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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
MARK ONE
(X)ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
(FEE REQUIRED)
For the fiscal year ended December 31, 1997
or
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
(NO FEE REQUIRED)
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 (IRS Employer
of incorporation) 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) 836-8000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Parts III of this Form 10-K or any amendment to
this Form 10-K. [ ]
Aggregate market value of the voting stock held by non-affiliates of the
Registrant, computed using the last sale price as reported for the Registrant's
common stock on March 9, 1998 was $64,274,184.
Indicate the number of shares outstanding of the Registrant's common stock as of
the latest practicable date.
Class Outstanding at March 9, 1998
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Common Stock, $.01 par value 20,567,739
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement dated March 27, 1998, for the 1998
Annual Meeting of Stockholders,
are incorporated by reference herein in response to Part III of this report.
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PART I
ITEM 1. BUSINESS
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.
GENERAL
Transcend Services, Inc. ("Transcend" or the "Company") provides healthcare
information management ("HIM") solutions to hospitals and other associated
healthcare providers. The Company's range of HIM services includes (i) contract
management, or "Co-Sourcing", of medical records and other HIM functions; (ii)
transcription of physicians' dictated medical notes; and (iii) consulting
relating to medical records and reimbursement coding. The Company currently
operates the medical records and certain other HIM functions of 21 general acute
care hospitals located in 11 states and the District of Columbia. The Company,
through its wholly-owned subsidiary Transcend Case Management, Inc. ("TCM"),
also provided case management and disability management services to insurance
carriers, third party administrators and self-insured employers; however, the
net assets of TCM were sold in March 1998.
With over 5,000 hospitals in the United States, the market for outsourcing the
management of medical records departments, medical transcription services,
medical record coding services, and management of other affiliated departments
is sizable. Approximately 1,500 hospitals in the United States have more than
200 beds and constitute the Company's first tier of market opportunity. The
Company believes that fewer than 50 such hospitals currently outsource the
management of the medical records department.
The healthcare industry is undergoing significant and rapid change. Hospitals
and other healthcare providers have come under increased scrutiny from
regulators and third party payers. As a result, hospitals are now looking to
outsource to third parties certain costly or complicated functions that are not
directly related to core competencies or where they are unable to achieve
economies of scale. In particular, patient information, and the delivery of such
information in a timely fashion, have become critical to improving productivity,
efficiency and cost containment, while maintaining a high level of patient care.
For instance, many hospitals are finding that their medical records departments
are inadequate, and to remedy the inadequacies of these functions, they are
beginning to turn to third party service providers which have expertise in
managing mdical records, admissions and other affiliated departments.
The healthcare industry has recognized the need for improvement in the
processing of healthcare information, and to achieve this improvement, there has
been a dramatic increase in the development of technological solutions offered
by third party vendors of computer hardware and software. Although there have
been significant advances in the management of medical information in general,
little progress has been made introducing technology to the management of the
medical records departments, patient admissions or other affiliated departments
of hospitals that handle the flow of patient information.
The Company believes that there is a need, and therefore an emerging market,
for third party service providers to assist hospitals and other healthcare
providers in (i) the effective implementation of the available technological
tools for healthcare information management, (ii) the process of managing
healthcare information across the pre-admission to post-discharge continuum of
the healthcare delivery system, and (iii) the management and training of
personnel in healthcare information departments. By managing the entire flow of
patient information through the hospital, errors, inefficiencies and their
associated costs can be minimized.
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INDUSTRY OVERVIEW
The healthcare industry is undergoing significant and rapid change.
Trends such as government regulation, industry consolidation, increased focus on
quality of care, and technological advancements are providing business
opportunities for Transcend and other healthcare service providers. Hospitals
and other healthcare providers have come under increased scrutiny from
regulators and third party payers. Reimbursement pressures from managed care
growth have fueled industry consolidation and the formation of various forms of
healthcare integration from integrated delivery networks to managed service
organizations. Documentation requirements have significantly increased resulting
in increases in dictation and transcription of medical notes. Breakthroughs in
technology, telecommunications, the growing acceptance of the Internet, and new
applications such as digital imaging systems and voice recognition systems have
emerged. As a result, hospitals are now looking towards new technologies to
help them compete.
The industry has long sought a true "electronic patient record" where all
relevant patient data is captured and organized for use in patient care,
outcomes evaluation, and for automating healthcare administration. However,
management of the Company believes that the development and wide scale
implementation of such systems are still several years away. Over the past
several years, new "electronic document management" technologies have emerged
and gained acceptance as a bridge to the electronic patient record.
Electronic document management systems capture patient demographic and
clinical data via interfaces to existing healthcare information systems and
capture images of paper documents still in use. Industry sources estimate that
as much as 60% of the patient record is still captured in paper form. While
electronic document management systems do not capture all relevant information
contained within paper documents as discreet data elements, these systems
automate and image enable the operation of the medical record department
functions. Electronic document systems also provide instantaneous and
simultaneous access to medical record information to authorized parties.
Advances in telecommunications, Internet technologies and voice recognition
capabilities are emerging, creating opportunities to apply these technological
advances to various functions within the medical record department, including
medical transcription, abstracting, and coding. These technologies enable cost-
effective digital movement of voice, images, and data allowing for offsite
processing of these various functions. The ability to process offsite allows
for faster turnaround times, increased availability of skilled professionals,
and lower costs.
The healthcare industry has recognized the need for improvement in the
processing of healthcare information, and to achieve this improvement, there has
been a dramatic increase in the development of technological solutions. Although
there have been significant advances in the management of medical information in
general, little progress has been made introducing this technology to the
management of the medical records departments, medical transcription, medical
coding, patient admissions or other areas that handle the flow of patient
information.
Many hospitals are finding that their medical records departments are
in many respects inadequate and that outsourcing healthcare information
functions and related departments can result in competitive advantages by
reducing costs such as employee training and technology and equipment upgrades.
Hospitals have outsourced basic services including housekeeping,
laundry and food preparation for a number of years to reduce operating costs and
ensure quality of service. They are now looking at other costly or complicated
functions that are not directly related to core competencies or where they are
unable to achieve economies of scale. An increasing number of healthcare
providers are now outsourcing the pharmacy, emergency room staffing and physical
therapy staffing functions. Many functions of health information management
have been widely outsourced including transcription, microfilming, record
storage, release of information, cancer registry and coding. The Company
believes its comprehensive Co-Sourcing concept is a natural extension of
underlying industry trends.
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HISTORY OF THE COMPANY
The Company was incorporated in California in 1976 and was reorganized as a
Delaware corporation in 1988. On January 10, 1995, the Company, formerly known
as "TriCare, Inc.," acquired Transcend Services, Inc., then a Georgia
corporation, by the merger of Transcend Services, Inc. into First Western Health
Corporation ("First Western"), a subsidiary of the Company (the "Merger"). On
May 31, 1995, Transcend Services, Inc. and Veritas Healthcare Management
("Veritas"), another subsidiary of the Company, merged into the Company, whose
name was then changed to "Transcend Services, Inc." The Merger was treated for
financial accounting purposes as the acquisition of TriCare, Inc. by Transcend
Services, Inc. and the historical financial statements of the former Transcend
Services, Inc. have become the financial statements of the Company and include
the businesses of both companies after the effective date of the Merger.
Prior to the Merger, Transcend Services, Inc., which was originally organized
in 1984, provided consulting services for medical records management, quality
and utilization management, records coding and records management software. In
1992, the former Transcend Services, Inc. developed, tested and marketed new
lines of business intended to capitalize on the increasing need for the
outsourcing of medical records, and by the end of 1992 had entered into its
first long-term agreement for the management of a hospital's medical records
department.
On March 16, 1998, the net assets of the Company's wholly-owned subsidiary,
Transcend Case Management Services, Inc. ("TCM"), formerly Sullivan Health and
Management Services, Inc. were sold to CORE, INC., a publicly traded
corporation.
BUSINESS STRATEGY
The Company's business strategy focuses on the application of advanced
technological tools and healthcare information management expertise to improve
the efficiency and productivity of HIM services and to improve the clinical
access to patient records. Key elements of the Company's business strategy are
as follows:
Expand the Core Co-Sourcing Business. The Company is focused on increasing
its penetration of the healthcare information management market. The Company's
initial target market is comprised of the approximate 1,500 hospitals in the
United States with more than 200 beds. The Company expanded its sales force by
the recent hiring of three new experienced sales professionals and has expanded
the scope of its professional sales force to include medical transcription,
medical coding, and consulting services. In early 1997, the Company implemented
a new lead qualification and sales process that resulted in a decline in the
number of outside assessments, but a dramatic increase in closure rates.
Apply Leading Technology. Transcend is a technology oriented service company
and intends to utilize the most effective technology available to improve the
way information is managed in healthcare. The application of advanced technology
will reshape the way information is managed across the healthcare delivery
system in the future and provide margin expansion opportunities. Such technology
is designed to provide instantaneous and simultaneous access to the medical
record by authorized users including physicians and other clinical providers.
Since July 1997, the Company has offered a turnkey solution to healthcare
providers where the Company acquires and implements electronic document
management systems for its clients as part of its overall Co-Sourcing solution.
Substantially all of the Company's sales and current prospects involve the
implementation and operation of electronic document management solutions as
part of the contract. The Company has sought and will continue to seek business
alliances with leading healthcare information technology companies where the
Company's Co-Sourcing solution enhances the opportunity to implement
technologies. In order to execute this strategy, the Company has created an
implementation and engineering group responsible for developing and executing a
standard methodology for the implementation of electronic document management
and transcription systems. Implementation teams will be staffed with project
management, technical support, and process engineering professionals.
Develop Information Delivery Center Capability. The Company has developed the
concept of an Information Delivery Center ("IDC") as a business model for the
offsite processing of healthcare information. Under the model the Company plans
to consolidate certain of the functional and technological aspects of HIM
services into service centers. The initial focus is the development of
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offsite coding and abstracting capabilities and a standard national
transcription platform. Additional functions such as chart analysis, release of
information, cancer registry, scheduling, pre-registration information assembly,
benefit verification and procedure precertification, and almost all patient
accounting and billing functions, could also be added.
In contrast to the current model, under which most of the personnel remains on
site at the customer's facility, much of the staff performing these functions
would be off site, with the potential for a significant portion of the personnel
to become home-based "telecommuters." Certain employees would remain at the
client hospital with responsibilities for document scanning and customer service
functions, as well as to provide an administrative liaison role in the hospital,
participate in hospital committee functions and oversee compliance issues.
The IDC offers several benefits, including the ability to (i) perform similar
functions for multiple clients, thereby increasing efficiency and reducing
staffing needs, (ii) offer centralized Co-Sourcing services to larger
geographically dispersed integrated delivery systems, and (iii) increase the
range of potential clients to include larger medical clinics, skilled nursing
facilities, long-term care facilities and, eventually, payors such as HMOs with
complex information management requirements.
The Company's first information delivery center, located at the Company's
headquarters in Atlanta, recently completed its beta testing and currently
employs three medical coders who perform offsite coding for the Company's
Phoenix, Arizona hospital client.
Expand Range of Co-Sourcing Services. Through its services, Transcend
provides immediate and long-term cost savings and revenue and cash flow
improvements to its healthcare provider customers. The Co-Sourcing relationship
could expand in time to include other services such as admissions, utilization
review, quality assurance and business office services. Because such services
are essential to the efficient flow of information in healthcare delivery
systems, and with the advantage of the Company's technology solution, these
services are a natural extension of the Co-Sourcing of the medical records
department.
Although the Company currently has no contracts for business office services,
the Company is exploring such opportunities. Better management of the business
office benefits the hospital by both reducing costs and increasing the turnover
rate of accounts receivable. The Company has demonstrated that by more
effectively managing medical records, it has significantly reduced the level of
unbilled accounts receivable and has created a more efficient and accurate flow
of information to the business office.
Pursue Acquisitions and Strategic Alliances. The Company has historically
used an acquisition strategy to fulfill part of its business plan, and will
continue to seek acquisition opportunities to complement, expand and diversify
its service offerings. The Company will also pursue the formation of strategic
alliances in an effort to accelerate its growth through market expansion. The
Company is presently pursuing joint marketing efforts with other companies to
establish more comprehensive Co-Sourcing relationships, including the business
office of the hospital, to be implemented over a larger shared client base.
However, the Company believes that the Co-Sourcing concept can meet the needs of
many other healthcare providers, and the Company's marketing efforts are
designed to eventually expand its customer profile to include larger clinics,
sub-acute care facilities, HMOs, skilled nursing facilities and others.
Create Value From Data Captured in Systems. As the Company develops and
implements its systems, it plans to capture the key data elements from its
systems in a data repository. Such data can then be "mined", increasing the
value of the services provided by Transcend and potentially creating new revenue
channels.
SERVICES
Co-Sourcing. The Company's "Co-Sourcing" solution involves the
management by the Company of patient information, both clinical and financial,
throughout the healthcare delivery system beginning before a patient is admitted
and continuing after the patient is discharged. This involves activities related
to the compilation, evaluation, and completion of patient records as well as the
storage and retrieval of patient records.
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Under the terms of its Co-Sourcing contracts, the Company provides complete
day-to-day management and operation of the facility's medical records
department. Activities include:
. Gathering of patient record information from various sources
. Transcription of medical dictation
. Coding of inpatient, outpatient, ambulatory, and emergency room visits
. Abstraction of medical information
Issuance of birth certificates
. Issuance of death certificates
. Reporting of certain data related to trauma and cancer cases to
governing bodies
. Patient record deficiency analysis
. Patient record completion
. Storage of patient records
. Retrieval and delivery of patient records
. Release of information to third parties
The Company's Co-Sourcing contracts are of two types. Under "Management
Only" contracts, the Company provides a department director to supervise a
hospital's medical records department and employs the departmental supervisory
personnel, while all other employees of the department remain on the hospital's
payroll. Under full contract management services agreements, the Company hires
all the employees of the department as the Company's employees. The Company
generally provides supplemental training to these employees once it takes over
the department. The Company prefers, whenever possible, to maintain the
employment of all of the existing employees and is rarely required to hire
additional staff.
A significant feature of the Company's Co-Sourcing services is the use
of a Professional Services Group, made up of skilled and experienced
professionals, whose responsibility is to act as an internal consulting team to
its Co-sourced customers. This team is to support the customer sites at any time
and to develop "Best Practices," the Company's quality standards that are
continuously updated to represent the best in the marketplace. This group also
performs services on a consulting basis to other customers.
The application of better technology will reshape the way information
is managed across the healthcare delivery system in the future and provide
additional cost savings. The Company will use the most effective technology
available to deliver its services. Such technology is designed to provide
instantaneous and simultaneous access to the medical record by authorized users.
Medical Transcription Services. The Company entered the medical
transcription services business to improve accuracy, reduce turnaround time and
improve margins for its Co-Sourcing customers, primarily through advances in
technology. Transcription generally consumes 25-35% of the medical record
department budget. The Company's transcription business provides a computer-
based service for transcription of physician dictation. While its service
arrangements vary by customer, some of which require transcription to be
performed on-site, these services are primarily provided from remote locations
utilizing telecommunications capabilities. As a result, many of its
transcription employees are able to work as "telecommuters" using networked
computers in their homes.
The Company is typically paid for its transcription services per line
transcribed. Where transcription services are included as part of the services
provided in the Company's Co-Sourcing contracts, the services are provided
internally by the Company's transcription operations as part of the overall Co-
Sourcing services. The Company seeks wherever possible to cross-market its
transcription services with its Co-Sourcing services.
Professional Consulting Services. In addition to supporting its Co-Sourcing
customers, the Professional Services Group offers independent consulting
services to healthcare providers. The group provides advice with respect to
management and operation of medical records departments and related healthcare
information functions, particularly reimbursement coding or data quality
improvement services, as well as consultation services regarding the health
information aspects of hospitals' utilization management and quality management
functions. Such services, which can also include interim medical record
department management and related services, are provided on a negotiated fee for
service basis.
Case Management. Case management provided assessment, care planning,
recommendations, and care coordination services for injured and ill persons
covered by workers compensation and health insurance plans. The Company employed
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or contracted with registered nurses who acted as a coordinator between the
patient, the healthcare providers and the insurance carriers or employers,
seeking to ensure the provision of optimal healthcare with an efficient use of
resources. Case management typically involves routine onsite visits to the
patient and monthly reporting to the insurance carriers. In addition, the
Company provided vocational evaluations and computerized skills assessments for
clients covered by insurance programs, workers' compensation, long-term
disability and Social Security disability.
The Company has viewed the case management operation as non-strategic. As
such, on March 16, 1998 the Company sold the net assets of its case management
operations and ceased operations.
CUSTOMERS
The Company's current customer base consists primarily of hospitals for which
the Company provides medical records department management, medical
transcription services, and/or consulting services. However, the Company
believes that the outsourcing concept can meet the needs of many other
healthcare providers, and the Company's marketing efforts are designed to
eventually expand its customer profile to include larger clinics, sub-acute care
facilities, HMOs, skilled nursing facilities and others.
PRINCIPAL CUSTOMERS. Based on revenues for the fiscal years ended December 31,
1995, 1996, and 1997, no single customer paid fees to the Company which amounted
to or exceeded 10% of the Company's revenues in those periods.
SALES AND MARKETING
The Company currently employs eight full-time sales professionals, excluding
Transcend Case Management Inc.; five in geographic territories, two national
account executives and the Executive Vice President Sales and Marketing. The
sales professionals are supported by a sales and marketing support staff of 3
who develop advertising, marketing literature, organize direct mail campaigns
and trade show events. In addition, the Company engages an outside
telemarketing firm for lead generation and targeted campaigns.
Transcend's prospects and sales have come principally on the basis of personal
contacts by the Company's sales professionals with senior hospital executives as
well as referrals from its relationships with healthcare information technology
companies, consulting clients and telemarketing leads. The Company's sales
force provides coverage in virtually every major hospital market in the country,
with sales representatives in each of the principal geographic regions of the
country (Southwest, West, Midwest, Southeast, and Northeast) along with a
national sales representative focused on larger strategic opportunities. The
Company's marketing strategy also includes targeted advertising in industry
trade publications, direct mailings, trade shows, customer testimonials,
seminars and other educational literature that emphasizes the Company's market
leadership position, its management expertise and its track record with current
clients.
The Company's transcription and consulting services have historically
been marketed primarily through personal contacts and referrals from existing
clients. Beginning in late 1997, the Company assigned sales professionals to
geographic territories for all services offered by the Company, including
transcription and coding services. Also in 1997, the Company has hired a
national accounts sales professional targeting national opportunities and
broadening strategic alliances. The Company has also signed an agreement with
VHA, Inc., a national association of non-profit hospitals, whereby Transcend
became VHA's preferred provider of medical records outsourcing, coding, and
medical transcription.
COMPETITION
The Company's greatest competition presently comes from existing, internal
medical records departments of hospitals, which often resist the Co-Sourcing
concept. Acceptance by hospitals of the outsourcing of medical records and
related departments will depend in part on the ability of the Company to
alleviate concerns of hospital management related to outsourcing. These include
loss of control, information quality and integrity concerns, employee welfare
concerns and a bias against outsourcing due to previous poor experiences. There
is currently only one national firm, Pyramid, Inc. (Southern California based),
engaged in comprehensive healthcare information management outsourcing, although
several other new entrants are expected. The Company expects that as the concept
of outsourcing becomes more accepted, it will encounter further competition.
With the substantial market opportunity, some or all of the following sources
are likely to enter the market: healthcare information management consultants;
healthcare information services providers, particularly developers and vendors
of management software; companies that outsource business office functions; and
other parties in contract management businesses (for example, business or
financial management services) desiring to enter the healthcare field.
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The Company expects that distinguishing competitive factors will include
reputation for expertise in health information management, expertise and
experience in implementing leading technologies, size and scope of referenceable
accounts, prior experience in outsourcing, and pricing. Additionally, there are
national companies that operate in other areas of the health information
management spectrum, primarily, the business office and transcription. As the
Company expands its scope into other areas of health information management, the
Company expects to compete with other, perhaps better established, better
capitalized and larger competitors.
The Company experiences competition with respect to its transcription
business from a variety of sources, including both local and national
businesses. The medical transcription services market is highly fragmented, with
over 1,500 transcription companies nationally. In addition, the industry is
undergoing consolidation led by MedQuist, Inc., a publicly held corporation, and
two national venture-backed private corporations, MRC and Rodeer. The Company
believes the principal competitive factors include reputation, prior experience,
pricing, timeliness (i.e., turnaround times on transcribed documents) and
accuracy of performance.
GOVERNMENT REGULATION
Virtually all aspects of the practice of medicine and the provision of
healthcare services are regulated by federal or state statutes and regulations,
by rules and regulations of state medical boards and state and local boards of
health and by codes established by various medical associations. The Company has
attempted to structure its operations to comply with these regulations. The
Company is not presently subject to direct regulation as an outsourcing services
provider. Future government regulation of the practice of medicine and the
provision of healthcare services may impact the Company and require it to
restructure its operations in order to comply with such regulations. In
addition, in connection with its case management business, certain of the
Company's employees and independent contractors were registered nurses. These
individuals were subject to certain licensing standards in the states in which
they practice, and were responsible for maintaining their licenses. The
Company's case management division was not subject to any material governmental
regulation, although certain states in which the Company provided case
management services have established fee schedules under their workers'
compensation laws which apply to certain case management services provided by
the Company.
EMPLOYEES
As of December 31, 1997, the Company had approximately 800 full-time employees
and 208 part-time employees, including 21 administrative and executive employees
at its headquarters office in Atlanta, Georgia; 17 employees in sales and
marketing; 459 employees at Co-Sourcing sites, and 524 employees in its medical
transcription operations. Case Management had 25 full-time employees, 3 part-
time employees and contracts with over 15 registered nurses who were not
employees of the Company. The Company also supervises 93 employees of
contracting hospitals at Co-Sourcing sites. The Company is not a party to any
collective bargaining agreement. The hospital employees at one Co-Sourcing site
have been solicited by union representatives, but no definitive action toward
representation has been taken. The Company has not experienced any strikes or
work stoppages, and believes that its relations with its employees are good.
ITEM 2. PROPERTIES.
The Company leases the space for its principal offices in Atlanta,
Georgia, space for satellite sales offices, and space for its transcription
offices in Chicago, Illinois; Pittsburgh, Pennsylvania; Columbus, Ohio; Boston,
Massachusetts; Atlanta, Georgia; Salt Lake City, Utah; Los Angeles, California;
Seattle, Washington; and Portland, Oregon. Transcend Case Management, Inc.
leased space for its business in Orlando, Florida and Dallas, Texas.
Co-Sourcing sites utilize the customer's premises without lease commitments.
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ITEM 3. 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 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 (the "Lawsuit".)
The Lawsuit was subsequently amended to name 13 defendant insurance groups
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
subsidiaries and their contracting associated medical groups. Nine 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.
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 was issued by the Court on June 18, 1997. The Company appealed the
ruling in the California Court of Appeals on June 25, 1997. There can be no
assurance that the Company will be successful 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.
For the year ended December 31,1997, the Company expensed approximately
$147,000 of legal expenses connected with the lawsuit. Under the original
agreement with the Company's counsel of record in the Lawsuit, there was a cap
on legal expenses and after December 1996, with respect to expenses incurred at
the trial court level, the Company would only be responsible for out-of-pocket
expenses and the payment to counsel of a percentage of any recovery of damages
by the Company. However, in May 1997, the Company was notified that the partner
principally responsible for the case was leaving the firm with which the Company
contracted to handle the case. The Company has moved the representation to new
counsel, which resulted in negotiation of a new fee arrangement requiring the
Company to pay additional legal expenses 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, Transcend Case Management, Inc., 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 demanded compensatory damages in
the amount of $1 million and punitive damages in the amount of $2 million, plus
costs. This matter was settled in March 1998 at no cost to the Company and the
Company was released from all related claims.
9
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT"S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Transcend Common Stock is quoted on the National Market. As of March 9, 1998
there were approximately 523 holders of record of Transcend Common Stock. The
table below sets forth for the fiscal periods indicated the high and low bid
prices per share of Transcend Common Stock as reported on the National Market.
The policy of the Board of Directors of the Company is to retain earnings for
the expansion and development of the Company"s business and the Board of
Directors does not anticipate paying cash dividends on the Common Stock in the
foreseeable future. Future dividend policy and the payment of dividends, if
any, will be determined by the Board of Directors in light of circumstances then
existing, including among other things, future earnings, operations, capital
requirements, contractual restrictions, the general financial condition of the
Company, general business conditions and other factors deemed relevant by the
Board. Pursuant to the terms of certain financing agreements, the Company is
restricted from paying dividends to its common stockholders.
<TABLE>
<CAPTION>
PRICE PER SHARE OF
COMMON STOCK
-------------------
HIGH LOW
-------- ---------
<S> <C> <C>
Year Ended December 31, 1997
First Quarter................ $ 5 7/8 $ 4
Second Quarter............... $ 4 7/8 $1 15/16
Third Quarter................ $ 4 3/8 $ 2 3/16
Fourth Quarter............... $ 4 1/4 $ 2 1/16
Year Ended December 31, 1996
First Quarter................ $ 9 3/8 $ 4 7/8
Second Quarter............... $12 1/8 $ 7 3/4
Third Quarter................ $10 3/4 $ 3 5/8
Fourth Quarter............... $ 6 1/8 $ 4 3/8
</TABLE>
RECENT SALES OF UNREGISTERED SECURITIES
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") to 15 accredited investors
including members of the Company's Board of Directors. The Preferred Stock was
sold in compliance with Rule 506 of Regulation D under the Securities Act of
1933, as amended. 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 (7.4 shares of Common Stock per share
of Preferred Stock). Under certain circumstances the Company may, at its
option, redeem the Preferred Stock on or after November 15, 1998, in whole or in
part, at the redemption prices set forth below together with all accrued and
unpaid dividends to the redemption date.
Redemption Dates Redemption Prices
- -------------------------------------------------------------------------------
November 15, 1998 through November 14, 1999 109%
November 15, 1999 through November 14, 2000 106%
November 15, 2000 through November 14, 2001 103%
November 15, 2001 and after 100%
The Preferred Stock has liquidation preferences to common stockholders.
Holders are entitled to 7.4 votes per share of Preferred Stock, and votes with
the common stockholders on all matters. The shares of common stock underlying
the Preferred Stock carry piggy-back registration rights, subject to certain
limitations, in the event the Company proposes to register the sale of any of
its securities for its own account or for the account of its shareholders.
10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company for the periods indicated, which data has been derived from the
Company's consolidated financial statements. The report of Arthur Andersen LLP,
independent public accountants, with respect to such consolidated financial
statements as of December 31, 1997 and 1996 and for the three years in the
period ended December 31, 1997 is included on page 21. This selected financial
data should be read in conjunction with the consolidated financial statements,
related notes and other financial information included and incorporated by
reference herein.
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
(in thousands)
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
RESULTS FROM OPERATIONS>:
Net revenues $6,511 $13,207 $28,009 $39,633 $43,413
- --------------------------------------------------------------------------------------------------
Gross profit 1,083 1,636 4,136 5,287 6,276
- --------------------------------------------------------------------------------------------------
Marketing and sales expenses 378 929 2,186 2,480 2,065
General and administrative expenses 1,330 1,673 4,961 5,771 4,787
Amortization expense 310 357 633 535 445
Non-recurring charges - - - 1,700 2,338
- ---------------------------------------------------------------------------------------------------
Loss from operations (935) (1,323) (3,644) (5,199) (3,359)
- ---------------------------------------------------------------------------------------------------
Interest and other expense, net 31 40 21 462 433
Provision for income tax - 13 - - -
- ---------------------------------------------------------------------------------------------------
Loss before discontinued operations (966) (1,376) (3,665) (5,661) (3,792)
- ---------------------------------------------------------------------------------------------------
Loss from discontinued operations - - (479) (1,582) (147)
Dividends on preferred stock - - - - 59
- ---------------------------------------------------------------------------------------------------
Net loss to common stockholders $(966) $(1,376) $(4,144) $(7,243) $(3,998)
- ---------------------------------------------------------------------------------------------------
RESULTS PER SHARE OF COMMON STOCK:
Basic and diluted loss from continuing
operations $(0.11) $(0.13) $(0.20) $(0.29) $(0.19)
Basic and diluted loss from discontinued
operations - - (0.02) (0.08) (0.01)
Dividends on preferred stock - - - - (0.00)
Net loss per share $(0.11) $(0.13) $(0.22) $(0.37) $(0.20)
Weighted average shares of common stock 9,096 10,572 18,626 19,517 20,279
FINANCIAL POSITION AT YEAR END:
Total Assets $1,200 $ 2,916 $16,869 $16,557 $20,650
Working Capital $ (569) $(2,943) $ 654 $(1,576) $ 6,271
Total Debt $ 0 $ 2,176 $ 2,796 $ 4,749 $ 7,091
Stockholders Equity $ 168 $(1,170) $ 9,698 $ 5,961 $ 7,913
</TABLE>
- ------------
(1) On January 10, 1995, the Company acquired a Georgia corporation then known
as "Transcend Services, Inc." by the merger of Transcend into a subsidiary
of the Company. The merger was treated for financial accounting purposes as
the acquisition of the Company by the former Transcend and the historical
financial statements of the former Transcend have become the financial
statements of the Company and include the business of both companies after
the effective date of the merger. See Note 11 of "Notes to Consolidated
Financial Statements."
(2) The Company has completed several acquisitions that could affect the
comparability of the information reflected in the table. See Note 11 of
"Notes to Consolidated Financial Statements."
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements of the Company (including the notes thereto) contained
elsewhere in this Report.
OVERVIEW
Transcend Services, Inc. ("Transcend" or the "Company") provides healthcare
information management ("HIM") solutions to hospitals and other associated
healthcare providers. The Company's range of HIM services includes (i) contract
management, or "Co-Sourcing", of medical records and other HIM functions; (ii)
transcription of physicians' dictated medical notes; and (iii) consulting
relating to medical records and reimbursement coding. The Company currently
operates, on a contract management basis, the medical records and certain other
HIM functions of 21 general acute care hospitals located in 11 states and the
District of Columbia. The Company also operates transcription centers both in
conjunction with its Co-Sourcing contracts and for 150 separate healthcare
customers where the Company performs transcription services only. The Company,
through its wholly owned subsidiary Transcend Case Management, Inc.("TCM"),
formerly Sullivan Health Management Services, Inc., also provided case
management and disability management services to insurance carriers, third party
administrators and self-insured employers; however, this operation was sold on
March 16, 1998.
RESULTS OF OPERATIONS
The Company produced net losses in each of the three years ended December 31,
1997. Excluding losses from TCM and non-recurring charges, the Company would
have had an operating profit of $26,000 in 1997 and reduced operating losses of
$2,614,000 in 1996 and $2,826,000 in 1995. Management believes that the
Company's historical operating losses, excluding TCM and non-recurring charges,
are primarily attributable to low gross profit margins from contract start ups
and the significant expenses incurred by the Company to build a larger sales and
management organization to support growth. Excluding TCM, in fiscal 1995, 1996
and 1997, respectively, the Company's gross profit margins were 13.6%, 13.1%,
and 14.6%. For the same periods its marketing, sales, general and
administrative expenses as a percentage of revenue were 23.6%, 19.2%, and 13.9%,
reflecting operating leverage as revenues grow and realizing the effects of cost
reductions in 1996 and 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net revenues for the Company increased from $39,633,000 in 1996 to $43,413,000
in 1997, an increase of 9.5%. Co-Sourcing revenues were the largest service
class representing 55.5% of total revenues in 1996 and 53.8% in 1997. Co-
Sourcing revenues increased from $21,983,000 in 1996 to $23,370,000 in 1997, an
increase of 6.3%. Medical transcription revenues were the second largest
revenue class for 1996 and 1997, representing 32.4% in 1996 and 40.9% in 1997.
Medical transcription revenues grew from $12,826,000 in 1996, to $17,760,000 in
1997, an increase of 38.5%. Co-Sourcing and medical transcription revenue
growth results from new contracts in late 1996 and 1997 offset by client
attrition. Consulting and coding revenues represented revenue growth of 1.7% of
the Company's total revenues for 1996 and 1.0 % for 1997. Consulting and coding
revenues decreased to $422,000 in 1997 from $686,000 in 1996 resulting primarily
from the write-off of $96,000 in 1997 of receivables related to revenue recorded
in 1996. TCM revenues represented 4.3% of total revenues in 1997 and 8.7% in
1996. TCM revenues decreased to $1,861,000 in 1997 from $3,461,000 in 1996, a
decrease of 46.2%, due to the loss of several key accounts. One-time revenue of
$678,000 was reported in 1996 related to the sale of a computer system to a
customer which was sold at cost.
Excluding TCM and the one-time system sale in 1996, net revenues for the
Company increased from $35,495,000 in 1996 to $41,552,000 in 1997, an increase
of 17.1%.
Gross profit increased 18.7% to $6,276,000 for 1997 from $5,287,000 in the
prior year. Gross profit margins increased to 14.5% for 1997 from 13.3% in the
prior year, an increase of 1.2 margin points. This increase was primarily
attributable to margin expansion in Co-Sourcing and medical transcription which
produced blended margins of 15.0% in 1997, an increase of 1.5 percentage points
from 1996. TCM margins declined year over year by 5.4 percentage points to
10.7% from 16.1% in 1996 due to significant revenue declines and an increase in
the use of contract nurses. Write-offs of accounts receivable resulted in a
loss in consulting in 1997 compared to a gross profit margin 10.9% in 1996.
12
<PAGE>
Excluding TCM and the one-time system sale in 1996, gross profits were
$6,077,000 in 1997, an increase of 27.7% over 1996. Gross margins, excluding
TCM and the one-time system sale, would be 14.6% in 1997 compared with 13.4% in
1996.
Marketing and sales expenses decreased 16.7% to $2,065,000 in 1997 from
$2,480,000 in the prior year and decreased as a percentage of revenues to 4.8%
for 1997 from 6.3% for 1996. The decrease in sales and marketing expenditures
as a percentage of revenues is attributable to the Company's improved leverage
of the fixed cost structure as revenues grow. The year over year decrease in
marketing and sales expenses is the result of the realignment of sales and
marketing resources to operations management in the early part of 1997 and a
reduction in sales promotion expenditures. In the fourth quarter of 1997, the
Company increased its direct sales force adding two sales representatives.
General and administrative expenses of $4,787,000 for the 1997 fiscal year
decreased 17.1% over the $5,771,000 expended in the same prior year period. .
The decline in general and administrative expenses year over year is
attributable to charges incurred in 1996 in connection with the Company's
internal reorganization and restructuring efforts. General and administrative
expenses as a percentage of revenues declined from 13.6% in 1996 to 11.0% in
1997.
Non-recurring charges of $2,338,000 in 1997 and $1,700,000 in 1996 were
recorded related primarily to asset write-downs associated with the default on a
note receivable and reductions in the carrying value of goodwill related to TCM.
Amortization expenses decreased to $445,000 in 1997 from $535,000 in 1996
reflecting the impact of acquisition expenses being fully amortized.
Net interest expense increased to $433,000 for 1997 as compared to $262,000
for 1996, primarily due to the impact of interest expense incurred in connection
the Company's increased borrowings, loan fees, and higher interest rates
associated with the credit facility with Coast (See "Note 4- Notes to
Consolidated Financial Statements".)
Other expense included $200,000 in 1996 to cover all of its legal, accounting
and printing costs incurred in connection with its filing of a registration
statement in May 1996 to raise additional capital through a public offering of
its Common Stock. Due to adverse market conditions, the Company withdrew its
offering in July 1996.
The Company's loss before discontinued operations decreased to $3,792,000 for
1997 from $5,661,000 in the prior year. Excluding non-recurring charges of
$2,338,000 in 1997 and $1,700,000 in 1996 and TCM losses of $889,000 in 1997 and
$728,000 in 1996, the Company's loss before discontinued operations was $565,000
in 1997, an improvement of $2,668,000 year over year.
The loss from discontinued operations decreased to $147,000 for 1997 from
$1,582,000 in 1996 as a result of 1996 charges for legal fees incurred in
connection with the Company's civil lawsuit against certain insurance companies
in the state of California ( See Note 5.)
In November 1997, the Company issued 212,800 shares of series A convertible
preferred stock which carry a dividend of 9%. Net loss to common stockholders
was increased in 1997 by $59,000 of preferred stock dividends.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net revenues for the Company increased from $28,009,000 in 1995 to $
39,633,000 in 1996, an increase of 41.5%. Co-Sourcing revenues were the largest
service class revenue source for the Company representing 51.0% of total
revenues in 1995 growing to 55.5% in 1996. Co-Sourcing revenues increased from
$14,300,000 in 1995 to $21,983,000 in 1996, an increase of 53.7% as a result of
new contracts in the second half of 1995 and in 1996. Medical transcription
revenues were the second largest source of revenues for the Company for 1995 and
1996, representing 31.4% in 1995 growing to 32.4% in 1996. Medical
transcription revenues grew from $8,789,000 in 1995, to $12,826,000 in 1996, an
increase of 45.9%. The increase in transcription revenues results from new
contract signings (representing 76.5% of the growth) and the acquisitions of
International Dictation Services, Inc. ("IDS") and Medical Transcriptions of
Atlanta, Inc. ("MTA") in 1995 (representing 23.5% of the growth.) Consulting
revenues represented 1.7% of the Company's total revenues for 1996, down from
2.7% for 1995. Consulting and coding revenues decreased to $686,000 in 1996
from $768,000 in 1995 as the Company emphasized its Co-Sourcing and medical
transcription services. TCM revenues represented 8.7% of the Company's total
revenues in 1996 as compared to 14.8% in 1995. TCM revenues decreased to
$3,461,000 in 1996 from $4,152,000 in 1995, a decrease of 16.6% due to a
13
<PAGE>
consolidation of certain sales territories and the loss of several key accounts.
In 1996 the Company also recorded revenues of $678,000 related to the sale of a
computer system to a hospital client.
Excluding TCM and the one-time system sale in 1996, net revenues for the
Company increased from $23,857,000 to $35,495,000 in 1996, an increase of 48.8%.
Gross profit increased 27.8% to $5,287,000 for 1996 from $4,136,000 in the
prior year. Gross profit as a percentage of total Company revenues decreased to
13.3% for 1996 from 14.8 % in the prior year, a decrease of 1.5 margin points.
This decrease was primarily attributable to the decline in TCM margins which
accounted for 1.0 margin points. The one-time system sale produced no gross
profit and accounted for the majority of the remaining margin decline year over
year.
Excluding TCM and the one-time system sale, gross profits were $4,761,000 in
1996, an increase of 45.9% over 1995. Gross margins, excluding TCM and the one-
time system sale, would be 13.4% in 1996 compared with 13.6% in 1995.
Marketing and sales expenses increased 13.4% to $2,480,000 in 1996 from
$2,186,000 in the prior year and decreased as a percentage of revenues to 6.3%
for 1996 from 7.8% for 1995. The decrease in sales and marketing expenditures
as a percentage of revenues is attributable to the Company's investment in a
national sales force and marketing program in 1995 and early 1996 which led to a
significant increase in sales in 1996 without a material increase in marketing
and sales expenditures in the 1996 fiscal year.
General and administrative expenses of $5,771,000 for the 1996 fiscal year
increased approximately 16.3% over the $4,961,000 expended in the same prior
year period; however, this represents a decrease as measured as a percentage of
revenues in comparing 1995 and 1996. The decline in general and administrative
expenses as a percentage of revenues from 17.7% in 1995 to 14.6% in 1996 is a
result of the Company's leveraging its relatively fixed administrative cost
structure over a higher revenue base. In 1996, the Company also incurred
unusual expenses of approximately $1,000,000 comprised of severance costs for
employees whose job positions were eliminated, costs incurred in connection with
1996 acquisitions, moving and lease buy-out costs connected with office
consolidations and consulting fees related to the Company's Information Delivery
Center.
Amortization expenses decreased to $535,000 in 1996 from $633,000 in 1995
reflecting the impact of the 1993 acquisition of dataLogix, Inc. being fully
amortized.
Other expenses increased to $462,000 in 1996 as compared to $21,000 for 1995,
primarily due to the impact of interest expense incurred in connection with (i)
the August 15, 1995 private placement of 8% Subordinated Convertible Debentures
and (ii) the Company's borrowings against its working capital line of credit
totaling $2,118,000 as of December 31, 1996. Also, the Company expensed
$200,000 in 1996 to cover all of its legal, accounting and printing costs
incurred in connection with its filing of a registration statement in May 1996
to raise additional capital through a public offering of its Common Stock. Due
to adverse market conditions, the Company withdrew its offering in July 1996.
The Company's loss before discontinued operations increased to $5,661,000 for
1996 from $3,665,000 in the prior year, due to non-recurring charges of $1.7
million from the write down of a note receivable, approximately $200,000
incurred in connection with the Company's attempt to raise additional capital
through a public offering of its Common Stock in May of 1996; and approximately
$1.0 million incurred in connection with the Company's internal reorganization
and restructuring.
TCM produced losses of $728,000 in 1996 and $660,000 in 1995. Excluding the
effects of the non-recurring charges and TCM operations, the loss before
discontinued operations increased to $3,233,000 for 1996, down from $3,005,000
in the prior year.
The loss from discontinued operations increased to $1,582,000 for 1996 from
$479,000 in 1995 as a result of charges for legal fees incurred in connection
with the Company's civil lawsuit against certain insurance companies in the
state of California.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flows from continuing operations required the use of cash
of $2,100,000 in 1997. Discontinued operations used cash of $215,000 in 1997
which includes cash contributed from discontinued operations (through the
collection of accounts receivable) of $152,000 net of cash expenditures of
14
<PAGE>
$367,000 for collection costs and 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 Note 5.)
The Company's working capital position increased to $6,271,000 during the
twelve months ended December 31, 1997, from a negative $1,576,000 at December
31, 1996. This increase in the Company's working capital position is primarily
the result of the Company refinancing its $5.0 million line of credit resulting
in the reclassification from current liabilities to long term debt and the $5.3
million offering of preferred stock.
The Company's cash flows from investing activities used cash of $2,393,000 in
1997 primarily for capital expenditures. In 1997, the Company incurred
$2,108,000 in capital expenditures, primarily for electronic document management
systems in connection with new contracts, digital dictation equipment and
continued investment in the development of the Information Delivery Center. The
Company also used cash of $285,000 in acquisitions primarily for dissenting
shareholders of DocuMedX.
Cash flows from financing activities provided $8,586,000 in 1997 primarily
from (i) the proceeds received on the exercise of incentive stock options in the
amount of $915,000; (ii) the utilization of credit facilities (as described
below) in the amount of $2,351,000; and (iii) proceeds of $5,320,000 received in
connection with the sale of preferred stock (as described below).
On April 3, 1997, the Company entered into a $5.0 million credit agreement
with Coast Business Credit ("Coast"), an asset based lender (and a division of
Southern Pacific Thrift and Loan Association). The agreement provides the
Company with a $4.7 million working capital facility and a $300,000 capital
expenditure facility secured by substantially all of the Company's assets. The
working capital facility has been used to pay off the previous credit
relationship with Silicon Valley Bank in full. These new Coast facilities do
not contain any financial covenants but contain restrictions from paying
dividends and entering into financing arrangements without consent. Coast has
consented to the payment of dividends related to the preferred stock and the
master lease agreement discussed below and in Note 8.
Funding limits under the agreement are determined by a funding formula. Under
the original terms of the agreement, the funding formula is based on 1.5 times
monthly contractual contract management revenues, plus 80% of all medical
transcription receivables under 90 days (aging) under the working capital
facility and up to $300,000 on new capital expenditures under the capital
expenditure facility.
On August 8, 1997, the Company agreed to amend its credit facility with Coast.
Under the terms of the amendment, the term of the agreement was extended to May
31, 2000 and the funding formula modified to provide additional liquidity to the
Company by providing funding of 1.5 times average monthly receipts under long
term transcription contracts. The amendment also provides for an increase in
the funding formula from 1.5 times to 2.0 times monthly contract revenues if the
Company's tangible net worth exceeds $5.0 million for five consecutive business
days. As of December 31, 1997 the capacity of the credit line based on the
funding formula was $5.0 million.
These facilities are priced at prime plus 2.25% declining to prime plus 1.75%
upon two consecutive quarters of achievement and ongoing maintenance of a debt
service coverage ratio of not less than 1.5 measured on an earnings before
interest, taxes, and amortization ("EBITA") basis. EBITA is used by Coast as an
indicator of a company's ability to incur and service debt. EBITA should not be
considered an alternative to operating income, net income, cashflows, or any
other measure of performance as determined in accordance with generally accepted
accounting principles, as an indicator of operating performance, or as a measure
of liquidity. These facilities are secured by a first security interest on all
Company assets.
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 (7.4
shares of common per share of Preferred Stock). Under certain circumstances the
Company may, at its option, redeem the Preferred Stock on or after November 15,
1998, in whole or in part, at the redemption prices set forth below together
with all accrued and unpaid dividends to the redemption date.
15
<PAGE>
Redemption Dates Redemption Prices
- --------------------------------------------------------------------------------
November 15, 1998 through November 14, 1999 109%
November 15, 1999 through November 14, 2000 106%
November 15, 2000 through November 14, 2001 103%
November 15, 2001 and after 100%
The holders of the Preferred Stock may convert the Preferred Stock into shares
of Common Stock within 60 days following the Company's notice of redemption.
On February 19, 1998, the Company signed a master lease agreement providing up
to $5.0 million in lease financing with Information Leasing Corporation, a
subsidiary of Provident Bank, Cincinnati, Ohio at interest rates equal to
Provident Bank prime rate plus two percent. Subject to a review of the
underlying customer contract, the master lease agreement calls for equal monthly
payments over the term of the lease, typically the life of the underlying
contract, not to exceed five years. The facility is intended to provide
financing for new electronic document management systems and transcription
systems required for new contracts.
The Company anticipates that cash on hand, together with internally generated
funds, cash collected from discontinued operations and cash available under its
new working capital facility and leasing facilities described should be
sufficient to finance continuing operations, make capital investments in the
normal and ordinary course of its business, and fund the expenses of its civil
litigation action against certain insurance carriers during 1998.
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>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following financial statements are filed with this report:
Report of Arthur Andersen LLP, Independent Public Accountants
Consolidated Balance Sheets at December 31, 1997 and 1996
Consolidated Statements of Operations for the years ended December 31, 1997,
1996 and 1995
Consolidated Statements of Stockholders' Equity for the years ended December
31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended December 31, 1997,
1996 and 1995
Notes to Consolidated Financial Statements
17
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
TRANSCEND SERVICES, INC.:
We have audited the accompanying consolidated balance sheets of Transcend
Services, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997
and 1996 and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Transcend Services, Inc. and
subsidiaries as of December 31, 1997 and 1996 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Atlanta, Georgia
March 16, 1998
18
<PAGE>
TRANSCEND SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
------------ -----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,541,000 $1,663,000
Accounts receivable, net of allowance for doubtful accounts
of $163,000 in 1997 and $147,000 in 1996 4,965,000 3,804,000
Prepaid expenses and other current assets 979,000 548,000
------------ -----------
Total current assets 11,485,000 6,015,000
------------ -----------
Property and equipment:
Property and equipment 6,699,000 4,655,000
Accumulated depreciation (3,277,000) (2,040,000)
------------ -----------
Property and equipment, net 3,422,000 2,615,000
Deposits and other assets 510,000 522,000
Goodwill and other intangible assets, net 2,587,000 4,828,000
Net assets from discontinued operations 2,646,000 2,577,000
------------ -----------
Total assets $20,650,000 $16,557,000
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long term debt $ 108,000 $2,285,000
Accounts payable 843,000 2,053,000
Accrued compensation and benefits 2,399,000 1,797,000
Other accrued liabilities 1,751,000 1,343,000
Deferred income taxes 113,000 113,000
------------ -----------
Total current liabilities 5,214,000 7,591,000
------------ -----------
Long term debt, net of current maturities 4,983,000 464,000
Deferred income taxes 540,000 541,000
Convertible debentures 2,000,000 2,000,000
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value 21,000,000 shares authorized
Series A convertible preferred stock, 212,800 and 0 shares issued at
December 31, 1997 and 1996 2,000 -
Common stock, $.01 par value, 30,000.000 shares authorized
20,500,000 and 20,000,000 shares issued at December 31, 1997 and 1996 205,000 200,000
Additional paid-in capital 26,208,000 19,980,000
Retained deficit (18,502,000) (14,219,000)
------------ -----------
Total stockholders' equity 7,913,000 5,961,000
------------ -----------
Total liabilities and stockholders' equity $ 20,650,000 $16,557,000
============ ===========
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
19
<PAGE>
TRANSCEND SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
Net revenues $43,413,000 $39,633,000 $28,009,000
Direct costs 37,137,000 34,346,000 23,873,000
----------- ----------- -----------
Gross profit 6,276,000 5,287,000 4,136,000
----------- ----------- -----------
Marketing and sales expenses 2,065,000 2,480,000 2,186,000
General and adminstrative expenses 4,787,000 5,771,000 4,961,000
Amortization expenses 445,000 535,000 633,000
Non-recurring charges 2,338,000 1,700,000 -
----------- ----------- -----------
Loss from operations (3,359,000) (5,199,000) (3,644,000)
----------- ----------- -----------
Other income (expense):
Interest expense, net (433,000) (262,000) (21,000)
Other - (200,000) -
----------- ----------- -----------
(433,000) (462,000) (21,000)
----------- ----------- -----------
Loss before taxes and discontinued
operations (3,792,000) (5,661,000) (3,665,000)
Income taxes - - -
----------- ----------- -----------
Loss before discontinued operations (3,792,000) (5,661,000) (3,665,000)
Loss from discontinued operations (147,000) (1,582,000) (479,000)
----------- ----------- -----------
Net loss (3,939,000) (7,243,000) (4,144,000)
----------- ----------- -----------
Dividends on preferred stock (59,000) - -
----------- ----------- -----------
Net loss to common stockholders $(3,998,000) $(7,243,000) $(4,144,000)
=========== =========== ===========
Basic and diluted loss per share:
From continuing operations ($0.19) ($0.29) ($0.20)
From discontinued operations (0.01) (0.08) (0.02)
----------- ----------- -----------
Net loss ($0.20) ($0.37) ($0.22)
=========== =========== ===========
Weighted average common shares
outstanding 20,279,000 19,517,000 18,626,000
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
20
<PAGE>
TRANSCEND SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
PREFERRED COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK STOCK CAPITAL DEFICIT EQUITY
----------- ---------- ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance December 31,1994 $ - $ 105,000 $ 1,710,000 $ (2,985,000) $ (1,170,000)
Issuance of 7,792,446
shares of Common Stock
with merger - 78,000 14,533,000 - 14,611,000
Issuance of 60,000
shares of Common Stock
in acquisition - 1,000 171,000 - 172,000
Issuance of 527,130
shares from exercise
of options and other
issuances - 5,000 262,000 - 267,000
Net loss - - - (4,144,000) (4,144,000)
Distribution to former
Stockholder/Owner - - - (38,000) (38,000)
----------- ---------- ------------ -------------- --------------
Balance, December 31,1995 - 189,000 16,676,000 (7,167,000) 9,698,000
Issuance of 521,725
shares of Common Stock
in private placement - 5,000 2,441,000 - 2,446,000
Issuance of 87,805
shares of Common Stock
in acquisitions - 1,000 - 312,000 313,000
Issuance of 476,054 shares of
Common Stock from exercise
of options and other
issuances - 5,000 863,000 - 868,000
Net loss - - - (7,243,000) (7,243,000)
Distribution to former
Stockholder/Owner - - - (121,000) (121,000)
----------- ---------- ------------ -------------- --------------
Balance, December 31, 1996 - 200,000 19,980,000 (14,219,000) 5,961,000
Issuance of 212,800
shares of Preferred Stock
in private placement 2,000 - 5,318,000 - 5,320,000
Issuance of 461,848 shares of
Common Stock from exercise
of option and other
issuances - 5,000 910,000 - 915,000
Net loss - - - (3,998,000) (3,998,000)
Distribution to former
Stockholder/Owner - - - (285,000) (285,000)
----------- ---------- ------------ -------------- --------------
Balance, December 31, 1997 $ 2,000 $ 205,000 $ 26,208,000 $ (18,502,000) $ 7,913,000
=========== ========== ============ ============== ==============
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
21
<PAGE>
TRANSCEND SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,998,000) $(7,243,000) $(4,144,000)
----------- ----------- ----------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,667,000 1,460,000 1,161,000
Non-recurring charges 2,338,000 1,700,000 -
Loss related to discontinued operations 147,000 1,582,000 479,000
Changes in assets and liabilities:
Accounts receivable, net (1,164,000) (333,000) (1,561,000)
Prepaid expenses (432,000) (235,000) (187,000)
Deposits and other assets (339,000) 243,000 (351,000)
Accounts payable (1,211,000) 734,000 (41,000)
Accrued liabilities 892,000 704,000 315,000
Other - (20,000) 123,000
----------- ----------- ----------
Total adjustments 1,898,000 5,835,000 (62,000)
Net cash used in continuing operations (2,100,000) (1,408,000) (4,206,000)
Net cash provided by (used in) discontinued operations (215,000) (1,745,000) 202,000
----------- ----------- ----------
Net cash used in operating activities (2,315,000) (3,153,000) (4,004,000)
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,108,000) (1,428,000) (1,329,000)
Disposal and transfer of property - 11,000 60,000
Cash acquired from acquisitions - 37,000 7,560,000
Acquisitions - - (1,527,000)
Distribution to former shareholder/owner (285,000) (121,000) (38,000)
----------- ----------- ----------
Net cash (used in) provided by investing activities (2,393,000) (1,501,000) 4,726,000
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from short-term debt - - 16,000
Repayments on short-term debt - (100,000) -
Borrowings under line of credit agreement 4,701,000 2,118,000 67,000
Repayments on line of credit agreement (2,118,000) (19,000) (2,024,000)
Borrowings from long-term debt 104,000 98,000 -
Principal payments long-term debt (336,000) (218,000) (76,000)
Proceeds - convertible debentures - - 2,000,000
Proceeds from private placement of preferred stock 5,320,000 - -
Proceeds from private placement of common stock - 2,446,000 -
Proceeds - stock options and other issuances 915,000 868,000 267,000
----------- ----------- -----------
Net cash provided by financing activities 8,586,000 5,193,000 250,000
----------- ----------- -----------
Net increase in cash and cash equivalents 3,878,000 539,000 972,000
Cash and cash equivalents, at beginning of year 1,663,000 1,124,000 152,000
----------- ----------- -----------
Cash and cash equivalents, at end of year $ 5,541,000 $ 1,663,000 $ 1,124,000
=========== =========== ===========
Supplemental cash flow information:
Cash paid for interest expense $ 483,000 $ 311,000 $ 56,000
- --------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Transcend Services, Inc. ("Transcend" or the "Company") provides healthcare
information management (''HIM'') solutions to hospitals and other associated
healthcare providers. The Company's range of HIM services includes (i) contract
management, or "Co-Sourcing", of medical records and other HIM functions; (ii)
transcription of physicians' dictated medical notes; and (iii) consulting
relating to medical records and reimbursement coding. The Company currently
operates the medical records and certain other HIM functions of 21 general acute
care hospitals located in 11 states and the District of Columbia. The Company,
through its wholly-owned subsidiary Transcend Case Management, Inc. ("TCM"),
also provided case management and disability management services to insurance
carriers, third party administrators and self-insured employers; however, the
net assets of TCM were sold in March 1998.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, Transcend Case Management, Inc. All significant
inter-company accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures in the Company's financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE
Accounts receivable are recorded net of an allowance for doubtful accounts
established to provide for losses on uncollectible accounts based on
management's estimates and historical collection. Charges for bad debts were
$100,000, $101,000, and $-0- in 1997, 1996, and 1995, respectively.
REVENUE AND COST RECOGNITION
Revenue is recognized monthly as the services are performed. Implementation
fee revenue is recognized over the first four months of a contract. Service and
implementation costs are expensed as incurred.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, less accumulated depreciation.
Charges for depreciation of capital assets are computed using the straight-line
method over their estimated useful lives, which range from three to five years.
INCOME TAXES
The Company accounts for its income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109. Deferred tax assets and
liabilities are recognized for the expected tax consequences of temporary
differences between tax basis of assets and liabilities and their reported
amounts and for operating loss and tax credit carry-forwards.
23
<PAGE>
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets are amortized over periods ranging from
three to thirty years. On January 1, 1996 the Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." Under SFAS No. 121, the Company periodically evaluates whether
events and circumstances have occurred that indicate that the remaining
estimated useful life of goodwill may warrant revision or that the remaining
balance of goodwill may not be recoverable. When factors (such as a change in
law or regulatory environment or forecasts showing changing long-term
profitability) indicate that goodwill should be evaluated for possible
impairment, the Company uses an estimate of the related business unit's
undiscounted net income over the remaining life of the goodwill to measure
whether the goodwill is recoverable. In December 1997, the Company recorded a
charge of $1.8 million for the impairment of its goodwill associated with its
subsidiary (See Note 11.)
FAIR VALUE OF DEBT
In accordance with SFAS No. 107, "Disclosures About Fair Value of Financial
Investments", the fair value of short-term debt is estimated to approximate its
carrying value. The fair value of long-term debt is estimated based on
approximate market interest rates for similar issues. The estimated fair value
of long-term debt at December 31, 1997 and 1996 was equal to the carrying amount
included in the accompanying balance sheets.
NET LOSS PER COMMON SHARE AND COMMON SHARE EQUIVALENT
Effective December 31, 1997, the Company has adopted SFAS No. 128, "Earnings
per Share." SFAS No. 128 establishes standards for computing and presenting
earnings or loss per share ("EPS".) Basic EPS is computed based on the weighted
average number of shares of the Company's common stock outstanding. When the
impact of common equivalent shares from stock options, warrants and convertible
securities are anti-dilutive, they are not included in the computation of
diluted EPS.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains,
and losses) in a full set of financial statements. SFAS No. 130 requires that
all components of comprehensive income be reported in a financial statement that
is displayed in the same prominence as other financial statements. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997 and has not yet
been adopted by the Company.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" which
establishes accounting standards for reporting information about operating
segments in annual financial statements. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997 and has not yet been adopted by the
Company.
2. DISCONTINUED OPERATIONS
The net loss and net assets from discontinued operations relate to the
operations of the Company's former subsidiaries, First Western Health
Corporation and Veritas Health Management, which ceased operations as of April
30, 1993. Net loss from discontinued operations represents costs for legal
proceedings associated with the $115 million civil lawsuit (the "Lawsuit") filed
by the Company (See Note 5.) The net assets related to discontinued operations
relate to receivables from certain workers compensation insurance carriers from
the Company's former subsidiaries, net of reserves for collection liabilities.
Charges for legal expenses connected with the Lawsuit were $147,000 in 1997,
$1,582,000 in 1996 and $479,000 in 1995. All future out-of-pocket legal expenses
will continue to be expensed on a current basis going forward.
24
<PAGE>
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
The net accounts receivable from the discontinued operations represent
reimbursements that are owed the Company by certain insurance companies from
applicant/legal evaluation services. The Company has filed liens for all of the
gross accounts receivable outstanding as of December 31, 1997 with the
California Workers' Compensation Appeals Board ("WCAB") due to lack of timely
payment by the insurance companies. While lien claimants are supposed to be
paid immediately, they are not entitled to a determination on the lien by an
administrative court until there has been a 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, after the
WCAB has made a determination as to payment, 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.
At December 31, 1997, the net assets related to the discontinued operations
were $2,645,000, consisting of $5,841,000 of gross accounts receivable offset by
reserves for collection liabilities of $3,198,000. Approximately 95% or
$5,549,000 of the gross accounts receivable are subject to stays, as discussed
below, pending the resolution of the Lawsuit. 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. The Company has contracted
with a third party for servicing and managing the remaining accounts receivable
balance which are not subject to stays as discussed below. The Company expects
to collect the receivables not subject to stays over the next several years.
During 1997, the Company collected approximately $152,000 on the receivables not
subject to stays and wrote off approximately $39,000.
Four insurers that are defendants in the Lawsuit have obtained stays of the
proceedings before the WCAB, pending resolution of the Lawsuit. 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 assets related to discontinued operations, 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 of the
disputed receivables by the WCAB. The Company will continue to re-evaluate the
valuation 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.
3. NON-RECURRING CHARGES
In December 1997, the Company recorded charges of $2.3 million related to the
carrying value of long-lived assets and assets to be disposed of and for
restructuring of the Company's wholly owned subsidiary, Transcend Case
Management, Inc. The charges were comprised of i.) $1.8 million related to the
adjustment of goodwill associated with the Company's wholly owned subsidiary,
Transcend Case Management, Inc. ("TCM") (See Note 12); ii.) $116,000 related to
the Company's restructuring of TCM in December 1997; iii.) $350,000 for the
write off of the remaining receivable balance from AmHealth, Inc. , see below,
after learning that there was no possibility of collection on the receivable;
and iv.) $75,000 related to the write off of certain obsolete assets.
In August 1996, the Company took a $1.7 million charge for the write down of a
receivable related to the sale of a former subsidiary in September 1994 to
AmHealth, Inc. In November 1996, AmHealth had its four Northern California
operating entities (three clinics and its Employee Services Division) foreclosed
on by the senior creditors. The operations were turned over to the senior
creditors.
25
<PAGE>
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
4. LONG TERM DEBT
Long-term debt is summarized as follows at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Notes payable, interest at 8.5% monthly payments
of principal and interest of $11,284 through
May 19, 2000.............................................................. $ 286,000 $ 392,000
Notes payable, 10.75% interest, paid in full at DocuMedX acquisition....... -- 239,000
Notes payable, 10% interest payable quarterly, annual principal
payments of $35,000, matures April 15, 2000.............................. 104,000 --
$5,000,000 revolving line of credit, interest computed
at prime plus 0.5 percent (8.75% at December 31, 1996).................... -- 1,870,000
$750,000 equipment line, interest computed at prime
plus 1 percent (9.25% at December 31, 1996)............................... -- 248,000
$5,000,000 revolving line of credit, interest at prime plus 2.25 percent,
(10.75% at December 31, 1997), matures May 31, 2000....................... 4,701,000 --
8% convertible debentures, due August 15, 2000............................. 2,000,000 2,000,000
- ------------------------------------------------------------------------------------------------------------------------
Total Debt................................................................. 7,091,000 4,749,000
Less: Current Maturities................................................... (108,000) (2,285,000)
- ------------------------------------------------------------------------------------------------------------------------
$6,983,000 $2,464,000
--------------------------------------------
</TABLE>
Convertible debentures bear interest at 8%, paid semi-annually, and are
convertible into common stock at $3.50 per share. The debentures mature on
August 15, 2000 and are convertible by the Company if the market value of
Transcend's common stock equals or exceeds $10.50 per share for 30 consecutive
trading days.
On April 3, 1997, the Company entered into a $5.0 million credit agreement
with Coast Business Credit ("Coast"), an asset-based lender (and a division of
Southern Pacific Thrift and Loan Association). The agreement provides the
Company with a $4.7 million working capital facility and a $300,000 capital
expenditure facility secured by substantially all of the Company's assets. The
working capital facility has been used to pay off the previous credit
relationship with Silicon Valley Bank in full. These new Coast facilities do
not contain any financial covenants but contain restrictions from paying
dividends and entering into financing arrangements without consent. Coast has
consented to the payment of dividends related to the preferred stock and the
master lease agreement discussed below and in Note 8.
Funding limits under the agreement are determined by a funding formula. Under
the original terms of the agreement, the funding formula is based on 1.5 times
monthly contractual Co-Sourcing revenues, plus 80% of all medical transcription
receivables under 90 days (aging) under the working capital facility and up to
$300,000 on new capital expenditures under the capital expenditure facility.
On August 8, 1997, the Company agreed to amend its credit facility with Coast.
Under the terms of the amendment, the term of the agreement was extended to May
31, 2000 and the funding formula modified to provide additional liquidity to the
Company by providing funding of 1.5 times average monthly receipts under long
term transcription contracts. The amendment also provides for an increase in
the funding formula from 1.5 times to 2.0 times monthly contract revenues if the
Company's tangible net worth exceeds $5.0 million for five consecutive business
days. As of December 31, 1997 outstanding borrowings under the line were
$4,701,000 with a total capacity of the credit line based on the funding formula
was $5.0 million.
These facilities are priced at prime plus 2.25% declining to prime plus 1.75%
upon two consecutive quarters of achievement and ongoing maintenance of a debt
service coverage ratio of not less than 1.5 measured on an earnings before
interest, taxes, and amortization ("EBITA") basis. EBITA is used by Coast as an
indicator of a company's ability to incur and service debt. EBITA should not be
considered an alternative to operating income, net income, cash flows, or any
other measure of performance as determined in accordance with generally accepted
accounting principles, as an indicator of operating performance, or as a measure
of liquidity. These facilities are secured by a first security interest on all
Company assets.
26
<PAGE>
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
5. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
Future minimum annual rental obligations under operating leases as of December
31, 1997 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998........................................................ $676,000
1999........................................................ 574,000
2000........................................................ 502,000
2001........................................................ 190,000
2002........................................................ 79,000
Thereafter.................................................. -0-
----------
$2,021,000
==========
</TABLE>
Rent expense was $573,000, $665,000 and $443,000 for the years ended December
31 1997, 1996 and 1995, respectively.
LITIGATION
On September 17, 1993, the Company and its former 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 (the "Lawsuit".)
The Lawsuit was subsequently amended to name 13 defendant insurance groups
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
subsidiaries and their contracting associated medical groups. Nine 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.
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 was issued by the Court on June 18, 1997. The Company appealed the
ruling in the California Court of Appeals on June 25, 1997. There can be no
assurance that the Company will be successful 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 believes
it has adequate defenses to the cross complaints.
27
<PAGE>
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
For the year ended December 31,1997, the Company expensed approximately
$147,000 of legal expenses connected with the lawsuit. Under the original
agreement with the Company's counsel of record in the Lawsuit, there was a cap
on legal expenses and after December 1996, with respect to expenses incurred at
the trial court level, the Company would only be responsible for out-of-pocket
expenses and the payment to counsel of a percentage of any recovery of damages
by the Company. However, in May 1997, the Company was notified that the partner
principally responsible for the case was leaving the firm with which the Company
contracted to handle the case. The Company has moved the representation to new
counsel, which resulted in negotiation of a new fee arrangement requiring the
Company to pay additional legal expenses 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, Sullivan Health & Rehabilitation Management, Inc. ("Sullivan") and
Fireman's Fund Insurance Company, in the circuit Court of Franklin County,
Tennessee, alleging breach of the duty to provide reasonably competent nursing
care to an injured individual. The case was settled without cost to the
Company on February 24, 1998.
6. RETIREMENT PLAN
The Company maintains a 401(k) retirement plan that covers substantially all
eligible employees. Employees are eligible to contribute amounts to the plan
subject to certain minimum and maximum limitations. The Company matches employee
contributions on a discretionary basis as determined by the Company's board of
directors. There have been no Company matches for 1997, 1996 and 1995.
7. TRANSACTIONS WITH RELATED PARTIES
Certain members of the Company's board of directors and parties related to the
Company's board of directors have participated in the following private
offerings:
<TABLE>
<CAPTION>
Offering Offering Date Percent of Offering
- ------------------------------------------------------------------------
<S> <C> <C>
Convertible Debentures August 15, 1995 23%
Common Stock September 5, 1996 69%
Convertible Preferred Stock November 15, 1997 64%
</TABLE>
8. STOCKHOLDERS' EQUITY
The Company has authorized 30,000,000 shares of common stock and 21,000,000
shares of preferred stock, $.01 par value.
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.
Under certain circumstances the Company may, at its option, redeem the Preferred
Stock on or after November 15, 1998, in whole or in part, at the redemption
prices set forth below together with all accrued and unpaid dividends to the
redemption date.
Redemption Dates Redemption Prices
-----------------------------------------------------------------------
November 15, 1998 through November 14, 1999 109%
November 15, 1999 through November 14, 2000 106%
November 15, 2000 through November 14, 2001 103%
November 15, 2001 and after 100%
28
<PAGE>
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
The holders of the Preferred Stock may convert the Preferred Stock into shares
of Common Stock within 60 days following the Company's notice of redemption.
On September 5, 1996, the Company raised $2.4 million in a private placement
of common stock and warrants to purchase common stock. A total of 522,000 shares
of common stock were sold at a price of $4.44 per share and a total of 522,000
warrants were sold at a price of $0.25 per warrant to 20 investors. The $4.44
price represents the ten-day average of the closing price of the Company's
common stock prior to the board meeting approving the private placement. The
securities issued in the private placement were issued in reliance on certain
exemptions from registration under federal and state securities laws. The shares
of common stock underlying the warrants and the common stock issued in the
private placement carry piggy-back registration rights, subject to certain
limitations, in the event the Company proposes to register the sale of any of
its securities for its own account or for the account of its stockholders.
9. STOCK OPTIONS AND WARRANTS
The Company has established a stock option plan for the employees of the
Company. The plan provides for the issuance of incentive stock options and non-
statutory options. Under this plan, options are granted for the Company's
common stock at the approximate fair value, as defined in the option agreement.
The following is a summary of stock option transactions:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
AVERAGE PRICE PRICE
OPTIONS PER SHARE PER SHARE
---------- ------------ ------------
<S> <C> <C> <C>
Options outstanding, December 31, 1994................... 683,000 $.07 to $.30 $ 0.15
Options issued in Merger (Note 11) 1,158,000 $1.87 to $3.75 2.22
Granted.................................................. 336,000 $1.87 to $5.75 3.55
Forfeited................................................ (161,000) $.07 to $3.13 1.38
Exercised................................................ (511,000) $.07 to $3.13 0.52
---------- ------
Options outstanding, December 31, 1995................... 1,505,000 2.43
Granted.................................................. 241,000 $4.00 to $11.38 6.79
Forfeited................................................ (222,000) $.30 to $7.13 5.01
Exercised................................................ (398,000) $.07 to $3.50 1.75
---------- ------
Options outstanding, December 31, 1996................... 1,126,000 2.83
Granted.................................................. 679,000 $.01 to $4.88 2.91
Forfeited................................................ (134,000) $1.87 to $5.75 3.80
Exercised................................................ (428,000) $.01 to $4.25 2.24
---------- ------
Options outstanding, December 31, 1997................... 1,243,000 $ 3.11
========== ======
Options eligible for exercise at December 31, 1997....... 536,646
==========
</TABLE>
At December 31, 1997 there were a total of 2,000 shares of common stock
available for grant.
On April 30, 1996, the Company granted a warrant to purchase shares of its
Common Stock to Silicon Valley Bank, a California-chartered bank in connection
with two credit facilities the Company established with Silicon Valley East, a
Division of Silicon Valley Bank. The warrant entitles the holder to purchase an
aggregate of 25,000 shares of the Company's Common Stock, subject to certain
adjustments, at an exercise price of $11.25 per share and expires April 30,
2001.
In connection with the private placement of common stock on September 5, 1996,
the Company sold 522,000 warrants to purchase common stock (See Note 8.) The
warrants have a five-year term and are exercisable at a price of $4.44 per
share, are redeemable by the Company at any time with thirty days notice (during
which time the holder may exercise the warrants) at an exercise price of $4.44
and are not transferable. The shares of common stock underlying the warrants and
the common stock issued in the private placement carry piggy-back registration
rights, subject to certain limitations, in the event the Company proposes to
register the sale of any of its securities for its own account or for the
account of its shareholders.
29
<PAGE>
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
The Company has elected to account for its stock-based compensation plans
under APB Opinion No. 25, under which no compensation cost has been recognized
by the Company. However, the Company has computed, for pro forma disclosure
purposes, the value of all options for shares of the Company's common stock
granted during 1997 and 1996 to employees and non-employee directors of the
Company using the Black-Scholes option-pricing model and the following weighted
average assumptions:
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------
<S> <C> <C>
Risk-free interest rate 5.33% - 6.72% 5.08% - 7.89%
Expected dividend yield 0% 0%
Expected lives Four years Four years
Expected volatility 0.70 0.70
</TABLE>
The total fair value of the options granted during the years ended December
31, 1997 and 1996 was computed as approximately $920,000 and $517,000,
respectively, which would be amortized over the vesting period of the options.
If the Company had accounted for these plans in accordance with SFAS No. 123,
the Company's reported pro forma net loss for the years ended December 31, 1997
and 1996 would have been as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Net Loss:
As reported $(3,998,000) $(7,243,000)
Pro forma $(4,348,000) $(7,372,000)
Basic and Diluted Net Loss per Common Share:
As reported $ (0.20) $ (0.37)
Pro forma $ (0.21) $ (0.38)
</TABLE>
The following table sets forth the exercise price range, number of shares,
weighted average exercise price, and remaining contractual lives by groups of
similar price and grant date:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- ---------------------------
Number Weighted Number
Outstanding Average Weighted Exercisable Weighted
Actual at Remaining Average at Average
Range of December 31, Contractua1 Exercise December 31, Exercise
Exercise Price 1997 Life Price 1997 Price
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.00-$0.05 8,500 2.8 $ 0.02 4,750 $ 0.04
$ 1.88-$2.94 778,396 2.2 2.32 381,146 2.21
$ 3.00-$5.63 427,000 2.7 4.06 123,125 3.94
$11.25-$11.38 29,500 2.3 11.26 27,625 11.25
- ---------------------------- --------- --- ------ ------- ------
$ 0.00-$11.38 1,243,396 2.4 $ 3.11 536,646 $ 2.22
============================ ========= === ====== ======= ======
</TABLE>
30
<PAGE>
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
10. INCOME TAXES
The tax effects of temporary differences between the carrying amounts of
assets and liabilities in the financial statements and their respective tax
bases, which give rise to deferred tax assets and liabilities as of December 31,
1996 and 1997 were as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Deferred tax liabilities:
Equipment and leasehold............ $ (110,000) $ (71,000)
Intangibles assets................. (136,000) (234,000)
Discontinued operations............ (1,032,000) (1,005,000)
Equity............................. (320,000) (263,000)
----------- -----------
(1,598,000) (1,573,000)
----------- -----------
Deferred tax assets:
Net operating loss carry-forwards.. 7,222,000 6,525,000
Cash-basis deferral................ 110,000 220,000
Accrued liabilities................ 191,000 226,000
Valuation allowance................ (6,578,000) (6,052,000)
----------- -----------
Net deferred tax (liabilities)..... $ (653,000) $ (654,000)
=========== ===========
</TABLE>
At December 31, 1997, the Company had net operating loss carry-forwards of
approximately $18,517,000 which may be used to reduce future income taxes. If
not utilized these carry-forwards will begin to expire in 2007. The Company has
Established a valuation allowance of $6,578,000 and $6,052,000 at December 31,
1997 and 1996, respectively due to the uncertainty regarding the realizability
of certain deferred tax assets, including its net operating loss carry-forward.
11. ACQUISITIONS
On January 10, 1995, Transcend acquired TriCare, Inc. in a merger accounted
for as a reverse merger. The acquisition was treated as a purchase. There were
approximately 7.8 million shares issued in the transaction resulting in goodwill
of approximately $3.2 million. This goodwill is being amortized over twenty
years (See Note 3 for charges for impairment of goodwill.) On June 15, 1994,
TriCare had completed the acquisition of Transcend Case Management, Inc. for an
adjusted purchase price of $3,285,000. Subsequent to the Merger, the Company
issued a final payment of $285,000 in lieu of the $1,260,000 obligation which
was payable in stock in January 1995 and July 1995, to the former owners of
Sullivan Health Management in full satisfaction of its long-term obligation
related to the acquisition of Sullivan and gave the former owners a release from
any and all further liabilities in connection therewith.
On January 31, 1995, the Company acquired the assets of International
Dictating Services ("IDS"), a Boston based medical transcription business for
approximately $832,000, which consisted of approximately $682,000 paid in cash
at closing with the balance payable to the sellers over the next two years. The
Company accounted for the acquisition under the purchase method of accounting.
The results of operations for IDS are included in the statement of operations of
the Company beginning on the date of acquisition. The fair value of tangible
assets acquired and liabilities assumed was $245,000 and $86,000, respectively.
The intangible related to customer lists is being amortized over seven years and
a non-compete agreement was amortized over two years. The balance of the
additional intangible asset is goodwill which is being amortized over 20 years.
On April 19, 1995, the Company acquired the assets of Medical
Transcription of Atlanta, Inc. ("MTA") for $1,372,000, consisting of $550,000
paid in cash at closing, promissory notes of $650,000, and 60,000 shares of
Transcend common stock valued at $172,000 at the time of the acquisition. The
Company accounted for the acquisition under the purchase method of accounting.
The results of operations for MTA are included in the statement of operations of
the Company beginning on the date of acquisition. The fair value of tangible
assets acquired and liabilities assumed was $363,000 and $27,000, respectively.
Intangible assets related to customer lists are being amortized over seven years
and a non-compete agreement is being amortized over a three-year period. The
balance of the additional intangible is goodwill, which is being amortized over
twenty years.
31
<PAGE>
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
On June 19, 1996 the Company acquired 100% of the capital stock of Greiner's
Medical Transcription, Inc. for 87,805 shares of Transcend common stock. On
June 28, 1996, the Company acquired 100% of the capital stock of Express Medical
Transcription, Inc. for 230,000 shares of Transcend common stock. On April 16,
1997, the Company acquired 100% of the capital stock of DocuMedX, Inc., a
Washington corporation for 608,800 shares of the Company's common stock. The
consolidated financial statements have been restated to reflect the acquisition
of Express Medical Transcription, Inc. and DocuMedX, Inc. under the pooling of
interests method of accounting.
12. SUBSEQUENT EVENTS
On February 19, 1998, the Company signed a master lease agreement providing up
to $5.0 million in lease financing with Information Leasing Corporation, a
subsidiary of Provident Bank, Cincinnati, Ohio at interest rates equal to
Provident Bank prime rate plus two percent. Subject to a review of the
underlying customer contract, the master lease agreement calls for equal monthly
payments over the term of the lease, typically the life of the underlying
contract, not to exceed five years. The facility is intended to provide
financing for new electronic document management systems and transcription
systems required for new contracts.
On March 16, 1998, the Company sold the net assets of its wholly owned
subsidiary, Transcend Case Management, Inc. ("TCM"), formerly Sullivan
Management Services, Inc., to CORE, INC., a publicly traded national provider of
managed disability and health care benefits management services. Under the
terms of the agreement, Transcend will receive CORE stock with the value based
on the future annual revenues from CORE's operation of TCM as of a date, the
"Determination Date", to be determined at Transcend's discretion between April
1, 1999 and February 28, 2001.
The net assets of TCM were re-evaluated and a charge of approximately $1.8
million related to the impairment of goodwill was recorded based upon the best
estimates of management related to its value (See Note 3.) Accordingly, as of
December 31, 1997, TCM's net assets were $1.0 million comprised of net tangible
assets of $200,000 and goodwill of $800,000.
TCM produced losses of approximately $1.0 million in 1997 and $728,000 in
1996. While CORE has certain warranties related to the conduct of the business
of TCM until the Determination Date, there is a substantial risk that CORE will
not achieve operating profitability during the period. Should CORE determine to
exit the business because they determine that the investment required to operate
the business of TCM is excessive, the Company may, at its option, re-acquire the
business for one dollar. The Company believes that TCM is currently profitable
and that CORE will continue to grow revenue and increase profits, however, there
can be no assurances that CORE will not determine to exit the business.
32
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no occurrence requiring a response to this item.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The disclosures required herein are incorporated by reference from the Company's
proxy statement, dated March 27, 1998 in connection with the 1998 Annual Meeting
of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The disclosures required herein are incorporated by reference from the Company's
proxy statement, dated March 27, 1998 in connection with the 1998 Annual Meeting
of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The disclosures required herein are incorporated by reference from the Company's
proxy statement, dated March 27, 1998 in connection with the 1998 Annual Meeting
of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The disclosures required herein are incorporated by reference from the Company's
proxy statement, dated March 27, 1998 in connection with the 1998 Annual Meeting
of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Annual Report for
Transcend Services, Inc.:
(1) Financial Statements
The Consolidated Financial Statements, the Notes to Consolidated Financial
Statements and the Report of Independent Public Accountants listed below
appear as Item 8.
Report of Independent Public Accountants.
Consolidated Balance Sheets as of December 31, 1996 and 1997
Consolidated Statements of Operations for the years ended December 31,
1995, 1996 and 1997
Consolidated Statements of Stockholder's Equity for the years ended December
31, 1995, 1996 and 1997
Consolidated Statements of Cash Flows for the years ended December 31, 1995,
1996 and 1997
Notes to Consolidated Financial statements
No financial statement schedules are required
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company
during the fourth quarter of fiscal 1997.
33
<PAGE>
(c) Exhibits.
--------
The following exhibits are filed with or incorporated by reference into this
report. The exhibits which are denoted by an asterisk (*) were previously filed
as a part of, and are hereby incorporated by reference from, either (i) a
Registration Statement on Form S-1 under the Securities Act of 1933 for the
Company, Registration No. 33-32587, filed on December 14, 1989 (referred to as
"1989 S-1"); (ii) a Registration Statement on Form S-1 under the Securities Act
of 1933 for the Company, Registration No. 33-41361, filed on June 26, 1991
(referred to as "1991 S-1"); (iii) a Registration Statement on Form S-4 under
the Securities Act of 1933 for the Company, Registration No. 33-83344, filed on
December 2, 1993 (referred to as "S-4"); (iv) a Registration Statement on Form
S-3 under the Securities Act of 1933 for the Company, Registration No. 333-
19177, filed on January 2, 1997 (referred to as "S-3"); (v) a Registration
Statement on Form S-8 under the Securities Act of 1933 for the Company,
Registration No. 33-37685, filed on November 8, 1990 (referred to as "1990 S-
8"); (vi) a Registration Statement on Form S-8 under the Securities Act of 1933
for the Company, Registration No. 33-57072, filed on January 15, 1993 (referred
to as "1993 S-8"); (vii) a Registration Statement on Form S-8 under the
Securities Act of 1933 for the Company, Registration No. 333-16213, filed on
November 15, 1996 (referred to as "1996 S-8"); (viii) the Company's Current
Report on Form 8-K relating to an event which occurred on March 1, 1992
(referred to as "3/1/92 8-K"); (ix) the Company's Current Report on Form 8-K
relating to an event which occurred June 15, 1994 (referred to as "6/15/94 8-
K"); (x) the Company's Current Report on Form 8-K relating to an event which
occurred September 16, 1994 (referred to as "9/16/94 8-K"); (xi) the Company's
Annual Report on Form 10-K for the year ended May 31, 1990 (referred to as "1990
10-K"); (xii) the Company's Annual Report on Form 10-K for the year ended May
31, 1992 (referred to as "1992 10-K"); (xiii) the Company's Annual Report on
form 10-K for the year ended May 31, 1993 (referred to as "1993 10-K"); (xiv)
the Company's Quarterly Report on Form 10-Q for the quarter ended November 30,
1995 (referred to as "11/30/95 10-Q"); (xv) the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1995 (referred to as "6/30/95 10-Q");
(xvi) Amendment No. 1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 (referred to as "9/30/96 10-Q/A No. 1"; or
(xvii) the Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1997 (referred to as "3/31/97" 10-Q").
EXHIBIT
NO. DESCRIPTION
- --- -----------
*2.1 - Merger Agreement dated April 16, 1997 for acquisition of DocuMedX (3-
31-97 10-Q, Exhibit 2.6)
2.2 - Purchase and Sale agreement dated March 16, 1998 with CORE, INC. for
the sale of the net assets of Transcend Case Management, Inc.
*3.1.1 - Certificate of Incorporation, as amended (1989 S-1, Exhibit 3(a))
*3.1.2 - Certificate of Incorporation (6/30/95 10-Q, Exhibit 3)
3.1.3 - Certificate of Designation of Series A Convertible Preferred Stock
*3.2 - Bylaws (as restated) (1993 10-K, Exhibit 3(a))
*4.1 - 1990 Employee Stock Purchase Plan (1990 S-8, Exhibit 4)
*4.2 - 1992 Stock Option Plan, as amended (1993 S-8, Exhibit 4(a))
*4.3 - 1992 Stock Option Plan, as Amended and Restated (1996 S-8, Exhibit
4.1)
*4.4 - Subordinated Convertible Debenture Purchase Agreement (9/30/95 10- Q,
Exhibit 4)
*4.5 - 1986 Incentive Stock Option Plan, as amended (1989 S-1, Exhibit
10(i))
*4.6.1- Loan and Security Agreement, $5,000,000 Working Capital Line,
provided by Coast Business Credit (3/31/97 10-Q No. 1, Exhibit 4.1)
*4.6.2- Working Capital Note (3/31/97 10-Q No. 1, Exhibit 4.2)
34
<PAGE>
*4.6.3 - Amendment to Loan Agreement provided by Coast Business Credit
(9/30/97 10-Q, No. 1, Exhibit 10.14.1)
4.8 - Certificate of Designation of Series A Convertible Preferred Stock
*4.9 - Warrant to Purchase Common Stock Granted to Silicon Valley
Bank(9/30/96 10-Q/A No. 1, Exhibit 4.4)
*4.10 - Silicon Valley Bank Antidilution Agreement (9/30/96 10-Q/A No. 1,
Exhibit 4.5)
*4.11 - Silicon Valley Registration Rights Agreement (9/30/96 10-Q/ No. 1,
Exhibit 4.6)
4.12 - Master Lease Agreement dated February 20, 1998 between Transcend
Services, Inc. and Information Leasing Corporation
*10.1 - Form of Non-qualified Stock Option Agreement (1989 S-1, Exhibit
10(g))
*10.2 - Form of Incentive Stock Option Agreement (1989 S-1, Exhibit 10(j))
*10.3 - Form of Incentive Stock Option Agreement under 1992 Stock Option
Plan, as Amended and Restated (1996 S-8, Exhibit 4.2)
*10.4 - Restated Rental and Management Agreement between First Western Health
Corporation and FWHC Medical Group, Inc. dated January 17, 1990 (1989
S-1, Exhibit 10(l))
*10.6 - Management Agreement between Veritas Healthcare Management and Veritas
Medical Group, Inc. dated as of January 1, 1991 (1991 S-1, Exhibit
(10(b))
*10.9 - Form of indemnification agreement (1993 10-K, Exhibit 10(a))
*10.10 - Letter Agreement dated December 5, 1996 by and between the Company
and VHA, Inc. (S-3, Exhibit 10.1)
*10.11 - Services Agreement dated December 5, 1996 by and between the Company
and VHA, Inc. (S-3, Exhibit 10.2)
11 - Statement re: Computation of earnings per share
21.1 - Subsidiaries of the Registrant
23 - Consent of Arthur Andersen LLP
27 - Financial Data Schedule (for SEC use only)
35
<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, thereunto duly authorized.
TRANSCEND SERVICES, INC.
Dated: March 27, 1998
By: /s/ Larry G. Gerdes
--------------------------------
Larry G. Gerdes
President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature TITLE DATE
--------- ----- ----
/s/ Donald L. Lucas Chairman of the Board March 27, 1998
- --------------------------
Donald L. Lucas
/s/ Larry G. Gerdes President, Chief Executive March 27, 1998
- ------------------------- Officer and Director
Larry G. Gerdes (Principal Executive Officer)
/s/ Doug Shamon Executive Vice President March 27, 1998
- ------------------------- Finance, Chief Financial Officer,
Doug Shamon Treasurer and Secretary
(Principal Financial Officer)
/s/ B. Frederick Becker Director March 27, 1998
- -------------------------
B. Frederick Becker
/s/ George B. Caldwell Director March 27, 1998
- -------------------------
George B. Caldwell
/s/ Walter S. Huff, Jr. Director March 27, 1998
- -------------------------
Walter S. Huff, Jr.
/s/ Charles E. Thoele Director March 27, 1998
- -------------------------
Charles E. Thoele
36
<PAGE>
EXHIBIT 2.2
ASSET PURCHASE AGREEMENT
BY AND AMONG
CORE, INC.
TCM SERVICES, INC.
TRANSCEND CASE MANAGEMENT, INC.
AND
TRANSCEND SERVICES, INC.
MARCH 16, 1998
<PAGE>
ASSET PURCHASE AGREEMENT
------------------------
THIS ASSET PURCHASE AGREEMENT is made and entered into as of the 16th day
of March, 1998 by and among CORE, INC., a Massachusetts corporation ("CORE"),
TCM SERVICES INC., a Delaware corporation and wholly-owned subsidiary of CORE
("Purchaser"), TRANSCEND CASE MANAGEMENT, INC., a Georgia corporation
("Seller"), and TRANSCEND SERVICES, INC., a Delaware corporation and owner of
all the capital stock of Seller ("Transcend").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Seller and Transcend own and operate a workers compensation case
management and bill audit business and related services and businesses
(collectively, as further defined herein, the "Business");
WHEREAS, Purchaser desires to purchase from Seller and Transcend and Seller
and Transcend desire to sell to Purchaser, on the Closing Date (as hereinafter
defined) substantially all assets used in operating the Business;
NOW, THEREFORE, in consideration of the covenants hereinafter set forth and
for good and valuable consideration, the receipt of which is hereby
acknowledged, the parties hereto do hereby agree as follows:
ARTICLE I
PURCHASE OF ASSETS; CONSIDERATION; CLOSING
SECTION 1.1 PURCHASE OF ASSETS BY PURCHASER
(a) Sale of Assets. Subject to the provisions of this Agreement, Seller
--------------
and Transcend agree to sell and Purchaser agrees to purchase, at the Closing (as
defined in Section 1.5 below), all of the properties, assets, rights, claims and
contracts used by Seller in the workers compensation case management and bill
audit business and related services and businesses (collectively, the
"Business"), including, without limitation, the following:
(i) All property, plant, equipment machinery, furniture, fixtures
and other tangible personal property (including supplies and
inventories) used in the Business, including those assets listed
on Schedule 2.6 hereto;
------------
(ii) All computer and similar equipment and software used in the
Business, including the equipment and software listed on
Schedules 2.6 and 2.7 hereto;
---------------------
(iii) All patents, patent applications, trade secrets, processes and
techniques,
1
<PAGE>
know-how, designs, inventions, copyrights, discoveries and other
proprietary or intangible rights and intellectual properties used
in the Business, including the intellectual property and
Proprietary Rights listed on Schedule 2.7 hereto;
------------
(iv) All rights to the name and marks "Sullivan Health and
Rehabilitation Services" (including derivatives thereof) and
other trade names, service names, trademarks, service marks,
trademark applications and service mark applications used in the
Business, including those names, marks and rights listed on
Schedule 2.7 hereto, excluding, however, the name and mark
------------
"Transcend Services, Inc." (including derivatives thereof) and
the Transcend Services corporate logo;
(v) All files, customer and supplier lists, mailing lists, accounting
records and other business records, all catalogs, printed
materials, telephone numbers (including 800 telephone numbers),
fax numbers and sales aids and all other data relating to the
Business;
(vi) Accounts receivable, refunds, deposits, prepaid expenses, short
and long term assets and instruments of every kind and
description related to the Business;
(vii) All rights of every kind under all contracts and agreements
inuring to Seller's benefit or with respect to the Business
including those rights under contracts listed on Schedule 2.10
-------------
hereto (the "Assigned Contracts");
(viii) Rights under real estate leases as listed on Schedule 2.8
------------
hereto (the "Real Estate Leases");
(ix) All documents and information relating to the Business and the
operations of Seller, for the past five (5) years, including,
without limitation, customer lists and all books and records
relating to the operations of the Business; and
(x) Seller's cash and accounts receivable (net of doubtful accounts)
shown on the books and records of the Seller as of the Closing
Date in an amount at least equal to $220,000; and
The assets specified above to be sold to and purchased by Purchaser under
this Agreement are referred to collectively as the "Subject Assets". The
Subject Assets shall not include any assets listed on Schedule 1.1(x) (the
---------------
"Excluded Assets").
Seller and Transcend jointly and severally represent and warrant to
Purchaser and CORE that the Subject Assets constitute all the assets utilized in
the Business.
SECTION 1.2 LIMITED ASSUMPTION OF LIABILITIES
2
<PAGE>
Subject to the provisions of this Agreement, at the Closing, Purchaser
shall assume only those debts, liabilities, obligations, commitments and
contracts of the Seller which are set forth on Schedule 1.2. THE PURCHASER IS
------------
NOT ASSUMING ANY OTHER LIABILITIES, OBLIGATIONS, COMMITMENTS OR CONTRACTS
WHATSOEVER.
The debts, liabilities, obligations, commitments and contracts specified
above to be assumed by Purchaser under this Agreement are referred to
collectively as the "Assumed Liabilities". The Assumed Liabilities shall,
without limitation, exclude all debts, liabilities, obligations, commitments and
contracts not specifically identified in Schedule 1.2; (i) all tort claims
------------
asserted against Seller or Transcend or the Business or claims against Seller or
Transcend or the Business for breach of contract or breach of warranty, which
are based on acts or omissions occurring before the Closing; (ii) all liability
related to environmental matters which originate prior to the Closing Date;
(iii) any contract or agreement of Seller not expressly listed as an assigned
contract on the Schedule 2.10 to this Agreement; (iv) any liabilities or
-------------
obligations under any real property leases for periods prior to the Closing; (v)
any obligations or liabilities to any employee of any Seller unless expressly
set forth on Schedule 1.2 and then only in the amount set forth on said Schedule
------------ --------
1.2; and (vi) any liabilities for taxes of any kind, including, without
- ---
limitation, sales, income or withholding taxes resulting from the operation of
the Business prior to Closing.
SECTION 1.3 CONSIDERATION; CALCULATION OF NUMBER OF PURCHASE PRICE SHARES
(a) Subject to the terms and conditions set forth in this Agreement, the
consideration to be paid by Purchaser to Seller for the Business and the Subject
Assets shall be (i) shares of common stock of CORE, Inc., the number of which
shall be determined pursuant to Section 1.3(b), below (the "Purchase Price
Shares") and (ii) assumption of the liabilities and obligations of Seller and
Transcend listed on Schedule 1.2.
------------
(b) The number of Purchase Price Shares shall be equal to: (i) the
Purchaser's Net Annualized Revenue, divided by (ii) the Market Price of one
share of CORE Common Stock on the Designation Date (as each term is defined
below).
(c) For the purposes of the foregoing calculation,
(i) "Net Annualized Revenue" shall equal four times the Selected Quarterly
------------------------
Revenue (as defined below) reduced by (A) any unpaid Shortfall amount related to
uncollected accounts receivable described in Section 5.16; and (B) any unpaid
indemnification claims described in Article VII, if any.
(ii) "Selected Quarterly Revenue" shall mean Purchaser's gross revenue
--------------------------
derived from workers compensation case management and workers compensation bill
audit, net of allowance for doubtful accounts, as reported by Purchaser pursuant
to GAAP for a quarter ended March 31, 1999 through December 31, 2000 as
selected in writing by Transcend pursuant to the procedure described below.
3
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For purposes of calculating Purchaser's gross revenue, net of allowance for
doubtful accounts, the following revenue shall be excluded:
(A) revenue related to CORE's wholly-owned subsidiary Cost Review Services,
Inc. ("CRS") which also conducts workers compensation case management and
workers compensation bill audit unless such revenue originates solely from
the efforts of a sales representative who was formerly an employee of
Seller or a replacement thereof (a "Transcend Sales Representative");
(B) revenue from any present or former customer of CRS (unless such
customer is as of the Closing Date also a customer of Seller, in which
event revenues shall be credited to Purchaser and CRS in the same
proportion as the current allocation);
(C) revenue from sources other than Seller's Business as operated by Seller
as of the Closing Date unless both of the following conditions are met: (1)
such revenue originates solely from the efforts of a Transcend Sales
Representative and (2) is performed by Purchaser or CRS;
(D) revenue which is directly attributable to services or products
purchased from a vendor or any other party other than Purchaser (a
"Rebillable"); provided, the difference between the revenue associated with
such Rebillable and the actual cost of such Rebillable (the "Margin") shall
be included in calculating Purchaser's gross revenue. (For example, and
without limitation, revenue from independent medical examinations ("IMEs"),
WorkAbility services, CORE's PRA services and CORE Analytic services and
other products or services for which Purchaser must pay or credit a vendor
or other person or entity shall be excluded from Purchaser's gross revenue
(except that the Margin on such purchases shall be included in gross
revenue)); and
(E) revenue from a client which is directly or indirectly acquired by CORE
to the extent such revenue exceeds the revenue for a quarterly period
prior to a letter of intent or public announcement of such acquisition by
CORE.
Notwithstanding the foregoing, in no event shall excluded revenue be
deducted more than once in calculating Purchaser's gross revenue.
(iii) "Market Price" of a share of CORE common stock means the average of
--------------
the closing bid prices of such stock sales as quoted on the NASDAQ - National
Market System ("NASDAQ-NMS") averaged over a period of 21 days consisting of the
day as of which "Market Price" is being determined and the 20 consecutive
business days prior to such day. If CORE common stock is not listed on NASDAQ-
NMS on the Designation Date, the Market Price shall equal the average of the
closing bid prices of such stock sales on all securities exchanges on which such
stock may at the time be listed, or, if there have been no sales on any such
exchange on any day, the average of the highest bid and lowest asked prices on
all such exchanges at the end of such day, or, if on any day such security is
not so listed, the average of the representative bid and asked prices quoted in
the NASDAQ System as of 4:00 P.M., New York time, or, if on any day such stock
is not quoted in the NASDAQ System, the average of the highest bid and lowest
asked prices on
4
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such day in the domestic over-the-counter market as reported by the National
Quotation Bureau, Incorporated, or any similar successor organization, in each
such case averaged over a period of 21 days consisting of the day as of which
"Market Price" is being determined and the 20 consecutive business days prior to
such day. If at any time such security is not listed on any securities exchange
or quoted in the NASDAQ System or the over-the-counter market, the "Market
Price" will be the fair value thereof determined in good faith jointly by CORE
and Transcend. If such parties are unable to reach agreement within a reasonable
period of time, such fair value will be determined by an appraiser jointly
selected by CORE and Transcend. The cost of such appraisal shall be paid fifty
percent (50%) by CORE and fifty percent (50%) by Transcend.
(d) Procedure. Within 5 business days following CORE's public announcement
---------
of financial results for each quarterly period beginning with the quarterly
period ending on June 30, 1998 and ending with the quarterly period ending on
December 31, 2000 (and in no event later than (i) 120 days following the end of
the quarterly periods ending December 31, 1999 and December 31, 2000 or (ii) 45
days following the end of each such quarterly period other than those quarterly
periods ending December 31, 1999 and December 31, 2000). Purchaser shall
deliver to Transcend Purchaser's quarterly gross revenue statement for such
preceding quarter, prepared in accordance with CORE's accounting procedures and
GAAP (the "Quarterly Revenue Statement"). Beginning with the quarter ended
March 31, 1999, within 20 days of CORE's delivery of each Quarterly Revenue
Statement, Transcend, may upon written notice to CORE designate the quarterly
revenue for such period as the Selected Quarterly Revenue, in which event the
revenue for such quarter, net of allowance for doubtful accounts, shall be the
--------------------------------------
Selected Quarterly Revenue. The date of CORE's receipt of such written
designation by Transcend (provided such receipt is within the 20 day period)
shall be the Designation Date. Time is of the essence with respect to
Transcend's selection of the Selected Quarterly Revenue and Transcend shall not
have the right to make the foregoing selection after said 20 day period has
passed. If Transcend does not designate any period as the Selected Quarterly
Revenue, the quarterly revenue, net of doubtful, as reported on the Quarterly
Revenue Statement for the quarter ended December 31, 2000 shall be the Selected
Quarterly Revenue and April 1, 2001 shall be the Designation Date.
(e) Inspection of Books and Records. At Transcend's or Seller's request
-------------------------------
and for the purpose of verifying the information in Purchaser's Quarterly
Revenue Statement, Purchaser will make the work papers and back-up materials
used in preparing the Purchaser's Quarterly Revenue Statement available to the
Seller and Transcend and their accountants and other representatives at
reasonable times and upon reasonable notice.
(f) Corporate Reorganization If (i) CORE is to be consolidated with or
------------------------
acquired by another entity in a merger, sale of all or substantially all of
CORE's assets or otherwise or (ii) Purchaser or substantially all Purchaser's
assets are acquired by an entity unaffiliated with CORE or Transcend (hereafter
events described in (i) and (ii) shall be referred to as an "Acquisition"), the
board of directors of CORE or any entity assuming the obligations of CORE (the
"Successor Board"), shall, as to obligation to issue Purchase Price Shares
either (i) make appropriate provision for the continuation of such obligation to
issue Purchase Price Shares by substituting on an equitable basis for the CORE
common stock then subject to issuance securities of the successor or acquiring
entity, or (ii) the Selected Quarterly Revenue shall be deemed to be
5
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Purchaser's highest gross revenue, net of allowance for doubtful accounts, (as
calculated pursuant to Section 1.3(b)(ii)) for a calendar quarter beginning with
the calendar quarter ending March 31, 1999 and ending with the most recent
complete calendar quarter immediately preceding such Acquisition, and based upon
such deemed Selected Quarterly Revenue, Purchase Price Shares in CORE common
stock shall be issued to Transcend prior to the closing or planned closing of
the Acquisition.
SECTION 1.4 ALLOCATION OF PURCHASE PRICE
Purchaser will propose an allocation of the Purchase Price in accordance
with the allocation method required by Section 1060 of the Internal Revenue Code
of 1986, as amended (the "Code") and the regulations thereunder. Subject to
Seller's agreement with such allocation, which will not be unreasonably
withheld, Seller and Purchaser each agree to report the federal, state and local
income and other tax consequences of the transactions contemplated herein, and
in particular to report the information required by Code Section 1060(b), in a
manner consistent with such allocation.
SECTION 1.5 CLOSING DATE
The parties agree that time is of the essence and the closing under this
Agreement (the "Closing") will take place at 10:00 a.m. local time, on Tuesday,
March 3, 1998, or at such other time and place as the parties may otherwise
agree upon (such time and such date being herein referred to as the "Time of
Closing" and such date being herein referred to as the "Closing Date"), at the
offices of CORE, 18881 Von Karman Avenue, Suite 1750, Irvine, California (or at
such other place as the parties may otherwise agree upon).
Notwithstanding the foregoing, CORE shall have the right in its absolute
discretion to postpone the Closing under this Agreement for a period of not more
than thirty days following the later of (i) March 3, 1998, (ii) the date all
Schedules hereto are delivered by Seller and Transcend to CORE, or (iii) the
date Seller's audited financial statements are delivered to CORE, in which event
such date shall be referred to as the "Closing Date".
SECTION 1.6 ACTIONS TO BE TAKEN AT CLOSING
(a) At the Closing, Seller and Transcend shall deliver or cause to be
delivered to Purchaser the following:
(i) a Bill of Sale from Seller and Transcend in the form attached as
Exhibit A;
---------
(ii) instruments of assignment of each of the Assigned Contracts in
the form set forth in Exhibit B, with such changes to such form
---------
approved by Purchaser and Seller (the "Contract Assignments"),
pursuant to which Purchaser will assume all obligations under
each such Assigned Contract accruing after the Closing Date;
6
<PAGE>
(iii) original, executed UCC termination statements in a form
acceptable to Purchaser and acceptable for filing for any
Temporary Encumbrances (as defined in Section 2.5) not yet
terminated;
(iv) an opinion of counsel to Seller covering the matters set forth on
Exhibit C in form reasonably satisfactory to Purchaser;
---------
(v) compliance certificates of Seller and Transcend, as described in
Section 9.3, dated the Closing Date, as to the fulfillment of the
conditions set forth in Sections 9.1 and 9.2;
(vi) written consents of all third parties required by any and all
agreements or documents to which Seller, is a party and by which
the Subject Assets are bound in order to consummate the
transactions contemplated hereby;
(vii) certified resolutions of the Board of Directors of Seller and
Transcend and certified votes of the stockholder of Seller duly
and legally authorizing the execution and performance of this
Agreement and the Ancillary Documents to which it is a party;
(viii) certificates of all Continuing Employees in the form of Exhibit
-------
H-1 and as described in Section 5.6;
---
(ix) acknowledgments of CORE's policies from each Continuing Employee
in the form of Exhibit H-2 and as described in Section 5.6;
-----------
(x) Consent and Amendment of Employment Agreements from certain
persons as described in Section 9.13;
(xi) all such other documents, assignments and other instruments as,
in the opinion of Purchaser's counsel, are necessary to vest in
Purchaser title to the Subject Assets to be transferred to it
pursuant to this Agreement; and
(xii) all other documents, endorsements, assignments, instruments,
writings and other items required to be delivered by Seller and
Transcend at or prior to the Closing pursuant to this Agreement
or otherwise required or reasonably requested in connection
herewith.
(b) At the Closing, Purchaser will deliver or cause to be delivered to Seller,
the following:
(i) an opinion of counsel to Purchaser and CORE covering the matters
set forth on Exhibit D in form reasonably satisfactory to Seller;
---------
(ii) a compliance certificate of the Purchaser and CORE as described
in Section 8.3, dated the Closing Date, as to the fulfillment of
the conditions set forth
7
<PAGE>
in Sections 8.1 and 8.2;
(iii) certified resolutions of the Board of Directors of Purchaser
and CORE duly and legally authorizing the execution and
performance of this Agreement and the Ancillary Documents to
which it is a party; and
(iv) all other documents, endorsements, assignments, instruments,
writings and other items required to be delivered by Purchaser
or CORE at or prior to the Closing pursuant to this Agreement
or otherwise required or reasonably requested in connection
herewith.
(c) At the Closing, CORE, Purchaser, Transcend and Seller shall execute,
and deliver the following to each other
(i) a Registration Rights Agreement between CORE and Transcend in
the form attached as Exhibit E (the "Registration Rights
---------
Agreement").
(ii) a Tradename License Agreement concerning the use of the
tradename "Transcend Case Management" for a period of one year,
in the form attached as Exhibit F (the "Tradename License
---------
Agreement").
All instruments, agreements, certificates and other documents delivered at
Closing or otherwise delivered pursuant to this Agreement other than this
Agreement shall be referred to as the "Ancillary Documents".
SECTION 1.7 FURTHER ASSURANCES
From time to time after the Closing at the request of Purchaser and without
further consideration, Seller and Transcend shall execute and deliver further
instruments of transfer and assignment (in addition to those delivered under
Section 1.6) and take such other action as Purchaser may require or request to
more effectively transfer and assign to, and vest in, Purchaser each of the
Subject Assets. To the extent that the assignment of any contract or right
shall require the consent of other parties thereto, this Agreement shall not
constitute an assignment thereof; however, Seller and Transcend shall use all
reasonable efforts before and after the Closing to obtain any necessary consents
or waivers and to otherwise assure Purchaser of the benefits of the assigned
contracts.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLER AND TRANSCEND
Seller and Transcend, jointly and severally, hereby represent and warrant
to Purchaser and CORE that:
SECTION 2.1 ORGANIZATION
8
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Each of Seller and Transcend is, and on the Closing Date will be, duly
organized, validly existing and in good standing under the laws of their
respective states of incorporation or organization; have, and on the Closing
Date will have, the power and authority to conduct all of the activities
conducted by them and to own or lease all of the assets owned or leased by them.
Each of Seller and Transcend is qualified as a foreign corporation (or otherwise
qualified to do business) in all states and jurisdictions in which such
qualification is required, except in the case of Transcend where the lack of
such qualification would not have a material adverse effect on the business,
results of operation or financial condition (a "Material Adverse Effect") of
Seller. A complete and correct copy of the Certificate of Incorporation and all
amendments thereto and the Bylaws of Seller and Transcend have been delivered to
CORE and no changes have been made thereto since the date delivered.
Each of Seller and Transcend do not and will not on the Closing Date
directly or indirectly own any shares of stock or any other securities, of any
corporation or have any direct or indirect interest in any firm, partnership,
limited liability company association or other entity which, in any way,
directly or indirectly, are related to the Business.
SECTION 2.2 AUTHORIZATION OF TRANSACTION
Seller and Transcend each has the power and authority to execute and
deliver this Agreement, to consummate the transactions hereby contemplated and
to take all other actions required to be taken by each of them pursuant to the
provisions hereof. This Agreement is valid, binding and enforceable against each
of Seller and Transcend in accordance with its terms.
Neither the execution and delivery of this Agreement nor the consummation
of the transactions hereby contemplated will (a) contravene or conflict with the
Certificate of Incorporation or By-laws of Seller or Transcend; (b) constitute
any violation or breach of any material provision of any material contract or
other instrument to which Seller or Transcend is a party or by which any of the
assets of the Business may be affected or secured; (c) constitute any violation
or breach of any order, writ, judgment, injunction, decree, statute, rule or
regulation or will result in the creation of any lien, charge or encumbrance
binding on or applicable to or contravene or conflict with the organizational
documents of Seller or Transcend or the Subject Assets; or (d) conflict with, or
constitute a default under, or result in the termination or cancellation of, or
right to accelerate, any material agreement, contract or other instrument
binding upon Seller or Transcend or any material license, franchise, permit or
other similar authorization held by Seller or Transcend.
The execution, any delivery and performance by Seller and Transcend of this
Agreement and the consummation of the transactions by Seller and Transcend
require no action by or in respect of, or filing with, any governmental body,
agency, official or authority.
SECTION 2.3 CAPITALIZATION
The authorized capital stock of Seller and a complete and accurate list of
stockholders of Seller is set forth in Schedule 2.3 hereto. There are not
------------
authorized or outstanding any options, warrants or other rights to purchase any
shares of capital stock of Seller.
9
<PAGE>
SECTION 2.4 FINANCIAL STATEMENTS
Schedule 2.4 attached hereto consists of the following financial statements
------------
(the "Financial Statements"): (i) unaudited financial statements of Seller,
which includes the balance sheets of Seller, as of December 31, 1996 and 1997,
and the related statements of income for the years ended December 31, 1995, 1996
and 1997, (the balance sheet of Seller, as of December 31, 1997, is hereinafter
referred to as the "Balance Sheet") and (ii) unaudited financial statement for
each month ending after December 1997. The financial statements included in
Schedule 2.4 are in accordance with the books and records of Seller, are
- ------------
complete and correct in all material respects and fairly present the financial
position of Seller as of the dates therein indicated and the results of the
operations of Seller for the periods so ended, all in conformity with generally
accepted accounting principles and practices applied on a consistent basis with
prior periods ("GAAP") (except as may be indicated in the notes thereto) subject
to normal year end adjustments and the absence of footnotes in the case of any
interim financial statements. The notes and accounts receivable reflected in
the Balance Sheet, net of reserves therein reflected, are, except to the extent
heretofore collected, fully collectible and subject to no counterclaims or set-
offs.
SECTION 2.5 TITLE TO ASSETS; ENCUMBRANCES; CONDITIONAL SALES
Except for the liens, mortgages, pledges and encumbrances set forth in
Schedule 2.5 hereto (the "Temporary Encumbrances"), either Seller or Transcend
- ------------
have good and marketable title to all of the Subject Assets. All Temporary
Encumbrances shall be terminated at or before Closing and at Closing Seller and
Transcend shall have good and marketable title to the Subject Assets. Without
limiting the generality of the foregoing, no officer, director, stockholder,
partner or affiliate of Seller or Transcend (or any member of their families)
own any asset, tangible or intangible, which is used in the Business. None of
the Subject Assets is held or will be held on the Closing Date by Seller or
Transcend as lessee under any lease or as conditional sale vendee under a
conditional sale contract or other title retention agreement, except as set
forth in Schedule 2.5 or as otherwise expressly permitted herein.
------------
Seller and Transcend, jointly and severally, represent that the Bill of
Sale and other documents and instruments of transfer delivered to Purchaser at
Closing shall effectively vest in Purchaser good and marketable title to the
Subject Assets, free and clear of all liens, restrictions and encumbrances.
Except for the Excluded Assets listed on Schedule 1.1(x), at Closing, the
---------------
Subject Assets shall include all the assets which are used by Seller or
Transcend in the operation of the Business.
SECTION 2.6 MACHINERY, EQUIPMENT, FIXTURES
Attached hereto as Schedule 2.6 is a complete and correct list and a brief
------------
description of all machinery, vehicles, equipment and fixtures, office equipment
and furniture and/or other personal property owned by Seller or used in the
Business on December 31, 1997, each with a book value or fair market value more
than $1,000.
10
<PAGE>
SECTION 2.7 PROPRIETARY RIGHTS; PATENTS; TRADEMARKS; SOFTWARE; ETC.
For the purposes of this Agreement, "Proprietary Rights" means any of the
following which are material to or used in the Business: (i) patents, patent
applications, patent disclosures and inventions (whether or not patentable and
whether or not reduced to practice), (ii) trademarks, service marks, trade
dress, trade names and corporate names and registrations and applications for
registration thereof, (iii) copyrights and registrations and applications for
registration thereof, (iv) mask works and registrations and applications for
registration thereof, (v) computer software, data and documentation, (vi) trade
secrets and other confidential information (including, without limitation,
ideas, formulas, compositions, know-how, manufacturing and production processes
and techniques, research and development information, drawings, specifications,
designs, plans, proposals, technical data, copyrightable works, financial and
marketing plans and customer and supplier lists and information), (vii) other
intellectual property rights, and (viii) copies and tangible embodiments thereof
(in whatever form or medium).
Schedule 2.7 attached hereto contains a complete and accurate list of (i)
------------
all patented and registered Proprietary Rights owned by Seller (or owned by
Transcend or a Transcend affiliate and used in the Business), (ii) all pending
patent applications and applications for registrations of other Proprietary
Rights filed by Seller (or filed by Transcend or a Transcend affiliate and used
in the Business), (iii) all trade names and corporate names owned or used by
Seller, (iv) all trademarks, service marks, copyrighted works and computer
software which are material to the financial condition, operating results,
assets, operations or business prospects of Seller or the Business, and (v) all
licenses and other rights granted by Seller to any third party with respect to
any Proprietary Rights and all licenses and other rights granted by any third
party to Seller, with respect to any Proprietary Right. Except as set forth in
Schedule 2.7, Seller owns and possesses all right, title and interest in and to,
- ------------
or has the right to use pursuant to a valid license, all Proprietary Rights
necessary for the operation of the Business as currently conducted and as
currently proposed to be conducted. All of such Proprietary Rights of Seller or
the Business will remain in effect and good standing as and to the extent
existing on the date of this Agreement, notwithstanding the consummation of the
transactions contemplated by this Agreement. Except as set forth on Schedule
--------
2.7, the loss or expiration of any Proprietary Right or related group of
- ---
Proprietary Rights would not have a material adverse effect on the financial
condition, operating results, assets, operations or Business prospects of Seller
and no such loss or expiration is threatened, pending or reasonably foreseeable.
Seller and Transcend have taken all actions which Seller and Transcend, in their
reasonable business judgment, have deemed necessary and desirable to maintain
and protect the Proprietary Rights which Seller owns or the Business uses.
Except as indicated on Schedule 2.7, (i) there have been no claims which have
------------
been made or are currently outstanding or are threatened against Seller or
Transcend asserting the invalidity, misuse, unenforceability, or contesting the
ownership, of any of the Proprietary Rights which Seller owns or the Business
uses, and, after reasonable inquiry, there are no grounds for the same, (ii) the
conduct of Seller's Business has not infringed, misappropriated or otherwise
conflicted with, and does not infringe, misappropriate or otherwise conflict
with, any Proprietary Rights of other persons or entities, and present conduct
of the Seller will not infringe, misappropriate or conflict with any Proprietary
Rights of other persons or entities, and (iii) the Proprietary Rights owned or
used by Seller have not been infringed or misappropriated by, or otherwise
conflict with, other persons or entities.
11
<PAGE>
SECTION 2.8 REAL PROPERTY
Schedule 2.8 includes a complete and correct list of all real property
------------
which is presently owned or leased by Seller and which will be owned or leased
by Seller on the Closing Date together with a brief description of all plants
and structures thereon. None of such owned real property is subject to any
liens, encumbrances or restrictions whether of record or otherwise, except as
particularly described in said Schedule 2.8. The real estate leases set forth
------------
in Schedule 2.8 are in full force and effect and will continue to be in full
------------
force and effect on identical terms following consummation of the transactions
contemplated in this Agreement.
SECTION 2.9 INSURANCE
Seller presently maintains and shall continue to maintain through the
Closing Date the insurance described in Schedule 2.9 attached hereto, including
------------
the term, premium, policy limits, exclusions and deductibles in each case
applicable thereto, as well as whether such policies are "occurrences" or
"claims made", and all of the policies set forth therein are in full force and
effect. True and complete copies of all insurance policies of Seller have been
provided to CORE.
SECTION 2.10 CONTRACTS
Attached hereto as Schedule 2.10 is a brief description of all contracts
-------------
and other agreements related to the Business, whether written or oral, if any,
to which Seller or Transcend is a party or which are binding on Seller with the
exception of the following:
(a) contracts or commitments for services, the purchase of materials,
inventory and supplies by Seller entered into in the ordinary and
usual course of business which do not individually exceed one thousand
dollars ($1,000.00);
(b) contracts or commitments for the sale of services, goods or products
by Seller entered into in the ordinary and usual course of business
which do not individually involve an amount or value in excess of one
thousand dollars ($1,000.00).
Schedule 2.10 also contains a separate list of all contracts or agreements
-------------
relating to the Business, whether written or oral, valid within the past 36
months or in the future pursuant to which Seller (or Transcend with respect to
the Business) is a party on the one hand, and any affiliate of Seller or
Transcend, including, without limitation, any director, officer, partner or
stockholder of Seller or Transcend (or any member of their respective families)
is a party on the other hand.
Except as set forth in Schedule 2.10, Seller and Transcend are not in
-------------
default under any material provision of said contracts and agreements nor is any
default or failure to perform by Seller or Transcend alleged by any party to any
such contracts and agreements, and no act or event has occurred which with
notice or lapse of time, or both, would constitute a default by Seller or
Transcend under any such contracts and agreements or permit modification,
cancellation, acceleration or termination of any such contract or agreement or
result in the creation of any
12
<PAGE>
security interest upon, or any person or entity obtaining any right to acquire
any property, assets or rights of Seller or the Business.
Seller and Transcend have delivered to Purchaser a correct and complete
copy of each written contract listed on Schedule 2.10 (including all
-------------
amendments). Each such contract and agreement is in full force and effect and
is valid and legally binding in accordance with its terms. To the best
knowledge of Seller and Transcend, there are no unresolved disputes involving or
with respect to any such agreement, and no party to any such agreement has
advised Seller or Transcend that it intends either to terminate a material
agreement or to refuse to renew a material agreement upon the expiration of the
term thereof.
SECTION 2.11 OTHER MATERIAL CONTRACTS
Seller and Transcend do not have any contract not specified in this
Agreement or the Schedules hereto which is binding on Seller or Transcend or on
any other party and which might materially (adversely or favorably) affect the
properties, business or the financial condition of Seller or the Business.
SECTION 2.12 EMPLOYEES
Schedule 2.12 attached hereto contains (a) a true and correct list of the
-------------
names of each employee and consultant of Seller and the current annual rate of
regular compensation and all bonuses or anticipated bonuses paid or payable by
Seller (or Transcend with respect to the Business) not otherwise described in
item (b) (including payments which are not reflected on the records of Seller to
each such employee and consultant); and (b) a list and/or description of all
pension, retirement, incentive, bonus, profit sharing, vacation, holiday,
health, life insurance or other plans or policies for the benefit of any
employees or consultants of Seller. Except as shown on Schedule 2.12, there are
-------------
no currently effective employment or consulting or other material agreements
with individual employees or consultants to which Seller is a party. Except as
set forth on Schedule 6.1, to the best of Transcend's and Seller's knowledge, no
------------
executive, key employee, or group of employees has any plans to terminate
employment with Seller and no such executive or employee intends to refuse
Purchaser's offer of employment as described in Section 6.1. Seller is not a
party to nor bound by any collective bargaining agreement. There is no pending
or threatened material dispute between Seller and any of its respective
employees. Seller has fully complied with the verification requirements and the
recordkeeping requirements of the Immigration Reform and Control Act of 1986.
The individual licenses of each employee and consultant of Seller or
Transcend performing services for the Business, if so required based upon their
particular employment or service requirements, including, without limitation,
all nursing licenses, are current and valid and will be current and valid as of
the Closing Date and for a period of sixty (60) days following the Closing Date.
No employee or consultant affiliated with Seller is presently on suspension or
subject to pending suspension or revocation, which was or may be imposed by any
private or governmental body. Except as expressly set forth on Schedule 2.12
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all employees of the Seller are employees at will.
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SECTION 2.13 EMPLOYEE PLANS
Seller does not have or participate in any pension, retirement, bonus,
deferred compensation, stock purchase, profit sharing, insurance or similar plan
or arrangement for the benefit of employees, oral or written other than
arrangements described in Schedule 2.12 attached hereto. In connection with any
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such plan or arrangement listed in said Schedule 2.12, there have not been, and
-------------
on the Closing Date there will not have been, any "prohibited transactions"
within the meaning of Section 406(a) of the Employee Retirement Income Security
Act of 1974 ("ERISA"), and there have not been, and on the Closing Date there
will not have been, any "reportable events" within the meaning of Section
4043(b) of ERISA. All contributions (including all employer contributions and
employee salary reduction contributions) which are due to date have been paid to
each such plan or arrangement, and all contributions for any period ending on or
before the Closing Date which are not yet due have been paid to each such plan
or arrangement or listed as an Assumed Liability on Schedule 1.2. All premiums
------------
or other payments for all periods ending on or before the Closing Date have been
paid (or will be paid by Seller prior to Closing) with respect to each such plan
or arrangement. All reports and filings with respect to said fringe benefit
plans required to be made pursuant to state or federal law have been, and on the
Closing Date will have been, timely filed.
Seller does not have any oral or written contract or agreement of
employment with any officer, salesman or other employee, or agency, territorial
franchise, sales representative or other service agreement, not terminable
without penalty on notice of one month or less, or with any labor union, except
those described in Schedule 2.12 attached hereto.
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SECTION 2.14 GOVERNMENTAL LICENSES AND PERMITS; GOVERNMENT RELATIONS
Seller has been granted all certificates, licenses, permits, authorities
and franchises from any federal, state or municipal or other governmental
instrumentality, agency or commission or similar body which may be necessary to
carry on the Business lawfully. Schedule 2.14 contains a list of all such
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certificates, permits, licenses and franchises.
All certificates, licenses, permits, authorities and franchises of the
Business are validly held by Seller. Seller has complied with all requirements
in connection therewith and the same will not be subject to suspension or
revocation as a result of this Agreement or the consummation of the transactions
contemplated hereby. All certificates, licenses, permits, authorities and
franchises issued or granted by local, state or federal authorities or agencies
which are necessary for the conduct of the Business and which are held in the
name of any employee, officer, director, shareholder, partner, agent or
otherwise of the Business shall be deemed included under this representation and
warranty, and Seller and Transcend warrant that such certificates, licenses,
permits, authorizations and franchises shall be duly and validly transferred to
the Purchaser (to the extent such certificates, licenses, permits, authorities
and franchises are transferable), without additional consideration at Closing.
Neither the Seller nor any director, officer, agent, employee or other
person acting on behalf of the Seller or the Business has used any funds for
improper or unlawful contributions,
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payments, gifts or entertainment, or made any improper or unlawful expenditures
relating to political activity to domestic or foreign government officials or
others. Neither the Seller nor any current director, officer, agent, employee or
other person acting on behalf of the Seller or the Business, has accepted or
received any improper or unlawful contributions, payments, gifts or
expenditures. The Company has at all times complied, and is in compliance, in
all material respects with the federal Foreign Corrupt Practices Act and in all
material respects with all foreign laws and regulations relating to prevention
of corrupt practices.
SECTION 2.15 LIABILITIES
Except as set forth in Schedule 2.15, Seller (or Transcend with respect to
-------------
the Business) has no liabilities or obligations of any nature (whether known or
unknown and whether absolute, accrued, contingent or otherwise) and there is no
basis for any present or future action, suit, claim or demand against Seller (or
Transcend with respect to the Business) giving rise to any liability or
obligation except for (a) liabilities or obligations disclosed or provided for
in the Balance Sheet (including the notes thereto); or (b) liabilities or
obligations incurred since the date of the Balance Sheet in the ordinary and
usual course of business or which would not, individually or in the aggregate,
have a material adverse effect on the financial condition of Seller or on the
conduct of its Business and, to the extent such liabilities or obligations arose
prior to the date thereof, are set forth in the monthly balance sheets delivered
to CORE pursuant to Section 5.12 hereof; or (c) liabilities under this
Agreement.
SECTION 2.16 TAXES
Seller and Transcend have prepared and filed when due all appropriate
federal, state, local and other tax returns of every kind and nature for all
periods on or before the due dates of such returns (as extended by any valid
extensions of time) and have paid all taxes shown to be due by said returns or
on any assessments received by Seller (or by Transcend and related to the
Business) or have made adequate provision for the payment thereof. Seller has
delivered to CORE complete and accurate copies of Seller's federal, state and
local tax returns for the years 1995-1996. All such tax returns are materially
correct.
The provisions for taxes (federal, state, local and other), and interest
and penalties, if any, with respect thereto, reflected in the Balance Sheet of
Seller are adequate to cover any and all taxes and any interest and penalties in
connection therewith which have been or may be assessed with respect to the
properties, business and operations of Seller, respectively, for the period
ended on the date of said Balance Sheet and all prior periods. No claim or
liability is pending or has been assessed or threatened against Seller in
connection with any such taxes except as reflected in the Balance Sheet.
Seller is not, and on the Closing Date will not be, a consenting
corporation within the meaning of Section 341(f) of the Internal Revenue Code.
All taxes or other assessments and levies which Seller (or Transcend with
respect to the Business) is or was required by law to withhold or collect have
been duly withheld and collected, and have been paid over to the proper
governmental authorities or are held by Seller (or
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Transcend with respect to the Business) in separate bank accounts for such
payment and all such withholdings and collections and all other payments due in
connection therewith are duly set forth on the books of Seller.
SECTION 2.17 LITIGATION; COMPLIANCE WITH LAWS
Except as set forth in Schedule 2.17 attached hereto, there are no actions,
-------------
suits, or proceedings pending or threatened against or affecting Seller, the
Business, the Subject Assets or the property of Seller in any court or before
any federal, state, municipal or other governmental department, commission,
board or other instrumentality or before any arbitrators (all of which claims
are adequately covered by insurance, or are adequately reserved for in Seller's
financial statements).
Seller (and Transcend with respect to the Business) has complied in all
material respects with all applicable laws including, without limitation,
environmental laws (including applicable rules, regulations, codes, plans,
injunctions, judgments, orders, decrees, rulings, and charges thereunder) of
federal, state, local, and foreign governments (and all agencies thereof) and
there are no pending or, to the best knowledge of Seller and Transcend,
threatened governmental investigations involving Seller or the Business,
including inquiries, citations, or complaints by any federal, state, local or
foreign government and agencies thereof. There are no outstanding orders,
decrees or stipulations to which Seller or Transcend is a party affecting
Seller, the Business or the Subject Assets and Seller and Transcend are not in
default with respect to any judgment, order, decree, award, rule or regulation
of any court of any such department, commission, board or other instrumentality
or arbitrators affecting Seller, the Business or the Subject Assets.
SECTION 2.18 ACCOUNTS RECEIVABLE; OPEN CASES
The accounts receivable set forth in the Balance Sheet are and the accounts
receivable set forth in the monthly financial statements delivered to CORE
pursuant to Section 5.12 will be bona fide, collectible in amounts set forth in
Section 5.16 hereof (except to the extent previously collected and except for
any reserves set forth in the Balance Sheet) and arose in the ordinary course of
business.
Attached hereto as Schedule 2.18 is a list of all Seller's clients and
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cases in processes (including capitated fee cases), including the status of the
cases.
Seller and Transcend know of no fact or pending or proposed change in laws,
regulations or procedures relating to Seller's Business which would materially
and adversely affect Purchaser's continued services in connection with the
clients or the open cases. Accordingly, to best of Seller's and Transcend's
knowledge, future fees from the open cases (including capitated fee cases) are
expected to be consistent with the Seller's past experience with similar cases
(including capitated fee cases).
SECTION 2.19 POWERS OF ATTORNEY; GUARANTIES
There are no outstanding powers of attorney executed on behalf of Seller
(or on behalf of
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Transcend with respect to the Business). Seller is not a guarantor or otherwise
liable for any liability or obligation (including indebtedness) of any third
party.
SECTION 2.20 SERVICE WARRANTIES
Every service provided by Seller or the Business (collectively, "Seller's
Services") has been in substantial conformity with all material applicable
contractual commitments and all express and implied warranties, and Seller and
Transcend have no liability (and there is no basis for any present or future
action, suit, proceeding, hearing, investigation, charge, complaint, claim, or
demand against any of them giving rise to any liability) for warranty work or
other additional related services or other damages in connection therewith. The
Seller's Services are not subject to any guaranty, warranty, or other indemnity
beyond the applicable standard terms and conditions of sale, license or lease.
Schedule 2.20 hereto includes copies of the standard terms and conditions of
- -------------
sale, license or lease for the Seller's Services.
SECTION 2.21 EVENTS SUBSEQUENT TO BALANCE SHEET DATE
Except as set forth on Schedule 2.21, since December 31, 1997, the date of
-------------
the Balance Sheet, there has not been (except as otherwise disclosed in the
Schedules hereto or expressly contemplated herein) and will not be on the
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Closing Date:
(a) Any material adverse change in assets, liabilities, financial
condition, business, business organization or personnel of Seller or
the Business, taken as a whole, or in relationships with suppliers,
customers, clients, landlords or others;
(b) Any disposition, sale or issuance by Seller of any of its capital
stock or grant of any option or right to acquire any of its capital
stock or any acquisition or retirement for consideration by Seller of
any of its capital stock or any declaration or payment by Seller of
any dividend or other distribution of or with respect to its capital
stock;
(c) Any sale, mortgage, pledge or other disposition of any material asset
owned by Seller or used in the Business as of the close of business on
the date of the Balance Sheet, or acquired by Seller or the Business
since said date other than in the ordinary and usual course of
business;
(d) Any material expenditure or commitment by Seller or the Business for
the acquisition of assets of any kind, other than inventories and
supplies acquired in the ordinary course of business;
(e) Any damage, destruction or loss (whether or not insured) materially
and adversely affecting the Business;
(f) Any general wage or salary increase by Seller or to Continuing
Employees (as defined in Section 6.1) outside the ordinary course of
business;
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(g) Any increase in the compensation payable or to become payable by
Seller (or Transcend with respect to the Business) to any officer or
key employee;
(h) Any loans or advances by or to Seller other than renewals or
extensions of existing indebtedness or any increase in indebtedness
for borrowed money or capitalized leases of Seller, except in the
ordinary course of business;
(i) Any cancellation by Seller of any material indebtedness owing to it or
any cancellation or settlement by Seller of any material claims
against others;
(j) Any sale, assignment or transfer by Seller (or Transcend with respect
to the Business) of any material patent, trademark, tradename,
copyright, license, franchise, certificate, permit or other intangible
asset used in connection with the Business;
(k) Any acceleration, termination, modification or cancellation of any
agreement, contract, lease or license involving more than $5,000 to
which Seller (or Transcend with respect to the Business) is a party or
by which Seller is bound;
(l) Any delay or postponement of the payment of accounts payable or other
liabilities of Seller outside the ordinary course of business;
(m) Any loan or other transaction between Seller, on one hand, and any
director, officer, partner or stockholder of Seller on the other hand;
(n) Any transaction of Seller (or Transcend with respect to the Business)
any kind not in the ordinary and usual course of business, except as
otherwise provided in this Agreement;
(o) Any amendment of any term of any outstanding securities or equity of
Seller;
(p) Any material reduction in the amounts of coverage provided by existing
casualty and liability insurance policies with respect to the business
of Seller;
(q) Any new or amendment to or alteration of any existing bonus, incentive
compensation, severance, stock option, stock appreciation right,
pension, matching gift, profit-sharing, employee stock ownership,
retirement, pension group insurance, death benefit, or other fringe
benefit plan, arrangement or trust agreement adopted or implemented by
Seller or Transcend which would result in a material increase in cost
to Seller; or
(r) Any commitment by Seller or Transcend to any of the foregoing.
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SECTION 2.22 NO BROKER
No agent or broker or other person acting pursuant to authority of Seller
or Transcend is entitled to any commission or finder's fee in connection with
the transactions contemplated by this Agreement.
SECTION 2.23 OFFICERS AND DIRECTORS
The officers and directors of Seller are as listed in Schedule 2.23
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attached hereto.
SECTION 2.24 BOARD OF DIRECTORS AND STOCKHOLDER APPROVAL
The execution, delivery and performance of this Agreement has been duly
authorized by (i) the Board of Directors and the stockholder of Seller; and (ii)
the Board of Directors of Transcend.
SECTION 2.25 TRADE NAMES
Schedule 2.25 hereto sets forth (a) all business names and addresses used
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by Seller or the Business within the past five years and (b) names and
addresses of business entities from which Seller or the Business acquired
significant assets within the past five years. Seller and Transcend have always
conducted the Business only under the names set forth on Schedule 2.25. Except
-------------
as set forth in Schedule 2.25, Seller (and Transcend with respect to the
-------------
Business) has never operated under or used an assumed or fictitious name.
Seller and Transcend have not received notice that the manner in which they
conduct the Business conflicts with any rights of third parties to trade names,
trademarks, trademark applications, trademark registrations, trademark licenses
and sublicenses, service marks, service mark applications, service mark
registrations, service mark licenses and sublicenses, copyrights, copyright
applications, copyright registrations, copyright licenses and sublicenses,
patents, patent applications and patent licenses and sublicenses. Purchaser's
use of the marks "Transcend Case Management" and "Sullivan Health and
Rehabilitation Services" after the Closing in the manner consistent with
Seller's (and Transcend's with respect to the Business) use of such marks prior
to the Closing will not subject Purchaser to any claim from third parties.
Seller shall not use any other business name or address from the date of
this Agreement through the Closing Date. Schedule 2.25 also contains all
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locations of the Subject Assets and Seller's places of business and chief
executive offices.
SECTION 2.26 ARMS LENGTH TRANSACTIONS
Except as set forth on Schedule 2.26, all transactions by the Seller (and
-------------
Transcend with respect to the Business) with outside parties have been conducted
on an arms length basis, and no affiliate, director, stockholder or officer of
Seller or Transcend (or any members of their respective families) has since
January 1, 1995 had any material direct or indirect ownership of or a profit
participation in any outside business enterprises with which the Seller or the
Business
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had significant purchases, sales or business dealings.
SECTION 2.27 OTHER LIABILITIES OF SELLER AND TRANSCEND
Seller and Transcend shall retain all of their liabilities other than the
Assumed Liabilities (the "Retained Liabilities"). Seller and Transcend shall
make timely payment of all the Retained Liabilities so that all liabilities of
Seller and the Business to the creditors (other than the Assumed Liabilities)
shall have been discharged. Neither Purchaser nor CORE shall have any liability
whatsoever for any of the Retained Liabilities.
SECTION 2.28 INVESTMENT
Seller and Transcend each understand that the Purchase Price Shares have
not been, and, except as otherwise provided in the Registration Rights
Agreement, will not be, registered under the Securities Act, or under any state
securities laws, and are being offered and sold in reliance upon federal and
state exemptions for transactions not involving any public offering. Transcend
(i) is acquiring the Purchase Price Shares solely for its own account for
investment purposes, and not with a view to the distribution thereof: (ii) is a
sophisticated investor with knowledge and experience in business and financial
matters, (iii) has received certain information concerning CORE and has had the
opportunity to obtain additional information as desired in order to evaluate the
merits and the risks inherent in holding the Purchase Price Shares, (iv) is able
to bear the economic risk and lack of liquidity inherent in holding the Purchase
Price Shares, and (v) is an Accredited Investor as defined in Regulation D
promulgated under the Securities Act of 1933, as amended. Immediately prior to
the issuance of the Purchase Price Shares, Transcend shall execute certificates
and agreements confirming the foregoing and addressing other matters to assure
compliance with or exemption from federal and other security laws.
SECTION 2.29 DISCLOSURE; EFFECT OF TRANSACTION
Neither this Agreement nor any statement, list or certificate furnished or
to be furnished by Seller or Transcend or their representatives to Purchaser or
CORE pursuant hereto or in connection with this Agreement or any of the
transactions hereby contemplated, contains or will contain any untrue statement
of a material fact or omits or will omit to state a material fact necessary in
order to make the statements contained herein and therein, in light of the
circumstances in which they are made, not misleading. To the best of Seller's
and Transcend's knowledge, there is no fact regarding Seller, the Business or
Transcend or their respective prospects which a reasonable buyer would
reasonably consider material in making a decision with respect to the purchase
of the Subject Assets which has not been disclosed to CORE or Purchaser in this
Agreement including the Schedules hereto.
No creditor, employee, consultant, client or other customer or other person
having a material business relationship with Seller or the Business has informed
Seller or Transcend that such person or entity intends to change the
relationship because of the purchase and sale of the Subject Assets as
contemplated hereby, which change would have a material adverse effect on
Business.
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SECTION 2.30 SUPPLEMENTAL DISCLOSURE
Prior to and through Closing, Seller and Transcend shall have the
continuing obligation promptly to supplement or amend the Schedules hereto with
respect to any material matter hereafter arising or discovered which, if
existing or known at the date of this Agreement, would have been required to be
set forth or described in such Schedules; provided, however, that for the
purpose of the rights and obligations of the parties hereunder, any such
supplemental or amended disclosure shall not be deemed to have been disclosed as
of the date of this Agreement unless expressly so agreed to in writing by
Purchaser and CORE.
SECTION 2.31 REPRESENTATIONS AND WARRANTIES AT CLOSING
On the Closing Date, all of the representations and warranties of Seller
and Transcend contained in this Agreement will be true and correct in all
material respects at and as of the Closing Date with the same force and effect
as though made at and as of the Closing Date, except for changes contemplated or
permitted by this Agreement.
SECTION 2.32 SURVIVAL OF REPRESENTATIONS
The representations and warranties of the Seller and Transcend contained in
this Agreement and any Ancillary Documents shall survive the Closing hereunder
notwithstanding any investigation which may be made by or on behalf of Purchaser
or CORE, for a period ending the earlier of (i) three years from the Closing
Date, or (ii) the date CORE delivers the Purchase Price Shares to Transcend, or
(iii) the date Purchaser retransfers assets to Transcend pursuant to Section 6.3
of this Agreement. Notwithstanding the foregoing limitation to the
representations and warranties of Seller and Transcend in the prior sentence,
without limitation as to time, in no event shall Purchaser's liabilities assumed
from Seller or Transcend exceed the Assumed Liabilities listed in Schedule 1.2.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF CORE
CORE and Purchaser, jointly and severally, hereby represent and warrant to
Seller and Transcend that:
SECTION 3.1 ORGANIZATION
CORE is, and on the Closing Date will be, a corporation duly organized,
validly existing and in good standing under the laws of the Commonwealth of
Massachusetts; and has, and on the Closing Date will have, the power and
authority to conduct all of the activities conducted by it and to own or lease
all of the assets owned or leased by it. CORE is qualified as a foreign
corporation in all states and jurisdictions in which such qualification is
required, except where the lack of such qualification would not materially and
adversely affect the ability to do business or financial condition of CORE.
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A complete and correct copy of the Articles of Organization and all
amendments thereto and the Bylaws of CORE have been made available to Seller and
Transcend.
SECTION 3.2 AUTHORIZATION OF TRANSACTION
CORE has the power and authority to execute and deliver this Agreement, to
consummate the transactions hereby contemplated and to take all other actions
required to be taken by it pursuant to the provisions hereof. This Agreement is
valid, binding and enforceable against CORE in accordance with its terms.
Neither the execution and delivery of this Agreement nor the consummation
of the transactions hereby contemplated will (a) contravene or conflict with the
Articles of Organization or By-laws of CORE, (b) constitute any violation or
breach of any material provision of any material contract or other instrument to
which CORE is a party; (c) constitute any violation or breach of any order,
writ, judgment, injunction, decree, statute, rule or regulation, (d) conflict
with, or constitute a default under, or result in the termination or
cancellation of, or right to accelerate, any material agreement, contract or
other instrument binding upon CORE.
The execution, any delivery and performance by CORE of this Agreement and
the consummation of the transactions by CORE require no action by or in respect
of, or filing with, any governmental body, agency, official or authority.
SECTION 3.3 BROKER
No agent or broker or other person acting pursuant to authority of CORE is
entitled to any commission or finder's fee in connection with the transactions
contemplated by this Agreement.
SECTION 3.4 BOARD OF DIRECTORS APPROVAL
The Board of Directors of CORE has duly authorized the execution and
delivery and performance of this Agreement by CORE.
SECTION 3.5 DISCLOSURE
Neither this Agreement nor any statement, list or certificate furnished or
to be furnished to Transcend or Seller by or on behalf of CORE pursuant hereto
or in connection with the transactions contemplated hereby contains or will
contain any untrue statement of a material fact, or omits or will omit to state
a material fact necessary in order to make the statements contained herein and
therein, in light of the circumstances on which they are made, not misleading.
SECTION 3.6 REPRESENTATIONS AND WARRANTIES AT CLOSING
On the Closing Date, all of the representations and warranties of CORE
contained in this Agreement will be true and correct in all material respects at
and as of the Closing Date with the same force and effect as though made at and
as of the Closing Date, except for changes contemplated or permitted by this
Agreement.
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SECTION 3.7 SURVIVAL OF REPRESENTATIONS
The representations and warranties of CORE contained in this Agreement and
any Ancillary Documents shall survive the Closing hereunder notwithstanding any
investigation which may be made by or on behalf of Seller or Transcend for a
period ending the earlier of (i) of three from the Closing Date, (ii) the date
CORE delivers the Purchase Price Shares to Transcend, or (iii) the date
Purchaser retransfers assets to Transcend pursuant to Section 6.3 of this
Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser and CORE, jointly and severally, hereby represent and warrant to
Seller and Transcend that:
SECTION 4.1 ORGANIZATION
Purchaser is, and on the Closing Date will be, a corporation duly
organized, validly existing and in good standing under the laws of or the state
of Delaware; and has, and on the Closing Date will have, the power and authority
to conduct all of the activities conducted by it and to own or lease all of the
assets owned or leased by it. Purchaser is qualified as a foreign corporation
in all states and jurisdictions in which such qualification is required, except
where the lack of such qualification would not materially and adversely affect
the ability to do business or financial condition of Purchaser.
A complete and correct copy of the Certificate of Incorporation and the
Bylaws of Purchaser have been made available to Seller and Transcend.
SECTION 4.2 AUTHORIZATION OF TRANSACTION
Purchaser has the power and authority to execute and deliver this
Agreement, to consummate the transactions hereby contemplated and to take all
other actions required to be taken by it pursuant to the provisions hereof, and
this Agreement is valid, binding and enforceable against Purchaser in accordance
with its terms.
Neither the execution and delivery of this Agreement nor the consummation
of the transactions hereby contemplated will (a) contravene or conflict with the
Certificate of Incorporation or By-laws of Purchaser, (b) constitute any
violation or breach of any material provision of any material contract or other
instrument to which Purchaser is a party; (c) constitute any violation or breach
of any order, writ, judgment, injunction, decree, statute, rule or regulation,
(d) conflict with, or constitute a default under, or result in the termination
or cancellation of, or right to accelerate, any material agreement, contract or
other instrument
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binding upon Purchaser.
The execution, delivery and performance by Purchaser of this Agreement and
the consummation of the transactions by Purchaser require no action by or in
respect of, or filing with, any governmental body, agency, official or
authority.
SECTION 4.3 BROKER
No agent or broker or other person acting pursuant to authority of
Purchaser is entitled to any commission or finder's fee in connection with the
transactions contemplated by this Agreement.
SECTION 4.4 BOARD OF DIRECTORS APPROVAL
The Board of Directors of Purchaser has duly authorized the execution and
delivery and performance of this Agreement and the ancillary agreements by
Purchaser.
SECTION 4.5 GOVERNMENTAL LICENSES AND PERMITS; GOVERNMENT RELATIONS
Purchaser has been granted all certificates, licenses, permits, authorities
and franchises from any federal, state or municipal or other governmental
instrumentality, agency or commission or similar body which may be necessary to
carry on the Business lawfully.
All certificates, licenses, permits, authorities and franchises of the
Purchaser are validly held by Purchaser. Purchaser has complied with all
requirements in connection therewith and the same will not be subject to
suspension or revocation as a result of this Agreement or the consummation of
the transactions contemplated hereby.
Neither the Purchaser nor any director, officer, agent, employee or other
person acting on behalf of the Purchaser or the Business has used any funds for
improper or unlawful contributions, payments, gifts or entertainment, or made
any improper or unlawful expenditures relating to political activity to domestic
or foreign government officials or others. Neither the Purchaser nor any
current director, officer, agent, employee or other person acting on behalf of
the Purchaser or the Business, has accepted or received any improper or unlawful
contributions, payments, gifts or expenditures. The Purchaser has at all times
complied, and is in compliance, in all material respects with the federal
Foreign Corrupt Practices Act and in all material respects with all foreign laws
and regulations relating to prevention of corrupt practices.
SECTION 4.6 LITIGATION; COMPLIANCE WITH LAWS
There are no actions, suits, or proceedings pending or threatened against
or affecting Purchaser or the property of Purchaser in any court or before any
federal, state, municipal or other governmental department, commission, board or
other instrumentality or before any arbitrators.
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Purchaser has complied in all material respects with all applicable laws
including, without limitation, environmental laws (including applicable rules,
regulations, codes, plans, injunctions, judgments, orders, decrees, rulings, and
charges thereunder) of federal, state, local, and foreign governments (and all
agencies thereof) and there are no pending or, to the best knowledge of
Purchaser, threatened governmental investigations involving Purchaser including
inquiries, citations, or complaints by any federal, state, local or foreign
government and agencies thereof. There are no outstanding orders, decrees or
stipulations to which Purchaser is a party affecting Purchaser, and Purchaser is
not in default with respect to any judgment, order, decree, award, rule or
regulation of any court of any such department, commission, board or other
instrumentality or arbitrators affecting Purchaser.
SECTION 4.7 DISCLOSURE
Neither this Agreement nor any statement, lists or certificate furnished or
to be furnished to Seller by or on behalf of Purchaser pursuant hereto or in
connection with the transactions contemplated hereby contains or will contain
any untrue statement of a material fact, or omits or will omit to state a
material fact necessary in order to make the statements contained herein and
therein, in light of the circumstances on which they are made, not misleading.
SECTION 4.8 REPRESENTATIONS AND WARRANTIES AT CLOSING
On the Closing Date, all of the representations and warranties of Purchaser
contained in this Agreement will be true and correct in all material respects at
and as of the Closing Date with the same force and effect as though made at and
as of the Closing Date, except for changes contemplated or permitted by this
Agreement.
SECTION 4.9 SURVIVAL OF REPRESENTATIONS
The representations and warranties of Purchaser contained in this Agreement
and any Ancillary Documents shall survive the Closing hereunder notwithstanding
any investigation which may be made by or on behalf of Seller or Transcend for a
period ending the earlier of (i) three years from the Closing Date, or (ii) the
date CORE delivers the Purchase Price Shares to Transcend, or (iii) the date
Purchaser retransfers assets to Transcend pursuant to Section 6.3 of this
Agreement.
ARTICLE V
ADDITIONAL AGREEMENTS OF SELLER AND TRANSCEND
Seller and Transcend each, jointly and severally, covenants and agrees as
follows:
SECTION 5.1 OPERATION OF BUSINESS
Seller will, subsequent to the date hereof and prior to the Closing Date:
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(a) continue in all material respects to conduct its business, maintain
its assets, carry on its business practices and keep its books of
account, records and files in the ordinary course;
(b) use commercially reasonable efforts to preserve the good will of its
suppliers and customers and others having business relations with it;
(c) use commercially reasonable efforts to continue the employment of key
personnel (except as otherwise permitted by Purchaser in writing);
(d) pay and perform all of its debts, obligations and liabilities as and
when due under all leases, agreements, contracts and other commitments
to which it is a party in accordance with the terms and provisions
thereof and in the ordinary course of business; and
(e) comply in all material respects with all laws and/or other
governmental regulations that may be applicable to its business.
SECTION 5.2 NEGATIVE COVENANTS
Seller will not, subsequent to the date hereof and prior to the Closing
Date, without the express written consent of Purchaser,
(a) enter into any leases, agreements, contracts or other commitments,
whether written or oral, other than commitments for the purchase of
inventory or supplies or for the furnishing of services, in each case
entered into in the ordinary course of business and not of unusual
size or duration;
(b) make any change in its corporate charter, bylaws, or other
organizational agreements and documents;
(c) sell, assign, lease or otherwise transfer or dispose of or encumber
any property (real or personal) or equipment, except for replacement
of any worn-out equipment in the ordinary course of business;
(d) merge or consolidate with or into any other corporation or entity;
(e) grant any options, warrants or other rights to purchase or obtain any
of its capital stock, or equity interests, or issue, sell or otherwise
dispose of any of its capital stock, or equity interests (except upon
the conversion or exercise of options, warrants, and other rights
currently outstanding);
(f) declare, set aside or pay any dividend or distribution with respect to
its capital stock (whether in cash or in kind), or redeem, repurchase,
or otherwise acquire any of its capital stock, or equity interests;
(g) issue any note, bond, or other debt security or create, incur, assume,
or guarantee
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any indebtedness for borrowed money or capitalized lease obligation
outside the ordinary course of business;
(h) make any capital investment in, make any loan to, or acquire the
securities or assets of any other person or entity;
(i) make any change in employment terms for any of its directors,
officers, partners and employees;
(j) conduct its business or take any other action other than in the
ordinary course of business;
(k) amend or change the period of exercisability or accelerate the
exercisability of any outstanding options or warrants to acquire
shares of its capital stock, or equity interests; or
(l) agree or commit to any of the foregoing.
SECTION 5.3 NO BREACHES OF REPRESENTATIONS AND WARRANTIES
Seller and Transcend will not take any action which would cause or
constitute a breach, or would, if it had been taken immediately prior to the
date hereof, have caused or constituted a breach, of any of the representations
and warranties of Seller or Transcend set forth herein. Seller and Transcend
will, in the event of, and promptly after the occurrence of or the impending or
threatened occurrence of, any event which would cause or constitute a breach or
would, if it had occurred immediately prior to the date hereof, have caused or
constituted a breach of any of the representations and warranties of Seller or
Transcend set forth herein, give detailed notice to CORE; and Seller and
Transcend will use their best efforts to prevent or promptly to remedy such
breach.
SECTION 5.4 FORM 8-K
Seller and Transcend each agree to provide information to CORE and
otherwise assist CORE with respect to disclosures concerning Seller to be
included in the Form 8-K to be filed by CORE with the Securities and Exchange
Commission following the Closing of the transaction described in this Agreement.
SECTION 5.5 ACCESS TO INFORMATION
Seller and Transcend will give to CORE and its representatives, from and
after the date of execution of this Agreement, full access during normal
business hours to all of the properties, books, contracts, documents and records
of Seller and the Business, and will furnish to CORE and its representatives all
additional financial statements, all information with respect to its business
affairs, and copies of all relevant contracts and other documents, which CORE
may reasonably request.
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SECTION 5.6 RELEASES AND ACKNOWLEDGMENT OF EMPLOYEES
Seller will deliver or cause to be delivered to Purchaser at the Closing
(i) the certificate of each Continuing Employee (as defined in Section 6.1) that
he or she has no claims of any kind against Seller or Transcend, except for his
or her unpaid salary with respect to the month in which the Closing occurs
accrued to the Closing, and (ii) CORE shall have received from each Continuing
Employee and key consultant of Seller a binding agreement, in form acceptable to
CORE, which sets forth an acknowledgement of CORE's policies concerning non-
disclosure and an acknowledgment of CORE's ownership of the intellectual
property of Seller being transferred to CORE.
SECTION 5.7 MAINTAIN BUSINESS ORGANIZATION
Seller and Transcend will use their best efforts until the Closing to
preserve the Business's organization intact, and to preserve the relationships
of Seller with employees, suppliers, customers, landlords, and others, all to
the end that the going business of Seller will be unimpaired at the Time of
Closing.
SECTION 5.8 FINANCIAL STATEMENT ITEMS
(a) Minimum Cash and Accounts Receivable. For the purposes of this
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Agreement "Cash and A/R Account" shall consist of cash, cash equivalents and
accounts receivable (net of reserves) of Seller transferred to Purchaser at
Closing. Transcend and Seller agree that the amount of the Cash and A/R Account
transferred to Purchaser at Closing shall be an amount at least equal to
$220,000.
(b) Maximum Assumed Liabilities. Transcend and Seller agree that the
----------------------------
amount of Assumed Liabilities transferred to Purchaser at Closing shall be less
than $68,760.
SECTION 5.9 MAINTAIN INSURANCE AND PROPERTIES
Seller and Transcend will use their best efforts to cause the existing
liability and property damage, fire, casualty and other insurance of Seller
described in Schedule 2.9 to be continued in force up to and through the Closing
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Date.
Seller will use all commercially reasonable efforts to maintain its
properties, equipment and operations in good repair and operating condition
through the Time of Closing Date.
SECTION 5.10 EXCLUSIVITY
Until the earlier to occur of the Closing of this Agreement or the
termination of this Agreement pursuant to Article X hereof, neither Transcend
nor Seller nor any of their respective officers, directors, employees, partners,
agents, affiliates or representatives will solicit, initiate, or encourage the
submission of any proposal or offer relating to the acquisition of any capital
stock, equity interest, partnership interest or other voting securities, or any
substantial portion of the assets of Seller or the Business. Additionally,
Seller and Transcend will notify CORE
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immediately if any person or entity contacts Seller or Transcend with any
proposal, offer, inquiry, or contact with respect to any of the foregoing.
SECTION 5.11 POST-CLOSING COOPERATION
To the extent reasonably requested by Purchaser and at Purchaser's expense,
Seller and Transcend will cooperate and use reasonable efforts to have the
present officers, directors and employees of the Seller and Transcend cooperate
with Purchaser on and after the Closing Date in furnishing information,
evidence, testimony and other assistance in connection with any actions,
proceedings, arrangements or disputes of any nature with respect to matters
pertaining to all periods prior to the Closing Date.
SECTION 5.12 MONTHLY FINANCIAL STATEMENTS; AUDITED FINANCIAL STATEMENTS
(a) Monthly Financial Statements. On the 10th day of each month prior to
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Closing, Seller shall deliver to CORE a balance sheet and related statements of
income and retained earnings and cash flows for the interim period ending at the
end of the prior month, which financial statements shall not reflect any
material adverse change in the financial condition or liabilities of Seller.
Such financial statements, when delivered to CORE, shall be in accordance with
the books and records of Seller, will be complete and correct in all material
respects and fairly present the financial position of Seller as of dates therein
indicated and the results of the operations of Seller for the periods so ended
all in conformity with GAAP (subject to normal year end adjustments and the
absence of footnotes).
(b) Audited Financial Statements. At least 3 days prior to the Closing,
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Seller shall deliver to CORE financial statements of Seller audited by Arthur
Andersen LLP for the one year ended December 31, 1997 and audited statements of
operations and cash flows for the same years and any other period deemed
necessary or appropriate by CORE in connection with CORE's disclosure
obligations under the federal securities laws (the "Audited Financial
Statements"). Such Audited Financial Statements shall be substantially similar
to the unaudited financial statements of Seller set forth in Schedule 2.4 hereof
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for the same periods and include Seller's independent auditors' opinion in a
form reasonably satisfactory to CORE. Without limiting the generality of the
foregoing, the Audited Financial Statements shall not be substantially similar
to the unaudited financial statements of Seller if for any period revenues or
net income vary by more than 5%.
SECTION 5.13 BULK SALES LAW
Seller and Transcend shall, jointly and severally, indemnify and hold
Purchaser and CORE harmless from any loss, cost or liability (including
reasonable attorneys' fees) incurred by Purchaser or CORE as a result of non-
compliance with any applicable bulk sales law, fraudulent conveyance law or
similar law with respect to the transactions contemplated herein.
SECTION 5.14 SHORT-TERM LICENSE OF TRADENAMES; USE OF MARKETING MATERIALS
Transcend, Seller and Purchaser shall at closing enter into a Tradename
License
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Agreement in the form attached hereto as Exhibit F pursuant to which Transcend
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and Seller shall (i) license to Purchaser, for one year, the right to use the
tradename "Transcend Case Management"; and (ii) permit Purchaser to use all
tradenames and trademarks on any marketing or related material delivered to
Purchaser as a Subject Asset.
SECTION 5.15 NON-COMPETITION; NON-SOLICITATION
Transcend and Seller each hereby agrees that, from and after the Closing
Date through December 31, 2002 neither of them shall (a) serve, directly or
indirectly, as an operator, owner, partner, consultant, officer, director, or
employee of any firm, entity or business or corporation engaged in the business
presently being conducted by Seller (or any business related thereto) within the
United States; (b) solicit or attempt to solicit, or accept business from, any
entity which is a client or customer of CORE, Purchaser, Seller (including
CORE's subsidiaries) or which at any time during the twelve month period prior
to the Closing Date, was a client or customer of any of the Business, for the
purpose of doing business with such client or customer in competition with
Purchaser or CORE (including CORE's subsidiaries) (for the purpose of this
covenant, the clients and customers of Purchaser shall include those entities
with which Seller had held discussions or negotiations concerning the Business
within the twelve month period prior to the Closing Date), or (c) solicit,
attempt to hire, or hire any employee or consultant of Purchaser (including
Continuing Employees) or CORE (including CORE's subsidiaries), or assist in such
solicitation or hiring by any other person or entity, or encourage any employee
or consultant or Purchaser (including Continuing Employees) or CORE (including
CORE's subsidiaries) to terminate his or her relationship with Purchaser or
CORE.
It is agreed that the remedy at law for any breach of the foregoing shall
be inadequate and that CORE and Purchaser shall be entitled to any other remedy
permitted by law. In the event that this Section shall be determined by
arbitrators or by any court of competent jurisdiction to be unenforceable by
reason of its extending for too great a period of time or over too large a
geographic area or over too great a range of activities, it shall be interpreted
to extend only over the maximum period of time, geographic area or range of
activities as to which it may be enforceable. Nothing herein contained shall
prevent Transcend or Seller from holding or making an investment in securities
listed on a national securities exchange or sold in the over-the-counter market,
provided such investments do not exceed in the aggregate five percent (5%) of
the issued and outstanding capital stock of a corporation which is a competitor
within the meaning of this Section.
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SECTION 5.16 ACCOUNTS RECEIVABLE
(a) Transfer and Guaranty of Accounts Receivable. Seller and Transcend
---------------------------------------------
shall guarantee that at Closing the accounts receivable of Seller transferred to
Purchaser shall in no event be less than $280,000 (the "Guaranteed Receivables
Amount") and that the Guaranteed Receivables Amount will be collected during the
Collection Period. In the event the accounts receivable collected during the
Collection Period are less than 90% of the Guaranteed Receivables Amount, then
either (i) the Net Annualized Revenue set forth in Section 1.3(b) shall be
reduced by an amount equal to the difference between the Guaranteed Receivables
Amount and the amount of the accounts receivable actually collected (the
"Shortfall") or (ii) Seller and Transcend shall pay to Purchaser the Shortfall
amount in cash.
(b) Collection of Accounts Receivable. Purchaser agrees to use reasonable
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collection efforts with respect to such Accounts Receivable (except that the
Purchaser shall not be obligated to institute litigation) through December 31,
1998 (the "Collection Period").
SECTION 5.17 BEST EFFORTS
Seller and Transcend each will use their reasonable efforts to effectuate
the transactions hereby contemplated, to perform all the covenants and
agreements contained herein and to fulfill the conditions of CORE's and
Purchaser's obligations under this Agreement.
ARTICLE VI
ADDITIONAL AGREEMENTS OF CORE AND PURCHASER
SECTION 6.1 EMPLOYMENT ARRANGEMENTS AND EMPLOYEE BENEFITS
(a) Purchaser intends to offer employment, commencing as of the Closing
Date, at substantially the same wages, salary, benefits, hours and conditions in
effect immediately prior to the Closing, to all employees listed on Schedule
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2.12 with such changes in the ordinary course of business of which Seller
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notifies Purchaser (other than those employees listed on Schedule 6.1 (the
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"Excluded Employees") including Purchaser's revisions to Schedule 6.1 at or
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prior to Closing); provided, however, Purchaser reserves the right to make
changes to such wages, salary, benefits, hours and conditions. Those employees
who shall accept said offer of employment with Purchaser and who shall actually
commence active employment with Purchaser shall collectively be referred to as
the "Continuing Employees."
Notwithstanding the foregoing, and without breaching the foregoing,
Purchaser reserves the right to review staffing levels, wages, benefits and
conditions of employment after the Closing, and to make appropriate changes, if
in its judgment such changes are necessary in light of then existing business
conditions.
(b) Unless expressly listed as an Assumed Liability, Seller and Transcend
shall retain responsibility for any hospital, medical, dental, life insurance,
disability, workers' compensation
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and other employee welfare benefit plan premiums due and payable for coverage
prior to the Closing Date. Hospital, medical, dental, life insurance,
disability, workers' compensation and other employee welfare benefit plans
listed on Schedule 2.12 for which premiums will be accrued and payable for
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coverage of the Continuing Employees on or after the Closing Date shall be the
responsibility of Purchaser. Unless expressly listed as an Assumed Liability on
Schedule 1.2, Seller shall remain responsible for paying all unpaid wages,
- ------------
salaries, vacation, sick-leave or other time-off pay accrued by all employees
through the Closing Date.
(c) Unless expressly listed as an Assumed Liability on Schedule 1.2,
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Seller shall pay to all Continuing Employees all benefits accrued to such
employees prior to the Closing Date (including, without limitation, vacation pay
and time-off pay) as soon as practicable after Closing, but in no event more
than 14 days after Closing.
(d) No provision of this Section 6.1 shall create any third-party-
beneficiary rights in any employee or former employee (including any beneficiary
thereof) of any Seller or Purchaser.
SECTION 6.2 REGISTRATION RIGHTS AGREEMENT; CURRENT PUBLIC INFORMATION.
At the Closing, CORE and Transcend will enter into a registration rights
agreement (the "Registration Rights Agreement") in the form attached hereto as
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Exhibit E granting to Transcend so-called "piggy-back" registration rights with
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respect to the Purchase Price Shares subject to the terms and conditions set
forth therein.
CORE will file all reports required to be filed by it under the Securities
Act and the Securities Exchange Act and the rules and regulations adopted by the
Securities and Exchange Commission thereunder, and will take such further action
as Transcend may reasonably request, all to the extent required to enable
Transcend to sell the Purchase Price Shares of CORE stock issued and delivered
in connection with this Agreement pursuant to Rule 144 adopted by the Securities
and Exchange Commission under the Securities Act (as such rule may be amended
from time to time) or any similar rule or regulation hereafter adopted by the
Securities and Exchange Commission.
SECTION 6.3 OPERATION OF BUSINESS OF PURCHASER
Purchaser will, from the Closing Date until the date upon which the value
of the Purchase Price Shares shall be determined in accordance with this
Agreement:
(a) in all material respects, conduct its business, maintain its assets,
carry on its business practices and keep its books of account, records and files
in the ordinary course, including, without limitation, the following:
(i) cause CRS to have not more than one (1) sales representative
unless Purchaser has at least five (5) sales representatives employed
exclusively in the Business (provided, however, that this covenant
shall not be deemed to require Purchaser to maintain at least five (5)
sales representatives);
(ii) acquire and maintain such insurance as may be commercially
practicable
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for the Business;
(iii) establish and maintain commercially practicable operating hours
for the Business;
(iv) use, operate, maintain and repair all of the property and
equipment of the Business in a normal business manner; and
(v) preserve, account and maintain adequate books and records for
the Business as a separate revenue center within Purchaser;
(b) use commercially reasonable efforts to preserve the good will of its
suppliers and customers and others having business relations with it;
(c) pay and perform all of its debts, obligations and liabilities as and
when due under all leases, agreements, contracts and other commitments to which
it is a party in accordance with the terms and conditions thereof in the
ordinary course of business;
(d) provide unaudited monthly income statements to Transcend within a
reasonable period of time after the end of each month; and
(e) comply in all material respects with all laws and/or other
governmental regulations that may be applicable to its business.
The foregoing obligations of Purchaser shall be limited to those times when
Purchaser is operating the Business at a profit.
Notwithstanding the foregoing or any other term or condition in this
Agreement or any Ancillary Agreement or Document, neither CORE nor Purchaser are
obligated to continue the operation of the Business if the Business is
generating a loss (i) in excess of $60,000 in any three month period or (ii) in
excess of $100,000 in any period less than three months as determined by
Purchaser or CORE. In determining losses for this Section 6.3, CORE and
Purchaser shall consider the business net income before taxes calculated in
accordance with generally accepted accounting principles ("GAAP") adjusted to
reflect reasonable corporate allocations (equal to 2% of revenues) and exclusive
of one-time, non-recurring extraordinary expenses.
In the event that Purchaser elects to discontinue the business due to
losses as described above, Purchaser shall provide Transcend 10 working days
advance written notice of the scheduled date of such discontinuance and
Transcend shall have the option to purchase from Purchaser all Subject Assets
still owned by Purchaser and other assets of Purchaser used exclusively by
Purchaser in the Business. If Transcend elects in writing to purchase such
assets of Purchaser by notifying Purchaser in writing of such election within
such 10 business day period: (i) the closing of the purchase and sale shall
occur as soon as practicable after such notice but in no event later than 30
days after Purchaser's scheduled date of discontinuance; (ii) such assets shall
be sold "where is" and "as is" without any representation or warranties by
Purchaser other than representations and warranties concerning Purchaser's title
to the assets being sold; (iii)
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the book value of the assets transferred to Transcend shall equal $220,000 (a)
minus the amount of all net losses incurred by Purchaser between the Closing
Date of this Agreement and the subsequent retransfer of such assets to
Transcend, if any, or (b) plus 50% of the amount of all net income earned by
Purchaser between the Closing Date of this Agreement and the subsequent
retransfer of such assets to Transcend, if any, (c) minus Purchaser's current
liabilities relating to the Business not assumed by Transcend in connection with
the acquisition of assets; and (v) Purchaser shall continue to operate the
Business for up to said 30 day period in accordance with this Section 6.3, and
Transcend shall promptly reimburse Purchaser for any losses incurred during such
period if for any reason the transfer of assets and liabilities to Transcend
does not occur.
SECTION 6.4 FORM 8-K
CORE and Purchaser each agree to provide information to Transcend and
otherwise assist Transcend with respect to disclosures concerning Seller to be
included in the Form 8-K to be filed by Transcend with the Securities and
Exchange Commission following the Closing of the transaction described in this
Agreement.
SECTION 6.5 NO BREACHES OF REPRESENTATIONS AND WARRANTIES
Between the date hereof and Closing, neither CORE nor Purchaser will
take any action which would cause or constitute a breach, or would, if it had
been taken immediately prior to the date hereof, have caused or constituted a
breach, of any of the representations and warranties of CORE and Purchaser set
forth herein. CORE or Purchaser, as appropriate, will, in the event of, and
promptly after the occurrence of or the impending or threatened occurrence of,
any event which would cause or constitute a breach or would, if it had occurred
immediately prior to the date hereof, have caused or constituted a breach of any
of the representations and warranties of CORE or Purchaser set forth herein,
give detailed notice to Seller; and CORE or Purchaser, as appropriate, will use
their reasonable best efforts to prevent or promptly to remedy such breach.
SECTION 6.6 BEST EFFORTS
CORE and Purchaser will use their reasonable best efforts to
effectuate the transactions hereby contemplated, to perform all the covenants
and agreements contained herein, and to fulfill the conditions of CORE's and
Purchaser's obligations under this Agreement.
ARTICLE VII
INDEMNITY BY THE SELLER AND TRANSCEND
SECTION 7.1 INDEMNIFICATION
Seller and Transcend, jointly and severally, hereby agree to
indemnify, defend, save and hold CORE and Purchaser harmless from and against,
and will reimburse CORE and its subsidiaries and Purchaser, and any person
serving as officers, directors, agents, counsel or
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employees thereof, as the case may be, for all losses, liabilities, costs,
damages, assessments, taxes, judgments, deficiencies, and expenses of any nature
whatsoever (including reasonable attorneys' fees and other costs and expenses
incident to any suit, action or proceeding) incurred by CORE or Purchaser which
shall arise out of or result from or constitute any breach of any
representation, warranty, covenant, or agreement of Seller or Transcend in this
Agreement, or in any certificate, schedule or exhibit delivered pursuant hereto,
and for any undisclosed liabilities of Seller or Transcend incurred prior to the
Closing Date. Seller and Transcend hereby release each other from any obligation
of contribution, indemnity or the like relating to any claims under this
Article.
Subject to the provisions of Section 7.6 hereof, the amount of the
indemnity to which CORE and Purchaser shall be entitled hereunder shall be
measured by the sum of (a) the amount of cash required to restore the
circumstances or condition which constitutes the breach of any such
representation, warranty, covenant or agreement or non-fulfillment of any such
obligation to what it would have been on the Closing Date had such breach or
non-fulfillment not occurred, and (b) all reasonable attorneys' fees and other
costs and expenses incident to any suit, action or proceeding relating thereto.
SECTION 7.2 DETERMINATION OF LIABILITY
In the event that at any time or from time to time, CORE shall
determine that it or Purchaser is entitled to indemnification under Section 7.1
hereof, it shall give written notice to the Seller and Transcend specifying the
cause, the amount of such claim and the 20 day objection period described in the
next sentence. Seller or Transcend may object to the claim by delivering
written notice thereof to CORE within twenty (20) days after receipt of CORE's
written notice. Failure on the part of Seller or Transcend so to object shall
constitute an acceptance of CORE's claim and if the amount to which CORE or
Purchaser is entitled is not paid by Seller or Transcend within ten (10) days of
such determination, then CORE shall have the right to satisfy all or part of
such indemnification obligations by reducing the Net Annualized Revenue (as
calculated in Section 1.3(b)) by an amount equal to such indemnification claim.
In the event such claim exceeds the amount of the Purchase Price Shares, or the
Purchase Price Shares have previously been delivered, or the Purchase Price
Shares are otherwise insufficient to satisfy fully such claim, Transcend and
Seller shall be jointly and severally liable to CORE and Purchaser for payment
of such claim.
In the event that Seller or Transcend shall so object and CORE and
Seller or Transcend shall fail to reach an agreement as to the entitlement of
CORE or Purchaser to indemnification or the amount thereof within sixty (60)
days after the written notice by Seller or Transcend objecting to the claim,
then so much of the matter as may be in dispute shall be submitted to the
American Arbitration Association in Orange County, California for settlement in
accordance with its rules, and the decision as to the disputed matter rendered
by the arbitrator or arbitrators shall be binding on all parties to this
Agreement. CORE, Purchaser, Seller and Transcend shall act upon such award in
like manner as though it constituted an agreement reached between the parties.
CORE or Purchaser, on one hand, and Seller and Transcend on the other hand,
shall each bear fifty percent (50%) of the arbitrators' fees.
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SECTION 7.3 DEFENSE OF CLAIMS
After receipt by CORE or Purchaser of notice of the existence of any
claim made or threatened by a third party, to which the indemnification
obligations hereunder apply, CORE shall give written notice thereof to Seller
and Transcend, but the omission to so notify Seller and Transcend will not
relieve Seller and Transcend from any liability except to the extent that Seller
and Transcend shall have been materially prejudiced as a result of the failure
in giving such notice. Such notice shall state the information then available
regarding the amount and nature of such claim and shall specify the provision or
provisions of this Agreement under which the liability or obligation is
asserted. If within twenty (20) days after receiving such notice, Seller or
Transcend gives written notice to CORE stating that it disputes and intends to
defend against such claim at Seller's or Transcend's own cost and expense
(subject to the consent of CORE which consent shall not be unreasonably withheld
but which consent may be conditional upon bonding or other evidence of ability
to pay upon a judgment) provided Seller's or Transcend's counsel in such defense
is acceptable to CORE, then CORE shall make no payment on such claim as long as
Seller or Transcend is conducting a good faith and diligent defense.
Notwithstanding anything herein to the contrary, CORE and Purchaser shall at all
times have the right to participate fully in such defense at CORE's and
Purchaser's own expense directly or through counsel; provided, however, if the
named parties to the action include both (i) either Seller or Transcend and (ii)
Purchaser or CORE and representation of both parties by the same counsel would
be inappropriate under applicable standards of professional conduct, the expense
of one separate counsel for CORE or Purchaser shall be paid by Seller and
Transcend. If no timely notice of intent to dispute and defend is given by
Seller or Transcend, or if such diligent good faith defense is not being or
ceases to be conducted, after written notice to Transcend and Seller and the
failure of Seller and Transcend to initiate or conduct such a defense within
twenty (20) days after such notice, CORE, at the expense of Transcend and
Seller, shall undertake the defense of such claim, liability or expense, and
shall have the right to compromise or settle the same. If such claim, liability
or expense is one that by its nature cannot be defended solely by Transcend or
Seller then CORE and Purchaser shall make available all information and
assistance that Transcend or Seller may reasonably request and shall cooperate
with Transcend or Seller in such defense; provided, Transcend or Seller shall
reimburse CORE and Purchaser for their costs and expenses in providing such
assistance.
SECTION 7.4 RECOURSE TO SELLER AND TRANSCEND
Any amounts offset against the Purchase Price Shares shall in no way
limit CORE's or Purchaser's rights in law or equity to recover from Transcend
and Seller in respect of any claims of CORE or Purchaser not fully satisfied by
such offsets.
SECTION 7.5 NOTIFICATION
To simplify notification and communications pursuant to this Article,
Seller hereby appoints Transcend to act as its agent and attorney-in-fact to
receive and deliver notices under this Article VII and to negotiate settlements
on its behalf. Accordingly, a notice by CORE or Purchaser to either Transcend or
to Seller shall be deemed to be a notice to each of Transcend and Seller.
Similarly, an instruction notice, waiver or objection from either Transcend or
Seller shall
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be deemed to be an instruction, notice, waiver or objection from each of
Transcend and Seller.
SECTION 7.6 LIMITATION ON RIGHTS OF INDEMNIFICATION
No party shall have the right to indemnification under this Agreement
VII unless the aggregate amount of any and all such indemnification claims made
by such party under this Agreement exceeds $20,000.00 (the "Threshold") and then
the entire amount of such claim(s), shall be subject to indemnification,
provided, however, that the Threshold shall not apply to claims arising out of
- -------- -------
Guaranteed Accounts Receivable, Assumed Liabilities, fraud or the intentional
acts of Seller or Transcend.
The aggregate liability of the Seller and Transcend, pursuant to
Article VII of this Agreement shall not exceed an amount equal to the value of
the Purchase Price Shares.
ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF SELLER AND TRANSCEND
The obligations of Seller and Transcend to consummate the transactions
contemplated by this Agreement on the terms and conditions contained herein
shall be subject to the fulfillment at or prior to the Closing Date of each of
the following conditions, any or all of which may be waived in whole or in part
by Transcend or Seller but only in a writing signed by Seller and Transcend:
SECTION 8.1 REPRESENTATIONS AND WARRANTIES
The representations and warranties of CORE and Purchaser contained in
this Agreement expressly made as of the Closing Date shall be true at and as of
the Closing Date in all material respects, and all of the other representations
and warranties contained shall be true in all material respects at and as of the
Closing Date as though such representations and warranties were made at and as
of such time.
SECTION 8.2 COMPLIANCE BY CORE AND PURCHASER
CORE and Purchaser shall have performed and complied with all
agreements and conditions on its part required by this Agreement to be performed
or complied with prior to or at the Closing Date.
SECTION 8.3 CLOSING CERTIFICATES
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Seller shall have received certificates of CORE and Purchaser executed
by the President and Chief Financial Officer of each corporation dated the
Closing Date, certifying to the fulfillment of the conditions specified in
Sections 8.1 and 8.2 of this Article VIII and such other evidence with respect
to the fulfillment of any said conditions as Seller may reasonably request upon
reasonable prior notice.
SECTION 8.4 LEGAL OPINION
Seller shall have received an opinion of Rich, May, Bilodeau &
Flaherty, P.C., counsel for CORE and Purchaser, dated the Closing Date,
reasonably satisfactory in form and substance to counsel for Seller
substantially to the effect as set forth on Exhibit D.
---------
Such opinion shall cover such related matters as Seller may reasonably
require, and may contain customary assumptions and exceptions.
SECTION 8.5 CERTIFIED RESOLUTIONS
CORE and Purchaser shall have furnished to Seller certified
resolutions and resolutions of their respective Boards of Directors duly and
legally authorizing the execution, performance of this Agreement by CORE and
Purchaser, and such other documentation as Seller shall reasonably request.
ARTICLE IX
CONDITIONS TO OBLIGATIONS OF CORE AND PURCHASER
The obligations of CORE and Purchaser to consummate the transactions
contemplated by this Agreement shall be subject to the fulfillment at or prior
to the Closing Date of each of the following conditions, any or all of which may
be waived in whole or in part by CORE and Purchaser but only in a writing signed
by CORE and Purchaser:
SECTION 9.1 REPRESENTATIONS AND WARRANTIES
The representations and warranties of Seller and Transcend contained
in this Agreement expressly made as of the Closing Date, and all of the other
representations and warranties of Seller and Transcend contained in this
Agreement shall be true and correct in all material respects at and as of the
Closing Date.
SECTION 9.2 COMPLIANCE BY SELLER AND TRANSCEND
Seller and Transcend shall have performed and complied with all
agreements, covenants and conditions on their part required by this Agreement to
be performed or complied with prior to or at the Closing Date.
38
<PAGE>
SECTION 9.3 CLOSING CERTIFICATE
CORE shall have received a certificate of Seller and Transcend
executed by the President and Chief Financial Officer of Seller and Transcend
and dated the Closing Date, certifying to the fulfillment of the conditions
specified in Sections 9.1 and 9.2 of this Article IX; and such other evidence
with respect to the fulfillment of any said conditions as CORE may reasonably
request upon reasonable prior notice.
SECTION 9.4 LEGAL OPINION
CORE and Purchaser shall have received an opinion of Smith, Gambrell &
Russell, LLP, counsel for Seller and Transcend, dated the Closing Date,
reasonably satisfactory in form and substance to counsel for CORE, substantially
to the effect as set forth on Exhibit C.
---------
Such opinion shall cover such related matters, as CORE or Purchaser
may reasonably require, and may contain customary assumptions and exceptions.
SECTION 9.5 CERTIFIED RESOLUTIONS AND VOTES
Seller shall have furnished CORE with certified resolutions and votes
of its Board of Directors and stockholders duly and legally authorizing the
execution and performance of this Agreement, and such other documentation as
CORE shall reasonably request.
Transcend shall have furnished CORE with certified resolutions of its
Board of Directors duly and legally authorizing the execution and performance
of this Agreement, and such other documentation as CORE shall reasonably
request.
SECTION 9.6 NO LITIGATION
Between the date of this Agreement and the Closing Date, no suit or
action or legal, administrative, arbitration or other proceeding shall have been
instituted, or threatened, against Seller or Transcend or which might adversely
affect the financial condition of Seller or the conduct of the Business.
SECTION 9.7 PRESERVATION OF BUSINESS
The going business of Seller and its business organization and
personnel shall have been substantially preserved intact and shall not have been
materially impaired. Between the date of this Agreement and the Closing Date,
the key employees of Seller shall have continued in the employ of Seller, Seller
shall not have discontinued any lines of business or changed in any material
respect the nature of its business from those existing on the date hereof.
There shall have been no material adverse change in Seller since December 31,
1997.
SECTION 9.8 RELATIONSHIPS WITH CUSTOMERS
The relations of Seller with its customers, suppliers, landlords and
others shall have been
39
<PAGE>
substantially preserved intact and not materially impaired.
SECTION 9.9 ADDITIONAL DOCUMENTATION; MONTHLY FINANCIAL STATEMENTS
Seller and Transcend shall have provided CORE with such additional
documentation as CORE shall reasonably request.
CORE shall have received the monthly financial statements and the
Audited Financial Statements of Seller as described in Section 5.12 hereof.
SECTION 9.10 CORPORATE AND OTHER RECORDS
There shall have been delivered to CORE the books and records of
Seller as described in Section 1.1(e) and (i).
SECTION 9.11 MAINTENANCE OF ASSETS
At the Closing, Seller shall have good and marketable title to all of
the Subject Assets, including personal property, real estate, intellectual
property, free and clear of all liens, mortgages, pledges and encumbrances. The
properties, machinery and equipment of Seller shall have been maintained in good
repair and operating condition, ordinary wear and tear excepted.
SECTION 9.12 RELEASES AND ACKNOWLEDGMENTS OF EMPLOYEES
CORE shall have received from all Continuing Employees the
certificates and acknowledgements described in Section 5.6, in substantially the
forms set forth in Exhibit H-1 and H-2 hereto.
-------------------
SECTION 9.13 CONSENT AND AMENDMENT TO EMPLOYMENT AGREEMENTS
Each of the persons listed on Schedule 9.13 shall have executed a
-------------
Consent and Amendment to Employment Agreement with Purchaser in substantially
the form annexed hereto as Exhibit G.
---------
SECTION 9.14 CONSENTS
Seller shall have delivered to CORE and Purchaser all consents of
third parties required by any and all agreements or documents to which any
Seller is a party or bound, in order to give effect to the transactions
contemplated hereby. Without limiting the generality of the foregoing, to the
extent required or requested by CORE and Purchaser, such consents shall include
consents of (i) the parties to the contracts and agreement listed on Schedule
--------
2.10; (ii) the employees or consultants with whom Seller has contracts or
- ----
agreements; and (iii) landlords of the Real Estate Leases. There shall have
been delivered to CORE all assignments, deeds, bills of sale, insurance
policies, contracts, leases, franchises, permits and all other documents
pertaining to the Subject Assets.
40
<PAGE>
SECTION 9.15 PROCEEDINGS
All corporate or other proceedings taken or required to be taken in
connection with the transactions contemplated hereby at or prior to the Closing
and all documents incident thereto shall be reasonably satisfactory in form and
substance to CORE and its counsel.
SECTION 9.16 FINANCIAL STATEMENT ITEMS; PURCHASE PRICE ADJUSTMENT
(a) The Business shall be operating at a profit as shown on the most
recent monthly financial statements of Purchaser delivered to CORE pursuant to
Section 5.12 hereof.
(b) On the Closing Date, the financial statement items set forth in
Section 5.8 shall have been maintained and satisfied.
(c) Within 90 days of the Closing Date or as soon thereafter as
reasonably practicable, Purchaser shall prepare and deliver to Transcend and
Seller a balance sheet for the Business as of the Closing Date (the "Closing
Balance Sheet"). The Closing Balance Sheet shall be prepared in accordance with
GAAP.
If the Closing Balance Sheet indicates that the financial conditions
set forth in Section 5.8 were not satisfied at Closing, then Transcend and
Seller shall immediately, upon written notice from Purchaser, pay to Purchaser,
in cash, an amount equal to the deficiency in the Minimum Cash and A/R Account.
(d) In no event will any amount, if any, owed to Purchaser or CORE by
Seller or Transcend as a result of the Shortfall amount related to uncollected
accounts receivable described in Section 5.16, any indemnification claim
described in Article VII or any Purchase Price deduction described in this
Section 9.16 be double-counted in connection with such reduction, claim or
deduction.
SECTION 9.17 GOVERNMENTAL CONSENT AND APPROVALS; STATUTES, LICENSES, PERMITS,
ETC.
All statutory requirements for the valid consummation of the
transaction described in this Agreement shall have been complied with, including
the receipt of all required authorizations, consents and approvals of federal
and state governmental agencies. No statute, rule, regulations, executive
order, decree, injunction or restraining order shall have been enacted,
promulgated or enforced (and not repealed, superseded or otherwise made
inapplicable) by any court or governmental authority which prohibits the
consummation of the transaction described in this Agreement.
Purchaser shall have received or have been granted any and all
necessary certificates, licenses, permits authorities and franchises by the
appropriate local, state and federal government agencies in order for Purchaser
to conduct the Business (the "Permits and Licenses") Seller and Transcend shall
cooperate and employ their best effort to assist Purchaser in receiving the
Permits and Licenses.
41
<PAGE>
SECTION 9.18 DUE DILIGENCE
CORE and Purchaser shall have completed its due diligence
investigation of Seller and the Business, including, without limitation, review
of financial statements, assets, liabilities, products, services, inventory,
methods of accounting, margins and financial and other business records and
investigation of Seller's customers and suppliers. In this connection, Seller
and Transcend agree to make necessary information available and to authorize
reasonable visits during normal business hours and upon advance written notice
to Seller to Seller's premises with such staff, consultants and experts as
Purchaser deems necessary or desirable. Purchaser and CORE agree to coordinate
closely all such activities with Seller and to conduct any such inquiries with
appropriate discretion and sensitivity to Seller's relationships with its
employees, customers and suppliers. Such due diligence shall include a valuation
of all the assets and goodwill of Seller and an allocation of the Purchase Price
over such Assets including goodwill. A satisfactory conclusion, in the opinion
of CORE (in its sole discretion), of this due diligence study (including
accounting treatment of the transaction by CORE) is a condition to CORE and
Purchaser consummating the transactions contemplated by this Agreement.
ARTICLE X
TERMINATION OR ABANDONMENT
SECTION 10.1 TERMINATION OR ABANDONMENT
This Agreement and the transactions contemplated herein may be
terminated and abandoned at any time prior to the Effective Date:
(a) by mutual consent of CORE, Purchaser, Transcend and Seller;
(b) by CORE if (i) any of the representations or warranties of Seller
or Transcend contained herein shall have been untrue or incorrect in any
material respect on the date hereof or (ii) Seller or Transcend shall be in
material breach of any of its covenants, agreements or obligations hereunder and
such breach shall continue uncured until the earlier of (x) the scheduled
Closing Date, or (y) the third day following the receipt by the breaching party
of notice thereof;
(c) by Transcend or Seller if (i) any of the representations or
warranties of CORE or Purchaser contained herein shall have been untrue or
incorrect in any material respect on the date hereof or (ii) CORE or Purchaser
shall be in material breach of any of its covenants, agreements or obligations
hereunder and such breach shall continue uncured until the earlier of (x) the
scheduled Closing Date, or (y) the third day following the receipt by the
breaching party of notice thereof;
(d) by either Transcend, Seller, Purchaser or CORE if, without fault
of such terminating party, the Closing has not become effective by April 1,
1998, or such other date, if any, as Seller and CORE shall agree upon in
writing;
42
<PAGE>
(e) by CORE if the conditions set forth in Article IX hereof have not
been satisfied on or prior to the Closing Date;
(f) by Transcend or any Seller if the conditions set forth in Article
VIII hereof have not been satisfied on or prior to the Closing Date.
SECTION 10.2 EFFECT OF TERMINATION OR ABANDONMENT
In the event of the termination and abandonment of this Agreement
pursuant to Section 10.1, written notice thereof shall forthwith be given to the
other parties and this Agreement shall become void and have no effect without
liability of any party to any other party except as set forth below, except the
provisions of Section 11.10 (Expenses); and Section 11.6 (Confidentiality; Press
Releases and Public Announcements), shall survive.
The parties hereto acknowledge that the Closing hereunder is subject
to further due diligence and contingencies. Accordingly, the parties agree that
no fee, penalty or other damages shall be due or payable for termination of this
Agreement, with or without cause, by any party hereto.
ARTICLE XI
GENERAL PROVISIONS
SECTION 11.1 CONFIDENTIALITY
CORE will use its reasonable best efforts to keep confidential any and
all information furnished to it by Seller or Transcend or its independent public
accountants in connection with the transactions contemplated by this Agreement,
and the business and financial review and investigation conducted by CORE,
except to the extent any such information may be generally available to the
public; provided, however, that (i) any disclosure of such information may be
made by CORE to the extent required by applicable law or regulation or judicial
or regulatory process, and (ii) such information may be used by CORE as evidence
in or in connection with any pending or threatened litigation relating to this
Agreement or any transaction contemplated hereby.
SECTION 11.2 CLOSING DOCUMENTS
The parties will make every good faith effort to reach agreement as to
the form of the documentation to be delivered in connection with the Closing
hereunder, except as provided in 9.18 concerning CORE and Purchaser's acceptance
and review of due diligence matters which remain in CORE's and Purchaser's sole
discretion.
43
<PAGE>
SECTION 11.3 NO THIRD PARTY BENEFICIARIES
This Agreement shall not confer any rights or remedies upon any person
or entity other than the parties hereto.
SECTION 11.4 WAIVERS; BEST KNOWLEDGE
Seller, Transcend, CORE or Purchaser may extend the time for or waive
the performance of any of the obligations of the other, waive any inaccuracies
in the representations or warranties of the other, or waive compliance by the
other with any of the covenants or conditions contained in this Agreement. Any
such extension or waiver shall be in writing and signed by a duly authorized
officer of the extending or waiving party.
SECTION 11.5 NOTICES
Except as otherwise provided herein, whenever it is provided in this
Agreement that any notice, demand, request, consent, approval, declaration or
other communication shall or may be given to or served upon any of the parties
by another, or whenever any of the parties desires to give or serve upon another
any communication with respect to this Agreement, each such notice, demand,
request, consent, approval, declaration or other communication shall be (a) in
writing and shall be deemed to be given (i) when delivered in person, (ii) on
the third business day after deposit in a regularly maintained receptacle of the
United States mail as registered or certified mail, return receipt requested,
postage prepaid, (iii) one business day after deposit with a recognized national
private courier service, or (iv) on the day on which the party to whom such
notice is addressed refuses delivery by mail or by private courier service, and
(b) addressed as follows:
if to CORE or
Purchaser to: CORE, INC.
18881 Von Karman Ave. - Suite 1750
Irvine, CA 92612
Attn: William E. Nixon, Executive Vice President
and Chief Financial Officer
Telephone: (714) 442-2100
Fax: (714) 442-2102
with a copy to: Rich, May, Bilodeau & Flaherty, P.C.
294 Washington Street
Boston, Massachusetts 02108
Attention: Stephen M. Kane, Esq.
Telephone: (617) 482-1360
Fax: (617) 556-3889
44
<PAGE>
if to Seller or
Transcend to:
Transcend Services, Inc.
Transcend Case Management, Inc.
3353 Peachtree Road, NE
Suite 1000
Atlanta, GA 30326
Attn: Doug Shamon, Executive Vice President and
Chief Financial Officer
Telephone: (404) 364-8000
Fax: (404) 364-8009
with a copy to: Smith, Gambrell & Russell LLP
Suite 3100 - Promenade II
1230 Peachtree Street
Atlanta, GA 30309
Attn: Richard Greenstein, Esq.
Telephone: (404) 815-3623
Fax: (404) 685-6923
or to such other address as may be designated in writing by either party from
time to time in accordance herewith.
To simplify notices and communications hereunder, Transcend and Seller
agree that notices or communications addressed, sent to or received by Transcend
or Seller shall be deemed to be addressed, sent or received by Transcend and
Seller.
SECTION 11.6 CONFIDENTIALITY; PRESS RELEASES AND PUBLIC ANNOUNCEMENTS
All parties hereto acknowledge that CORE and Transcend are publicly-
traded corporations and accordingly, disclosure of information and news
concerning CORE and Transcend must be effected in a systematic, controlled
manner. Accordingly, all parties hereto shall keep confidential and not disclose
to any person or entity (except for their respective tax, accounting and legal
advisors and any employee on a "need to know" basis and then only when the
confidentiality and non-disclosure obligations have been fully explained and
accepted by such persons) any information about this Agreement, the proposed
transaction or any related matter, provided, however, that (i) any disclosure of
such information may be made to the extent required by applicable law or
regulation or judicial or regulatory process, and (ii) such information may be
used as evidence in or in connection with any pending or threatened litigation
relating to this Agreement or any transaction contemplated hereby.
Without limiting the generality of the foregoing, no party hereto
shall issue any press release or make any public announcement relating to the
subject matter of this Agreement without the prior written approval of both CORE
and Transcend; provided, however, that CORE and Transcend may make any public
disclosure it believes in good faith is required by or prudent
45
<PAGE>
under applicable law or any listing or trading agreement concerning its
publicly-traded securities (in which case CORE and Transcend will consult the
other prior to making the disclosure).
SECTION 11.7 SUCCESSORS, ASSIGNS;
This Agreement may not be transferred, assigned or hypothecated by any
party hereto other than by operation of law or with the prior written consent of
the other parties. All covenants and agreements contained in this Agreement by
or on behalf of any of the parties hereto shall bind and inure to the benefit of
the respective successors, heirs, personal representatives and permitted assigns
of the parties hereto.
SECTION 11.8 COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of which
shall be deemed an original.
SECTION 11.9 GOVERNING LAW; AMENDMENTS
This Agreement shall be governed by and construed in accordance with the
laws of Delaware applicable to contracts made and to be performed therein and
cannot be changed, amended or terminated orally, but only in writing duly signed
on behalf of all parties hereto.
SECTION 11.10 EXPENSES
Except as provided otherwise herein, the parties shall bear their own
expenses with respect to the transactions contemplated by this Agreement.
SECTION 11.11 HEADINGS AND CAPTIONS
The section headings and captions contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
SECTION 11.12 RESTRICTIONS ON TRANSFERABILITY OF THE PURCHASE PRICE SHARES.
The Purchase Price Shares of CORE stock to be issued and delivered in
connection with the transactions contemplated hereby will not have been
registered under the Securities Act or under the securities laws of any state.
Accordingly, those Purchase Price Shares of CORE stock (together with any other
shares received pursuant to conversions, exchanges, stock splits, stock
dividends or other reclassification or changes thereof, or consolidations or
reorganizations of CORE) will not be transferable except pursuant to compliance
with or exemption from federal and state securities laws.
Each certificate representing Purchase Price Shares of CORE issued to
Transcend hereunder shall bear a legend in substantially the following form:
46
<PAGE>
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE ACT), OR UNDER THE SECURITIES LAWS
OF ANY STATE. SUCH SECURITIES MAY NOT BE SOLD OR OFFERED FOR SALE OR OTHERWISE
HYPOTHECATED OR DISTRIBUTED EXCEPT (A) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT FOR SUCH SECURITIES UNDER THE ACT, OR (B) PURSUANT TO A VALID
EXEMPTION FROM SUCH REGISTRATION UNDER THE ACT AND UNDER THE SECURITIES LAW OF
ANY STATE AND UPON RECEIPT BY CORE INC. OF AN OPINION OF COUNSEL SATISFACTORY IN
FORM AND SUBSTANCE TO IT THAT ANY SUCH SALE IS IN COMPLIANCE WITH, OR NOT
SUBJECT TO, THE ACT AND STATE SECURITIES LAWS."
SECTION 11.13 SEVERABILITY
Any term or provision of this Agreement that is invalid or unenforceable in
any situation in any jurisdiction shall not affect the validity of
enforceability of the remaining terms and provisions hereof or the validity or
enforceability of the offending term or provision in any other situation or in
any other jurisdiction.
SECTION 11.14 INCORPORATION OF SCHEDULES AND EXHIBITS
The Schedules and Exhibits identified in this Agreement are incorporated
herein by reference and made a part hereof.
SECTION 11.15 ENTIRE AGREEMENT
This Agreement (including the documents referred to herein) constitutes the
entire agreement among the parties and supersedes any prior understandings,
agreements, or representations by or among the parties, written or oral, to the
extent they have related in any way to the subject matter hereof. Each of the
parties hereto acknowledges that they have participated in the drafting of this
Agreement, and agrees that no provision of this Agreement shall be construed for
or against any party solely on the basis of its contribution, or lack of
contribution, to the drafting of such provision.
SECTION 11.16 ARBITRATION
Except for injunctive relief or other equitable remedies described in
Section 5.15, any dispute arising out of or related to this Agreement, or the
breach thereof, that the parties are unable to resolve shall be submitted to
arbitration in Orange County, California (or another location if mutually
unanimously agreed to by the parties) before a single arbitrator in accordance
with the Commercial Arbitration Rules of the American Arbitration Association.
The decision of the arbitrator shall be rendered in writing and shall state the
reasons on which it is based and shall bear the signature of the arbitrator.
The decision of the arbitrator shall be final and binding upon the parties and
judgment on the award may be entered in any court having jurisdiction thereof.
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In connection with such arbitration, the arbitrator may, but it is not
required, to award the prevailing party or parties all or a portion of the
costs, including reasonable legal and arbitration fees and other damages,
associated with efforts to enforce this Agreement or recover damages for
violation or breach of this Agreement.
[SIGNATURES ON FOLLOWING PAGE]
48
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
CORE, INC.
("CORE")
Attest:
By:_________________________ By:________________________ Stephen M.
Kane William E. Nixon
Assistant Clerk Executive Vice President and Chief
Financial Officer
Attest: TCM SERVICES, INC
("Purchaser")
By: _______________________ By: ______________________________
Stephen M. Kane William E. Nixon
Assistant Secretary Treasurer
Attest: TRANSCEND CASE MANAGEMENT, INC.
("Seller")
By:_________________________ By: _____________________________
Name:_______________________ Name: _________________________
Title: __________________ Title: _______________________
Attest: TRANSCEND SERVICES, INC.
("Transcend")
By:___________________ By: _____________________________
Name:________________ Name: _________________________
Title:_______________ Title: _______________________
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<PAGE>
LIST OF EXHIBITS
----------------
Exhibit Description
- ------- -----------
A Form of Bill of Sale
B Form of Contract Assignment
C Form of Legal Opinion of [Seller counsel]
D Form of Legal Opinion of Rich, May, Bilodeau & Flaherty, P.C.
E Registration Rights Agreement
F Trademark License Agreement
H-1 Certificate of Continuing Employees re: claims
H-2 Acknowledgment of CORE's Policies
I Form of Consent and Amendment of Employment Agreement for Certain
Employees
LIST OF SCHEDULES
-----------------
Schedule Description
- -------- -----------
1.1(x) Excluded Assets
1.2 Assumed Liabilities
2.3 Capitalization of Seller
2.4 Financial Statements
2.5 Temporary Encumbrances (Liens, mortgages, pledges)
2.6 Machinery, equipment, fixtures, etc.
2.7 Proprietary Rights
2.8 Real Property
2.9 Insurance
2.10 Contracts
2.12 Employees and Employee Plans
2.14 Certificates, Permits, Licenses
2.15 Liabilities other than listed on Balance Sheet
2.17 Litigation; Compliance with Laws
2.20 Service Warranties
2.21 Events Subsequent to Balance Sheet Date
2.23 Officers and Directors of Seller
2.25 Trade Names, Addresses of Seller and location of Subject Assets;
2.26 Transactions with Affiliated Parties
6.1 * Excluded Employees
9.13 * Persons to enter into Consent and Amendment of Employment Agreement
__________
*to be prepared by Purchaser
50
<PAGE>
EXHIBIT A
BILL OF SALE
------------
KNOW ALL MEN BY THESE PRESENTS, that Transcend Case Management, Inc., a
Georgia corporation ("Seller"), and Transcend Services, Inc., a Delaware
corporation ("Transcend") for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, do hereby sell, assign, bargain,
convey and transfer to TCM Services, Inc., a Delaware corporation ("Purchaser"),
its successors and assigns, pursuant to the Asset Purchase Agreement, dated
March __, 1998, among CORE, Inc., Purchaser, Seller and Transcend (the "Asset
Purchase Agreement"), all of the Subject Assets as such term is defined in the
Asset Purchase Agreement.
TO HAVE AND TO HOLD said assets, properties and business unto Purchaser,
its successors and assigns forever. Seller and Transcend do, for themselves and
for their successors and assigns, covenant and agree with Purchaser, its
successors and assigns, that they are the true and lawful owners of the Subject
Assets, and have lawful authority to sell and transfer the same, that the same
are free and clear of all liens, restrictions and encumbrances whatsoever, and
that they will, and their successors and assigns shall, warrant and defend the
same against lawful claims and demands of all persons whomsoever.
Seller and Transcend hereby irrevocably constitute and appoint Purchaser,
its successors and assigns, the true and lawful attorneys of Seller and
Transcend with full power of substitution, in the name of Seller or Transcend or
otherwise, and on behalf and for the benefit of Purchaser, its successors and
assigns to demand and receive from time to time any and all of the assets,
properties and business hereby sold and transferred or intended so to be; to
give receipts, releases and aquittances for or in respect of the same or any
part thereof; and from time to time to institute and prosecute in the name of
Seller or Transcend or otherwise any and all proceedings at law, in equity, or
otherwise, which Purchaser, its successors or assigns, may deem proper to
collect, to assert or enforce any claim, right, title, debt or account hereby
sold and transferred or intended so to be.
Seller and Transcend agree that they will hereafter execute and deliver any
further assignments, instruments of transfer, bills of sale, or conveyances
which may be necessary fully to vest in Purchaser title to the assets,
properties and business hereby conveyed.
This instrument is made, executed and delivered for and on the
consideration provided in
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<PAGE>
the Asset Purchase Agreement.
IN WITNESS WHEREOF, Seller has caused this instrument to be executed this
____ day of March, 1998.
TRANSCEND CASE MANAGEMENT, INC.
By:_____________________________
Title:___________________________
TRANSCEND SERVICES, INC.
By:_____________________________
Title:___________________________
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<PAGE>
ASSIGNMENT & ASSUMPTION OF CONTRACTS
------------------------------------
This Agreement is made as of March 17, 1998, by and between Transcend Case
--
Management, Inc., a Georgia corporation ("Seller"), Transcend Services, Inc., a
Delaware corporation ("Transcend") and TCM Services, Inc., a Delaware
corporation ("Purchaser").
WHEREAS, pursuant to an Asset Purchase Agreement, dated March 17, 1998, by
and among CORE, Inc., Purchaser, Seller and Transcend (the "Asset Purchase
Agreement"), Purchaser is acquiring certain assets from Seller and Transcend;
WHEREAS, Seller and/or Transcend has entered into the contracts and
agreements inuring to Seller's benefit or with respect to the Seller's business
as set forth on Exhibit A attached hereto (the "Assigned Contracts");
---------
WHEREAS, Seller and Transcend desire to assign, and Purchaser desires to
acquire, Seller's and Transcend's interests in the Assigned Contracts.
NOW, THEREFORE, for good and valuable consideration paid by Purchaser to
Seller, the receipt of which is hereby acknowledged, the parties agree as
follows:
1. Copies of Assigned Contracts. Seller and Transcend represent and
----------------------------
warrant to Purchaser that Seller and Transcend have delivered to Purchaser true,
complete and accurate copies of each Assigned Contract, including all amendments
thereto.
2. Assignment. Seller and Transcend hereby assign and transfer unto
----------
Purchaser, its successors and assigns, all Seller's and Transcend's rights,
title and interest in each Assigned Contract.
3. Assumption. Purchaser hereby assumes the respective rights, duties and
----------
obligations of Seller and Transcend under the Assigned Contracts and agrees to
perform and observe all the covenants and conditions of the Assigned Contracts
on Seller's and Transcend's part to be performed and observed, which shall
accrue from and after the date hereof.
4. Representations and Warranties. Seller and Transcend represent and
------------------------------
warrant to Purchaser that: (a) they are not in default under any provision of
any Assigned Contract, nor is any default or failure to perform alleged by any
party to any Assigned Contract, and no act or event has occurred which with
notice or lapse of time, or both, would constitute a default by Seller or
Transcend under any Assigned Contract, or permit modification, cancellation,
acceleration or termination of any Assigned Contract or result in the creation
of any security interest upon, or any person or entity obtaining any rights
under the Assigned Contracts; (b) each Assigned Contract is in full force and
effect and is valid and legally binding in accordance with its terms; (c) to the
best of their knowledge there are no unresolved disputes involving or with
respect to any Assigned Contract, and (d) no party to any such agreement has
advised Seller or Transcend that it intends either to terminate or refuse to
renew an Assigned Contract upon the expiration of the term thereof.
53
<PAGE>
5. Further Assurances. Seller and Transcend covenant and agree to
------------------
execute, to acknowledge and to deliver at their own expense such other
instruments and to take such other actions as may be reasonably requested by
Purchaser to effectuate this Agreement.
6. Headings and Captions. The section headings and captions contained in
---------------------
this Agreement are inserted for convenience only and shall not affect in any way
the meaning or interpretation of this Agreement.
7. Successors, Assigns. This Agreement may not be transferred,
-------------------
assigned or hypothecated by any party hereto other than by operation of law or
with the prior written consent of the other parties. All covenants and
agreements contained herein by or on behalf of any of the parties hereto shall
bind and inure to the benefit of the respective successors and permitted assigns
of the parties hereto.
8. Governing Law. This Agreement shall be construed under the same laws
-------------
and in the same manner as the Asset Purchase Agreement.
IN WITNESS WHEREOF, the parties hereto have signed this agreement under
seal as of the day and year first above written.
TRANSCEND CASE MANAGEMENT, INC.
(a Georgia corporation)
By:_____________________________
Title:___________________________
TRANSCEND SERVICES, INC.
(a Delaware corporation)
By:_____________________________
Title:___________________________
TCM SERVICES, INC.
(a Delaware corporation)
By:_____________________________
William E. Nixon
Vice President
Attachments
- -----------
Exhibit A - Assigned Contracts
54
<PAGE>
EXHIBIT C
TO
ASSET PURCHASE AGREEMENT
------------------------
FORM OF SELLER'S COUNSEL'S OPINION
1. Transcend Services, Inc. ("Transcend") is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Transcend Case Management, Inc. ("Seller") is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Georgia.
2. Each of Transcend and Seller has all requisite power and authority to
execute, deliver and perform the Asset Purchase Agreement (the "Agreement") and
all other documents to be executed and delivered by each of them pursuant to the
Agreement (the "Ancillary Documents"), and the execution and delivery by
Transcend and Seller of the Agreement and the Ancillary Documents, and the
performance by Transcend and Seller of their respective obligations thereunder,
have been duly and validly authorized by all requisite corporate action.
3. The Agreement and the Ancillary Documents have been duly executed and
delivered by each of Transcend and Seller, and constitute the legal, valid and
binding obligations of Transcend and Seller, enforceable against Transcend and
Seller in accordance with their respective terms.
4. Neither the execution and the delivery of the Agreement and the
Ancillary Documents, nor the consummation of the transactions contemplated
thereby, will (i) violate any provision of the respective charter or bylaws of
Transcend or Seller, or any constitution, statute or governmental regulation,
or, to the best of our knowledge any injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which either Transcend or Seller is subject, (ii) to the best of our
knowledge conflict with, result in a breach of, constitute a default under,
result in the acceleration of, create in any party the right to accelerate,
terminate, modify, or cancel, or require any notice under any agreement,
contract, lease, license, instrument, or other arrangement referred to in the
Agreement or any schedule to the Agreement to which Transcend and/or Seller is a
party or by which either Transcend or Seller is bound or to which any of their
assets is subject (or result in the imposition of any Security Interest upon any
of their assets).
5. Neither Transcend nor Seller is required to give any notice to, make
any filing with, or obtain any authorization, consent, or approval of any
government or governmental agency in order for the parties to the Agreement to
consummate the transactions contemplated thereby.
6. To the best of our knowledge, each of Transcend and Seller has
complied with all applicable laws (including rules, regulations, codes, plans,
injunctions, judgments, orders, decrees, rulings, and charges thereunder) of
federal, state, local, and foreign governments (and all agencies thereof), and
no action, suit, proceeding, hearing, investigation, charge, complaint,
claim, demand, or notice has been filed or commenced against any of them
alleging any failure so to comply.
55
<PAGE>
7. To the best of our knowledge, there is no pending or threatened suit,
action or litigation, or administrative, arbitration or other proceeding or
governmental inquiry or investigation, questioning the validity of the Agreement
or any of the Ancillary Documents, or any of the transactions contemplated
thereby.
8. To the best of our knowledge, there are no disputes, claims, actions,
suits or proceedings, arbitrations or investigations, either administrative or
judicial, pending or threatened against Transcend, the Seller or the Subject
Assets (as such term is defined in the Agreement) at law or in equity or
otherwise, before or by any court or governmental agency or body, domestic or
foreign, or before an arbitrator of any kind.
56
<PAGE>
EXHIBIT D
TO
ASSET PURCHASE AGREEMENT
------------------------
FORM OF CORE'S COUNSEL'S OPINION
1. CORE is a corporation duly organized, validly existing and in good
standing under the laws of the Commonwealth of Massachusetts. Purchaser is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware.
2. Each of CORE and Purchaser has all requisite power and authority to
execute, deliver and perform the Asset Purchase Agreement (the "Agreement") and
all other documents to be executed and delivered by CORE and/or Purchaser
pursuant to the Agreement (the "Ancillary Documents"), and the execution and
delivery by CORE and Purchaser of the Agreement and the Ancillary Documents, and
the performance by CORE and Purchaser of their respective obligations
thereunder, have been duly and validly authorized by all requisite corporate
action.
3. The Agreement and the Ancillary Documents have been duly executed and
delivered by CORE and Purchaser, and constitute the legal, valid and binding
obligations of CORE and Purchaser, enforceable against CORE and Purchaser in
accordance with their respective terms.
4. Neither the execution and the delivery of the Agreement and Ancillary
Documents, nor the consummation of the transactions contemplated thereby, will
violate any provision of the respective charter or by laws of CORE or Purchaser
or any constitution, statute or governmental regulation, or, to the best of our
knowledge any injunction, judgment, order, decree, ruling, charge, or other
restriction of any government, governmental agency, or court to which either
CORE or Purchaser is subject or any provision of their respective charters or
bylaws.
5. Neither CORE nor Purchaser is required to give any notice to, make any
filing with, or obtain any authorization, consent, or approval of any government
or governmental agency in order for the parties to the Agreement to consummate
the transactions contemplated thereby.
6. To the best of our knowledge, there is no litigation or governmental
or administrative proceeding or investigation pending or threatened against CORE
or Purchaser which would prevent, hinder or render inadvisable the consummation
of the transactions contemplated by the Agreement.
57
<PAGE>
RMB&F DRAFT
3/10/98 2:00 P.M
REGISTRATION RIGHTS AGREEMENT
-----------------------------
THIS AGREEMENT is made as of March___, 1998, between CORE, Inc., a
Massachusetts corporation (the "Company") and Transcend Services, Inc., a
Delaware corporation ("Transcend").
The Company and Transcend are among the parties to an Asset Purchase
Agreement dated March ___, 1998 (the "Purchase Agreement"), pursuant to which a
wholly-owned subsidiary of CORE shall purchase substantially all of the assets
of Transcend's wholly-owned subsidiary, Transcend Case Management, Inc. In
order to induce Transcend to enter into the Purchase Agreement, the Company has
agreed to provide the registration rights set forth in this Agreement. The
execution and delivery of this Agreement is a condition to the Closing under the
Purchase Agreement. Unless otherwise provided in this Agreement, capitalized
terms used herein shall have the meanings set forth in Section 7 hereof or in
the Purchase Agreement.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained in this Agreement, the parties hereto agree as follows:
1. Piggyback Registrations.
-----------------------
(a) Right to Piggyback. Whenever the Company proposes to register any of
------------------
its securities under the Securities Act of 1933 (the "Securities Act") and the
registration form to be used may be used for the registration of Registrable
Securities (a "Piggyback Registration"), the Company will give prompt written
notice to Transcend of its intention to effect such a registration and will
include in such registration all Registrable Securities with respect to which
the Company has received written requests from Transcend for inclusion therein
within 15 days after the receipt of the Company's notice.
(b) Piggyback Expenses. The Registration Expenses as defined in Section
------------------
4(a) of this Agreement shall be paid by the Company in all Piggyback
Registrations.
(c) Priority on Primary Registrations. If a Piggyback Registration is an
---------------------------------
underwritten primary registration on behalf of the Company, and the managing
underwriters advise the Company in writing that in their opinion the number of
securities requested to be included in such registration exceeds the number
which can be sold in such offering without adversely affecting the marketability
of the offering, the Company will include in such registration (i) first, the
securities the Company proposes to sell, (ii) second, the Registrable Securities
which Transcend requests to be included in such registration, and (iii) third,
other securities requested to be included in such registration.
(d) Priority on Secondary Registrations. If a Piggyback Registration is an
-----------------------------------
underwritten secondary registration on behalf of holders of the Company's
securities, and the managing underwriters advise the Company in writing that in
their opinion the number of securities requested to be included in such
registration exceeds the number which can be sold in such offering without
adversely affecting the marketability of the offering, the Company will include
58
<PAGE>
in such registration (i) first, the securities requested to be included therein
by the holders requesting such registration (ii) second, the Registrable
Securities requested by Transcend to be included in such registration, and (iii)
third, other securities requested to be included in such registration.
(e) Selection of Underwriters. If any Piggyback Registration is an
-------------------------
underwritten offering, the Company in its sole discretion shall select the
investment banker(s) and manager(s) for the offering.
2. Holdback Agreements.
-------------------
(a) Transcend agrees not to effect any public sale or distribution
(including sales pursuant to Rule 144 or Rule 144A) of equity securities of the
Company, or any securities convertible into or exchangeable or exercisable for
such securities, during the seven days prior to and the 180-day period beginning
on the effective date of any underwritten Piggyback Registration in which
Registrable Securities are included (except as part of such underwritten
registration), unless the underwriters managing the registered public offering
otherwise agree.
(b) The 180-day period referred to in Section 2(a) above may be changed
unilaterally by the Company at the request of its investment banker and/or the
manager of the offering, provided, however that Transcend shall not be subject
to a longer period than any other similarly situated Person.
3. Registration Procedures. Whenever Transcend has requested that any
-----------------------
Registrable Securities be registered pursuant to this Agreement, the Company
will use its best efforts to effect the registration and the sale of such
Registrable Securities in accordance with the intended method of disposition
thereof, and pursuant thereto the Company will as expeditiously as possible:
(a) prepare and file with the Securities and Exchange Commission a
registration statement with respect to such Registrable Securities and use its
reasonable best efforts to cause such registration statement to become effective
(provided that before filing a registration statement or prospectus or any
amendments or supplements thereto, the Company will furnish to the counsel
selected by Transcend such registration statement copies of all such documents
proposed to be filed, which documents will be subject to the reasonable review
of such counsel);
(b) prepare and file with the Securities and Exchange Commission such
amendments and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to keep such registration
statement effective for a period of not less than six months and comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement during such period in
accordance with the intended methods of disposition by the sellers thereof set
forth in such registration statement;
(c) furnish to Transcend as a seller of Registrable Securities such number
of copies of such registration statement, each amendment and supplement thereto,
the prospectus included in such registration statement (including each
preliminary prospectus) and such other documents as Transcend may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by Transcend;
(d) use its reasonable best efforts to register or qualify such Registrable
Securities under
59
<PAGE>
such other securities or blue sky laws of such jurisdictions as Transcend
reasonably requests and do any and all other acts and things which may be
reasonably necessary or advisable to enable Transcend to consummate the
disposition in such jurisdictions of the Registrable Securities owned by
Transcend (provided that the Company will not be required to (i) qualify
generally to do business in any jurisdiction where it would not otherwise be
required to qualify but for this subparagraph, (ii) subject itself to taxation
in any such jurisdiction, or (iii) consent to general service of process in any
such jurisdiction);
(e) notify Transcend as a seller of Registrable Securities at any time when
a prospectus relating thereto is required to be delivered under the Securities
Act, of the happening of any event as a result of which the prospectus included
in such registration statement contains an untrue statement of a material fact
or omits any fact necessary to make the statements therein not misleading, and,
at the request of Transcend as a seller of Registrable Securities, the Company
will prepare a supplement or amendment to such prospectus so that, as thereafter
delivered to the purchasers of such Registrable Securities, such prospectus will
not contain an untrue statement of a material fact or omit to state any fact
necessary to make the statements therein not misleading;
(f) cause all such Registrable Securities to be listed on each securities
exchange on which similar securities issued by the Company are then listed and,
if not so listed, to be listed on the NASD Automated Quotation System if so
qualified;
(g) provide an independent transfer agent and registrar for all such
Registrable Securities not later than the effective date of such registration
statement;
(h) enter into such customary agreements (including underwriting agreements
in customary form) and take all such other actions as Transcend, may reasonably
request in order to expedite or facilitate the disposition of such Registrable
Securities by Transcend;
(i) make available for inspection by Transcend as a seller of Registrable
Securities, any underwriter participating in any disposition pursuant to such
registration statement and any attorney, accountant or other agent retained by
Transcend or any underwriter, all financial and other records, pertinent
corporate documents and properties of the Company, and cause the Company's
officers, directors, employees and independent accountants to supply all
information reasonably requested by Transcend, and any such underwriter,
attorney, accountant or agent in connection with such registration statement;
and
(j) otherwise use its best efforts to comply with all applicable rules and
regulations of the Securities and Exchange Commission, and make available to its
security holders, as soon as reasonably practicable, an earnings statement
covering the period of at least twelve months beginning with the first day of
the Company's first full calendar quarter after the effective date of the
registration statement, which earnings statement shall satisfy the provisions of
Section 11(a) of the Securities Act and Rule 158 thereunder.
In connection with any Piggyback Registration, Transcend will expeditiously
supply the Company with all information and copies of all documents reasonably
necessary to effect such registration in compliance with the Securities Act and
the rules and regulations thereunder and shall otherwise cooperate with the
Company and its counsel in expediting the effectiveness of any such
registration.
60
<PAGE>
4. Registration Expenses.
---------------------
(a) All expenses incident to the Company's performance of or compliance
with this Agreement, including without limitation all registration and filing
fees, fees and expenses of compliance with securities or blue sky laws, printing
expenses, messenger and delivery expenses, and fees and disbursements of counsel
for the Company and all independent certified public accountants, underwriters
(excluding discounts and commissions and excluding legal fees and disbursements
of any counsel used by Transcend) and other Persons retained by the Company (all
such expenses being herein called "Registration Expenses"), will be borne as
provided in this Agreement, except that the Company will, in any event, pay its
internal expenses (including, without limitation, all salaries and expenses of
its officers and employees performing legal or accounting duties), the expense
of any annual audit or quarterly review, the expense of any liability insurance
and the expenses and fees for listing the securities to be registered on each
securities exchange on which similar securities issued by the Company are then
listed or on the NASD Automated Quotation System.
(b) To the extent Registration Expenses are not required to be paid by the
Company, Transcend will pay those Registration Expenses allocable to the
registration of its securities so included, and any Registration Expenses not so
allocable will be borne by all sellers of securities included in such
registration in proportion to the aggregate selling price of the securities to
be so registered.
5. Indemnification.
---------------
(a) The Company agrees to indemnify, to the extent permitted by law,
Transcend, its officers, directors, counsel and each Person who controls
Transcend (within the meaning of the Securities Act) against all losses, claims,
damages, liabilities and expenses resulting from any untrue or alleged untrue
statement of material fact contained in any registration statement, prospectus
or preliminary prospectus or any amendment thereof or supplement thereto or any
omission or alleged omission of a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as the
same are caused by or contained in any information furnished in writing to the
Company by Transcend expressly for use therein or by Transcend's failure to
deliver a copy of the registration statement or prospectus or any amendments or
supplements thereto after the Company has furnished Transcend with a sufficient
number of copies of the same. In connection with an underwritten offering, the
Company will indemnify such underwriters, their officers and directors and each
Person who controls such underwriters (within the meaning of the Securities Act)
to the same extent as provided above with respect to the indemnification of
Transcend; provided that such underwriters indemnify the Company to the same
extent as provided in subparagraph (b) below with respect to indemnification of
the Company by Transcend.
(b) In connection with any registration statement in which Transcend is
participating, Transcend will furnish to the Company in writing such information
and affidavits as the Company reasonably requests for use in connection with any
such registration statement or prospectus and, to the extent permitted by law,
will indemnify the Company, its directors, officers, counsel and each Person who
controls the Company (within the meaning of the Securities Act) against any
losses, claims, damages, liabilities and expenses resulting from any untrue or
alleged untrue statement of material fact contained in the registration
statement, prospectus or preliminary prospectus or any amendment thereof or
supplement thereto or any omission or alleged omission
61
<PAGE>
of a material fact required to be stated therein or necessary to make the
statements therein not misleading, but only to the extent that such untrue
statement or omission is contained in any information or affidavit so furnished
in writing by Transcend; provided that the obligation to indemnify will be
limited to the net amount of proceeds received by Transcend from the sale of
Registrable Securities pursuant to such registration statement.
(c) Any Person entitled to indemnification hereunder will (i) give prompt
written notice to the indemnifying party of any claim with respect to which it
seeks indemnification and (ii) unless in such indemnified party's reasonable
judgment a conflict of interest between such indemnified and indemnifying
parties may exist with respect to such claim, permit such indemnifying party to
assume the defense of such claim with counsel reasonably satisfactory to the
indemnified party. If such defense is assumed, the indemnifying party will not
be subject to any liability for any settlement made by the indemnified party
without its consent (but such consent will not be unreasonably withheld). An
indemnifying party who is not entitled to, or elects not to, assume the defense
of a claim will not be obligated to pay the fees and expenses of more than one
counsel for all parties indemnified by such indemnifying party with respect to
such claim, unless in the reasonable judgment of any indemnified party a
conflict of interest may exist between such indemnified party and any other of
such indemnified parties with respect to such claim.
(d) The indemnification provided for under this Agreement will remain in
full force and effect regardless of any investigation made by or on behalf of
the indemnified party or any officer, director or controlling Person of such
indemnified party and will survive the transfer of securities. The Company also
agrees to make such provisions, as are reasonably requested by any indemnified
party, for contribution to such party in the event the Company's indemnification
is unavailable for any reason.
6. Participation in Underwritten Registrations. No Person may participate
-------------------------------------------
in any registration hereunder which is underwritten unless such Person (a)
agrees to sell such Person's securities on the basis provided in any
underwriting arrangements approved by the Person or Persons entitled hereunder
to approve such arrangements and (b) completes and executes all questionnaires,
powers of attorney, indemnities, underwriting agreements and other documents
required under the terms of such underwriting arrangements.
7. Definitions.
-----------
"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, an unincorporated organization
and a governmental entity or any department, agency or political subdivision
thereof.
"Registrable Securities" means (i) any of the shares of the Company's
common stock which are Purchase Price Shares acquired by Transcend pursuant to
the Purchase Agreement, (ii) any Common Stock issued or issuable with respect to
the securities referred to in clause (i), and (iii) any Common Stock issued by
way of a stock dividend or stock split or in connection with a combination of
shares, recapitalization, merger, consolidation or other reorganization. As to
any particular Registrable Securities, such securities will cease to be
Registrable Securities upon transfer of such shares by Transcend to any other
party.
"Registration Expenses" means as defined in Section 4(a) hereto.
Unless otherwise stated, other capitalized terms contained herein have the
meanings set
62
<PAGE>
forth in the Purchase Agreement.
8. Term. This Agreement shall terminate upon the earliest of the
----
following events (i) two years from the effective date of this Agreement, (ii)
upon all of the Registrable Securities being registered and sold pursuant to an
effective registration statement, or (iii) upon the sale of all of Transcend's
Registrable Securities through any combination of methods including Rule 144 or
Rule 144A.
9. Miscellaneous.
-------------
(a) No Inconsistent Agreements. The Company will not hereafter enter into
--------------------------
any agreement with respect to its securities which is inconsistent with or
violates the rights granted to Transcend in this Agreement.
(b) Adjustments Affecting Registrable Securities. The Company will not take
--------------------------------------------
any action, or permit any change to occur, with respect to its securities which
would adversely affect the ability of Transcend to include such Registrable
Securities in a registration undertaken pursuant to this Agreement or which
would materially adversely affect the marketability of such Registrable
Securities in any such registration (including, without limitation, effecting a
stock split or a combination of shares).
(c) Remedies. Any Person having rights under any provision of this
--------
Agreement will be entitled to enforce such rights specifically to recover
damages caused by reason of any breach of any provision of this Agreement and to
exercise all other rights granted by law.
(d) Amendments and Waivers. Except as otherwise provided herein, the
----------------------
provisions of this Agreement may be amended or waived only upon the prior
written consent of the Company and Transcend.
(e) Successors and Assigns. All covenants and agreements in this Agreement
----------------------
by or on behalf of any of the parties hereto will bind and inure to the benefit
of the respective successors and assigns of the parties hereto whether so
expressed or not. Transcend shall not be permitted to assign its rights under
this Agreement to any party without the Company's prior written consent, which
the Company may withhold in its sole discretion.
(f) Severability. Whenever possible, each provision of this Agreement will
------------
be interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be prohibited by or invalid
under applicable law, such provision will be ineffective only to the extent of
such prohibition or invalidity, without invalidating the remainder of this
Agreement.
(g) Counterparts. This Agreement may be executed simultaneously in two or
------------
more counterparts, any one of which need not contain the signatures of more than
one party, but all such counterparts taken together will constitute one and the
same Agreement.
(h) Descriptive Headings. The descriptive headings of this Agreement are
--------------------
inserted for convenience only and do not constitute a part of this Agreement.
(i) Governing Law. The corporate law of Massachusetts will govern all
-------------
issues concerning
63
<PAGE>
the relative rights of the Company and its stockholders. All other questions
concerning the construction, validity and interpretation of this Agreement and
the exhibits and schedules hereto will be governed by the internal law, and not
the law of conflicts, of Massachusetts.
(j) Notices. All notices, demands or other communications to be given or
-------
delivered under or by reason of the provisions of this Agreement shall be in
writing and shall be deemed to have been given when delivered personally to the
recipient, sent to the recipient by reputable express courier service (charges
prepaid) or mailed to the recipient by certified or registered mail, return
receipt requested and postage prepaid. Such notices, demands and other
communications will be sent to each Transcend at the address indicated in the
Purchase Agreement, or to such other address or to the attention of such other
person as the recipient party has specified by prior written notice to the
sending party.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
CORE, INC.
By:___________________________________________
William Nixon, Chief Financial Officer
TRANSCEND SERVICES, INC.
By:___________________________________________
Its:__________________________________________
64
<PAGE>
EXHIBIT F
TRADENAME LICENSE AGREEMENT
THIS AGREEMENT made and entered into as of the ____ day of March, 1998 (the
"Effective Date") by and between Transcend Services, Inc., a Delaware
corporation ("Transcend") and Transcend Case Management, Inc., a Georgia
corporation ("Seller") (collectively, Transcend and Seller shall be referred to
as "Licensor"), and TCM Services, Inc., a Delaware corporation ("Purchaser" or
"Licensee").
WHEREAS, Seller is the owner of the tradename "Transcend Case Management"
(the "Tradename");
WHEREAS, pursuant to an Asset Purchase Agreement between Licensor, CORE,
Inc. a Massachusetts corporation ("CORE"), and Licensee dated March __, 1998
(the "Asset Purchase Agreement"), Licensor is transferring to Purchaser
substantially all of Seller's assets in connection with Seller's workers
compensation case management and bill audit business and related services and
businesses (the "Business");
WHEREAS, the Asset Purchase Agreement requires as additional consideration
for the Purchase Price (as such term is defined in the Asset Purchase
Agreement), that Licensor enter into this License Agreement with Licensee; and
WHEREAS, Licensee wishes to acquire and Licensor is willing to grant to
Licensee a license to use the Tradename in the advertising, promotion, and sale
of the goods and services of the Business, now existing or developed hereafter
(collectively, the "Services") on the terms and conditions hereinafter set
forth.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is mutually agreed as follows:
1. Grant of Licenses.
-----------------
(a) As of the date hereof, Licensor hereby grants to Licensee, and
Licensee accepts upon the terms and conditions hereinafter set forth, the
license to use the Tradename throughout the United States (the "Licensed
Territory"), in the advertising, promotion, and sale of the Services. No
license is herein granted under any name or trademark other than the Tradename
except as set forth below, nor for any products or services other than the
Services. Licensor may license the tradename "Transcend" to any other party;
provided, however, Licensor shall not be permitted to license the Tradename to
any third party.
65
<PAGE>
(b) Licensor hereby grants to Licensee the license to use all tradenames,
trademarks, service names and service marks set forth in all printed materials
which Licensee acquired from Licensor in connection with the Asset Purchase
Agreement (the "Pre-Printed Materials"); Licensee shall be permitted to use such
materials for the earlier of i) one year from the Effective Date or ii) until
the inventory of such Pre-Printed Materials is exhausted. The license granted
in this Section 1(b) for tradenames, trademarks, service names and service
marks, other than the Tradename (the "Pre-Printed Marks") is also limited to
Licensee's right to exhaust the existing supply of Pre-Printed Materials or to
use such materials for one year from the Effective Date of this Agreement,
whichever period is shorter. Licensee may not use the Pre-Printed Marks in
other materials developed by Licensee.
(c) Except for the Pre-Printed Materials discussed in Section 1(b) hereof,
this License Agreement does not permit Licensee to utilize Licensor's logo
_________________ (the "Logo").
(d) In connection with the use of the Tradename, Licensee agrees to use all
efforts to prevent the public, or any person or entity, from believing that
Licensee is affiliated with Licensor or any of Licensor's affiliates. Without
limiting the generality of the foregoing, Licensees agree that:
(i) Licensee will never use the Tradename in the form "Transcend
Case Management, Inc.";
(ii) Licensee shall, in its discretion, use the Tradename to indicate
that the Services are being sold by Purchaser (for example,
without limiting the generality of the foregoing, Purchaser's
stationary, letterhead, business cards and printed forms may use
the Tradename in the following manner "Transcend Case
Management, a Division of TCM Services, Inc. or CORE"); and
(iii) Other than with respect to the Pre-Printed Materials, if
requested by Licensor, in its sole discretion, Licensee agrees
to include the following disclaimer with the use of the
Tradename: "The Transcend Case Management" tradename is owned by
and used with the permission of Transcend Case Management, Inc.
Licensee is not affiliated with Transcend Case Management, Inc.
or its parent company, Transcend Services, Inc.
2. The Tradename.
-------------
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<PAGE>
Licensee acknowledges that the Tradename has not been registered by
Licensor with any governmental authority. Licensee agrees that Licensor is the
sole and exclusive owner of the Tradename and all goodwill of the Business
associated with the Tradename, in all territories, including, but not limited
to, the Licensed Territory, that Licensee's right to use the Tradename shall be
governed exclusively by this Agreement, and that all use of the Tradename by
Licensee shall at all times inure solely to the benefit of Licensor,
irrespective of the registered or unregistered status of the Tradename.
Licensee agrees and acknowledges that Licensor, as the sole and exclusive owner
of the Tradename, shall have the exclusive right to apply for registration of
the Tradename as a trademark of corporate name in any territory throughout the
world. At Licensor's request, Licensee agrees to cooperate with Licensor with
respect to the preparation, filing and prosecution of any applications for
registration. Licensee will not register or cause to be registered the
Tradename or any mark or name confusingly similar thereto with any federal,
state, municipal or other governmental authority in the Licensed Territory or
any other territory throughout the world, except with the prior written approval
of Licensor. Licensee will not adopt or use any part of the Tradename, or any
name confusingly similar thereto, as any part of its corporate name or any
tradename or trademark used by it, except with the prior written approval of
Licensor. Licensor acknowledges that pursuant to the Asset Purchase Agreement,
Licensor is transferring and assigning all rights it may have, if any, to the
trade name and trademark "TCM Services" (including all derivatives thereof) and,
Licensor hereby consents to Licensee's use of the corporate name TCM Services,
Inc.
3. Term.
----
Except with respect to the license to use the Pre-Printed Materials, which
license shall terminate in accordance with Section 1(b) of this Agreement, this
Agreement shall commence as of the Effective Date hereof, and shall continue for
a period of one year from the Effective Date, unless sooner terminated pursuant
to Section 10 of this Agreement (the "Term"). Notwithstanding the foregoing or
any other provision of this Agreement, during the Term and for a period of one
year after the termination of this Agreement, Licensee shall be permitted to use
the Tradename in the following manner "TCM Services, Inc., formerly known as
Transcend Case Management."
4. Maintenance and Infringement of Tradename.
-----------------------------------------
Licensee shall apprise Licensor as soon as practicable of any infringement
and any reproductions, counterfeit, copy or colorable imitation by others of the
Tradename which comes to the attention of the Licensee. Licensor shall, in its
own name and at its expense, prosecute and
67
<PAGE>
defend any action or proceeding which is reasonably necessary to protect the
Tradename for use in the advertising, promotion and sale of the Services in the
Licensed Territory. If Licensor should deem it reasonably necessary to protect
its rights in the Tradename, it may require Licensee, at Licensor's expense, to
join in any such action or proceeding.
5. Quality Control.
---------------
(a) Licensee acknowledges Licensor's right to approve the advertising,
promotion and all manner of other materials on which the Tradename is to be used
("Advertising Materials"). Prior to Licensee's use of Advertising Materials,
Licensee shall submit to Licensor, for Licensor's written approval, specimens of
the Advertising Materials Licensee intends to use with the Tradename, unless the
Tradename is referenced only in the following manner: "TCM Services, Inc.,
formerly known as Transcend Case Management" (copies of Advertising Materials
which use the Tradename exclusively in this manner will be sent to Licensor upon
being used). After Licensor has rendered its written approval, the then-
approved Advertising Materials shall be the standard for other materials
produced thereafter. Licensee's submittal shall be deemed approved by Licensor
within five (5) days of such submittal unless Licensor informs Licensee in
writing of its objections within such five (5) day period. Licensor has approved
Licensee's use of the Pre-Printed Materials, which approval cannot be revoked by
Licensor. Licensee shall inform Licensor of material changes to any Advertising
Materials, which require approval, at any time after Licensor's approval of
same; such changed materials shall be subject to approval by Licensor as
provided in this section.
(b) From time to time, at Licensor's request, Licensee shall submit to
Licensor, a reasonable quantity of the Advertising Materials.
(c) Advertising Materials produced by Licensee must comply with all
federal, state, and local labeling laws or regulations known to Licensee.
Licensee shall undertake to amend or cause to be amended to the reasonable
satisfaction of Licensor any Advertising Materials previously approved by
Licensor but subsequently found not to be in compliance with such laws or
regulations.
(d) In the event any Advertising Materials produced by Licensee fail to
comply with any applicable labeling law or regulation, Licensee undertakes to
hold Licensor harmless from any and all damages it may suffer as a result of
failure to comply with such laws and regulations, provided such damages are not
a result of instructions issued by Licensor.
6. Confidentiality of Proprietary Information.
------------------------------------------
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<PAGE>
Either party may utilize any information disclosed and submitted to it by
the other solely for the purpose of complying and evaluating compliance with
this Agreement. As a result of the disclosure and submission of such
information by one party to the other, the receiving party shall not acquire any
interest in or rights to said information, shall not disclose such information
to any third party in any manner without the prior written consent of the
disclosing party, and shall not use and shall not have any right to use any such
information in any manner or for any purpose other than complying and evaluating
compliance with this Agreement.
7. Hypothecation and Assignment.
----------------------------
Without the prior written consent of Licensor, Licensee shall not
hypothecate, pledge, encumber, grant a security interest in, assign, delegate,
sublicense or transfer, by operation of law or otherwise, any of its rights or
interests under this Agreement. Licensee may assign or transfer its rights
under this Agreement to any successor by reason of merger, consolidation, or
other form of corporate reorganization, or to a transferee of all or
substantially all of the assets of Purchaser. Any pledge, assignment or the
like by Licensee in violation of this Section 7 shall be void and of no effect
and constitute a breach of this Agreement, provided, however, the use of the
Tradename or the Pre-Printed Material by CORE or CORE's affiliated corporations,
including without limitation, Cost Review Services, Inc., a Texas corporation,
in a manner permitted by this Agreement, shall not be a violation or breach of
this Agreement.
8. Validity of the Tradename.
--------------------------
(a) Licensor represents and warrants to Licensee that it is the owner of
the Tradename and Pre-Printed Marks. Licensee hereby recognizes and
acknowledges Licensor's sole and absolute common law and statutory rights in and
ownership of the Tradename and Pre-Printed Marks. Licensee agrees that all use
of the Tradename by it shall at all times inure solely to the benefit of
Licensor.
(b) Licensee further agrees that it will not at any time dispute or
contest:
(i) the validity of the Tradename and/or any registrations thereof,
whether now existing or hereafter obtained;
(ii) the exclusive ownership by Licensor of the Tradename and/or of any
registrations thereof, whether now existing or hereafter obtained;
and
(iii) the Licensor's right to grant to the Licensee the rights and
privileges conferred by this Agreement.
9. Indemnification.
---------------
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<PAGE>
Licensee hereby agrees to indemnify and hold harmless and release and
forever discharge Licensor and its agents, officers, directors and employees
from any and all claims, demands, damages, judgment costs and expenses,
including attorneys' fees, arising out of any action which occurs after the
Effective Date, that may be claimed, asserted or rendered against Licensor, or
any or all of the above-mentioned persons or their successors, on account of any
actual or alleged injury, damage, death or other occurrence to any person or
property arising or resulting directly or indirectly out of the distribution and
sale of the Advertising Materials, or the use or consumption of Licensee's
services, sold or supplied by Licensee at any time.
10. Termination.
-----------
(a) This Agreement shall be subject to termination by Licensor upon written
notice to Licensee at any time following the happening of any one or more of the
following events:
(i) if Licensee shall at any time commit any breach of any agreement
herein contained, and shall fail to remedy such failure or
breach within sixty (60) days after written notice to Licensee
from Licensor of such failure or breach; or
(ii) if Licensee ceases to do business or votes to wind up or go out
of business.
(b) In the event Licensee files a petition in bankruptcy, or a trustee in
bankruptcy is appointed, or if a petition in bankruptcy is filed against it and
is not dismissed within ninety (90) days from the date of filing, or if Licensee
becomes insolvent, or makes an assignment for the benefit of its creditors, or
files a petition or otherwise seeks relief under or pursuant to any bankruptcy,
liquidation, insolvency or reorganization statute or proceedings, or if a
custodian, receiver or trustee is appointed for it or a substantial portion of
its business or assets, Licensor may, notwithstanding any other provisions of
this Agreement, at its sole election, terminate this Agreement by written notice
to Licensee, and thereupon this Agreement shall terminate.
(c) No assignment for the benefit of creditors, custodian, receiver,
trustee in bankruptcy, sheriff or any other officer of a court or official
charged with taking over custody of Licensee's assets or business, shall have
any rights to continue this Agreement or to exploit or in any way use the
Tradename if Licensor exercises its right of termination pursuant to subsection
10(b) above.
(d) In the event that a trustee in bankruptcy of Licensee (the "Trustee")
proposes to assign this Agreement to a third party, which proposed assignment
satisfies the requirements of
70
<PAGE>
applicable law, the Trustee shall notify Licensor of such proposed assignment in
writing, including the terms thereof. The giving of such notice shall be deemed
to constitute an offer to Licensor to have this Agreement assigned to it or its
designee. In the event Licensor wishes to accept such offer, Licensor shall
notify the Trustee in writing within fifteen (15) days after Licensor's receipt
of the Trustee's notice. The Trustee and Licensor shall thereupon determine the
consideration and such other terms of the assignment as shall be mutually
acceptable to both the Trustee and Licensor. If Licensor does not give notice to
the Trustee within the said fifteen (15) days, it shall be deemed to have
declined such offer and the Trustee may proceed with an assignment to an
unrelated third party, but only if such assignment is for consideration equal to
or greater than that contained in such offer to Licensor and upon all other
terms and conditions not more favorable to such assignee than those offered to
Licensor.
(e) Upon termination of this Agreement for any reason, Licensee shall
destroy all Pre-Printed Materials, and all other materials, which depict the
Tradename or any of the Pre-Printed Marks, and provide Licensor with a sworn
certificate of destruction in a form acceptable to Licensor and executed by an
officer of Licensee. These actions must be taken no later than twenty (20) days
following termination.
11. Counterparts.
------------
This License Agreement may be executed in any number of counterparts, each
of which shall be deemed an original and all of which taken together shall
constitute one and the same instrument.
12. Agency.
------
It is understood and agreed that the parties hereto are independent
contractors and are engaged in the operation of their own respective businesses
and none of the parties hereto shall be considered the agent of the other party
hereto. No party has the authority to enter into any contracts, including but
not limited to contracts for the purchase, or sale of services, or to assume any
obligations for any other party hereto, and nothing in this Agreement shall be
construed to establish a relationship of partners or joint venturers between or
among the parties hereto.
13. Waiver.
------
Any failure by a party to enforce at any time any of the terms and
conditions of this Agreement shall not be considered a waiver of that party's
right thereafter to enforce such terms and conditions. No provision of this
Agreement shall be deemed waived unless such waiver is in writing signed by the
party making such waiver. No waiver by a party of any provision of this
71
<PAGE>
Agreement, or of any breach or default, shall constitute a continuing waiver of
such provision or a waiver of any other provision of this Agreement, or of any
breach thereof or default thereunder.
14. Captions.
--------
The captions and section numbers appearing in this Agreement are inserted
only as a matter of convenience and may not be used in any way to define or
limit the scope of or to construe the meaning of such Sections nor in any way
otherwise to affect this Agreement.
15. Enforcement; Injunctive Relief.
------------------------------
In the event any provision of this Agreement shall for any reason be held
to be invalid, illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect any other term or provision
hereof, and this Agreement shall be interpreted and construed as if such
provision, to the extent the same shall have been held to be invalid, illegal or
unenforceable, had never been contained herein.
16. Entire Agreement.
----------------
This Agreement sets forth the entire agreement of the parties concerning
the subject matter hereof. There are no other agreements or understandings,
written or oral, between or among the parties. No modification or amendment of
this Agreement may be made except in writing signed by all of the parties
hereto.
17. Notices.
-------
All notices hereunder shall be sent as set forth in Section 11.5 of the
Asset Purchase Agreement.
18. Service Names and Marks.
-----------------------
The terms trademarks and tradenames as used in this License Agreement shall
be defined to include service marks and service names, respectively.
19. Successors and Assigns.
----------------------
This Agreement shall be binding upon Licensor and Licensee and shall be
binding on Licensor's and Licensee's successors and assigns.
20. Dispute Resolution.
------------------
Any and all disputes between the parties, arising out of this Agreement,
shall be resolved in the manner set forth in Section 11.16 of the Asset Purchase
Agreement.
21. Governing Law.
-------------
This Agreement shall be construed under the same laws and in the same
manner as the
72
<PAGE>
Asset Purchase Agreement
***
73
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the day and year first
above written.
TRANSCEND SERVICES, INC.
ATTEST: By:_________________________________
Title:______________________________
By:______________________________
TRANSCEND CASE MANAGEMENT, INC.
ATTEST: By:_________________________________
Title:______________________________
By:______________________________
TCM SERVICES, INC.
ATTEST: By:_________________________________
Title:______________________________
By:______________________________
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<PAGE>
EXHIBIT H-1
EMPLOYEE CERTIFICATE
--------------------
The undersigned, an employee of Transcend Case Management, Inc., a Georgia
corporation ("Seller") and/or Transcend Services, Inc., a Delaware corporation
("Transcend"), hereby represents and warrants to CORE, Inc., a Massachusetts
corporation, and TCM Services, Inc., a Delaware corporation ("Purchaser") in
connection with Purchaser's purchase of the assets of Seller, as follows:
1. The undersigned is an at will employee of Seller and/or Transcend and
there is no written or oral agreement between the undersigned and either Seller
or Transcend concerning the undersigned's continuing employment with Seller or
Transcend.
2. Except for salary during the present pay period, accrued vacation, and
fringe benefits described in the employee benefit booklets, there are no
benefits, bonuses or other payments due or potentially due to the undersigned
from Seller or Transcend.
3. The undersigned has no claims against Seller or Transcend or any of
their respective officers or affiliates concerning employment or any other
matter.
IN WITNESS WHEREOF, the undersigned has executed this Employee Certificate
on this ______ day of March, 1998.
___________________________________
Print name:________________________
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<PAGE>
EXHIBIT 3.1.3
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS OF
SERIES A CONVERTIBLE PREFERRED STOCK
OF
TRANSCEND SERVICES, INC.
PURSUANT TO SECTION 151 OF THE GENERAL
CORPORATION LAW OF THE STATE OF DELAWARE
Transcend Services, Inc., a corporation organized and existing under the
General Corporation Law of the State of Delaware (the "COorporation"), does
hereby certify that, pursuant to the authority contained in paragraph IV of its
Certificate of Incorporation and in accordance with Section 151 of the General
Corporation Law of the State of Delaware, the following resolutions creating a
series of Preferred Stock, $.01 par value, designated as Series A Convertible
Preferred Stock, were duly adopted by the Board of Directors of the Corporation
(the "Board") as of November 11, 1997:
RESOLVED, that the Board hereby creates from among the Corporation=s
21,000,000 authorized and previously undesignated shares of Preferred Stock,
$.01 par value, a series of such Preferred Stock to be known as the "Series A
Convertible Preferred Stock" and to comprise 212,800 shares, and hereby adopts
and prescribes therefore the designation, relative rights, preferences and
limitations, and other terms and conditions of such series as set forth in, and
governed by, Exhibit A attached to these minutes, with such Exhibit A being
hereby incorporated as part of this resolution; and
FURTHER RESOLVED, that the officers of the Corporation be and hereby are
authorized and directed to take any and all further action that may be necessary
or desirable to accomplish the above authorized action, including but not
limited to the execution and filing of all instruments or documents that may be
necessary to create, designate, issue or evidence shares of the Corporation=s
Series A Convertible Preferred Stock.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
executed in its name by the undersigned duly authorized officers of the
Corporation, this 11/th/ day of November, 1997.
By: /s/Larry G. Gerdes
--------------------
Larry G. Gerdes
Title: President and Chief Executive Officer
ATTEST:
By:___________________
Title:
<PAGE>
EXHIBIT A
SERIES A CONVERTIBLE PREFERRED STOCK
1. Designation; Rank. 212,800 shares of the preferred stock, $.01 par
-----------------
value, stated value $25.00 per share (the "Stated Value"), of the Corporation
are hereby constituted as a series of the preferred stock designated as "Series
A Convertible Preferred Stock" (the "Series A Preferred Stock") and having
relative rights and preferences to all other classes and series of the capital
stock of the Corporation as set forth herein. The Series A Preferred Stock
shall rank senior to all other classes or series of capital stock of the
Corporation except as permitted by Section 4(b) hereof.
2. Dividends.
---------
(a) The holders of record of issued and outstanding shares of the
Series A Preferred Stock (the "Record Holders") shall be entitled to receive,
when and as declared by the Board of Directors of the Corporation or a duly
authorized committee thereof (the "Board") out of funds legally available
therefor, a cumulative, quarterly cash dividend of nine percent (9%) of the
Stated Value, calculated at the rate of 9% per annum from the Issue Date, of the
shares of the Series A Preferred Stock held by each such Record Holder and no
more, payable on or about the 15th day of February, May, August, and November of
each year, commencing February 15, 1998 (the "Dividend Payment Dates"). Each
dividend declared by the Board shall be paid to the Record Holders as their
names appear on the stock books of the Corporation on the 1st of the month in
which the Dividend Payment Dates fall. Dividends in arrears for any quarter may
be declared and paid at any time, without reference to any regular Dividend
Payment Dates, to the Record Holders on the date fixed by the Board as their
names appear on the stock books of the Corporation; provided that such date
fixed by the Board shall not exceed 15 days preceding the payment date thereof.
Any dividend payment made on shares of this Series A Preferred Stock shall first
be credited against the earliest accrued but unpaid dividend due for this Series
A Preferred Stock. Whether or not declared for payment by the Board, dividends
at the rate prescribed above shall be deemed to accrue in arrears on each
outstanding share of this Series A Preferred Stock from month to month as of the
15th day of each month, commencing with the month next following the month in
which such share is issued.
(b) Failure by the Corporation to pay dividends on eight consecutive
Dividend Payment Dates shall constitute a default entitling the holders of the
Series A Preferred Stock to a readjustment of the Conversion Price, as defined
below, so that the holders of the Series A Preferred Stock may convert their
shares into two (2) times as many shares of the common stock, $.01 par value per
share (the "Common Stock"), of the Corporation as the Conversion Price in effect
prior to the default would allow.
(c) During any fiscal quarter of the Corporation, no dividend shall be
paid upon, or declared and set apart for, any share of this Series A Preferred
Stock or for any share of any other series of the Preferred Stock ranking pari
----
passu with shares of this Series A Preferred Stock as to dividends, unless
- -----
during such fiscal quarter a like proportionate dividend, ratably in proportion
to the respective dividends applicable thereto, shall be paid upon, or be
declared and set apart for, all shares of this Series A Preferred Stock as to
which dividends shall have accrued. Record Holders of shares of this Series A
Preferred Stock shall not be entitled to any dividend, whether payable in cash,
securities or other property, in excess of the full cumulative dividends on
shares of this Series A Preferred Stock.
(d) So long as any Series A Preferred Stock is outstanding, no
dividend (other than a dividend payable in Common Stock or any other stock of
the Corporation ranking junior to this Series A Preferred Stock as to dividends
and upon liquidation, and other than as provided in paragraph (c) of this
Section 2) shall be declared or paid or set aside for payment, nor shall any
other distribution be declared or made, upon the Common Stock or upon any other
stock of the Corporation ranking junior to or pari passu with this Series A
---- -----
Preferred Stock as to dividends or upon liquidation, nor shall any of the Common
Stock or any other stock of the Corporation ranking junior to or pari passu with
---- -----
this Series A Preferred Stock as to dividends or upon liquidation be redeemed,
repurchased or otherwise acquired for any consideration (or any monies paid to
or made available for a sinking fund for the redemption of any shares of any
such stock) by the Corporation or any subsidiary thereof (except by conversion
into or exchange for shares of Common Stock or of any other stock of the
<PAGE>
Corporation ranking junior to this Series A Preferred Stock as to dividends and
upon liquidation) unless, in each case, the full cumulative dividends on all
outstanding shares of this Series A Preferred Stock for all dividends in arrears
shall have been paid or declared and set apart for payment.
(e) Subject to the foregoing provisions, dividends, whether payable in
cash, stock or otherwise as to the Board may determine, may be declared and paid
from time to time on Common Stock and on any other class or series of stock of
the Corporation, out of funds of the Corporation legally available for the
payment of dividends, and this Series A Preferred Stock shall not be entitled to
participate in any such dividends.
3. Preference on Liquidation.
-------------------------
(a) Liquidation Preference for Series A Preferred Stock. In the event
---------------------------------------------------
that the Corporation shall commence a voluntary case under the federal
bankruptcy laws or any other applicable federal or state bankruptcy, insolvency
or similar law, or consent to the entry of an order for relief in an involuntary
case under such law or to the appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or other similar official) of the Corporation
or of any substantial part of its property, or make an assignment for the
benefit of its creditors, or admit in writing its inability to pay its debts
generally as they become due, or if a decree or order for relief in respect of
the Corporation shall be entered by a court having jurisdiction in the premises
in an involuntary case under the federal bankruptcy laws or any other applicable
federal or state bankruptcy, insolvency or similar law, or appointing a
receiver, liquidator, assignee, custodian, trustee, sequestrator (or other
similar official) of the Corporation or of any substantial part of its property,
or ordering the winding up or liquidation of its affairs, and on account of any
such event the Corporation shall liquidate, dissolve or wind up, or if the
Corporation shall otherwise liquidate, dissolve or wind up, no distribution of
the assets of the Corporation shall be made to the holders of shares of Common
Stock or other Junior Securities (and no monies shall be set apart for such
purpose) unless (i) prior thereto, the holders of shares of Series A Preferred
Stock shall have received from the assets of the Corporation an amount per share
equal to the sum of $25.00 (the "Series A Liquidation Preference").
(b) Pro Rata Payments. If, upon any such liquidation, dissolution or
-----------------
other winding up of the affairs of the Corporation, the assets of the
Corporation shall be insufficient to permit the payment in full of the Series A
Liquidation Preference for each share of Series A Preferred Stock then
outstanding and the full liquidating payments on all Parity Securities, then the
assets of the Corporation remaining after the distribution to holders of any
Senior Securities of the full amounts to which they may be entitled shall be
ratably distributed among the holders of Series A Preferred Stock and of any
Parity Securities in proportion to the full amounts to which they would
otherwise be respectively entitled if all amounts thereon were paid in full.
(c) Sale not a Liquidation. Neither the voluntary sale, conveyance,
----------------------
exchange or transfer (for cash, shares of stock, securities or other
consideration) of all or substantially all the property or assets of the
Corporation nor the consolidation, merger or other business combination of the
Corporation with or into one or more corporations shall be deemed to be a
liquidation, dissolution or winding up, voluntary or involuntary, of the
Corporation.
(d) Notice of Liquidation. Written notice of any liquidation,
---------------------
dissolution or winding up of the Corporation, stating the payment date or dates
when and the place or places where amounts distributable in such circumstances
shall be payable, shall be given by first class mail, postage prepaid, not less
than thirty (30) days prior to any payment date specified therein, to the
holders of record of the Series A Preferred Stock at their respective addresses
as shall appear on the records of the Corporation.
4. Voting.
------
(a) General Rights. In addition to any voting rights provided in the
--------------
Certificate of Incorporation or By-laws, the Series A Preferred Stock shall vote
together with the Common Stock as a single class on all actions to be voted on
by the stockholders of the Corporation. Each share of Series A Preferred
-3-
<PAGE>
Stock shall entitle the holder thereof to such number of votes per share on each
such action as shall equal the number of shares of Common Stock (rounded down to
the nearest whole share of Common Stock) into which each share of Series A
Preferred Stock is then convertible. The holders of Series A Preferred Stock
shall be entitled to notice of any stockholders= meeting in accordance with the
By-Laws of the Corporation.
(b) Special Voting Rights on Certain Corporate Actions. The
--------------------------------------------------
Corporation shall not, without the prior consent (in addition to any other vote
or consent required by law, contract or otherwise) of the holders of seventy-
five percent (75%) of the outstanding shares of Series A Preferred Stock, voting
as a class in person or by proxy in writing or at a special meeting called for
the purpose: (i) create or authorize any additional stock or any class or series
unless the same ranks junior to the Preferred Stock as to dividends, as to
redemptions and as to the distribution of assets on dissolution, liquidation or
winding up, whether voluntary or involuntary, or create or authorize any
obligation or security convertible into shares of stock of any class or series
unless the same ranks junior to the Series A Preferred Stock as to dividends, as
to redemptions and as to the distribution of assets on dissolution, liquidation
or winding up, whether voluntary or involuntary, whether any such creation or
authorization shall be by means of amendment of the Certificate of
Incorporation, this Certificate of Designations, merger, consolidation or
otherwise; or (ii) amend, alter or repeal the Certificate of Incorporation, this
Certificate of Designations or Bylaws, or file any directors= resolutions
pursuant to the General Corporation Law of the State of Delaware, containing, in
any such case, any provision which in any manner adversely affects the
respective powers, designations, preferences or rights, or the qualifications,
limitations or restrictions thereof, of the Series A Preferred Stock, (iii)
agree to, or permit any subsidiary to agree to, any provision in any agreement
that would impose any restrictions on the Corporation=s right to make any
redemption of or convert any of the Series A Preferred Shares or otherwise
prohibit the Corporation from honoring the exercise of any rights the holders of
the Series A Preferred Shares now have or may hereafter have, or (iv) engage in
any merger, share exchange, consolidation or reorganization which would result
in the holders of Common Stock of the Corporation immediately prior to such
transaction owning less than fifty percent (50%) of the Common Stock of the
Corporation, or such surviving entity, immediately after such transaction;
provided, however, with respect to this subsection 4(b)(iv), in the event that
such consent is not obtained, the Company may, at its option, redeem all or a
portion of the then issued and outstanding Series A Preferred Stock at the
Redemption Price and upon the terms set forth, and then in effect, in Section
6(a)(iii) hereof.
5. Conversion. The holders of Series A Preferred Stock shall have the
----------
right to convert all or a portion of such shares into fully paid and
nonassessable shares of Common Stock or any capital stock or other securities
into which such Common Stock shall have been changed or any capital stock or
other securities resulting from a reclassification thereof as follows:
(a) Optional Conversion. Subject to and upon compliance with the
-------------------
provisions of this Section 5, a holder of shares of Series A Preferred Stock
shall have the right without payment of any additional consideration, at the
option of such holder, at any time or from time to time, to convert each of such
shares into the number of fully paid and nonassessable shares of Common Stock
(calculated as to each conversion to the nearest 1/100th of a share of Common
Stock) obtained by dividing $25.00 by the Conversion Price then in effect and by
surrender of such shares, such surrender to be made in the manner provided in
paragraph (b) of this Section 5. The Common Stock issuable upon conversion of
the shares of Series A Preferred Stock, when such Common Stock shall be issued
in accordance with the terms hereof, are hereby declared to be and shall be duly
authorized, validly issued, fully paid and nonassessable Common Stock held by
the holders thereof.
(b) Mechanics of Conversion. Each holder of Series A Preferred Stock
-----------------------
that desires to convert the same into shares of Common Stock shall surrender the
certificate or certificates therefor, duly endorsed, at the principal office of
the Corporation or of any transfer agent for the Series A Preferred Stock or
Common Stock, accompanied by written notice to the Corporation setting forth the
name or names in which such holder wishes the certificate or certificates for
shares of Common Stock to be issued if such name or names shall be different
than that of such holder. In case such notice shall specify a name or names
other than that of such holder, such notice shall be accompanied by payment of
all transfer taxes payable upon the issuance and delivery of shares of Common
Stock in such name or names. Thereupon, the Corporation shall issue and deliver
at such
-4-
<PAGE>
office on the fifth (5th) succeeding Business Day (unless such conversion is in
connection with an underwritten public offering of Common Stock, in which event
concurrently with such conversion) to such holder or on such holder's written
order, (i) a certificate or certificates for the number of validly issued, fully
paid and nonassessable full shares of Common Stock to which such holder is
entitled and (ii) if less than the full number of shares of Series A Preferred
Stock evidenced by the surrendered certificate or certificates are being
converted, a new certificate or certificates, of like tenor, for the number of
shares evidenced by such surrendered certificate or certificates less the number
of shares converted.
Each conversion shall be deemed to have been effected immediately
prior to the close of business on the date of such surrender of the shares to be
converted (except that if such conversion is in connection with an underwritten
public offering of Common Stock, then such conversion shall be deemed to have
been effected upon such surrender) so that the rights of the holder thereof as
to the shares being converted shall cease at such time except for the right to
receive shares of Common Stock, and the person entitled to receive the shares of
Common Stock issuable upon such conversion shall be treated for all purposes as
the record holder of such shares of Common Stock at such time.
(c) Adjustment of the Conversion Price. The Conversion Price shall be
----------------------------------
adjusted from time to time as follows:
(i) Adjustment for Stock Splits and Combinations. If the
--------------------------------------------
Corporation at any time or from time to time after the Issue Date
effects a subdivision of the outstanding Common Stock or combines the
outstanding shares of Common Stock, then, in each such case, the
Conversion Price in effect immediately prior to such event shall be
adjusted so that each holder of shares of Series A Preferred Stock
shall have the right to convert its shares of Series A Preferred Stock
into the number of shares of Common Stock which it would have owned
after the event had such shares of Series A Preferred Stock been
converted immediately before the happening of such event. Any
adjustment under this Section 5(c)(i) shall become effective as of the
date and time the subdivision or combination becomes effective.
(ii) Reorganization, Reclassification, Merger or
-------------------------------------------
Consolidation. If the Corporation shall at any time reorganize or
-------------
reclassify the outstanding shares of Common Stock (other than a change
in par value, or from no par value to par value, or from par value to
no par value, or as a result of a subdivision or combination) or
consolidate with or merge into another corporation (where the
Corporation is not the continuing corporation after such merger or
consolidation), the holders of Series A Preferred Stock shall
thereafter be entitled to receive upon conversion of the Series A
Preferred Stock in whole or in part, the same kind and number of
shares of stock and other securities, cash or other property (and upon
the same terms and with the same rights) as would have been
distributed to a holder upon such reorganization, reclassification,
consolidation or merger had such holder converted its Series A
Preferred Stock immediately prior to such reorganization,
reclassification, consolidation or merger (subject to subsequent
adjustments under Section 5(c) hereof). The Conversion Price upon such
conversion shall be the Conversion Price that would otherwise be in
effect pursuant to the terms hereof. Notwithstanding anything herein
to the contrary, the Corporation will not effect any such
reorganization, reclassification, merger or consolidation unless prior
to the consummation thereof, the corporation who may be required to
deliver any stock, securities or other assets upon the conversion of
the Series A Preferred Stock shall agree by an instrument in writing
to deliver such stock, cash, securities or other assets to the holders
of the Series A Preferred Stock. A sale, transfer or lease of all or
substantially all of the assets of the Corporation to another person
shall be deemed a reorganization, reclassification, consolidation or
merger for the foregoing purposes.
(iii) Issuance of Common Stock at a Price Below Conversion
----------------------------------------------------
Price. In case the Corporation at any time or from time to time shall
------
issue after the Issue Date shares of its
-5-
<PAGE>
Common Stock (or securities convertible into its Common Stock) at a
price per share (or having a conversion price per share) less than the
Conversion Price (as defined in Section 9 below) per share of Common
Stock, and in such case, the number of shares of Common Stock into
which each share of the Series A Preferred Stock is convertible shall
be adjusted so that the holder of each share thereof shall be entitled
to receive, upon the conversion thereof, the number of shares of
Common Stock determined by multiplying (a) the number of shares of
Common Stock into which such share was convertible immediately prior
to such event by (b) a fraction, the numerator of which shall be the
sum of (I) the number of shares of Common Stock outstanding
immediately prior to such event plus (II) the number of additional
shares of Common Stock issued, and the denominator of which shall be
the sum of (III) the number of shares of Common Stock outstanding
immediately prior to such event plus (IV) the number of shares of
Common Stock which the aggregate consideration receivable by the
Corporation for the total number of shares of Common Stock so issued
would purchase at such Conversion Price on the date of such issuance.
The adjustment contemplated by this section shall not be made for the
first 250,000 shares of Common Stock issued upon exercise of stock
options granted to employees or non-employee directors pursuant to
plans in existence on the Issue Date provided, however, that the
consideration received by the Corporation upon issuance is at least
$2.00 per share.
(iv) Other Provisions Applicable to Adjustments under this
-----------------------------------------------------
Section. The following provisions shall be applicable to the making
-------
of adjustments of the shares of Common Stock into which the Series A
Preferred Stock is convertible and the Conversion Price at which the
Series A Preferred Stock is convertible provided for in this Section
5(c):
(A) When Adjustments to Be Made. The adjustments
---------------------------
required by this Section 5(c) shall be made whenever and as
often as any event requiring an adjustment shall occur,
except that any adjustment of the Conversion Price that
would otherwise be required may be postponed (except in the
case of a subdivision or combination of shares of the Common
Stock, as provided for in Section 5(c)(i)) up to, but not
beyond the date of conversion if such adjustment either by
itself or with other adjustments not previously made amount
to a change in the Conversion Price is less than $.05. Any
adjustment representing a change of less than such minimum
amount (except as aforesaid) which is postponed shall be
carried forward and made as soon as such adjustment,
together with other adjustments required by this Section
5(c) and not previously made, would result in a minimum
adjustment or on the date of conversion. For the purpose of
any adjustment, any event shall be deemed to have occurred
at the close of business on the date of its occurrence.
(B) Fractional Interests. In computing adjustments
--------------------
under this Section 5(c), fractional interests in the Common
Stock shall be taken into account to the nearest 1/10th of a
share.
(C) Challenge to Good Faith Determination. Whenever
-------------------------------------
the Board shall be required to make a determination in good
faith of the fair value of any item under this Section 5(c),
such determination may be challenged in good faith by a
holder of Series A Preferred Stock and any dispute shall be
resolved by an investment banking firm of recognized
national standing selected by the Corporation and acceptable
to such holder. The fees of such investment banker shall be
borne by such holder if the Corporation=s calculation is
determined to be correct and otherwise by the Corporation.
(d) No Fractional Share Adjustments. No fractional shares shall be
-------------------------------
issued upon conversion of the Series A Preferred Stock. If more than one share
of the Series A Preferred Stock is to be
-6-
<PAGE>
converted at one time by the same stockholder, the number of full shares
issuable upon such conversion shall be computed on the basis of the aggregate
amount of the shares to be converted. Instead of any fractional shares of Common
Stock which would otherwise be issuable upon conversion of any shares of Series
A Preferred Stock the Corporation will pay a cash adjustment in respect of such
fractional interest in an amount equal to the same fraction of the Market Price
per share of Common Stock at the close of business on the day of conversion
which such fractional share of Series A Preferred Stock would be convertible
into on such date.
(e) Shares to be Reserved. The Corporation shall at all times reserve
---------------------
and keep available, out of its authorized and unissued stock, solely for the
purpose of effecting the conversion of the Series A Preferred Stock, such number
of shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all of the Series A Preferred Stock from time to time outstanding
including all those required under subsection 2(b). The Corporation shall from
time to time, in accordance with the laws of the State of Delaware, increase the
authorized number of shares of Common Stock if at any time the number of shares
of authorized but unissued Common Stock shall be insufficient to permit the
conversion in full of the Series A Preferred Stock.
(f) Taxes and Charges. The Corporation will pay any and all issue or
-----------------
other taxes that may be payable in respect of any issuance or delivery of shares
of Common Stock on conversion of the Series A Preferred Stock. The Corporation
shall not, however, be required to pay any tax which may be payable in respect
of any transfer involved in the issuance or delivery of Common Stock in a name
other than that of the Series A Preferred Stock, and no such issuance or
delivery shall be made unless and until the Person requesting such issuance has
paid to the Corporation the amount of such tax or has established, to the
satisfaction of the Corporation, that such tax has been paid.
(g) Accrued Dividends. Upon conversion of any shares of the Series A
-----------------
Preferred Stock, the holder thereof shall be entitled to receive any accrued but
unpaid dividends in respect of the shares of the Series A Preferred Stock so
converted to the date of such conversion in the form of cash.
(h) Closing of Books. The Corporation will at no time close its
----------------
transfer books against the transfer of any shares of Series A Preferred Stock or
of any shares of Common Stock issued or issuable upon the conversion of any
shares of Series A Preferred Stock in any manner which interferes with the
timely conversion of such shares of Series A Preferred Stock.
6. Redemption.
----------
(a) Optional Redemption. The Series A Preferred Stock will be
-------------------
redeemable, at the Corporations option, as follows:
(i) Provided that the Common Stock has traded at a Market Price
of greater than $10.50 per share for the 20 consecutive Trading Days
immediately preceding the Redemption Date, at any time on or after
November 15, 1998, upon not less than 60 days' notice mailed to each
holder of Series A Preferred Stock to be redeemed at its address
appearing in the Security Register, during which time the holder shall
maintain the ability to convert its Series A Preferred Stock into
shares of Common Stock at the then current Conversion Price, at the
following redemption prices (the "Redemption Price") (expressed as
percentages of the Stated Value), if redeemed during the 12-month
period beginning November 15 of the years indicated below:
REDEMPTION
YEAR PRICE
---- -----
1998 109%
1999 106%
2000 103%
2001 and thereafter 100%
-7-
<PAGE>
in each case together with any and all accrued but unpaid dividends
thereon as of the Redemption Date as defined below.
(ii) At any time on or after November 15, 1998, the Corporation
may, at its option, use the net proceeds of one or more Public Equity
Offerings to redeem all or a portion of the then issued and
outstanding Series A Preferred Stock at the Redemption Price set forth
above then in effect for the Series A Preferred Stock; provided that,
the holders of the Series A Preferred Stock shall maintain the ability
to convert their shares at the Conversion Price then in effect. In
order to effect the foregoing redemption, the Corporation must mail a
notice of redemption no later than 60 days after the closing of the
related Public Equity Offering and must consummate such redemption
within 90 days of the closing of the related Public Equity Offering.
(iii) If, at any time on or after November 15, 1998, the
holders of the outstanding shares of Series A Preferred Stock do not
consent to a transaction requiring their consent as set forth in
Section 4(b)(iv) relating to certain mergers, share exchanges,
consolidations, or reorganizations, the Company may, at its option,
redeem all or a portion of the then issued and outstanding Series A
Preferred Stock at the Redemption Price set forth in paragraph (i)
above then in effect for the Series A Preferred Stock; provided,
however, the holders of the Series A Preferred Stock shall maintain
the ability to convert their shares at the Conversion Price then in
effect. In order to effect the foregoing redemption, the Corporation
must mail a notice of redemption to the holders of Series A Preferred
Stock not less than 30 days prior to the effective date of the
transaction.
(iv) If less than all of the outstanding shares of this Series
are to be redeemed pursuant to this Section 6, the shares to be
redeemed shall be selected by the Corporation or from outstanding
shares of this Series not previously called for redemption, pro rata
by lot, or by any other method determined by the Corporation in its
sole discretion to be equitable.
(b) Procedures for Redemption. In the event the Corporation shall
-------------------------
desire to redeem shares of Series A Preferred Stock pursuant to Section 6(a),
the Corporation shall give written notice of such redemption by first class
mail, postage prepaid, mailed not less than sixty (60) days prior to the
Redemption Date, to each holder of record of the shares to be redeemed, at such
holder's address as the same appears on the stock records of the Corporation.
Each such notice shall state: (i) the redemption date; (ii) the number of shares
of Series A Preferred Stock to be redeemed; (iii) the Redemption Price; (iv) the
place or places where certificates for such shares are to be surrendered for
payment of the Redemption Price; and (v) that payment will be made upon
presentation and surrender of such Series A Preferred Stock. Notice having
been mailed as aforesaid, from and after the Redemption Date, unless the
Corporation shall be in default in the payment of the Redemption Price, (A)
shares of Series A Preferred Stock shall be deemed no longer outstanding, and
(B) all rights of the holders thereof as stockholders of the Corporation (except
the right to receive from the Corporation any moneys payable upon redemption
without interest thereon) shall cease.
Upon surrender in accordance with such notice of the certificates for
any such shares so redeemed (properly endorsed or assigned for transfer, if the
Board of Directors shall so require and the notice shall so state), such shares
shall be redeemed by the Corporation at the applicable Redemption Price.
7. Shares to be Retired. Any share of Series A Preferred Stock
--------------------
converted, redeemed or otherwise acquired by the Corporation shall be retired
and canceled and shall upon cancellation be restored to the status of
authorized but unissued shares of preferred stock, subject to reissuance by the
Board as shares of preferred stock of one or more other series but not as shares
of Series A Preferred Stock.
-8-
<PAGE>
8. Restrictions on Transfer. Prior to conversion as set forth in Section
------------------------
5, the Series A Preferred Stock shall not be transferrable without the prior
written consent of the Company, which consent shall not be unreasonably
withheld.
9. Definitions. As used herein, the following terms shall have the
-----------
respective meanings set forth below:
"Business Day" means any day that is not a Saturday, a Sunday or a day
------------
on which banks are required or permitted to be closed in the State of
Georgia.
"Common Stock" means the Corporation's Common Stock, no par value per
------------
share, and any stock into which such Common Stock may hereafter be changed
or for which such Common Stock may be exchanged after giving effect to the
terms of such change or exchange (by way of reorganization,
recapitalization, merger, consolidation or otherwise).
"Conversion Price" means the Conversion Price per share of Common
----------------
Stock into which the Series A Preferred Stock is convertible, as such
Conversion Price may be adjusted pursuant to Section 5 hereof. The initial
Conversion Price shall be $3.375.
"Issue Date" means, as to any share of Series A Preferred Stock, the
----------
date of original issuance thereof by the Corporation.
"Junior Securities" means the Common Stock and any other class of
-----------------
capital stock or series of preferred stock hereafter created by the
Corporation which does not expressly provide that it ranks senior to or
pari passu with the Series A Preferred Stock as to dividends, other
---- -----
distributions, liquidation preference or otherwise.
"Market Price" means, as to any security on the date of determination
------------
thereof, the average of the closing prices of such security's sales on all
principal United States securities exchanges on which such security may at
the time be listed, or, if there shall have been no sales on any such
exchange on any day, the last trading price of such security on such day,
or if such there is no such price, the average of the bid and asked prices
at the end of such day, on The Nasdaq Stock Market, in each such case
averaged for a period of twenty (20) consecutive Business Days prior to the
day as of which Market Price is being determined; provided that if such
security is listed on any United States securities exchange the term
"Business Days" as used in this sentence means business days on which such
exchange is open for trading. Notwithstanding the foregoing, with respect
to the issuance of any security by the Corporation in an underwritten
public offering, the Market Price shall be the per share purchase price
paid by the underwriters. If at any time such security is not listed on
any exchange or The Nasdaq Stock Market, the Market Price shall be deemed
to be the fair value thereof determined in good faith by the Board of
Directors of the Corporation, as of the most recent practicable date as of
which the determination is to be made, taking into account the value of the
Corporation as a going concern, and without taking into account any lack of
liquidity of such security or any discount for a minority interest.
"Parity Securities" mean any class of capital stock or series of
-----------------
preferred stock hereafter created by the Corporation which expressly
provides that it ranks pari passu with the Series A Preferred Stock as to
---- -----
dividends, other distributions, liquidation preference or otherwise.
"Person" or "person" shall mean an individual, partnership,
------ ------
corporation, trust, unincorporated organization, joint venture, government
or agency, political subdivision thereof, or any other entity of any kind.
-9-
<PAGE>
"Public Equity Offering" means an underwritten offering with gross
----------------------
proceeds to the Corporation of at least $15 million pursuant to a
registration statement that has been declared effective by the Commission
(other than a registration statement on Form S-8 or otherwise relating to
equity securities issuable under any employee benefit plan of the
Corporation).
"Redemption Date" shall mean the date which shall be selected by the
---------------
Board for redemption of all or a portion of the shares of this Series A
Preferred Stock.
"Senior Securities" means any class or series of capital stock, debt
-----------------
instrument or security convertible into capital stock or debt securities of
the Corporation other than Parity Securities or Junior Securities.
"Series A Liquidation Preference" shall have the meaning set forth in
-------------------------------
Section 3(a).
"Series A Preferred Stock" shall have the meaning set forth in Section
------------------------
1.
"Trading Day" shall mean any day in which The Nasdaq Stock Market, or
-----------
any other market or exchange upon which the Common Stock is traded, is open and
no less than 100 shares of Transcend Services, Inc. are traded.
10. Notices. Except as may otherwise be provided for herein, all notices
-------
referred to herein shall be in writing, and all notices hereunder shall be
deemed to have been given (i) upon receipt, in the case of a notice of
conversion given to the Corporation as contemplated in Section 5(b) hereof, or
(ii) in all other cases, upon the earlier of (x) receipt of such notice, (y)
three Business Days after the mailing of such notice if sent by registered mail
(unless first-class mail shall be specifically permitted for such notice under
the terms hereof) or (z) the Business Day following sending such notice by
overnight courier, in any case with postage or delivery charges prepaid,
addressed: if to the Corporation, to its offices at 3353 Peachtree Road, N.E.,
Suite 1000, Atlanta, Georgia 30342, Attention: Doug Shamon, or to an agent of
the Corporation designated as permitted by the Articles of Incorporation, or, if
to any holder of the Series A Preferred Stock, to such holder at the address of
such holder of the Series A Preferred Stock as listed in the stock record books
of the Corporation.
-10-
<PAGE>
EXHIBIT 4.12
INFORMATION LEASING CORPORATION
MASTER LEASE AGREEMENT
dated as of February 20, 1998 by and between
<TABLE>
<S> <C>
Lessor: Information Leasing Corporation and Lessee: Transcend Services, Inc.
1023 W. Eighth Street 3353 Peachtree Road, N.E.
Cincinnati, OH 45203 Suite #1000
Contact: Contract Administration Atlanta, GA 30326
Phone: (513) 421-9191 Contact: Doug Shamon
Phone: (404)836-8598
</TABLE>
1. LEASE. Lessor agrees to lease to Lessee and Lessee agrees to lease
from Lessor the personal property including intangibles (the "Equipment")
described in one or more Rental Schedules (herein called "Schedule(s)") to this
Master Lease Agreement. Each such Schedule incorporates by this reference, the
terms and conditions set forth in this Master Lease Agreement and constitutes a
separate Lease (the "Lease"). The lease of Equipment under each Lease shall be
for such term and such rents as may be agreed to by execution of the Schedules,
and this Master Lease Agreement shall control and be effective as to all such
Schedules, the same as though set forth Therein unless expressly amended or
modified in writing for particular Schedules. The term "Equipment" as used in
this Master Lease Agreement shall refer to items leased under all Schedules and
the terms hereof, unless expressly amended or modified in writing, shall apply
equally to all such Equipment.
2. TERM AND RENT. The Initial Term for each item of Equipment shall be
for the period specified in the applicable Schedule, and Lessee shall pay
Lessor, throughout the Initial Term for the use of the Equipment, the Rent
specified in the applicable Schedule. The Initial Term and Rent with respect to
each item of Equipment shall commence as set out in the applicable Schedule.
3. LATE CHARGES. Time is of the essence in this Lease. If any Rent or
other amount due hereunder is not paid within ten (10) days after the due date
--------
thereof, Lessor shall have the right to add and collect and Lessee agrees to pay
a late charge on, and in addition to, such unpaid Rent or other charges, equal
to five percent (5%) of such unpaid Rent or a lesser amount if established by
any state of federal statute applicable thereto.
4. DISCLAIMER OF WARRANTIES. Lessee acknowledges that Lessor is not
the manufacturer of the Equipment, nor manufacturer's agent, and Lessee
represents that Lessee has selected the Equipment leased hereunder based upon
Lessee's judgment prior to having requested Lessor to purchase the same for
leasing to Lessee, and Lessee agrees that as between Lessor and Lessee, the
Equipment leased hereunder is of a design, size, fitness and capacity selected
by Lessee and that Lessee is satisfied that the same is suitable and fit for its
intended purposes. LESSEE FURTHER AGREES THAT LESSOR HAS MADE AND MAKES NO
REPRESENTATIONS OR WARRANTIES OF WHATSOEVER NATURE, DIRECTLY OR INDIRECTLY,
EXPRESSED OR IMPLIED, INCLUDING BUT NOT LIMITED TO ANY REPRESENTATIONS OR
WARRANTIES WITH RESPECT TO SUITABILITY, DURABILITY, FITNESS FOR USE AND
MERCHANTABILITY OF ANY SUCH EQUIPMENT, THE PURPOSES AND USES OF THE LESSEE THE
CHARACTERIZATION OF THE LEASE FOR TAX, ACCOUNTING OR OTHER PURPOSES, COMPLIANCE
OF THE EQUIPMENT WITH APPLICABLE GOVERNMENTAL REQUIREMENTS, OR OTHERWISE. Lessee
specifically waives all rights to make claim against Lessor herein for breach of
any warranty of any kind whatsoever. Notwithstanding the foregoing, Lessee shall
be entitled to the benefit of any applicable manufacturer's warranties received
by Lessor and to the extent assignable, and lessor hereby assigns such
warranties to Lessee for the term of the applicable Schedule. Lessor shall take
such actions as may reasonably be necessary to assign such warranties to Lessee.
Lessor shall not be liable to Lessee for any loss, damage or expense of any kind
or nature caused directly or indirectly by any Equipment leased hereunder or for
the use or maintenance thereof, or for the failure of operations thereof, or for
the repairs, service or adjustment thereto, or by any delay or failure to
provide any thereof, or by any interruption of service or loss of use thereof or
for any loss of business or any other damage
1
<PAGE>
whatsoever and howsoever caused. No defect or unfitness of the Equipment shall
relieve Lessee of the obligation to pay Rent, or to perform any other obligation
under this Lease.
5. USE, OPERATION AND MAINTENANCE. Lessee shall use the Equipment in the
manner for which it was designed and intended, solely for Lessee's business
purposes, in accordance with all manufacturer manuals and instructions and in
compliance with all applicable laws, regulations and orders. Lessee, at
Lessee's own cost and expense, shall keep the Equipment in good repair,
condition and working order, ordinary wear and tear excepted, and shall furnish
all parts, mechanisms, devices and servicing required therefor and necessary to
comply with all applicable health and safety standards. The Equipment, upon
return to Lessor, shall be in such condition as to qualify for a maintenance
agreement with the manufacturer or such other party as may be acceptable to
Lessor, if such agreement is customarily available, without additional cost to
Lessor, but nothing contained herein shall require the Lessee to modify or
upgrade the equipment. All replacement parts and repairs at any time made to or
placed upon the Equipment shall become the property of Lessor. Lessee may, with
Lessor's prior written consent, which shall not be unreasonably withheld, make
such alterations, modifications or additions to the Equipment as Lessee may deem
desirable in the conduct of its business; provided the same shall not diminish
the value or utility of the Equipment, or cause the loss of any warranty thereon
or any certification necessary for the maintenance thereof, and shall be readily
removable without causing damage to the Equipment. Upon return to Lessor the
Equipment as to which such alterations, modifications or additions have been
made, Lessee, if requested to do so by Lessor, shall remove the same and restore
the Equipment to its original condition, reasonable wear and tear only being
excepted, and, if not so removed, title thereto shall automatically vest in
Lessor. Lessor acknowledges that any data files or software developed or
installed by Lessee which is resident on the equipment shall be and remain the
property of Lessee; provided however that the Lessor shall have no obligation or
responsibility to remove or return same to Lessee. Upon receipt of the
Equipment, Lessor agrees to give Lessee reasonable access to the Equipment for
the purpose of allowing Lessee an opportunity to remove any data files or
software developed or installed by Lessee which is resident on the Equipment.
Any failure or unreasonable delay on the part of Lessee in accomplishing such
removal shall not reduce any of Lessor's rights herein.
LESSEE SHALL KEEP THE EQUIPMENT FREE AND CLEAR FROM ALL LIENS, CHARGES,
ENCUMBRANCES, LEGAL PROCESS AND CLAIMS. LESSEE SHALL NOT ASSIGN, SUBLET,
HYPOTHECATE, SELL, TRANSFER OR PART WITH POSSESSION OF THE EQUIPMENT OR ANY
INTEREST IN THIS LEASE, AND ANY ATTEMPT TO DO SO SHALL BE NULL AND VOID AND
SHALL CONSTITUTE A DEFAULT HEREUNDER. LESSEE SHALL NOT MOVE THE EQUIPMENT FROM
THE LOCATION NOTED IN THE SCHEDULES WITHOUT THE PRIOR WRITTEN NOTICE TO LESSOR
FIVE DAYS IN ADVANCE OF THE MOVE. NEITHER THIS LEASE NOR ANY INTEREST IN THE
EQUIPMENT IS ASSIGNABLE OR TRANSFERABLE BY LESSEE BY OPERATION OF LAW. LESSEE
AGREES NOT TO WAIVE ITS RIGHT TO USE AND POSSESS THE EQUIPMENT IN FAVOR OF ANY
PARTY OTHER THAN LESSOR AND FURTHER AGREES NOT TO ABANDON THE EQUIPMENT TO ANY
PARTY OTHER THAN LESSOR. SO LONG AS LESSEE FAITHFULLY PERFORMS AND MEETS EACH
AND EVERY MATERIAL TERM AND CONDITION TO BE PERFORMED OR MET BY LESSEE UNDER
THIS LEASE, LESSEE'S QUIET AND PEACEFUL POSSESSION OF THE EQUIPMENT WILL NOT BE
DISTURBED BY LESSOR OR ANYONE CLAIMING BY, THROUGH OR ON BEHALF OF LESSOR.
6. TITLE. The Equipment is and at all times shall remain the sole and
exclusive personal property of Lessor (subject to Section 18 hereof). No right,
title or interest in the Equipment shall pass to Lessee other than the right to
maintain exclusive possession and use of the Equipment for the full lease term,
conditioned upon Lessee's compliance with the terms and conditions of this
Lease. If requested by Lessor, Lessee shall affix to or place on the Equipment,
at Lessors expense, plates or markings indicating Lessor's ownership. Lessee
covenants and agrees that the Equipment is, and will at all times, remain the
personal property of Lessor (subject to Section 18 hereof). If requested by
Lessor, Lessee will make reasonable efforts to obtain a waiver on any Equipment
that may be deemed a fixture in recordable form, from all persons with a real
property interest in the premises wherein the Equipment may be located, waiving
any claim with respect thereto. Lessor shall have the right from time to time
during normal business hours, with reasonable notice, to enter upon Lessee's
premises or elsewhere for the purpose of confirming the existence, condition,
and proper maintenance of the Equipment.
7. RENT ADJUSTMENT. Not Applicable.
8. TAXES. Lessee shall promptly reimburse Lessor for, or shall pay
directly if so requested by Lessor, as additional Rent, all taxes, charges and
fees which may now or hereafter be imposed or levied by any governmental
2
<PAGE>
body or agency upon or in connection with the purchase, ownership, lease,
possession, use or location of the Equipment or otherwise in connection with the
transactions contemplated by the Lease, excluding, however, all taxes on or
measured by the net income of Lessor, and shall keep the Equipment free and
clear of all levies, liens or encumbrances arising therefrom. Lessor shall file,
as owner and party responsible for payment of tax, personal property tax return
relating to the Equipment unless otherwise provided in writing. Lessee shall
promptly reimburse Lessor in full for all property taxes levied on or assessed
against the Equipment during the Initial Term and all renewals or extensions.
Failure of Lessee to promptly pay amounts due hereunder shall be the same as
failure to pay any installment of Rent. If Lessee is requested by Lessor to file
any returns or remit payments directly to any governmental body or agency as
provided for hereunder, Lessee shall provide proof of said filing or payment to
Lessor upon request.
9. LOSS OR DAMAGE OF EQUIPMENT. Lessee hereby assumes and shall bear the
risk of loss for destruction of or damage to the Equipment from any and every
cause whatsoever, whether or not insured, until the Equipment is returned to
Lessor. No such loss or damage shall impair any obligation of Lessee under this
Lease, which shall continue in full force and effect. In event of damage to or
theft, loss or destruction of the Equipment (or any item thereof), Lessee shall
promptly notify Lessor in writing of such fact and of all details with respect
thereto, and shall, within thirty (30) days of such event, at Lessor's option,
(a) place the same in good repair, condition and working order or, (b) Lessee
shall have the option to ,at Lessee's expense, substitute Equipment (or any item
thereof) of the Identical Manufacture, Make, Model, and Features, unless this
option is expressly prohibited in a specific Lease, in good repair, condition
and working order and transfer clear title to such replacement property to
Lessor whereupon such property shall be subject to this Lease and be deemed the
Equipment for purposes hereof; or, (c) pay Lessor an amount equal to the sum of
(i) all Rent accrued to the date of such payment, plus (ii) the "Stipulated Loss
Value" as set forth in the Schedules, whereupon this Lease shall terminate,
except for Lessee's duties under Section 11 hereof, solely with respect to the
Equipment (or any item thereof) for which such payment is received by Lessor.
Upon payment of the amount set forth in (c), the Rent for such Schedules shall
be reduced proportionately. Any insurance proceeds received with respect to the
Equipment (or any item thereof) shall be applied, in the event option (c) is
elected, in reduction of the then unpaid obligations, including the Stipulated
Loss Value, of Lessee to Lessor, if not already paid by Lessee, or, if already
paid by Lessee, to reimburse Lessee for such payment, or, in the event option
(a) or (b) is elected, to reimburse Lessee for the costs of repairing, restoring
or replacing the Equipment (or any item thereof) upon receipt by Lessor of
evidence, satisfactory to Lessor, that such repair, restoration or replacement
has been completed, and an invoice therefor.
10. INSURANCE. Lessee shall keep the Equipment insured against theft and
all risks of loss or damage from every cause whatsoever for not less than the
greater of the replacement cost, new, or the Stipulated Loss Value of the
Equipment and shall carry public liability insurance, both personal injury and
property damage, and Lessee shall be liable for all deductible portions of all
required insurance. All said insurance shall be in form and amount and with
companies satisfactory to Lessor. All insurance for theft, loss or damage shall
provide that losses, if any, shall be payable to Lessor, and all such liability
insurance shall name Lessor (or Lessor's assignee as appropriate) as additional
insured and shall be endorsed to state that it shall be primary insurance as to
Lessor. Any other insurance obtained by or available to Lessor shall be
secondary insurance. Lessee shall pay the premiums therefor and deliver to
Lessor a certificate of insurance or other evidence satisfactory to Lessor that
such insurance coverage is in effect; provided, however, that Lessor shall be
under no duty either to ascertain the existence of or to examine such insurance
policies or to advise Lessee in the event such insurance coverage shall not
comply with the requirements hereof. Each insurer shall agree by endorsement
upon the policy or policies issued by it or by independent instrument furnished
to Lessor, that it will give Lessor thirty (30) days written notice prior to the
effective date of any alteration or cancellation of such policy. The proceeds
of such insurance payable as a result of loss of or damage to the Equipment
shall be applied as set out in Section 9 hereof. After thirty days from an
event of loss or damage as set out in Section 9, Lessee hereby irrevocably
appoints Lessor as Lessee's attorney-in-fact to make claim for, receive payment
of, and execute and endorse all documents, checks or drafts received in payment
for loss or damage under any said insurance policies.
In case of the failure of Lessee to procure or maintain said insurance, Lessor
shall have the right but shall not be obligated to effect such insurance. In
that event, monies spent by and expenses of Lessor in a reasonable amount in
effecting such insurance or compliance shall be deemed to be additional Rent,
and shall be paid by Lessee to Lessor upon written demand.
11. LESSEE INDEMNITY. Lessee assumes liability for and shall indemnify,
save, hold harmless (and, if requested by Lessor, defend) Lessor, it's officers,
directors, employees, agents or assignees from and against any and all claims,
actions, suits or proceedings of any kind and nature whatsoever, including all
-----
damages, liabilities, penalties,
3
<PAGE>
costs, expenses and legal fees (hereinafter "Claim(s)") based on, arising out
of, connected with or resulting from this Lease of the Equipment, including
without limitation the manufacture, selection, purchase, delivery, acceptance,
rejection, possession, use or operation of the equipment and claims by third
parties resulting from or relating to ownership, return or disposition of the
Equipment, and including without limitation Claims arising in contract or tort
(including negligence, strict liability or otherwise), arising out of latent
defects (regardless of whether the same are discoverable by Lessor or Lessee) or
arising out of any trademark, patent or copyright infringement. If any Claim is
made against Lessee or Lessor, the party receiving notice of such Claim shall
promptly notify the other, but the failure of such person receiving notice so to
notify the other shall not relieve Lessee of any obligation hereunder.
12 TAX INDEMNITY. Lessee acknowledges that (1) Lessor intends to claim
and take the accelerated cost recovery deductions available in the manner and as
provided by section 168 and related sections of the Internal Revenue Code of
1986, as amended, and regulations adopted thereunder (the "Code") as in effect
on the date hereof (such deductions being referred to hereinafter as "Tax
Benefits") and (2) the Rent payable hereunder has been computed upon the
assumption that such Tax Benefits shall be available to Lessor. Lessee
represents and warrants to Lessor that all of the Equipment is, at and after the
time of delivery of the Equipment to the location set forth in the Schedules,
new, unless designated otherwise on the Schedules. Lessee further represents
and warrants to the best of _Lessee's knowledge that it has not, and will not at
any time from such delivery through the term of this Lease take any action or
omit to take any action (whether or not the same is permitted or required
hereunder) which will result in the loss by Lessor of all or any part of the Tax
Benefits. If as a result of any act, omission or misrepresentation of Lessee,
the Tax Benefits are lost, disallowed, eliminated, reduced, recaptured,
compromised or are otherwise unavailable to Lessor (any of the foregoing being a
"Loss"), Lessee shall promptly pay to Lessor on written demand, as additional
Rent, an amount which will, after deduction therefrom of all taxes required to
be paid in respect of the receipt thereof, enable Lessor to receive the same
rate of return that Lessor would have realized had such Loss not occurred,
together with any interest, penalties or additions to tax. Upon payment of such
amount by Lessee, such act, omission or misrepresentation of Lessee which
resulted in a Loss shall not be deemed a default hereunder. Any event which by
the term of this Lease requires payment by Lessee to Lessor of the Stipulated
Loss Value of the Equipment, shall not constitute the act, omission or
misrepresentation of Lessee for purposes of the foregoing sentence. Lessor
hereby agrees to exercise in good faith its best efforts (determined in the sole
discretion of Tax Counsel of Lessor to be reasonable, proper and consistent with
the overall tax interest of Lessor) to avoid requiring Lessee to pay the tax
indemnity referred to in this Section 12; provided, however, Lessor shall have
the sole discretion to determine whether or not to undertake judicial or
administrative proceedings beyond the level of an Internal Revenue Service
auditing agent; and provided further, that Lessor shall not be required to take
any action pursuant to this sentence unless and until Lessee shall have agreed
to indemnify Lessor for any and all expenses (including attorney's fees),
liabilities or losses which Lessor may incur as a result of taking such action.
For purposes of this Section 12, the term "Lessor" shall include the entity or
entities, if any, with which Lessor consolidates its tax return.
13 RETURN OF EQUIPMENT. Lessee shall give Lessor forty-five (45) days
written notice prior to the expiration of the Initial Term of its intent to
return the Equipment. Upon expiration of the Initial Term or other termination
pursuant to the terms of this Lease, Lessee shall immediately return the
Equipment and all related accessories, to such place within the continental
United States, not to exceed 500 miles from Cincinnati, Ohio. The Equipment
shall, at Lessee's sole expense, be crated and shipped in accordance with the
manufacturer's specifications, freight prepaid and properly insured. If the
Equipment, upon its return, is not in good repair, condition and working order,
ordinary wear and tear excepted, and has not been maintained in accordance with
Section 5 hereof, Lessee shall promptly reimburse Lessor for all reasonable
costs incurred to place the Equipment in such condition after Lessee has
inspected the _Equipment. Lessor shall promptly notify Lessee if equipment is
not in good repair, condition and working order, ordinary wear and tear
excepted, and has not been maintained in accordance with Section 5 hereof, and
Lessee shall have the right of inspection within a reasonable period of time,
not to exceed fifteen (15) days after receiving written notice of such condition
from Lessor.
14. AUTOMATIC RENEWAL. The Lease shall automatically extend as a month-
to-month rental if; (a) written notice as specified in Section 13 hereof is not
received by Lessor; or (b) such notice is received by Lessor but the Equipment
is not returned upon the expiration of the Initial Term. Lessee shall pay as
Rent to Lessor an amount based on the average monthly rent during the Initial
Term on the due dates set out in the Schedules until terminated by either party
by giving sixty (60) days prior written notice. All terms and conditions of
this Lease shall continue in full force and effect during any extension or
renewal hereof.
4
<PAGE>
15. DEFAULT AND REMEDIES. (a) Lessee shall be in default hereunder if (i)
Lessee fails to pay Rent or any other payment required hereunder within ten (10)
business days of the due date thereof, and such default shall continue for a
period of 10 days after receipt of written notice thereof, (ii) Lessee fails to
observe, keep or perform any other term or condition of this Lease and such
failure continues for thirty (30) days following receipt of written notice
thereof from Lessor, (iii) any representation or warranty made by Lessee herein
or in any document delivered to Lessor in connection herewith shall prove to be
false or misleading, or (iv) Lessee defaults under any other obligation to
Lessor. (b) If Lessee is in default, Lessor shall have the right to take any
one or more of the following actions: (i) proceed by appropriate court action
or actions at law or in equity to enforce performance by Lessee of the terms and
conditions of this Lease and/or recover damages for the breach thereof; and/or
(ii) by written notice to Lessee, which notice shall apply to all Schedules
hereunder except as specifically excluded therefrom by Lessor, declare due and
payable, and Lessee shall without further demand, forthwith pay to Lessor an
amount equal to any unpaid Rent then due as of the date of such notice plus, as
liquidated damages or loss of the bargain and not as a penalty, an amount equal
to the Stipulated Loss Value as set forth in the Schedules. Lessee shall return
the Equipment to Lessor as provided in Section 13. Should Lessee fail to return
the Equipment within fifteen (15) business days of receipt of legal notice,
Lessor may, personally, or by its agents, and with or without notice of legal
process, enter upon the premises where the Equipment is located, without
liability for trespass or other damages and repossess the Equipment free from
all claims by Lessee. Return or repossession of the Equipment shall not
constitute a termination of this Lease unless Lessor so notifies Lessee in
writing. With respect to Equipment returned to or repossessed by Lessor, if
Lessor has not terminated this Lease, Lessor will, in a commercially reasonable
manner, and upon such terms as Lessor may determine in its sole discretion,
either sell such Equipment at one or more public or private sales or re-lease
the Equipment. The proceeds of sale or re-lease shall be applied in the
following order or priority: (i) to pay all Lessor's fees, costs and expenses
for which Lessee is obligated pursuant to (c), below; (ii) to the extent not
previously paid by Lessee, to pay Lessor its liquidated damages hereunder and
all other sums then remaining unpaid hereunder; and (iii) to reimburse Lessee
for any sums previously paid by Lessee to Lessor as liquidated damages. In the
event the proceeds of sale or re-lease are less than the sum of the amounts
payable under (i) and (ii), Lessee shall pay Lessor such deficiency, after
written notice to Lessee. (c) Lessee shall be liable for all reasonable legal
and collection fees, costs and expenses arising from Lessee's default and the
exercise of Lessor's remedies hereunder, including costs of repossessions,
storage, repairs, reconditioning and sale or re-leasing of the Equipment. (d) In
the event that any court of competent jurisdiction determines that any provision
of this Section 15 is invalid or unenforceable in whole or in part, such
determination shall not prohibit Lessor from establishing its damages sustained
as a result of any breach of this Lease in any action or proceeding in which
Lessor seeks to recover such damages. Any repossession sale or re-lease of the
Equipment shall not bar an action for damages for breach of this Lease, as
hereinabove provided, and the bringing of an action or the entry of judgment
against Lessee shall not bar Lessor's right to repossess the Equipment. No
express or implied waiver by Lessor of any default shall in any way be, or be
construed to be, a continuing waiver or a waiver of any future or subsequent
default.
16 FURTHER ASSURANCES. Lessee agrees, at the request of Lessor, to
execute and deliver to Lessor any reasonable financing statements, fixture
filings or other instruments necessary for expedient filing, recording or
perfecting the interest and title of Lessor in this Lease and the Equipment,
agrees that a copy of this Lease and any Schedule may be so filed, and agrees
that all costs incurred in connection therewith (including, without limitation,
filing fees and taxes) shall be paid equally by Lessee and Lessor, and agrees to
promptly, at Lessee's expense, deliver such other reasonable documents and
assurances, and take such further action as Lessor may request, in order to
effectively carry out the intent and purpose of this Lease and Schedules.
Additionally, Lessee agrees that where permitted by law, a copy of the financing
statement may be filed in lieu of the original. Lessee shall, as soon as
practicable, deliver to Lessor, Lessee's future annual reports of financial
condition, and Lessee agrees, as soon as practicable, to deliver to Lessor,
Lessee's future quarterly reports if such quarterly reports are not available in
the public domain, prepared in accordance with generally accepted accounting
principles, in a manner consistently applied; which reports Lessee represents
and warrants shall be prepared in accordance with Generally Accepted Accounting
Principles. Lessee's covenants, representations, warranties and indemnities
contained in Section 8, 11, 12 and 19 are made for the benefit of Lessor and
shall survive, remain in full force and effect and be enforceable after the
expiration or termination of this Lease for any reason.
17. ACCEPTANCE OF EQUIPMENT: NON CANCELABLE. Lessee's acceptance of the
Equipment shall be conclusively and irrevocably evidenced by Lessee signing the
Certificate of Acceptance in the form of Annex A to the Schedules and upon
acceptance, the Schedules shall be non-cancelable for the Initial Term thereof
unless otherwise _agreed to by Lessor and Lessee in writing. If Lessee cancels
or terminates the Schedules after its execution and prior to delivery of the
Equipment or if Lessee fails or refuses to sign the Certificate of Acceptance as
to all or any
5
<PAGE>
part of the Equipment within a reasonable time, not to exceed ten (10) business
days, after the Equipment has been delivered, in which event Lessee will be
deemed to have canceled the Schedule, Lessee shall automatically assume all of
Lessor's purchase obligations for the Equipment and Lessee agrees to indemnify
and defend Lessor from any claims, including any demand for payment of the
purchase price for the Equipment, by the manufacturer or seller of the
Equipment. In addition thereto, Lessee shall pay Lessor (a) all of Lessor's
reasonable out-of-pocket expenses and (b) a sum equal to one percent (1%) of the
total rents for the lease term as liquidated damages, the exact sum of which
would be extremely difficult to determine and is reasonably estimated hereby, to
reasonably compensate Lessor for credit review, document preparation, ordering
equipment and other administrative expenses. Lessor may apply any advance Rent
payments to sums due from Lessee under (a) and (b) above.
18. ASSIGNMENT. Lessee acknowledges and agrees that Lessor may, at any
time, without notice to or consent of Lessee, assign its rights but not its
obligations under this Lease and/or mortgage, or pledge or sell the Equipment.
Such assignee or mortgagee may re-assign this Lease and/or mortgage without
notice to Lessee. Any such assignee, buyer, transferee, grantee or mortgagee
shall have and be entitled to exercise any and all rights and powers of Lessor
under this Lease, but such assignee, buyer, transferee, grantee or mortgagee
shall not be obligated to perform any of the obligations of Lessor hereunder
other than Lessor's obligation not to disturb Lessee's quiet and peaceful
possession of the Equipment and unrestricted use thereof for its intended
purpose during the term thereof and for as long as Lessee is not in default of
any of the provisions hereof.
Each assignment, sale, transfer or grant shall be subject to all of the
rights of Lessee under the Lease or any renewal or extension or amendment
thereof and shall contain a covenant or covenants binding upon the assignee,
buyer, transferee, grantee or mortgagee to the effect that so long as an Event
of Default shall not exist under the Lease: (a) Lessee shall not be named as a
defendant, provided Lessee is not in default, in any foreclosure or other
proceeding which may be instituted by such assignee, buyer, transferee grantee
or mortgagee as to the Lease or as to the Equipment; and (b) Neither the
assignee, buyer, transferee, grantee or mortgagee shall interfere with the right
of Lessee to have unlimited quiet and peaceful use and possession of the
Equipment during the term of the Lease and so long as there is no Event of
Default existing under the Lease, Lessor shall defend Lessee's right to quiet
and peaceful possession; and (c) Lessee may deal exclusively with Lessor with
respect to matters covered by the Lease and no consent of any assignee, buyer,
transferee, grantee or mortgagee shall be required as to such matters. Lessor
shall at all times during the term of the Lease be specifically authorized by
any assignee, buyer, transferee or grantee to act in the assignee's, buyer's,
transferee's or grantee's behalf in this regard, and shall execute, and if
requested by Lessee, obtain the assignee's, buyer's, transferee's or grantee's
execution of, any documents necessary or desirable to carry out the provisions
of this clause and any other clause referred to in this clause.
Without limiting the foregoing, Lessee further acknowledges and agrees that
in the event Lessee receives written notice of an assignment from Lessor, Lessee
will pay all Rent and any and all other amounts payable by Lessee under any
Schedule to such assignee or mortgagee or as instructed by Lessor,
notwithstanding any defense or claim of whatever nature, whether by reason of
breach of such Schedule or otherwise which it may now or hereafter have as
against Lessor (Lessee reserving its right to make claims directly against
Lessor). Lessee agrees to confirm in writing receipt of notice of assignment as
may be reasonably requested by assignee or mortgagee.
19. REPRESENTATIONS AND WARRANTIES. Lessee represents and warrants to
Lessor that: (i) the making of this Lease and any Schedule thereto executed by
Lessee are duly authorized on the part of Lessee and upon execution thereof by
Lessee and Lessor they shall constitute valid obligations binding upon, and
enforceable against, Lessee ; (ii) neither the making of this Lease or such
Schedule, nor the due performance thereof by Lessee, including the commitment
and payment of the Rent, shall result in any breach of, or constitute a default
under, or violation of, Lessee's certificate of incorporation, by-laws, or any
agreement to which Lessee is a party or by which Lessee is bound; (iii) Lessee
is in good standing in its state of incorporation and in any jurisdiction where
the Equipment is located, and is entitled to own properties and to carry on
business therein; and (iv) no approval, consent or withholding of objection is
required from any governmental authority or entity with respect to the entering
into, or performance of this Lease or such Schedules by Lessee.
Lessee shall provide Lessor a Certified Copy of it's Corporate Resolutions and
Certificate of Incumbency substantially in the form of Annex B hereto.
Lessor has the power to enter into this Lease, and its execution has been duly
authorized by all necessary corporate action on the part of the Lessor. Lessor
is duly and validly organized and existing in good standing under the laws of
6
<PAGE>
the state of Ohio and has all power and authority to own its properties and
carry on its business in the places where such properties are located and such
business is conducted.
20. NOTICES. Any notice required or given hereunder shall be deemed
properly given (i) three (3) business days after mailed first class, overnight,
or certified mail, return receipt requested, postage prepaid, addressed to the
designated recipient at its address set forth at the heading hereof or such
other address as such party may advise by notice given in accordance with this
provision or (ii) upon receipt by the party to whom addressed if given in
writing by personal delivery, commercial courier service, telecopy or other
means which provides a permanent record of the delivery of such notice.
21. DOCUMENTATION. Except for the payment of the Rent set forth in the
applicable Schedules, for which invoices are provided as an accommodation to
Lessee and not as a condition precedent to payment, Lessor shall use its best
efforts to provide Lessee with reasonable documentation, including, statements,
tax bills and/or invoices, evidencing payment obligations or reimbursement due
to Lessor pursuant to the terms of this Lease.
22. LESSEE'S OBLIGATIONS UNCONDITIONAL: NO OFFSET. This Lease is a net
lease and except as expressly provided for herein, the Lessee shall not be
entitled to any abatement or reduction of rent and Lessee hereby agrees that
Lessee's obligation to pay all rent and other amounts hereunder shall be
absolute and unconditional under all circumstances.
23. COUNTERPARTS. Each Schedule may be executed in one or more
counterparts, each of which shall be deemed an original as between the parties
thereto, but there shall be a single executed original of each Schedule which
shall be marked "Counterpart No. 1"; all other counterparts shall be marked with
other counterpart numbers. To the extent, if any, that a Lease constitutes
chattel paper (as such term is defined in the Uniform Commercial Code) no-
security interest in the Schedule may be created through the transfer or
possession of any counterpart other than Counterpart No. 1. The Master Lease
Agreement is incorporated by reference in each of the Schedules and shall not be
chattel paper by itself.
24. SPECIAL TERMS. Not Applicable.
25. GOVERNING LAW. This Lease and any Schedules thereto are entered into,
under and shall be construed in accordance with, and governed by, the laws of
the State of Ohio without giving effect to its conflicts of laws principles. The
State of Ohio shall have exclusive jurisdiction over any action or proceeding
brought to enforce or interpret this Lease or otherwise in connection therewith.
26. MISCELLANEOUS. For purposes of this Lease, the term "Rent" as used
herein shall mean and include all amounts payable by Lessee to Lessor hereunder.
The captions of this Lease are for convenience only and shall not be read to
define or limit the intent of the provision which follows such captions. This
Lease contains the entire agreement and understanding between Lessor and Lessee
relating to the subject matter hereof. Any variation or modification hereof and
any waiver of any of the provisions or conditions hereof shall not be valid
unless in writing signed by an authorized representative of the parties hereto.
Any provision of this Lease which is unenforceable in any jurisdiction shall, as
to such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction. Lessor's failure
at any time to require strict performance by Lessee or any of the provisions
hereof shall not waive or diminish Lessor's right thereafter to demand strict
compliance therewith or with any other provision. The term "Lessee" as used
herein shall mean and include any and all Lessees who have signed this Lease,
each of whom shall be jointly and severally bound thereby.
THIS LEASE IS A NON-CANCELABLE LEASE. THIS LEASE IS SUBJECT TO THE TERMS AND
CONDITIONS WRITTEN ABOVE WHICH LESSEE ACKNOWLEDGES HAVING READ. THIS LEASE
SHALL BE EFFECTIVE UPON EXECUTION BY LESSEE AND LESSOR.
LESSOR: LESSEE:
7
<PAGE>
INFORMATION LEASING CORPORATION TRANSCEND SERVICES, INC.
By: _______________________ By: _______________________
Title: ____________________ Title: ____________________
Date Accepted: ____________ Date Accepted: ____________
8
<PAGE>
EXHIBIT 11
TRANSCEND SERVICES, INC.
COMPUTATIONS OF LOSS PER SHARE
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Loss from continuing operations................... ($3,792,000) ($5,661,000) ($3,665,000)
Loss from discontinued operations................. (147,000) (1,582,000) (479,000)
----------- ----------- -----------
Net Loss.......................................... ($3,939,000) ($7,243,000) ($4,144,000)
Dividends on Preferred Stock...................... (59,000) -- --
----------- ----------- -----------
Net Loss to Common Stockholders.................. ($3,998,000) ($7,243,000) ($4,144,000)
Weighted Average Shares Outstanding (1)........... 20,279,000 19,517,000 18,626,000
Basic and Diluted net loss per common share:
Loss from continuing operations.................. ($0.19) ($0.29) ($0.20)
Loss from discontinued operations................ (0.01) (0.08) (0.02)
----------- ----------- -----------
Net Loss.......................................... ($0.20) ($0.37) ($0.22)
=========== =========== ===========
</TABLE>
(1) In 1997, 1996 and 1995, the common stock equivalents related to stock
options were not included in the computation due to there being an
antidilutive effect.
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Transcend Case Management, Inc., formerly Sullivan Health Management Services,
Inc., a corporation organized under the laws of the State of Georgia.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K into the Company's previously filed
Registration Statement File Nos. 33-57072, 33-41361, 33-37685, 33-32587 and 33-
16213.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 28, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1997 JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<CASH> 5,541 1,663 1,124
<SECURITIES> 0 0 0
<RECEIVABLES> 5,128 3,951 3,346
<ALLOWANCES> (163) (147) (42)
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 11,485 6,015 4,737
<PP&E> 6,699 4,655 3,029
<DEPRECIATION> (3,277) (2,040) (1,134)
<TOTAL-ASSETS> 20,650 16,557 16,869
<CURRENT-LIABILITIES> 5,214 7,591 4,083
<BONDS> 0 0 0
0 0 0
2 0 0
<COMMON> 205 200 189
<OTHER-SE> 7,706 5,761 9,509
<TOTAL-LIABILITY-AND-EQUITY> 20,650 16,557 16,869
<SALES> 43,413 39,633 28,009
<TOTAL-REVENUES> 43,413 39,633 28,009
<CGS> 37,137 34,346 23,873
<TOTAL-COSTS> 0 0 0
<OTHER-EXPENSES> 9,635 10,686 7,780
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 433 262 21
<INCOME-PRETAX> (3,792) (5,661) (3,665)
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> (3,792) (5,661) (3,665)
<DISCONTINUED> (147) (1,582) (479)
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (3,998) (7,243) (4,144)
<EPS-PRIMARY> $ (0.20) $ (0.37) $ (0.22)
<EPS-DILUTED> $ (0.20) $ (0.37) $ (0.22)
</TABLE>
