committee and may be less than fair market value.
The exercise period for an incentive stock option cannot exceed 10 years, while
there is no limitation with respect to non-qualified stock options. The
Committee cannot grant an incentive stock option to any person who owns at least
10% of the outstanding Common Stock unless the price is 110% of fair market
value and the option expires within five years.
In the event of termination of employment by reason of death or disability, an
option may be exercised, to the extent exercisable at the time of death or
disability, by the optionee or his legatees or personal representatives within
twelve months following such termination. In all other events of termination,
the Plan provides that the option may be exercised beyond such date only to the
extent provided in the stock option agreement, typically not more than 60 days
after termination, but not beyond the earlier of the expiration date of the
option or twelve (12) months from the date of termination.
Non-Employee Director Options. The Plan provides for non-discretionary or
-----------------------------
automatic grants of options to Non-Employee Directors. Each Non-Employee
Director serving on the Board on the effective date of the Plan, March 16, 1992,
received an option to purchase 10,000 shares of Common Stock, except that the
Chairman of the Board received an option to purchase 20,000 shares. Each Non-
Employee Director appointed or newly elected to the Board in the future will
also receive an option to purchase 10,000 shares. In addition, on the date of
each annual meeting of stockholders of the Company, each Non-Employee Director
elected to the Board who has served on the Board for at least six months prior
17
<PAGE>
thereto will receive an option to purchase 6,000 shares, except for the
Chairman, who shall receive an option to purchase 9,000 shares. The price of
Common Stock subject to a Non-Employee Director option is the fair market value
on the date of grant, except that the price of Common Stock subject to options
granted on March 16, 1992 was the fair market value on October 14, 1992, the
date the Plan was approved by the stockholders of the Company.
Each Non-Employee Director option must conform to the provisions of the Plan.
Non-Employee Director options become exercisable six months from the date of
grant and expire ten (10) years from the date of grant. In the event a Non-
Employee Director terminates membership on the Board for any reason, an option
held by him may be exercised beyond such date only to the extent provided in the
stock option agreement but not beyond the earlier of the expiration of the
option or twelve (12) months from the date of termination.
FEDERAL INCOME TAX CONSEQUENCES
Incentive Stock Options. All incentive stock options granted or to be granted
-----------------------
under the Plan which are designated as incentive stock options are intended to
be incentive stock options as defined in Section 422 of the Code.
Under the provisions of Section 422, neither the holder of an incentive stock
option nor the Company will recognize income, gain, deduction or loss upon the
grant or exercise of an incentive stock option. An optionee will be taxed only
when the stock acquired upon exercise of his incentive stock option is sold or
otherwise disposed of in a taxable transaction. If at the time of such sale or
disposition the optionee has held the shares for the required holding period
(two years from the date the option was granted and one year from the date of
the transfer of the shares to the optionee), the optionee will recognize long-
term capital gain or loss, as the case may be, based upon the difference between
his exercise price and the net proceeds of the sale. However, if the optionee
disposes of the shares before the end of such holding period, the optionee will
recognize ordinary income on such disposition in an amount equal to the lesser
of:
(a) gain on the sale or other disposition; or
(b) the amount by which the fair market value of the shares on the date of
exercise exceeded the option exercise price, with any excess gain being capital
gain, long-term or short-term, depending on whether or not the shares had
previously been held for more than one year on the date of sale or other taxable
disposition.
The foregoing discussion and the reference to capital gain or loss
treatment therein assume that the option shares are a capital asset in the hands
of the optionee. A sale or other disposition which results in the recognition
of ordinary income to the optionee will also result in a corresponding income
tax deduction for the Company.
The Plan permits an optionee to pay all or part of the purchase price for
shares acquired pursuant to exercise of an incentive stock option by
transferring to the Company other shares of the Company's Common Stock owned by
the optionee. Section 422 of the Code provides that an option will continue to
be treated as an incentive stock option even if an optionee exercises such
incentive stock option with previously acquired stock of the corporation
granting the option. Accordingly, except as noted below with respect to certain
"statutory option stock," an optionee who exercises an incentive stock option in
whole or in part by transferring to the Company shares of the Company's Common
Stock will recognize no gain or loss upon such exercise. The optionee's basis
in the shares so acquired will be equal to the optionee's cost basis in the
shares surrendered (plus, in the case of payment of the purchase price in a
combination of cash and surrendered shares, the amount of any cash paid).
Section 424(c)(3) of the Code provides that if "statutory option stock" is
transferred in connection with the exercise of an incentive stock option, and if
the holding period requirements under Section 422(a)(1) of the Code are not met
with respect to such statutory option stock before such transfer, then ordinary
income will be recognized as a result of the transfer of statutory option stock.
However, the incentive stock option stock acquired through the exchange of
statutory option stock will still qualify for favorable tax treatment under
Section 422 of the Code.
Incentive stock options offer two principal tax benefits: (1) the
possibility of converting ordinary income into capital gain to the extent of the
excess of fair market value over option price at the time of exercise, and (2)
18
<PAGE>
the deferral of recognition of gain until disposition of the stock acquired upon
the exercise of the option.
The Taxpayer Relief Act of 1997 (the "1997 Tax Act") made significant
changes to individual capital gains tax rates. The 1997 Tax Act generally
reduces the maximum tax rate for gains realized by individual taxpayers from the
sale of capital assets held for more than eighteen months from 28% to 20% (18%
if the property has been held for more than five years and is acquired and sold
after the year 2000). For capital assets held for more than one year but not
more than eighteen months, the maximum tax rate remains at 28%, as it was under
prior law. In addition, taxpayers otherwise subject to the 15% rate bracket
will be entitled to a 10% maximum tax rate on long-term capital gains (8% if the
property has been held for more than five years and is sold after the year
2000). The new maximum tax rates for long-term capital gains will apply for
purposes of both the regular income tax and the alternative minimum tax.
However, the excess of the fair market value of shares acquired through the
exercise of an incentive stock option over the exercise price is taken into
account in computing an individual taxpayer's alternative minimum taxable
income. Thus, the exercise of an incentive stock option could result in the
imposition of an alternative minimum tax liability.
In general, an option granted under the Plan which is designated as an
incentive stock option will be taxed as described above. However, in some
circumstances an option which is designated as an incentive stock option will be
treated as a non-qualified stock option and the holder taxed accordingly. For
example, a change in the terms of an option which gives the employee additional
benefits may be treated as the grant of a new option. Unless all the criteria
for treatment as an incentive stock option are met on the date the "new option"
is considered granted (such as the requirement that the exercise price of the
option be not less than the fair market value of the stock as of the date of the
grant), the option will be treated and taxed as a non-qualified stock option.
Non-Qualified Stock Options. All options granted or to be granted under
---------------------------
the Plan which do not qualify as incentive stock options are non-statutory
options not entitled to special tax treatment under Section 422 of the Code.
A participant in the Plan will recognize taxable income upon the grant of a
non-qualified stock option only if such option has a readily ascertainable fair
market value as of the date of the grant. In such a case, the recipient will
recognize taxable ordinary income in an amount equal to the excess of the fair
market value of the option as of such date over the price, if any, paid for such
option. No income would then be recognized on the exercise of the option, and
when the shares obtained through the exercise of the option are disposed of in a
taxable transaction, the resulting gain or loss would be capital gain or loss
(assuming the shares are a capital asset in the hands of the optionee). However,
under the applicable Treasury Regulations, the non-qualified stock options
issued under the Plan will not have a readily ascertainable fair market value
unless at the time such options are granted similar options of the Company are
actively traded on an established market. The Company presently has no such
actively traded options.
Upon the exercise of a non-statutory option not having a readily
ascertainable fair market value, the optionee recognizes ordinary income in an
amount equal to the excess of the fair market value of the shares on the date of
exercise over the option exercise price for those shares. The Company is not
entitled to an income tax deduction with respect to the grant of a non-statutory
stock option or the sale of stock acquired pursuant thereto. The Company
generally is permitted a deduction equal to the amount of ordinary income the
optionee is required to recognize as a result of the exercise of a non-statutory
stock option.
The Plan permits the Committee to allow an optionee to pay all or part of
the purchase price for shares acquired pursuant to an exercise of a non-
statutory option by transferring to the Company other shares of the Company's
Common Stock owned by the optionee. If an optionee exchanges previously
acquired Common Stock pursuant to the exercise of a non-qualified stock option,
the Internal Revenue Service has ruled that the optionee will not be taxed on
the unrealized appreciation of the shares surrendered in the exchange. In other
words, the optionee is not taxed on the difference between his or her cost basis
for the old shares and their fair market value on the date of the exchange, even
though the previously acquired shares are valued at the current market price for
purposes of paying all or part of the option price.
General. The Plan is not qualified under Section 401(a) of the Code and is
-------
not subject to the provisions of the Employee Retirement Income Security Act of
1974.
19
<PAGE>
The preceding discussion is based upon federal tax laws and regulations in
effect on the date of this proxy statement, which are subject to change, and
upon an interpretation of the statutory provisions of the Code, its legislative
history and related income tax regulations. Furthermore, the foregoing is only
a general discussion of the federal income tax consequences of the Plan and does
not purport to be a complete description of all federal income tax aspects of
the Plan. Option holders may also be subject to state and local taxes in
connection with the grant or exercise of options granted under the Plan and the
sale or other disposition of shares acquired upon exercise of the options. Each
employee receiving a grant of options should consult with his or her personal
tax advisor regarding federal, state and local consequences of participating in
the Plan.
20
<PAGE>
AGENDA ITEM THREE
APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP served as the independent public accountants for the
fiscal year ended December 31, 1997, and upon the recommendation of the Audit
Committee, the Board of Directors has selected Arthur Andersen LLP as the
Company's independent public accountants for the fiscal year ending December 31,
1998. The Board of Directors recommends that such appointment be ratified.
Representatives of Arthur Andersen LLP are expected to be present at the
meeting and shall have the opportunity to make a statement, if they desire to do
so, and respond to appropriate questions.
PROPOSALS BY STOCKHOLDERS
Proposals by stockholders intended to be presented at the 1999 Transcend
annual meeting (to be held in the Spring of 1999) must be forwarded in writing
and received at the principal executive office of Transcend no later than
December 1, 1998 directed to the attention of the Secretary, for consideration
for inclusion in the Transcend's proxy statement for the annual meeting of
stockholders to be held in 1999. Any such proposals must comply in all
respects with the rules and regulations of the Securities and Exchange
Commission.
ANNUAL REPORT ON FORM 10-K
Additional information concerning the Company, including financial statements
of the Company, is provided in the Company's Form 10-K for the fiscal year ended
December 31, 1997, that accompanies this Proxy Statement. Copies of exhibits and
basic documents filed with the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997, as filed with the Securities and Exchange
Commission, are available to stockholders who make written request therefor to
the Company's Secretary, 3353 Peachtree Road, N.E., Suite 1000, Atlanta, Georgia
30326.
OTHER MATTERS
The Board of Directors is not aware of any other matters to be presented for
action at the Annual Meeting. If any other matter should come before the Annual
Meeting, it is the intention of the persons named in the accompanying proxy to
vote on such matter in accordance with their best judgment of what is in the
best interests of the Company.
By Order of the Board of Directors
Donald L. Lucas, Chairman of the Board
Atlanta, Georgia
March 27, 1998
21
<PAGE>
EXHIBIT A
AMENDMENT NO. 2
1992 STOCK OPTION PLAN, AS AMENDED
TRANSCEND SERVICES, INC.
WHEREAS, the Board of Directors of Transcend Services, Inc. (the "Company")
has previously adopted, and the shareholders of the Corporation have approved,
the 1992 Stock Option Plan, as amended (the "Plan") pursuant to which options to
purchase stock of the Corporation may be issued to eligible directors and
employees of the Corporation; and
WHEREAS, the Board of Directors of the Corporation deems it desirable to amend
the Plan so as to increase the number of shares available for issuance pursuant
to the exercise of options granted under the Plan.
NOW, THEREFORE, the Plan is amended upon the terms, and subject to the
conditions, set forth herein:
ARTICLE I
AMENDMENT TO PLAN
1.1 Section 5.1 of Article V of the Plan shall be amended by deleting the
first sentence of such section in its entirety and substituting therefor the
following:
"5.1 LIMITATIONS. Subject to adjustments pursuant to the provisions of
Section 5.2 hereof, the maximum number of shares of Stock that may be
issued and sold hereunder shall not exceed, in the aggregate, 2,750,000
shares."
ARTICLE II
EFFECTIVE DATE OF AMENDMENT
2.1 The amendment effected hereby shall be effective on the date that such
amendment is approved by a majority of all votes present and entitled to vote at
the Special Meeting of Stockholders to be held on April 28, 1998.
22
<PAGE>
PROXY SOLICITED BY THE BOARD OF DIRECTORS
OF TRANSCEND SERVICES, INC.
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 28, 1998
The undersigned hereby appoints Larry G. Gerdes and Doug Shamon, or either of
them, with full power of substitution as proxies and attorneys-in-fact, to
represent and to vote, as designated on the reverse hereof, the common stock of
the undersigned at the Annual Meeting of Stockholders of the Company to be held
on April 28, 1998, at The Buckhead Club, 3343 Peachtree Road, NE, Atlanta,
Georgia, at 10:00 a.m. local time and at any adjournment thereof, on the matters
set forth below:
1. To elect six Directors for a term of one year and until their successors
are elected and qualified:
[ ] For All Nominees Listed Below (except as instructed below).
George B. Caldwell, B. Frederick Becker, Larry G. Gerdes, Walter S.
Huff, Jr., Donald L. Lucas, Charles E. Thoele
[ ] WITHHOLD AUTHORITY to vote for those Nominees listed below
----------------------------------------------------------------------
2. To approve an amendment to the Company's 1992 Stock Option Plan, as
amended, to increase the number of shares available for issuance under such
Plan by 750,000 shares, from 2,000,000 to 2,750,000 shares.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. To ratify the appointment of Arthur Andersen LLP as independent public
accountants for the year ending December 31, 1998.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. In their discretion, upon such other matter or matters as may properly come
before the meeting or any adjournment thereof.
<PAGE>
The shares represented by this proxy card will be voted as directed above. IF
NO DIRECTION IS GIVEN AND THE PROXY CARD IS VALIDLY EXECUTED, THE SHARES WILL BE
VOTED FOR ALL LISTED PROPOSALS. IN THEIR DISCRETION, THE PROXY HOLDERS ARE
AUTHORIZED TO VOTE UPON SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE
MEETING.
--------------------------------------
Signature of Stockholder
--------------------------------------
Signature of Stockholder
Dated:
-------------------------------
Important: Sign exactly as your name appears
above. Give full title of executor,
administrator, trustee, guardian, etc.
Joint owners should each sign personally.
