-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JrNn3s5eygWr5ZTgmlFmQ4SQGpZssK/IzN9cuW2Ub1THScpcOesdWOClBM/Yvhwk EVOkpfEx/+YvGa2CMpv6Lw== 0000950109-96-003485.txt : 19960531 0000950109-96-003485.hdr.sgml : 19960531 ACCESSION NUMBER: 0000950109-96-003485 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19960530 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRANSCEND SERVICES INC CENTRAL INDEX KEY: 0000858452 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-OFFICES & CLINICS OF DOCTORS OF MEDICINE [8011] IRS NUMBER: 330378756 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: S-3 SEC ACT: 1933 Act SEC FILE NUMBER: 333-04777 FILM NUMBER: 96574637 BUSINESS ADDRESS: STREET 1: 3353 PEACHTREE RD NE STE 1000 CITY: ATLANTA STATE: GA ZIP: 30326 BUSINESS PHONE: 4043644600 MAIL ADDRESS: STREET 1: 3353 PEACHTREE RD NE CITY: ATLANTIC STATE: GA ZIP: 30326 FORMER COMPANY: FORMER CONFORMED NAME: TRICARE INC DATE OF NAME CHANGE: 19920703 S-3 1 FORM S-3 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 30, 1996 REGISTRATION NO. 333- =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- TRANSCEND SERVICES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 33-0378756 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 3353 PEACHTREE ROAD, N.E. SUITE 1000 ATLANTA, GEORGIA 30326 (404) 364-8000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) LARRY G. GERDES PRESIDENT AND CHIEF EXECUTIVE OFFICER 3353 PEACHTREE ROAD, N.E. SUITE 1000 ATLANTA, GEORGIA 30326 (404) 364-8000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: HELEN T. FERRARO, ESQ. FREDERICK W. KANNER, ESQ. SMITH, GAMBRELL & RUSSELL DEWEY BALLANTINE 3343 PEACHTREE ROAD, N.E., 1301 AVENUE OF THE AMERICAS SUITE 1800 NEW YORK, NEW YORK 10019 ATLANTA, GEORGIA 30326 (212) 259-8000 (404) 264-2620 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If the only securities being registered on this form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [_] If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] ===============================================================================
PROPOSED PROPOSED TITLE OF EACH CLASS OF AMOUNT MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF SCURITIES TO BE REGISTERED TO BE REGISTERED(1) PRICE PER UNIT(2) OFFERING PRICE(1)(2) REGISTRATION FEE ----------------------------------------------------------------------------------------------------------------------------------- Common Stock, par value $.01 per share............ =================================================================================================================================
(1) Includes 450,000 shares subject to the Underwriters' over-allotment option. (2) Estimated solely for the purpose of calculating the filing fee pursuant to Rule 457(c) under the Securities Act of 1933. --------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. =============================================================================== ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED MAY 30, 1996 PROSPECTUS 3,000,000 Shares [LOGO of Transcend Services, Inc.] Common Stock --------- All of the shares of Common Stock offered hereby are being offered by Transcend Services, Inc., (the "Company" or "Transcend"). The Common Stock of the Company is listed on The Nasdaq Stock Market's National Market under the symbol "TRCR." On May 29, 1996, the last sale price of the Common Stock as reported by Nasdaq was $10.50. SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. --------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS(1) COMPANY(2) - -------------------------------------------------------------------------------- Per Share.................................. $ $ $ - -------------------------------------------------------------------------------- Total(3)................................... $ $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. See "Underwriting." (2) Before deducting expenses of the offering estimated at $ payable by the Company. (3) The Company has granted to the Underwriters a 30-day option to purchase up to 450,000 additional shares of Common Stock on the same terms as set forth above to cover over-allotments, if any. If the Underwriters exercise such option in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." --------- The shares of Common Stock are offered by the several Underwriters named herein, subject to prior sale, when, as and if accepted by them and subject to certain conditions. It is expected that certificates for the shares of Common Stock offered hereby will be available for delivery on or about , 1996 at the offices of Smith Barney Inc., 333 West 34th Street, New York, New York 10001. --------- Smith Barney Inc. Dain Bosworth Incorporated , 1996 STRATEGIC DIRECTION A diagram that depicts the flow of patient information across the pre- admission to post-discharge continuum. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING." 2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including the consolidated financial statements and notes thereto, appearing elsewhere in this Prospectus. THE COMPANY Transcend is a leader in the emerging field of health care information management services to hospitals and other associated health care providers. The Company provides a range of services along the following lines: (i) contract management ("outsourcing") of health information management ("medical records"), patient access ("admissions") and other affiliated departments; (ii) medical transcription services for physician dictation; and (iii) consulting services relating to health information management and reimbursement coding. The Company currently operates, on a contract management basis, the health information management ("HIM"), or medical records departments, of 15 general acute care hospitals located in ten states and the District of Columbia. The Company also provides case management and disability management services to insurance carriers, third party administrators and self-insured employers. The health care industry is undergoing significant and rapid change. Hospitals and other health care providers have come under increased scrutiny from regulators and third party payors. As a result, hospitals are now looking to outsource to third parties certain costly or complicated functions that are not directly related to core competencies or where they are unable to achieve economies of scale. In particular, patient information, and the delivery of such information in a timely fashion, have become critical to improving productivity, efficiency and cost containment, while maintaining a high level of patient care. For instance, many hospitals are finding that their medical records departments are inadequate, and to remedy the inadequacies of these functions, they are beginning to turn to third party service providers which have expertise in managing medical records, admissions and other affiliated departments. With over 5,000 hospitals in the United States, the market for outsourcing the management of medical records departments and other affiliated departments is sizable. Approximately 3,000 hospitals in the United States have more than 100 beds and constitute the Company's first tier of market opportunity. American Hospital Publishing, Inc. has reported that in 1995 two out of three U.S. hospitals were outsourcing one or more departments. According to Modern Healthcare magazine's 17th Annual Contract Management Survey, published in September 1995, the total number of hospital management contracts increased by nearly 12% from the end of 1993 to the end of 1994, from approximately 7,800 to approximately 8,770. The health care industry has recognized the need for improvement in the processing of health care information, and to achieve this improvement, there has been a dramatic increase in the development of technological solutions offered by third party vendors of computer hardware and software. Although there have been significant advances in the management of medical information in general, little progress has been made introducing technology to the management of the medical records departments, patient admissions or other affiliated departments of hospitals that handle the flow of patient information. The Company believes that there is a need, and therefore an emerging market, for third party service providers to assist hospitals and other health care providers in (i) the effective implementation of the available technological tools for health care information management, (ii) the process of managing health care information across the pre-admission to post- discharge continuum of the health care delivery system and (iii) the management and training of personnel in health care information departments. By managing the entire flow of patient information through the hospital, errors, inefficiencies and their associated costs can be minimized. The Company's business strategy focuses on the application of advanced technological tools and health care information management expertise to improve the efficiency and productivity of health care information management services from pre-admission of the patient through post-discharge. Key elements of the Company's business strategy include: (i) the expansion of the Company's core HIM business; (ii) the application of emerging technology to HIM; (iii) the development of Information Service Centers as a business model for the provision of future outsourcing services designed to consolidate all of the functional and technological aspects of HIM into one centralized center; (iv) the expansion of contract management services offered to include patient admitting and the business office; and (v) the use of strategic acquisitions and alliances to complement, expand and diversify the Company's services portfolio and to accelerate growth. 3 THE OFFERING Common Stock offered.............. 3,000,000 shares Common Stock to be outstanding 21,401,403 shares(1) after the offering............... Use of proceeds................... General corporate purposes and for working capital. See "Use of Proceeds." Nasdaq National Market symbol..... TRCR - -------- (1) Excludes (a) 1,298,275 shares of Common Stock issuable as of May 24, 1996 upon the exercise of outstanding stock options, 872,875 of which are presently exercisable or become exercisable within the next 60 days, (b) 572,000 shares of Common Stock issuable upon conversion of the Company's 8% Subordinated Convertible Debentures, (c) 25,000 shares issuable upon exercise of the outstanding Warrant to purchase Common Stock, (d) 45,750 shares reserved for future issuance under the Company's 1992 Stock Option Plan, as amended and (e) 155,524 shares reserved for future issuance under the Company's 1990 Employee Stock Purchase Plan, as amended. SUMMARY CONSOLIDATED FINANCIAL DATA(1) (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS YEARS ENDED DECEMBER 31, ENDED MARCH 31, --------------------------- ---------------- 1993 1994 1995 1995 1996 -------- -------- -------- ------- ------- STATEMENTS OF OPERATIONS DATA: Net revenues.................. $ 6,208 $ 12,393 $ 25,882 $ 4,897 $ 8,688 Direct costs.................. 5,125 10,787 22,334 4,346 7,260 ------- -------- -------- ------- ------- Gross profit.................. 1,083 1,606 3,548 551 1,428 Marketing and sales expenses.. 378 929 2,186 437 641 General and administrative ex- penses....................... 1,330 1,673 4,604 1,113 1,122 Amortization expense.......... 310 357 633 145 145 ------- -------- -------- ------- ------- Operating loss................ (935) (1,353) (3,875) (1,144) (480) Other, net ................... (31) (53) (21) 36 (43) ------- -------- -------- ------- ------- Net loss...................... $ (966) $ (1,406) $ (3,896) $(1,108) $ (523) ======= ======== ======== ======= ======= Net loss per share............ $ (0.11) $ (0.14) $ (0.22) $ (0.06) $ (0.03) Weighted average shares out- standing..................... 8,866 9,733 17,818 17,533 18,217
MARCH 31, 1996 -------------------- AS ACTUAL ADJUSTED(2) ------- ----------- BALANCE SHEET DATA: Working capital.......................................... $ (16) $29,408 Total assets............................................. 16,651 46,075 Long-term debt and capital lease obligations............. 2,368 2,368 Shareholders' equity..................................... $ 9,556 $38,980
- -------- (1) On January 10, 1995, the Company acquired a Georgia corporation then known as "Transcend Services, Inc." by the merger of Transcend into a subsidiary of the Company. The merger was treated for financial accounting purposes as the acquisition of the Company by the former Transcend and the historical financial statements of the former Transcend have become the financial statements of the Company and include the business of both companies after the effective date of the merger. See "The Company." (2) Adjusted to give effect to the sale by the Company of 3,000,000 shares of Common Stock at an assumed public offering price of $10.50 per share and the application of the net proceeds therefrom as described under "Use of Proceeds." ---------------- Unless otherwise indicated, the information in this Prospectus assumes the Underwriters' over-allotment option is not exercised. The "fiscal year" when used in this Prospectus shall mean the twelve-month period ended December 31 of the calendar year indicated. 4 RISK FACTORS In addition to other information contained in this Prospectus, the following factors should be considered carefully in evaluating the Company and its business before purchasing any of the shares of Common Stock offered hereby. This Prospectus contains, in addition to historical information, forward- looking statements that involve risks and uncertainties. The Company's actual results could differ materially. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below, as well as those discussed elsewhere in this Prospectus. OPERATING LOSSES Although the Company has experienced revenue growth on an annual basis since the fiscal year ended December 31, 1992, the Company has not operated profitably during its last five fiscal years, and for the quarter ended March 31, 1996, it continued to experience losses. At March 31, 1996, the Company had an accumulated deficit of $7,426,000. There can be no assurance that revenue growth will continue in the future or that the Company will achieve profitability. Management believes that the Company's losses are primarily attributable to the significant expenditures made by the Company to build its infrastructure to support future growth and expansion of the services that the Company provides to health care institutions. These expenditures are currently above a level which the Company's revenues can support. There can be no assurance that the Company will be able to increase its revenues from contract management contracts and other services to the extent necessary to support expenses and achieve profitability. In addition, the Company's pricing mechanism on most of its outsourcing contracts requires the Company to increase operating efficiencies over the life of the contract in order to become profitable. To achieve and sustain profitability, the Company also believes that it must acquire a critical mass of such contracts, and be able to renew such contracts on favorable terms. There can be no assurance that the Company will be able to attain the required operating efficiencies or increase the number of outsourcing contracts to the level needed to become profitable. Also, there can be no assurance that the Company will be able to utilize the proceeds from this offering for the profitable expansion of its business and there can be no assurance that the Company will operate profitably in the future or that the losses which the Company is presently experiencing will not worsen in the future. MANAGEMENT OF GROWTH The Company has experienced significant growth, principally through acquisitions of transcription businesses and the expansion of its contract management business. The Company intends to continue to pursue an aggressive growth strategy for the foreseeable future, and its future operating results will depend largely upon its ability to ensure that an adequate infrastructure is in place to support this growth. The process of integrating acquired businesses into the Company's operations may result in unforeseen difficulties and may require a disproportionate amount of resources and management's attention. There can be no assurance that the Company will be able to expand its market presence in its current locations or successfully enter other markets through acquisitions or that any such expansion will be profitable. If the Company's management is unable to manage growth effectively, the Company's business, results of operations and financial condition could be materially and adversely affected. See "Business--Strategy." MARKET ACCEPTANCE OF OUTSOURCING STRATEGY The success of the Company will require acceptance by hospitals and other health care providers of the concept of outsourcing their information management departments. Such acceptance will depend on the ability of the Company to alleviate outsourcing concerns of hospital management, including loss of control, information quality and integrity concerns and a bias against outsourcing due to previous poor experiences. There can be no assurance that the Company will be successful in alleviating these concerns and in marketing its services. Failure of the Company to achieve market acceptance of its services could have a material adverse effect on the Company's business, financial condition and results of operations. Additionally, under the terms of five of its existing outsourcing contracts, the Company has undertaken to provide not only health information management 5 (medical records) services, but also to manage that hospital's patient access (admissions) function, as well as the social services, utilization management and quality management functions for one hospital. The Company intends to seek more outsourcing contracts providing fully integrated health care information management services across multiple departments of the same institution. In light of the Company's lack of any prior experience with such integrated outsourcing arrangements, there can be no assurance that such services will achieve market acceptance by health care providers or that the Company will be able to market successfully or provide such integrated outsourcing services to health care providers. NATURE OF CONTRACTS The Company derives a substantial portion of its revenues from 15 outsourcing contracts which have remaining terms ranging from one to five years. At the end of each contract's duration, the Company must renegotiate a new contract. Should the Company fail to retain an existing customer or fail to adequately expand its base of contracts, the Company's future revenues could be at substantial risk. While the Company believes that there is a significant target market in which the Company may expand its outsourcing contracts base, there can be no assurance that the Company will be able to obtain new outsourcing contracts. Due to its limited operating history in medical records management, there can be no assurance that the Company will be able to renegotiate or renew its existing outsourcing contracts. In addition, the limited number of contracts places an emphasis on the margin earned for each contract. Should the Company be unable to achieve the necessary operating efficiencies in its contracts, the margin earned for each contract will be reduced. The Company is also beginning to explore new methods for pricing its contract management contracts, including a more volume oriented "capitated" pricing mechanism that is based on a hospital customer's activity levels such as the weighted average number of annual patient discharges. In the future, the Company also intends to offer its customers a "per member per month" capitated pricing option. Although the Company believes that these new pricing mechanisms will benefit its customers and generate adequate revenues for the Company, there can be no assurance that these pricing alternatives will be successful or that they will generate sufficient revenues to operate profitably. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview." COMPETITION The outsourcing or contract management of health information services departments is still a relatively new concept in the hospital industry. Management believes that the Company's greatest competition comes from existing, internal medical records departments. To the Company's knowledge, there is currently only one regional firm and one national firm engaged in the same business. The Company expects that as the concept of outsourcing becomes more widely accepted, it will encounter further competition from some or all of the following sources: other traditional health care information management consultants; coding consultants; multi-specialty health care services businesses which currently provide contract management to clinical, housekeeping, dietary or other non-medical services departments of hospitals; management information services providers, particularly developers and vendors of management software; and other parties in contract management businesses (for example, business or financial management services) desiring to enter the health care field. The Company expects that competitive factors will include reputation for expertise in health information management, size and scope of referenceable accounts, prior experience in outsourcing and pricing. Some of its potential competitors are larger, better known and better capitalized than the Company, and such factors could affect the Company's ability to withstand such competition over the long term. There are also companies that operate in other areas of the health information management spectrum, including admissions and the business office. As the Company expands its scope of business into these other areas of health information management, the Company will confront other, sometimes more established competitors. The Company also experiences significant competition with respect to its transcription, consulting and case management businesses from a variety of sources, including, in each case, both local and national businesses. The markets both for medical transcription services and for medical records coding and consultation services are highly fragmented, and no competitor or identifiable group of competitors could be said to be dominant. See "Business--Competition." 6 LITIGATION On September 17, 1993, the Company and its health care subsidiaries and the physician-owned medical groups which had contracts with the health care subsidiaries, initiated a lawsuit against 22 insurance carriers seeking $115 million in compensatory damages plus punitive damages. The claims arise out of the Company's former business, which prior to the merger with Transcend Services, Inc., included the business of providing medical/legal evaluations and medical treatment services (in association with managed medical groups) in the workers' compensation industry in California. In connection with this lawsuit, seven of the insurance carriers have filed cross complaints seeking restitution for funds previously paid by the defendants, disgorgement of profits and punitive damages, based primarily upon allegations of illegal corporate practice of medicine, illegal referral arrangements and related improper conduct. The costs associated with the claims asserted against the insurance companies and the defense of the cross complaints cannot be ascertained with any certainty, but are expected to be substantial. The Company is deferring these costs until resolution of the litigation. The costs associated with this litigation will reduce the Company's results of operations, and there can be no assurance as to the outcome of this litigation, including potential recovery, if any, of the Company's claims or damages, if any. The cross complaints expose the Company to risk of liability which, if the Company is unsuccessful in the defense of such cross complaints, could have a materially adverse impact on the Company's results of operations for a particular period. The Company believes that the cross complaints against the Company are without merit and that the final resolution of the cross complaints will not have a material adverse effect on the Company's financial condition or results of operations; however, there can be no assurance that the Company will be successful in the defense of such cross complaints. See "Business--Legal Proceedings" and Note 2 of Notes to Consolidated Financial Statements. HEALTH CARE INDUSTRY AND UNCERTAINTY OF REFORM The health care industry is subject to changing political, economic and regulatory influences that may affect the outsourcing practices and other operational aspects of hospitals in the Company's target market. The levels of revenues and profitability of the Company may be affected by the continuing efforts of government and third party payors to contain or reduce the costs of health care through various means. In the United States there have been, and the Company expects that there will continue to be, a number of federal and state proposals to control health care costs. These proposals contain measures intended to control public and private spending on health care as well as to provide universal public access to the health care system. If enacted, these proposals may result in a substantial restructuring of the health care delivery system. Significant changes in the nation's health care system could have an adverse impact on the Company's outsourcing services, although the impact of such changes cannot be predicted with any certainty. DEPENDENCE ON KEY PERSONNEL The success of the Company has been largely dependent on the skills, experience and efforts of its senior management and especially its President and Chief Executive Officer, Larry G. Gerdes, its Chief Operating Officer, Julian L. Cohen, its Chief Financial Officer, David W. Murphy and its Chief Development Officer, G. Scott Dillon. The loss of the services of Messrs. Gerdes, Cohen, Murphy or Dillon or other members of the Company's senior management could have a material adverse effect on the Company's business and prospects. The Company believes that its future success will also depend in part upon its ability to attract, retain and motivate qualified personnel. Competition for such personnel is intense. There can be no assurance that the Company will be successful in attracting and retaining such personnel. The loss of key personnel, or inability to hire or retain qualified personnel, could have an adverse effect on the Company's business, financial condition and results of operations. The Company does not carry any "key-man" insurance on the life of any officer of the Company. See "Management." SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, the Company will have 21,401,403 shares of Common Stock outstanding. Of these shares, a total of 21,341,403, including the 3,000,000 shares offered hereby, will be eligible for sale in 7 the open market without restriction under the Securities Act of 1933, as amended (the "Securities Act"), except to the extent any shares are purchased by "affiliates" (as that term is defined under the Securities Act) of the Company. All of the remaining 60,000 shares of Common Stock are "restricted securities" as that term is defined in Rule 144 promulgated under the Securities Act, none of which are currently eligible for sale in the public market. Additional shares of Common Stock, including shares issuable upon exercise of options and the Warrant to purchase Common Stock and upon conversion of the Company's 8% Convertible Debentures, will also become eligible for sale in the public market from time to time. Certain of the holders of these additional shares have registration rights obligating the Company to register their shares under certain circumstances. See "Shares Eligible for Future Sale--Registration Rights." The Company and the Company's officers and directors have agreed not to sell any of their shares of Common Stock for a period of 120 days from the date of this Prospectus without the prior written consent of Smith Barney Inc. Following this offering, sales and potential sales of substantial amounts of the Company's Common Stock in the public market pursuant to Rule 144 or otherwise could adversely affect the prevailing market prices for the Common Stock and impair the Company's ability to raise additional capital through the sale of equity securities. See "Description of Capital Stock," "Shares Eligible for Future Sale" and "Underwriting." ANTI-TAKEOVER PROVISIONS The Company's Certificate of Incorporation, as amended, authorizes the issuance of up to 21,000,000 shares of Preferred Stock, issuable in series, the relative rights and preferences of which may be designated by the Board of Directors. The issuance of Preferred Stock could make it more difficult for a third party to acquire a majority of the outstanding voting stock. Accordingly, the issuance of Preferred Stock may be used as an "anti-takeover" device without further action on the part of the stockholders of the Company. No shares of Preferred Stock have been issued, and the Company has no present plans to issue any shares of Preferred Stock. See "Description of Capital Stock." DILUTION; NO DIVIDENDS The public offering price per share of Common Stock will exceed the net tangible book value per share of the Common Stock. Purchasers of the Common Stock in this offering will experience immediate and substantial dilution. See "Dilution." In addition, the Company has not previously paid any dividends on its Common Stock and for the foreseeable future intends to retain earnings to finance the development and expansion of its business. Pursuant to the terms of certain financing agreements, the Company is restricted from paying dividends to its shareholders. See "Dividend Policy." POSSIBLE VOLATILITY OF STOCK PRICE The market price of the Common Stock could be subject to significant fluctuations in response to the Company's operating results and other factors, and there can be no assurance that the market price of the Common Stock will not decline below the public offering price herein. In addition, the stock market has from time to time experienced extreme price and volume volatility. These fluctuations may be unrelated to the operating performance of particular companies whose shares are traded and may adversely affect the market price of the Common Stock. See "Price Range of Common Stock." 8 THE COMPANY The Company was incorporated in California in 1976 and was reorganized as a Delaware corporation in 1988. On January 10, 1995, the Company, formerly known as "TriCare, Inc.," acquired Transcend Services, Inc., then a Georgia corporation, by the merger of Transcend Services, Inc. into First Western Health Corporation ("First Western"), a subsidiary of the Company (the "Merger"). Prior to the Merger, Transcend Services, Inc., which was originally organized in 1984, provided consulting services for medical records management, quality and utilization management, records coding and records management software. In 1992, the former Transcend Services, Inc. developed, tested and marketed new lines of business intended to capitalize on the increasing need for the outsourcing of medical records, and by the end of 1992 had entered into its first long-term agreement for the management of a hospital's medical records department. On May 31, 1995, Transcend Services, Inc. and Veritas Healthcare Management ("Veritas"), another subsidiary of the Company, merged into the Company, whose name was then changed to "Transcend Services, Inc." The Merger was treated for financial accounting purposes as the acquisition of TriCare, Inc. by Transcend Services, Inc. and the historical financial statements of the former Transcend Services, Inc. have become the financial statements of the Company and include the businesses of both companies after the effective date of the Merger. The Company has one wholly-owned subsidiary, Sullivan Health and Rehabilitation Services, Inc. ("Sullivan"). When used in this Prospectus, the term "Company" or "Transcend" shall mean Transcend Services, Inc. and Sullivan unless otherwise stated in this Prospectus or unless the context otherwise requires. The Company's executive offices are located at 3353 Peachtree Road, N.E., Suite 1000, Atlanta, Georgia 30326. Its telephone number is (404) 364-8000. USE OF PROCEEDS The net proceeds to the Company from the sale of the 3,000,000 shares offered by the Company hereby (after deducting the underwriting discount and estimated offering expenses payable by the Company) at an assumed public offering price of $10.50 per share are estimated to be approximately $29.4 million ($33.9 million if the Underwriters' over-allotment option is exercised in full). The Company intends to use the net proceeds for general corporate purposes and for working capital to fund the Company's growth pursuant to its business strategy, which may include the use of up to approximately $12 million of the net proceeds to finance the installation and development of its Information Service Center concept if the Company is successful in marketing the concept to certain of its customers. The Company may also use up to approximately $5 million of net proceeds to purchase computer hardware and optical imaging equipment in connection with the application of better technologies in its contract management business. The Company may also utilize a portion of the net proceeds to fund future acquisitions, should suitable opportunities arise. See "Business-Strategy." Pending such uses, the net proceeds will be invested in short-term, interest-bearing obligations of investment grade. 9 PRICE RANGE OF COMMON STOCK The Common Stock is traded on the Nasdaq National Market under the symbol "TRCR." The following table sets forth, for the Company's fiscal periods indicated, the high and low sales prices per share for the Common Stock, as reported on the Nasdaq National Market.
HIGH LOW ------ ----- 1994 First Quarter.................................................. $ 3.50 $2.00 Second Quarter................................................. 3.25 2.38 Third Quarter.................................................. 3.00 1.75 Fourth Quarter................................................. 2.75 1.50 1995 First Quarter.................................................. $ 4.13 $1.56 Second Quarter................................................. 3.69 2.50 Third Quarter.................................................. 7.50 2.50 Fourth Quarter................................................. 7.13 4.75 1996 First Quarter.................................................. $ 9.38 $4.88 Second Quarter (through May 29, 1996).......................... $12.13 $8.63
On May 29, 1996, the last sale price of the Common Stock as reported on the Nasdaq National Market was $10.50 per share. As of May 29, 1996, there were approximately 403 holders of record of the Common Stock. 10 DILUTION As of March 31, 1996, the Company had a net tangible book value of $4,338,000, or $0.23 per share. Net tangible book value per share is determined by dividing the net tangible book value (tangible assets less liabilities) of the Company by the number of shares of Common Stock outstanding at that date (giving effect to the conversion of 8% Convertible Subordinated Debentures and the exercise of the outstanding Warrant to purchase Common Stock, as if converted on March 31, 1996). Without taking into account any changes in net tangible book value after March 31, 1996, other than to give effect to the sale of the 3,000,000 shares of Common Stock offered by the Company hereby (at an assumed public offering price of $10.50 per share) and the receipt of the net proceeds therefrom, the net tangible book value of the Company as of March 31, 1996 would have been $33,762,000, or $1.54 per share. This represents an immediate increase in net tangible book value of $1.31 per share to existing shareholders and an immediate dilution of $8.96 per share to new investors. The following table illustrates this dilution per share. Assumed public offering price per share........................ $10.50 Net tangible book value per share as of March 31, 1996......... $0.23 Increase in net tangible book value per share attributable to the offering(1)............................................... 1.31 ----- Adjusted net tangible book value per share after the offering.. 1.54 ------ Dilution per share to new investors(2)......................... $ 8.96 ======
- -------- (1) After deduction of underwriting discounts and commissions and estimated offering expenses. (2) Determined by subtracting the adjusted net tangible book value per share after the offering from the amount of cash paid by a new investor for a share of Common Stock. DIVIDEND POLICY The Company intends to retain its earnings to finance the growth and development of its business and does not anticipate paying cash dividends on the Common Stock in the foreseeable future. The payment of any future dividends will be at the discretion of the Company's Board of Directors and will depend upon, among other things, future earnings, operations, capital requirements, contractual restrictions, the general financial condition of the Company and general business conditions. Pursuant to the terms of certain financing agreements, the Company is restricted from paying dividends to its shareholders. 11 CAPITALIZATION The following table sets forth the capitalization of the Company at March 31, 1996 on an actual basis and as adjusted to give effect to the sale of the 3,000,000 shares of Common Stock, at an assumed public offering price of $10.50 per share, offered by the Company hereby and the application of the net proceeds therefrom as described under "Use of Proceeds."
MARCH 31, 1996 -------------------- ACTUAL AS ADJUSTED ------- ----------- (IN THOUSANDS) Long-term debt and capital lease obligation............... $ 2,368 $ 2,368 Shareholders' equity: Preferred stock--par value $.01 per share; 21,000,000 shares authorized; no shares issued and outstanding...... -- -- Common stock, par value $.01 per share; 30,000,000 shares authorized; 18,291,000 and 21,291,000 shares issued and outstanding on an actual and as adjusted basis, respec- tively(1)................................................ 183 213 Paid-in capital........................................... 16,799 46,193 Accumulated deficit....................................... (7,426) (7,426) ------- ------- Total shareholders' equity................................ 9,556 38,980 ------- ------- Total capitalization...................................... $11,924 $41,348 ======= =======
- -------- (1) Excludes (a) 1,298,275 shares of Common Stock issuable as of May 24, 1996 upon the exercise of outstanding stock options, 872,875 of which are presently exercisable or become exercisable within the next 60 days, (b) 572,000 shares of Common Stock issuable upon conversion of the Company's 8% Subordinated Convertible Debentures, (c) 25,000 shares issuable upon exercise of the outstanding Warrant to purchase Common Stock, (d) 45,750 shares reserved for future issuance under the Company's 1992 Stock Option Plan, as amended and (e) 155,524 shares reserved for future issuance under the Company's 1990 Employee Stock Purchase Plan, as amended. 12 SELECTED CONSOLIDATED FINANCIAL DATA(1) (IN THOUSANDS, EXCEPT PER SHARE DATA) The following table sets forth selected consolidated financial data of the Company for the periods indicated, which data has been derived from the Company's consolidated financial statements as of December 31, 1994 and 1995 and the consolidated financial statements for the three years in the period ended December 31, 1995. The report of Arthur Andersen LLP, independent public accountants, with respect to such consolidated financial statements as of December 31, 1994 and 1995 and for the three years in the period ended December 31, 1995 is included on page F-2. The consolidated financial statements of the Company for each of the years in the two-year period ended December 31, 1992 were derived from financial statements audited by another firm of independent certified public accountants. The selected financial data for the three month periods ended March 31, 1995 and 1996 are derived from the unaudited consolidated financial statements of the Company. The unaudited consolidated financial statements include all adjustments, consisting of normal recurring accruals, which the Company considers necessary for a fair presentation of the consolidated financial condition and results of operations for these periods. Operating results for the three months ended March 31, 1996 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 1996. This selected consolidated financial data should be read in conjunction with the consolidated financial statements, related notes and other financial information included and incorporated by reference herein.
THREE MONTHS YEARS ENDED DECEMBER 31, ENDED MARCH 31, ---------------------------------------- ---------------- 1991 1992 1993 1994 1995 1995 1996 ------ ------ ------ ------- ------- ------- ------- STATEMENTS OF OPERATIONS DATA: Net revenues............ $1,854 $1,702 $6,208 $12,393 $25,882 $ 4,897 $ 8,688 Direct costs............ 1,074 893 5,125 10,787 22,334 4,346 7,260 ------ ------ ------ ------- ------- ------- ------- Gross profit............ 780 809 1,083 1,606 3,548 551 1,428 Marketing and sales ex- pense.................. 362 209 378 929 2,186 437 641 General and administra- tive expense........... 538 715 1,330 1,673 4,604 1,113 1,122 Amortization expense of intangible assets...... -- -- 310 357 633 145 145 ------ ------ ------ ------- ------- ------- ------- Operating loss.......... (120) (115) (935) (1,353) (3,875) (1,144) (480) Interest, net........... (40) (16) (132) (65) (21) 36 (43) Other................... -- (2) 101 25 -- -- -- ------ ------ ------ ------- ------- ------- ------- Total other income (ex- penses)................ (40) (18) (31) (40) (21) 36 (43) ------ ------ ------ ------- ------- ------- ------- Pre-Tax loss............ (160) (133) (966) (1,393) (3,896) (1,108) (523) Provision for income tax.................... -- -- -- 13 -- -- -- ------ ------ ------ ------- ------- ------- ------- Net loss................ $ (160) $ (133) $ (966) $(1,406) $(3,896) $(1,108) $ (523) ====== ====== ====== ======= ======= ======= ======= Net loss per share...... $ (.04) $ (.02) $ (.11) $ (.14) $ (.22) $ (0.06) $ (0.03) Weighted average shares outstanding............ 3,774 7,162 8,866 9,733 17,818 17,533 18,217 THREE MONTHS DECEMBER 31, ENDED MARCH 31, ---------------------------------------- ---------------- 1991 1992 1993 1994 1995 1995 1996 ------ ------ ------ ------- ------- ------- ------- BALANCE SHEET DATA: Working capital......... $ 384 $ 202 $ (552) $(3,001) $ 461 $ 1,109 $ (16) Total assets............ $ 922 $ 790 $1,191 $ 2,680 $16,833 $16,018 $16,651 Long-term debt and capi- tal lease obligations.. $ 355 $ 300 $ -- $ -- $ 2,392 $ -- $ 2,368 Shareholders' equity.... $ 411 $ 277 $ 162 $(1,233) $ 9,921 $12,270 $ 9,556
- -------- (1) On January 10, 1995, the Company acquired a Georgia corporation then known as "Transcend Services, Inc." by the merger of Transcend into a subsidiary of the Company. The merger was treated for financial accounting purposes as the acquisition of the Company by the former Transcend and the historical financial statements of the former Transcend have become the financial statements of the Company and include the business of both companies after the effective date of the merger. See "The Company." 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the consolidated financial statements of the Company (including the notes thereto) contained elsewhere in this Prospectus. OVERVIEW Transcend is a leader in the emerging field of health care information management services to hospitals and other associated health care providers. The Company provides a range of services along the following lines: (i) contract management ("outsourcing") of health information management ("medical records"), patient access ("admissions") and other affiliated departments; (ii) medical transcription services for physician dictation; and (iii) consulting services relating to health information management and reimbursement coding. The Company currently operates, on a contract management basis, the health information management ("HIM"), or medical records departments, of 15 general acute care hospitals located in ten states and the District of Columbia. The Company also provides case management and disability management services to insurance carriers, third party administrators and self-insured employers. The Company intends to expand the range of its contract management services to include management of other functional areas of hospitals associated with health information management, such as management of patient access (admissions), utilization review, quality assurance and the business office. The Company presently provides full contract management outsourcing services in the admissions departments for five of the 15 hospitals it manages. The Company is actively seeking to provide this expanded range of services to its current and future hospital customers. The Company also provides, through outsourcing as well as other contracts, medical records transcription services through computer and telephone links from centralized facilities to approximately 100 hospital customers. Approximately 3,000 hospitals in the United States have more than 100 beds and constitute the Company's first tier of market opportunity. The Company currently has contract management contracts covering the HIM departments of 15 hospitals ranging in bed size from 56 beds to 541 beds, with the average contract size of approximately $1.5 million. The initial contract terms of the Company's current contracts range from two to five years and are generally terminable without cause upon expiration of the initial term or for cause at any time during the initial term thereof. The Company's existing contracts currently have remaining terms ranging from approximately one to five years. Due to its limited operating history in medical records management, the Company is unable to assess or predict its contract renewal rate. The Company negotiates its contract management fees on a fixed installment basis which represents, at contract inception, an immediate savings to the contracting hospital as compared to its historical costs. In the early term of such a contract, the Company's expenses in providing the contract services remain relatively high, as a percentage of contract revenues received, as set- up and training costs are incurred, new procedures are implemented and departmental reorganizations are initiated. Completion of such steps should result in lower operating expenses, which in turn should increase the profit margin of a constant revenue stream over time. Due to the Company's limited operating history in the contract management business, however, there can be no assurances that operating expenses will sufficiently decrease over the life of such contracts. The Company is considering alternative pricing structures and has recently developed a more volume oriented "capitated" pricing mechanism based on its hospital customers' activity levels such as the weighted average number of annual patient discharges. In the future, the Company also intends to offer a "per member per month" (PMPM) capitated pricing option which is similar to the current pricing mechanisms used by managed health care institutions and will therefore enable its customers to more effectively compete in a managed care environment. 14 The Company is typically paid for its transcription services on a production basis at rates determined on a per-line-transcribed basis. Where transcription services are included as part of the services provided in the Company's outsourcing contracts for health information management, however, the services are provided by the Company as part of a set contract fee. The Company is paid for its consulting and coding services on a negotiated fee for services basis. In addition, the Company is paid for its health care case management services primarily on an hourly basis. On January 10, 1995, the Company acquired a Georgia corporation then known as "Transcend Services, Inc." by the merger of Transcend Services into a subsidiary of the Company. The merger was treated for financial accounting purposes as the acquisition of the Company by the former Transcend Services and the historical financial statements of the former Transcend Services have become the financial statements of the Company and include the business of both companies after the effective date of the merger. See "The Company." RESULTS OF OPERATIONS The following table presents for the periods indicated, as a percentage of total net revenues, components of the Company's net revenues and categories from the Company's consolidated statements of operations and the period-to- period changes in the dollar amounts of the respective line items:
PERIOD TO PERIOD PERCENTAGE PERCENTAGE OF NET REVENUES INCREASE (DECREASE) ----------------------------------------- ----------------------------- THREE MONTHS THREE MONTHS FISCAL YEAR ENDED MARCH 31, FISCAL YEAR ENDED MARCH 31, --------------------- ----------------- ------------ --------------- 1994 1995 1996 VS VS VS 1993 1994 1995 1995 1996 1993 1994 1995 ----- ----- ----- ------- ------- ----- ----- --------------- Contract management..... 62.3% 74.6% 55.3% 57.3% 61.0% 139.1% 54.8% 88.7% Medical transcription... 18.3 19.6 25.7 24.7 23.0 113.4 174.4 65.6 Consulting and coding... 19.4 5.8 3.0 3.2 2.5 (40.0) 6.2 38.6 Case management......... -- -- 16.0 14.8 13.5 -- -- 61.7 ----- ----- ----- ------- ------- ----- ----- ----- Net revenues.......... 100.0% 100.0% 100.0% 100.0% 100.0% 99.6% 108.8% 77.4% ----- ----- ----- ------- ------- ----- ----- ----- Direct costs............ 82.6 87.0 86.3 88.8 83.6 110.5 107.0 67.1 Gross profit.......... 17.4 13.0 13.7 11.2 16.4 48.3 120.9 159.2 Marketing and sales ex- pense.................. 6.1 7.5 8.4 8.9 7.4 145.8 135.3 46.7 General and administrative expense. 21.4 13.5 17.8 22.7 12.9 25.8 175.2 0.8 Amortization expense.... 5.0 2.9 2.5 3.0 1.7 15.2 77.3 -- ----- ----- ----- ------- ------- ----- ----- ----- Operating loss........ (15.1)% (10.9)% (15.0)% (23.4)% (5.5)% 44.7% 186.4% (58.0)%
15 Three Months Ended March 31, 1996 Compared to Three Months Ended March 31, 1995 The increase in total revenues for the quarter ended March 31, 1996 is primarily attributable to (i) the increased contract management outsourcing revenues attributable to six contract management contracts signed in August and September 1995 and two contracts signed in February and March 1996; (ii) increased medical transcription operations revenues resulting from the April 1995 acquisition of Medical Transcription of Atlanta, Inc. ("MTA"); and (iii) the increase in case management and rehabilitation revenues resulting from enhanced sales and marketing efforts in 1995 that resulted in new customers as well as the expansion of case management services into Texas by means of an acquisition made in July 1995. Gross profit increased 159.2% to $1,428,000 for the quarter ended March 31, 1996 from $551,000 in the first quarter of the prior year. Gross profit as a percentage of revenues increased to 16.4% for the quarter ended March 31, 1996 from 11.2% in the same prior year period. This increase was primarily attributable to the contract management outsourcing division which expanded its gross margin from 13.3% in 1995 to 16.6% in 1996, as a result of increased efficiencies and lower operating costs following the Company's re-engineering efforts, and the medical transcription business which expanded its gross margin from 11.6% in the quarter ended March 31, 1995, to 17.3% in the quarter ended March 31, 1996. The margin improvement in transcription is a result of increased efficiencies and lower operating costs following the continued deployment of digital technology and the improved productivity of the Company's transcriptionists. The Company's overall gross margin was further enhanced in the 1995 to 1996 quarter comparison by the increase in case management's gross margin from 13.4% for the quarter ended March 31, 1995 to 27.1% for the quarter ended March 31, 1996. This gain in case management gross margin is the result of increased operating efficiencies and lower direct costs across an expanded, more diverse (less concentrated) customer base. Marketing and sales expenses increased 46.7% to $641,000 in the quarter ended March 31, 1996 from $437,000 in the same prior year period and decreased as a percentage of revenues to 7.4% for the quarter ended March 31, 1996 from 8.9% for the quarter ended March 31, 1995. The increase in sales and marketing expenses from the first quarter 1995 to 1996 is primarily attributable to (i) a larger national sales force in place in the 1996 quarter; (ii) increased expenditures for telemarketing and market analysis implemented to provide the Company better sales lead qualification and more accurate target marketing opportunities; and (iii) sales commissions paid on two new sales in the first quarter 1996 as compared to only one sale in the first quarter 1995. The Company typically pays and expenses 100% of its sales commission upon contract signing. With much of the Company's investment in a national sales force, telemarketing and marketing/advertising now in place, the Company anticipates that sales and marketing expenses, as a percentage of revenues, will decline, as revenues increase. General and administrative expenses remained relatively constant at $1,122,000 for the quarter ended March 31, 1996 and $1,113,000 in the same prior year period and decreased as a percentage of revenues to 12.9% for the quarter ended March 31, 1995 from 22.7% in the first quarter of the prior year. General and administrative expenses remained constant in the quarter-to- quarter comparison and declined as a percentage of revenues due to the Company's investment over the past 18 to 24 months in building the corporate structure necessary to support the Company's growth for the foreseeable future. The Company's loss from operations decreased to $480,000 for the quarter ended March 31, 1996 from $1,144,000 in the first quarter of the prior year period. This $480,000 quarterly loss compares to an operating loss of $502,000 for the quarter ended December 31, 1995 and an operating loss of $834,000 for the quarter ended September 30, 1995. Other expenses increased to $43,000 for the quarter ended March 31, 1996 from other income of $36,000 in the first quarter of the prior year period, primarily due to the impact of interest expense incurred in connection with the August 15, 1995 private placement of 8% Subordinated Convertible Debentures. 16 Year Ended December 31, 1995 Compared with Year Ended December 31, 1994 Net revenues increased 109% to $25,882,000 in 1995 from $12,393,000 in 1994. The increase in net revenues is primarily attributable to operations in the Company's contract management outsourcing division, contributing $5,058,000 of the overall increase due to the addition of six new outsourcing contracts. Medical transcription revenues grew from $2,428,000 in 1994 to $6,662,000 for 1995, primarily due to the acquisition of IDS and MTA. Sullivan's 1994 revenues are not included as they were prior to the Merger. Gross profit increased 121% to $3,548,000 in 1995 from $1,606,000 in 1994. Gross profit as a percentage of revenues increased to 13.7% in 1995 from 13.0% in 1994. This increase was primarily attributable to the addition of Sullivan's case management revenues reflecting an overall 21% gross margin. Gross margins in contract management outsourcing increased to 14% from 11% in 1994. Average transcription margins decreased from 19% to 14% as a result of the Script-Ease, Inc. and IDS acquisitions. Marketing and sales expenses increased 135% to $2,186,000 in 1995 from $929,000 in 1994 and increased as a percentage of revenues to 8.4% from 7.5% in 1994. The increase is attributable to expenses associated with the efforts to heighten market awareness of the Company and contract outsourcing, the expansion of the Company's sales force, an increase in commission compensation relating to the six new contract management contracts signed in the third quarter and the additional sales costs related to the case management division. General and administrative expenses increased 175% to $4,604,000 in 1995 from $1,673,000 in 1994 and increased as a percentage of revenues to 17.8% from 13.5%. The increase reflects additional expense for expanded management and support staff incurred to position the Company for future growth, as well as the additional overhead attributable to the Merger. Amortization expenses increased to $633,000 in 1995 from $357,000 in 1994 reflecting the full impact of the intangible assets associated with the Company's acquisition of three medical transcription businesses and the additional amortization expense related to the Merger. The Company's loss from operations increased to $3,875,000 in 1995 from $1,353,000 in 1994; however, beginning in the second quarter of 1995, the Company realized an improving trend with regard to minimizing its loss from operations. The Company's loss from operations was $1,393,000 in the second quarter ending June 30, 1995. The loss from operations for the third quarter ended September 30, 1995 was $867,000, while the fourth quarter ended December 31, 1995 loss from operations decreased to $527,000. Other expense decreased to $21,000 in 1995 from $40,000 in 1994, primarily as the result of the Company's recognition of higher interest income as applied against interest expense. Year Ended December 31, 1994 Compared With Year Ended December 31, 1993 Net revenues increased 99.6% to $12,393,000 in 1994 from $6,208,000 in 1993. This increase in net revenues is primarily attributable to increased sales in the contract management outsourcing division, reflecting the full year impact of five new outsourcing contracts entered into in 1993 and one outsourcing contract entered into on June 1994. Other factors contributing to the increase in net revenues include the acquisition of the transcription business Script- Ease, Inc. in September 1994 and the full year impact of the acquisition of dataLogix Transcription, Inc. ("dataLogix") in April 1993. Gross profit increased 48.3% to $1,606,000 in 1994 from $1,083,000 in 1993. Gross profit as a percentage of revenues declined to 13.0% in 1994 from 17.5% in 1993. This decline was primarily attributable to higher costs associated with the implementation of the six new outsourcing contracts entered into in 1993 and 1994, which the Company anticipates will decrease as a percentage of revenues over the life of the contract. Transcription profit margins increased from 12% in 1993 to 20% in 1994 due to reduced costs resulting from efficiencies implemented in 1994 at the transcription office in Chicago, Illinois. Consulting and coding margins declined in 1994 due to the Company's increased focus on contract management outsourcing. 17 Marketing and sales expenses increased 145.8% to $929,000 in 1994 from $378,000 in 1993 and increased as a percentage of revenues to 7.5% from 6.1% in 1993. This increase reflects increased expenses associated with additional marketing efforts in the contract management outsourcing division and expansion of the contract management sales force, which resulted in additional salaries and sales commissions. General and administrative expenses increased 25.8% to $1,673,000 in 1994 from $1,330,000 in 1993 but decreased as a percentage of revenues, to 13.5% from 21.4%. The increase reflects additional expense for expanded management and support staff incurred to support the Company's present and future growth. The increase in amortization expenses to $357,000 in 1994 from $310,000 in 1993 reflects the full impact of the intangible assets associated with the dataLogix acquisition and the additional amortization expense related to the acquisition of Script-Ease, Inc. The Company's loss from operations increased to $1,353,000 in 1994 from $953,000 in 1993. Other expense increased to $40,000 in 1994 from $31,000 in 1993, primarily as the result of the Company's recognition of a gain of $100,000 from the sale of the software division in April 1993 as compared to the recognition of only a $25,000 gain in 1994. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of cash are internally generated funds and the net assets of the Company's discontinued operations, the remainder of which are expected to be collected over the next several years. In 1995 the Company expended $1,232,000 in cash to acquire the medical transcription businesses of IDS and MTA. In connection with these acquisitions, on August 15, 1995, the Company raised $2 million in cash through the private placement of 8% Subordinated Convertible Debentures. The Debentures are unsecured and subordinated to all other debt of the Company. The interest rate on the Debentures is 8%, payable semi-annually, and the principal amount is due in full on August 15, 2000. The Debentures are convertible into Common Stock by the holder at any time prior to August 15, 2000 at a rate of 286 shares of Common Stock for each $1,000 in principal amount and are convertible by the Company at any time when the Common Stock trades at $10.50 per share for 30 consecutive trading days. The Company may redeem the Debentures at any time upon 30 to 60 days notice to the holder of a Debenture. The Company's working capital position decreased during the quarter ended March 31, 1996 from $461,000 at December 31, 1995 to $(16,000) at March 31, 1996. This decrease in the Company's working capital position arises from a combination of several factors including the financing from current cash sources of capital expenditures for equipment during the quarter ended March 31, 1996 and the continued funding of losses from the Company's operations. On April 30, 1996, the Company established two separate credit facilities with Silicon Valley East (Wellesley, Massachusetts), a division of Silicon Valley Bank, a California-chartered bank (Santa Clara, CA). The aggregate credit available to the Company (under both facilities) is $5.75 million. The banking facilities are secured by all of the Company's assets. One of the facilities is a $5.0 million working capital credit line subject to an initial cap of $3.0 million. The cap is removed subject to the Company's compliance with several covenants going forward. The second facility is a $750,000 term facility set up to help the Company meet its capital investment requirements in the near term. This term note is subject to an initial cap of $250,000, with the cap being removed upon the Company's compliance with specific covenants. Both facilities will mature on April 30, 1997. The Company anticipates that cash on hand, together with internally generated funds, cash collected from discontinued operations and the net proceeds from this offering should be sufficient to finance continuing operations for the foreseeable future as well as the civil litigation action against certain insurance carriers. IMPACT OF INFLATION Inflation has not had a material effect on the Company to date. However, the effects of inflation on future operating results will depend in part, on the Company's ability to increase prices and/or lower expenses in amounts offsetting inflationary cost increases and on reimbursement levels established by state authorities. 18 BUSINESS GENERAL Transcend is a leader in the emerging field of health care information management services to hospitals and other associated health care providers. The Company provides a range of services along the following lines: (i) contract management ("outsourcing") of health information management ("medical records"), patient access ("admissions") and other affiliated departments; (ii) medical transcription services for physician dictation; and (iii) consulting services relating to health information management and reimbursement coding. The Company currently operates, on a contract management basis, the health information management ("HIM"), or medical records departments, of 15 general acute care hospitals located in ten states and the District of Columbia. The Company also provides case management and disability management services to insurance carriers, third party administrators and self-insured employers. The health care industry is undergoing significant and rapid change. Hospitals and other health care providers have come under increased scrutiny from regulators and third party payors. As a result, hospitals are now looking to outsource to third parties certain costly or complicated functions that are not directly related to core competencies or where they are unable to achieve economies of scale. In particular, patient information, and the delivery of such information in a timely fashion, have become critical to improving productivity, efficiency and cost containment, while maintaining a high level of patient care. For instance, many hospitals are finding that their medical records departments are inadequate, and to remedy the inadequacies of these functions, they are beginning to turn to third party service providers which have expertise in managing medical records, admissions and other affiliated departments. With over 5,000 hospitals in the United States, the market for outsourcing the management of medical records departments and other affiliated departments is sizable. Approximately 3,000 hospitals in the United States have more than 100 beds and constitute the Company's first tier of market opportunity. American Hospital Publishing, Inc. has reported that in 1995 two out of three U.S. hospitals were outsourcing one or more departments. According to Modern Healthcare magazine's 17th Annual Contract Management Survey, published in September 1995, the total number of hospital management contracts increased by nearly 12% from the end of 1993 to the end of 1994, from approximately 7,800 to approximately 8,770. The health care industry has recognized the need for improvement in the processing of health care information, and to achieve this improvement, there has been a dramatic increase in the development of technological solutions offered by third party vendors of computer hardware and software. Although there have been significant advances in the management of medical information in general, little progress has been made introducing technology to the management of the medical records departments, patient admissions or other affiliated departments of hospitals that handle the flow of patient information. The Company believes that there is a need, and therefore an emerging market, for third party service providers to assist hospitals and other health care providers in (i) the effective implementation of the available technological tools for health care information management, (ii) the process of managing health care information across the pre-admission to post- discharge continuum of the health care delivery system and (iii) the management and training of personnel in health care information departments. By managing the entire flow of patient information through the hospital, errors, inefficiencies and their associated costs can be minimized. INDUSTRY OVERVIEW The health care industry is undergoing significant and rapid change. Hospitals and other health care providers have come under increased scrutiny from regulators and third party payors, which has forced the providers to examine their cost structures and business practices. The industry has recognized the need for improvement in the processing of health care information, and to achieve this improvement, there has been a dramatic increase in the development of technological solutions offered by third party vendors of computer hardware and software. Although there have been significant advances in the management of medical information in general, little progress has been made introducing technology to the management of the medical records 19 departments, patient admissions or other affiliated departments of hospitals that handle the flow of patient information. Health care information technology vendors have focused on developing information systems such as "electronic medical records" that promise to move all patient information on- line, giving all constituents immediate access to relevant information. However, the development of such systems and more importantly the widespread adoption of such systems is still several years away. The Company believes that transitioning the medical record from paper to electronic format will require a higher level of service in the performance of certain HIM functions, including coding, record analysis and completion, transcription, as well as others. With the expansion of the Company's contract management business and the development of the Information Service Center business model, the Company believes it will be well positioned to provide hospitals and other health care providers with this higher level of service. Many hospitals are finding that their medical records departments are in many respects inadequate and that outsourcing HIM and related departments can result in competitive advantages by reducing costs such as employee training and technology and equipment upgrades. Hospitals have outsourced basic services including housekeeping, laundry and food preparation for a number of years to reduce operating costs and ensure quality of service and are now looking to outsource other costly or complicated functions that are not directly related to core competencies or where they are unable to achieve economies of scale. An increasing number of health care providers are now outsourcing the pharmacy, emergency room staffing and physical therapy staffing functions and have more recently started to outsource critical administrative functions such as patient health information management of medical records departments and related functions including patient admission, utilization review, quality assurance and the business office. Many hospitals are now turning to third party providers to apply their expertise in managing not only the medical records, but admissions and other affiliated departments as well. This development is helping providers control costs and allowing them to concentrate on the core business of providing high quality patient care and at the same time creating a significant opportunity for third party service providers to assist hospitals and other health care providers in processing and managing health care information across the pre- admission to post-discharge continuum. BUSINESS STRATEGY The Company's business strategy focuses on the application of advanced technological tools and health care information management expertise to improve the efficiency and productivity of health care information management services from pre-admission of the patient through post-discharge. Key elements of the Company's business strategy consist of the following: Increase Penetration of HIM Outsourcing Market. The Company is focused on increasing its penetration of the HIM outsourcing market through the implementation of an enhanced sales, marketing and lead generation program. The Company's initial target market is comprised of the approximate 3,000 hospitals in the United States with more than 100 beds. The Company has substantially expanded its marketing efforts, evidenced by the fact that the Company conducted 49 onsite operational assessments through the four month period ended April 30, 1996 as compared to a total of 16 assessments during calendar 1995. Furthermore, the Company intends to continue expanding its marketing efforts to include large clinics, sub-acute care facilities, HMOs, skilled nursing facilities and other health care providers as part of the integrated health care delivery system. Apply Emerging Technology. Although the Company is a service company and therefore does not intend to develop a proprietary software/hardware system, the Company is technology oriented and intends to utilize the most effective technology available to reshape the way information is managed across the integrated health care delivery system to obtain new levels of cost effectiveness. Through a strategic partnership with a small imaging company, the Company has introduced an electronic document management ("EDM") product in two of its contract management sites. However, the Company does not intend to invest in the research and development of EDM systems, and to the extent that more effective technological products become available, 20 the Company will use such technology, or partner with qualified technology companies, to establish the most effective optical scanning or electronic imaging capabilities at its sites. Develop Information Service Centers. The Company has developed the concept of an Information Service Center as a business model for the provision of future outsourcing services in a unique format, designed to further reduce hospital costs and improve efficiencies by reducing and moving staff off-site and taking advantage of economies of scale. Under the model, once the Company has signed contracts with a group of health care provider customers which are under common ownership and/or located in a given geographic area, the Company plans to consolidate all of the functional and technological aspects of health information management into one centralized off-site service center. The Company believes that the Information Service Center model offers several benefits, including the ability to perform similar functions for multiple clients, to offer outsourcing services to larger integrated delivery systems and to provide geographically spaced health care providers with a central location for the receipt of patient data. Expand Range of Contract Management Services. Once the Company has established itself in a hospital by successfully managing the medical records department, the Company believes it is well positioned to manage other aspects of the hospital's operations related to health information, including patient admitting and the business office. The Company intends to pursue additional outsourcing business from existing as well as new customers. The Company believes that additional efficiencies in information management can be achieved through the management of the record creation process at its point of beginning (pre-registration, admitting) through post-discharge (the business office). Pursue Acquisitions and Strategic Alliances. The Company has historically used an acquisition strategy to fulfill part of its business plan, and will continue to seek acquisition opportunities to complement, expand and diversify its services portfolio. The Company will also pursue the formation of strategic alliances in an effort to accelerate its growth through market expansion. The Company is presently pursuing joint marketing efforts with other companies to establish more comprehensive outsourcing relationships, including the business office of the hospital, to be implemented over a larger shared client base. SERVICES Contract Management (Outsourcing). Contract management, or outsourcing, of health information involves the management by the Company of patient information, both clinical and financial, throughout the health care delivery system beginning before a patient is admitted and continuing after the patient is discharged. The Company's principal source of revenues is currently from long-term contracts for outsourcing, or contract management, of the HIM, or medical records, departments of hospitals. Under the terms of its outsourcing contracts, the Company provides the contracting medical facility with complete day-to-day management and operation of the facility's medical records department, including maintenance of patient records, monitoring and reduction of backlog in record keeping and chart completion, compliance with record keeping and record retention requirements of governmental and other third- party payors, implementation of record coding functions to optimize reimbursement, medical record abstracting and maintenance of record storage and retrieval systems. With respect to staffing requirements, the Company's outsourcing contracts are of two types. The first is a "Management Only" contract by which the Company provides a department director to supervise a hospital's medical records department and employs the departmental supervisory personnel, while all other employees of the department remain on the hospital's payroll. The second type is a full contract management services agreement by which the Company provides not only a records-management director but also hires all the employees of the department as the Company's employees. The Company generally provides supplemental training to these employees once it takes over the department. The Company prefers, whenever possible, to maintain the employment of all of the employees of a hospital's outsourced department and is rarely required to hire new employees. 21 A significant feature of the Company's contract management services is the use of a Professional Services Team, made up of highly skilled and experienced HIM professionals, whose responsibility is to act as an internal consulting team to its outsourced customers. This team is used during initial implementation to reengineer the outsourced department's work processes, to support the customer sites at any time and to develop "Best Practices," the Company's quality standards that are continuously updated to represent the best in the HIM marketplace. The Company believes that the application of better technology in contract management will reshape the way information is managed across the health care delivery system in the future and provide additional cost savings. Although the Company does not intend to directly invest in research and development of electronic document management ("EDM") systems, it will use the most effective technology available to the extent that its customers desire to implement such systems. Such technology is designed to provide simultaneous access to the medical record by multiple users. The Company has partnered with a small imaging company to develop and beta test an EDM product, trademarked "TransChart(TM)," and has now installed this optical scanning product in two of its contract management sites. The Company will continue to use this technology, or partner with qualified providers, to establish the most effective optical scanning capabilities at its sites. The application of more advanced technologies is a key factor in the Company's planned implementation of its Information Service Center concept. See "--Future Outsourcing Services--Information Service Centers." Management of the Company believes that through its services, it provides immediate and long-term cost savings to its health care provider customers which helps them compete in a managed care environment. The Company also believes that health care providers have overlooked other services which are attractive outsourcing candidates such as admissions, utilization review, quality assurance and the business office. Because such services are essential to the efficient flow of information along the pre-admission to post-discharge continuum in the health care delivery system, the Company believes that these services are suited to outsourcing and are a natural extension of the outsourcing of the medical records department. The Company believes that there is a significant outsourcing opportunity in the health care industry to provide multiple information management and processing functions on an integrated basis beginning before a patient is admitted, through the creation and management of the medical record and continuing after a patient is discharged, in the business office. It is the intention of the Company to seek more outsourcing contracts providing fully- integrated health care information management across multiple departments of the same institution for a single fee. Under the terms of five of the Company's outsourcing contracts, the Company has undertaken to provide not only HIM services, but also to manage that hospital's patient access (admissions) function. The Company also manages the social services, utilization management and quality management functions for two hospitals. Although the Company currently has no outsourcing contracts for the hospital business office, the Company is exploring opportunities for contract management of the business office. Better management of the business office benefits the hospital by both reducing costs and increasing the turnover rate of accounts receivable. The Company has demonstrated that by more effectively managing medical records, it has significantly reduced the level of unbilled accounts receivable and has created a more efficient and accurate flow of information to the business office. Future Outsourcing Services--Information Service Centers. The Company has developed the concept of an Information Service Center ("ISC") as a business model for the provision of future outsourcing services in a format designed to reduce hospital costs and improve efficiencies. Under the model, once the Company has signed contracts with a group of health care provider customers which are under common ownership and/or located in a given geographic area, the Company plans to consolidate all of the functional and technological aspects of health information management into one centralized service center. Specific areas of initial focus would include functions such as chart assembly and analysis, coding, transcription and information retrieval and storage. In order to streamline the flow of patient information as much as possible, additional labor intensive 22 services such as scheduling, preregistration information assembly, benefit verification and procedure precertification, and almost all patient accounting and billing functions, could also be added. In contrast to the current model, under which most of the personnel remains on site at the customer's facility, all of the staff performing these functions would be relocated to the service center, with the potential for a significant portion of the personnel to become home-based "telecommuters." Fewer than ten individuals would remain at the client hospital with responsibilities for document scanning and customer service functions, as well as to provide an administrative liaison role in the hospital, participate in hospital committee functions, oversee compliance issues and other management functions. The Company believes that the ISC model offers several benefits, including the ability to (i) perform similar functions for multiple clients that are common throughout the pre-admission to post-discharge health care continuum, thereby increasing efficiency and reducing staffing needs, (ii) offer outsourcing services to larger integrated delivery systems with multiple facilities and to provide geographically spaced health care providers with a central location from which they receive patient data, and (iii) increase the scope of potential clients to include larger medical clinics, skilled nursing facilities, long-term care facilities and, eventually, payors such as HMOs with complex information management requirements. Medical Transcription Services. The Company entered the medical transcription services business because it saw an opportunity to improve accuracy, reduce turnaround time and improve margins for its contract management customers, primarily through advances in technology. The market for medical transcription is not formally tracked, but the Executive Director of the Medical Transcription Industry Alliance has estimated that the total U.S. market for medical transcription services is in excess of the one billion dollar range, and that the market is continuing to experience growth as more hospitals outsource their medical transcription needs. The medical transcription services market is highly fragmented, with over 500 transcription companies nationally. The Company's transcription business provides a computer-based service for transcription of physician dictation for hospitals. While its service arrangements vary from institution to institution, some of which require transcription to be performed on-site or by hospital employees, the transcription division's services are primarily defined as transcription of dictation at remote locations, and transmission via modem or similar telephone link into the computer data base of the contracting hospital. As a result, while it currently provides services to over 100 different medical institutions in the eastern half of the United States, the transcription division is able to provide such services from a central office and therefore many of its transcription employees are able to work as "telecommuters" using networked computer terminals in their homes. The Company is typically paid for its transcription services on a production basis at rates determined on a per-line-transcribed basis. The Company also provides transcription services in connection with nine of its contract management contracts. Where transcription services are included as part of the services provided in the Company's outsourcing contracts for health information management, the services are provided internally by the Company's transcription sites as part of the overall services provided by the Company for a set contract fee. The Company seeks wherever possible to cross-market its transcription services with its outsourcing contract services, using the institutions with which it has outsourcing contracts as a base for generation of additional transcription business and using the institutions with which it has transcription contracts as a basis for generating additional contract management outsourcing business. Consulting and Coding Services. The Company continues to offer independent consulting services to hospitals on a case by case basis, and believes that its consulting services comprise an additional services offering to its existing customer base. The Company provides advice with respect to management and operations of medical records departments and related health care information management, particularly reimbursement coding or "optimization" services, as well as consultation services regarding the health information aspects of hospitals' utilization management and quality management functions. Such services, which can also include interim medical records department management and related services, are provided on a negotiated fee for service basis. The Company's consulting and coding department includes specialists in various aspects of records coding and management. The Company recently added a medical doctor to its staff of consultants, which will allow the 23 Company to offer consultation services to physicians who are interested in improving their coding and reimbursement practices. Health Care Case Management. Medical case management provides assessment, care planning, recommendations, and care coordination services for injured and ill persons covered by insurance carriers or self-insured employers. The Company employs or contracts with registered nurses who act as a coordinator between the patient, the health care providers and the insurance carriers, seeking to ensure the provision of optimal health care with an efficient use of resources. Case management typically involves routine onsite visits to the patient and monthly reporting to the insurance carriers. In addition, the Company provides vocational evaluations and computerized skills assessments for clients covered by insurance programs, workers' compensation, long-term disability and Social Security disability. The Company faces a very competitive market on a national, regional and local level, with all of the competition offering the full continuum of cost containment products, including field case management, telephonic case management, pre-certification utilization review, PPO networks, bill repricing and managed care. CUSTOMERS The Company's current customer base consists primarily of hospitals for which the Company provides contract management or outsourcing of the medical records department, medical transcription services and/or consulting services. However, the Company believes that the outsourcing concept can meet the needs of many other health care providers, and the Company's marketing efforts are designed to eventually expand its customer profile to include larger clinics, sub-acute care facilities, HMOs, skilled nursing facilities and others. With over 5,000 hospitals in the United States, the market for outsourcing the management of medical records departments and other affiliated departments is sizable. Approximately 3,000 of the hospitals in the United States have more than 100 beds and constitute the Company's first tier opportunity. The Company further screens potential hospitals through a variety of lead generation methods, including a recently initiated telemarketing program, which helps pinpoint those hospitals that may benefit most from outsourcing their medical records department and focuses the Company's efforts on approximately 2,000 target hospitals. As the use of health care information management technology increases in the future, the Company believes that three levels of health care provider customers will emerge. The Company divides these customers into "No Tech," "Medium Tech," and "High Tech" categories. The No Tech customer is one that has not embraced the use of technology within the facility's medical records functions to enhance productivity, quality and costs. This customer will either lack the financial resources and/or vision to progress past the paper record. For this customer, the Company will continue to reengineer the paper processes and continue to guarantee the customer reduced costs and improved quality, timeliness and service. The Medium Tech customer will be ready to begin to leverage technology, primarily through the use of optical scanning to reduce costs, improve quality and timeliness and provide multiple users access to the same record simultaneously. This will also allow for the electronic completion of the patient record by the physician, providing a significant productivity tool for the physician as well. The High Tech customer will likely initially be large for-profit systems or not-for-profit multi-hospital groups, which will be committed to the complete change of the medical record process as it is known today. The Company believes that the High Tech customer group will be the initial market for its Information Service Center concept. SALES AND MARKETING The Company currently employs ten full-time sales personnel in the contract management area of its business. Because the Company's outsourcing services are relatively new in the industry, marketing of those services has proceeded principally on the basis of personal contacts by the Company's sales personnel with senior hospital executives as well as referrals from its consulting clients. Beginning in early 1996, the Company has added a telemarketing program, targeting hospital chief executive and chief financial officers, in an effort to significantly improve qualified sales leads and shorten the overall sales cycle. Having established its initial base 24 of outsourcing contract clientele, the Company's sales force provides coverage in virtually every major hospital market in the country, with sales representatives in each of the principal geographic regions of the country (Southwest, West, Midwest, Southeast, Mid-Atlantic and Northeast). The Company's 1996 marketing strategy also includes targeted advertising in industry trade publications, direct mailings, trade shows, customer testimonials, seminars and other educational literature that emphasizes the Company's market leadership position, its management expertise and its track record with current clients. The Company's transcription and consulting services have historically been marketed primarily through personal contacts and referrals from existing clients. While management believes that this is an appropriate marketing strategy, particularly for consulting services, the Company has begun to implement a broader marketing campaign for its transcription services, particularly in those markets in which its transcription offices are located, and has employed two national sales persons targeting this business. COMPETITION Outsourcing or contract management of health information services departments is still a relatively new concept in the hospital industry. The Company believes it is a pioneer in developing outsourcing of health information management functions on a national basis, and therefore the Company's greatest competition comes from existing, internal medical records departments of hospitals. There is currently one national firm and one regional firm engaged in the same business. The Company expects that as the concept of outsourcing becomes more accepted, it will encounter further competition from some or all of the following sources: other traditional health care information management consultants; coding consultants; multi- specialty health care services businesses which currently provide contract management to clinical, housekeeping, dietary or other non-medical services departments of hospitals; management information services providers, particularly developers and vendors of management software; and other parties in contract management businesses (for example, business or financial management services) desiring to enter the health care field. The Company expects that competitive factors will include reputation for expertise in health information management, size and scope of referenceable accounts, prior experience in outsourcing, and pricing. Additionally, there are companies that operate in other areas of the health information management spectrum, including admissions, the business office and transcription. As the Company expands its scope into these other areas of health information management, the Company expects to confront other, perhaps better established, better capitalized and larger competitors. The Company experiences competition with respect to both its transcription and consulting business from a variety of sources, including, in each case, both local and national businesses. The markets both for medical transcription services and for medical records coding and consultation services are highly fragmented, and no competitor or identifiable group of competitors could be said to be dominant. The Company believes the principal competitive factors in each case include reputation and prior experience, and in the case of transcription services, pricing, timeliness (i.e., turnaround times on transcribed documents) and accuracy of performance. In both fields, the Company, in some cases, competes with larger, better known and better capitalized competitors. With respect to its case management business, the Company competes with several large national vendors, as well as many regional and local competitors that have established a niche in the business. Additionally, many insurance carriers and third party administrators have developed case management programs of their own rather than outsourcing this business. GOVERNMENT REGULATION Virtually all aspects of the practice of medicine and the provision of health care services are regulated by federal or state statutes and regulations, by rules and regulations of state medical boards and state and local boards of health and by codes established by various medical associations. The Company has attempted to structure its operations to comply with these regulations. The Company is not presently subject to direct regulation as an outsourcing services provider. Future government regulation of the practice of medicine and the provision of health care services may impact the Company and require it to restructure its operations in order to comply with such regulations. In addition, in connection with its case management business, certain of the 25 Company's employees and independent contractors are registered nurses. These individuals are subject to certain licensing standards in the states in which they practice, and are responsible for maintaining their licenses. The Company's case management division is not subject to any material governmental regulation, although certain states in which the Company provides case management services have established fee schedules under their workers' compensation laws which apply to certain case management services provided by the Company. EMPLOYEES As of May 15, 1996, the Company had approximately 693 full-time employees and 164 part-time employees, including 20 administrative and executive employees at its headquarters office in Atlanta, Georgia; 29 employees in sales and marketing or consultative functions; and 456 employees at outsourcing sites, as well as 285 employees in its medical transcription operations. As of that date, Sullivan had 52 full-time employees and contracts with over 15 part-time registered nurses who are not employees of the Company. The Company also supervises an additional 162 employees of contracting hospitals at outsourcing sites, pursuant to the terms of its outsourcing agreements. Neither the Company nor any of the employees it supervises is currently a party to any collective bargaining agreement; the hospital employees at one outsourcing site have been solicited by union representatives, but no definitive action toward representation has been taken. The Company has not experienced any strikes or work stoppages, and believes that its relations with its employees are good. PROPERTIES The Company leases the space for its principal offices in Atlanta, Georgia, and space for satellite sales offices in Dallas, Texas and Newton, Pennsylvania. It also leases space for its transcription offices in Chicago, Illinois; Pittsburgh and Erie, Pennsylvania; Boston and Worcester, Massachusetts; and Atlanta, Georgia. The Company leases space for its case management business in Atlanta, Georgia; Orlando, Florida; and Dallas, Texas. LEGAL PROCEEDINGS The Company is subject to certain claims in the ordinary course of business which are not material. On September 17, 1993, the Company and its health care subsidiaries and the physician-owned medical groups which had contracts with the health care subsidiaries initiated a lawsuit in the Superior Court of the State of California, County of Los Angeles, against 22 of the largest California workers' compensation insurance carriers seeking $115 million in compensatory damages plus punitive damages. The plaintiffs claim abuse of process, intentional interference with contractual and prospective business relations, negligent interference and unlawful or unfair business practices which led to the discontinuation in April 1993 of the former business of the Company's health care subsidiaries and their contracting associated medical groups (the "Lawsuit"). The claims arise out of the Company's former business, which prior to the merger with Transcend Services, Inc., included the business of providing medical/legal evaluations and medical treatment services (in association with managed medical groups) in the workers' compensation industry in California. Seven defendants in the Lawsuit have filed cross complaints against the plaintiffs seeking restitution, accounting from the plaintiffs for monies previously paid by the defendants, disgorgement of profits, injunctive relief, attorneys' fees and punitive damages, based upon allegations of illegal corporate practice of medicine, illegal referral arrangements, specific statutory violations and related improper conduct. The case is presently in the early stages of discovery. The defendants have filed various motions to dismiss and other motions seeking the failure of the plaintiffs' cause of action, none of which have been successful. The Company and its counsel do not believe that it is likely that the Company will be held liable on any of the cross complaints; however, there can be no assurance that the Company will be successful in the defense of the cross complaints. In addition, there can be no assurance as to the recovery by the Company of the damages sought in its complaint against the defendants. The costs associated with the conduct of the Lawsuit cannot be ascertained with certainty but are expected to be substantial, and the Company has to date deferred such costs until resolution of the litigation. Based upon facts and circumstances known to date, in the opinion of management, final resolution of the Lawsuit will not have a material adverse effect on the Company's financial condition or results of operations. See "Risk Factors--Litigation" and Note 2 of Notes to Consolidated Financial Statements. 26 On June 22, 1995, an action was filed by Timothy S. Priest in his capacity as administrator of the estate of Robert V. Taylor against Carol Brown, Debbie Ostwald, the Company's subsidiary Sullivan, and Fireman's Fund Insurance Company, in the Circuit Court of Franklin County, Tennessee, alleging breach of the duty to provide reasonably competent nursing care to an injured individual. The plaintiff demands compensatory damages in the amount of $1 million and punitive damages in the amount of $2 million, plus costs. Management of the Company believes that the Company has meritorious defenses to the allegations and intends to vigorously contest liability in this matter. At the present time, management of the Company cannot predict the outcome of this litigation, but does not believe that the resolution of the litigation will have a material adverse effect on the Company's financial condition or results of operations. DISCONTINUED OPERATIONS At March 31, 1996, the net assets related to the discontinued operations of the Company's health care subsidiaries, First Western and Veritas, both of which ceased operations as of April 30, 1993, were $3,015,000, including deferred legal costs related to the Lawsuit and $2,407,000 in net accounts receivable. The collection liabilities of First Western and Veritas have been deducted in determining net accounts receivable. The Company has contracted with a third party to service and manage the remaining accounts receivable balance for a set fee. The Company will continue to re-evaluate the net realizability of the net assets related to discontinued operations on an ongoing basis. Any such re-evaluation could result in an adjustment that may potentially be material to the carrying value of the asset. In September 1994, the Company sold substantially all of the assets and liabilities of its wholly-owned subsidiary, Occu-Care, Inc., which operated industrial medical clinics, to AmHealth, Inc. ("AmHealth") for a purchase price of $4,000,000. The purchase price included $1,500,000 in cash paid at closing and the issuance of two promissory notes bearing interest at 8% per annum. AmHealth defaulted on the first interest payments on the two notes and on December 30, 1994, the Company agreed to exchange the notes receivable of $2,500,000 for 2,500,000 shares of convertible redeemable preferred stock with a 6.5% cumulative dividend. In conjunction with the Merger on January 10, 1995, the Company recorded these securities at $2,050,000, which was the Company's estimate of their fair value. AmHealth defaulted on a December 1, 1995 mandatory redemption of a portion of the preferred stock. However, AmHealth has executed a definitive agreement with CORE, Inc., a public company, pursuant to which CORE would purchase for cash substantially all the assets of AmHealth in a transaction expected to close by July 1996. In anticipation of the consummation of the foregoing transaction, AmHealth and the Company are presently negotiating to settle AmHealth's obligation to the Company, but no agreement has been reached. There can be no assurance that the CORE/AmHealth transaction will close and there can be no assurance that the amount the Company will ultimately realize on the preferred stock will not be materially less than the carrying value of the investment as reflected in the Company's financial statements. See Note 2 of Notes to Consolidated Financial Statements. 27 MANAGEMENT The following table sets forth certain information regarding executive officers and directors of the Company:
NAME AGE POSITION WITH THE COMPANY - ---- --- ------------------------- Larry G. Gerdes............ 47 President, Chief Executive Officer and Director Julian L. Cohen............ 40 Chief Operating Officer G. Scott Dillon............ 46 Chief Development Officer David W. Murphy............ 38 Chief Financial Officer, Secretary and Treasurer Donald L. Lucas............ 66 Chairman of the Board George B. Caldwell......... 65 Director Walter S. Huff, Jr......... 61 Director Charles E. Thoele.......... 60 Director
DIRECTORS AND EXECUTIVE OFFICERS The following persons serve as the directors and executive officers of the Company: Mr. Gerdes has served as a director of the Company since June 1985 and as its President and Chief Executive Officer since May 1993. From 1991 to 1993, Mr. Gerdes was a private investor and from May 1992 until the Merger Mr. Gerdes was the Chairman of the Board of Directors of the former Transcend Services, Inc. For the five years prior to 1991, Mr. Gerdes held various executive positions with HBO & Company, a provider of information services to the healthcare industry, including Chief Financial Officer and Executive Vice President. Mr. Gerdes also serves as a director of Delphi Information Systems, Inc. and Aksys, Ltd. Mr. Cohen has served as the Company's Chief Operating Officer since October 1994. Mr. Cohen served in various capacities at MCC Behavioral Care, Inc., a provider of managed behavioral health products and services from November 1987 to September 1994, including President from October 1992 to September 1994. Mr. Cohen previously served as Administrator of Northwestern Memorial Hospitals Institute of Psychiatry, Assistant Executive Director for professional services at Menorah Hospital and Assistant Administrator at University Hospital of New York at Stonybrook. Mr. Dillon has served as the Company's Chief Development Officer since September 1995. From September 1992 to August 1995, Mr. Dillon served as Executive Vice President and Chief Development Officer for Coastal Physician Services. Prior to Coastal Physician Services, Mr. Dillon served as Executive Vice President and Chief Operating Officer of the Fisher Mangold Group from January 1991 to September 1992. Mr. Dillon's 17 years in the health care industry also includes his service in various senior sales and marketing positions with ARAMARK, Inc., EmCare Holdings and the Patient Care Products division of Proctor and Gamble. Mr. Dillon is active in various professional organizations including, the American Hospital Association, the Healthcare Financial Management Association and the Center for Health Information Management. Mr. Murphy has served as the Company's Chief Financial Officer since May 1995. Mr. Murphy joined the Company in September 1994 as Vice-President of Acquisitions. Prior to joining the Company, Mr. Murphy was a founder and General Partner of an investment company and served in various financial, operating and mergers and acquisition positions with companies such as Hutchinson SA (France), First Boston and International Paper Company. Mr. Lucas has served as a director of the Company since December 1985 and has served as Chairman since August 1989. Mr. Lucas has been a venture capitalist for more than twenty-five years. Mr. Lucas also serves on the boards of directors of Amati Communications Corporation; Cadence Design Systems, Inc.; Delphi Information Systems, Inc.; Kahler Realty Corporation; Macromedia, Inc.; Oracle Corporation; Quantum Health Resources, Inc.; Racotek, Inc. and Tricord Systems, Inc. 28 Mr. Caldwell has served as a director of the Company since May 1995. Mr. Caldwell is the President Emeritus of Lutheran General HealthSystem in Park Ridge, Illinois. Mr. Caldwell served as President and Chief Executive Officer of Lutheran General Health Care System from 1979 to 1989. Prior to 1979, Mr. Caldwell served as the President and Chief Executive Officer of The Greater Southeast Community Hospital Foundation of Washington, D.C., and as President and Chief Executive Officer of Lake Forest Hospital, Lake Forest, Illinois. Mr. Caldwell is presently the Chairman of The Collier Company, a healthcare consulting company in Chicago, Illinois. Mr. Caldwell is also the Chairman of The Hunter Group and a Director of MMI Companies. Mr. Huff has served as a director of the Company since October 1993. Mr. Huff was the founder of HBO & Company, a provider of information services to the healthcare industry and served as its Chairman from 1974 until 1990 and Chief Executive Officer from 1974 to 1984 and 1986 until 1989. Since 1990, Mr. Huff has been a private investor. Mr. Thoele has served as a director of the Company since October 1993. Mr. Thoele has been a consultant to Sisters of Mercy Health Systems since February 1991. From 1986 to February 1991, he served as a director and the Chief Operating Officer of Sisters of Mercy Health Systems. Mr. Thoele is currently Chairman of the Catholic Hospital Association. Mr. Thoele is also director of HBO & Company. BOARD OF DIRECTORS The Board of Directors of the Company currently consists of five persons. The Company's By-Laws provide that the Board of Directors shall consist of not less than one person, the precise number to be determined from time to time by the Board of Directors or shareholders of the Company. The directors are elected annually by the shareholders of the Company and serve for a term of one year, or until their earlier resignation, removal from office or death. The executive officers of the Company are elected annually by the Board of Directors and serve for a term of one year, or until their earlier resignation, removal from office or death. The Company's Board of Directors has two standing committees--the Audit and Finance Committee and the Stock Option and Compensation Committee. The Audit and Finance Committee, which is comprised of Messrs. Lucas and Huff, has been assigned the principal functions of: (i) recommending the independent auditors; (ii) reviewing and approving the annual report of the independent auditors; (iii) approving the annual financial statements; and (iv) reviewing and approving summary reports of the auditor's findings and recommendations. The Stock Option and Compensation Committee, which is comprised of Messrs. Huff and Thoele, has been assigned the functions of administering the Company's 1992 Stock Option Plan, as amended and making recommendations concerning the establishment of additional employee benefit plans and compensation for the Company's executive officers. 29 EXECUTIVE COMPENSATION The following table provides certain summary information for the fiscal years ended December 31, 1995 and 1994 and May 31, 1994 concerning compensation paid or accrued by the Company to or on behalf of the Company's Chief Executive Officer and the other executive officers of the Company (the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
LONG TERM ANNUAL COMPENSATION COMPENSATION ------------------------- ------------- SECURITIES UNDERLYING NAME AND PRINCIPAL POSITION YEAR(1) SALARY BONUS OPTIONS/SAR'S - --------------------------- -------- -------- ------- ------------- Larry G. Gerdes........................ 12/31/95 $205,376 $ -- -- President and Chief Executive Officer 12/31/94 116,700 -- -- 05/31/94 200,000 -- -- Julian L. Cohen........................ 12/31/95 $193,756 $ -- Chief Operating Officer 12/31/94 39,600 -- 145,000 05/31/94 -- -- David W. Murphy........................ 12/31/95 $100,130 $22,675 60,000 Chief Financial Officer, 12/31/94 28,385 -- Treasurer and Secretary 05/31/94 -- -- G. Scott Dillon........................ 12/31/95 $ 59,599 $ -- 60,000 Chief Development Officer 12/31/94 -- -- 05/31/94 -- --
- -------- (1) Information relates to the fiscal years ended May 31, 1993 and December 31, 1994 and 1995. The fiscal year ended December 31, 1994 was for a seven month period. COMPENSATION OF DIRECTORS Directors of the Company who are compensated as officers of the Company serve without compensation for their services as directors. Each director of the Company who is not a compensated officer of the Company is paid a fee of $8,000 per annum. Each person who first becomes a non-employee director is granted, as of the date such person becomes a director of the Company, an option to purchase 10,000 shares of Common Stock. Each non-employee director will be granted an option to purchase 6,000 shares of the Common Stock, except the Chairman who will be granted an option to purchase 9,000 shares, upon election or reelection at the annual meeting of shareholders provided they have served on the board a minimum of six months. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The following persons served as members of the Stock Option and Compensation Committee of the Board of Directors during the year ended December 31, 1995: Walter J. Huff, Jr. and Charles E. Thoele. None of the members of the Stock Option and Compensation Committee has been an officer or employee of the Company. STOCK OPTION PLAN The Company has adopted a 1992 Stock Option Plan, as amended (the "Plan") for selected employees and directors who are not employed by the Company ("Non-Employee Directors"). The Plan is administered by the Stock Option and Compensation Committee of the Board of Directors and provides for the grant of incentive and non-qualified stock options to purchase up to 1,600,000 shares of Common Stock. On April 30, 1996, the Board of Directors adopted a resolution to amend the Plan by increasing the number of shares reserved for issuance under the Plan by 400,000 shares. The Company is submitting the proposed amendment to the shareholders of the Company for their approval at a special meeting of shareholders to be held on June 5, 1996. 30 Under the terms of the Plan, the Stock Option and Compensation Committee may determine the employees to whom options will be granted, the time or times of exercise, the number of shares subject to an option and the terms and conditions of each stock option agreement. The Stock Option and Compensation Committee also determines whether an option is an incentive stock option or a non-qualified stock option. The price per share of stock subject to an incentive stock option must equal 100% of the fair market value thereof on the date of grant. The price per share of stock subject to a non-qualified stock option is to be determined by the Stock Option and Compensation Committee and may be less than fair market value. The exercise period for an incentive stock option cannot exceed ten years, while there is no limitation with respect to non-qualified stock options. In addition, the Stock Option and Compensation Committee cannot grant an incentive stock option to any person who owns at least 10% of the outstanding Common Stock unless the price is 110% of fair market value and the option exercise period does not exceed five years. The Plan also provides for non-discretionary or automatic grants of options to Non-Employee Directors. See "Management--Compensation of Directors." The price of Common Stock subject to a Non-Employee Director option is the fair market value on the date of grant, except that the price of Common Stock subject to options granted on March 16, 1992 was the fair market value on October 14, 1992, the date the Plan was approved by the shareholders of the Company. Each Non-Employee Director option must conform to the provisions of the Plan. Non-Employee Director options become exercisable six months from the date of grant and expire ten years from the date of grant. Moreover, in the event a Non-Employee Director terminates membership on the Board for any reason, an option held by him may be exercised until the earlier of the expiration of the option or 12 months from the date of termination. As of May 24, 1996, options to purchase a total of 1,276,500 shares of Common Stock were outstanding at a weighted average exercise price of $2.76 per share. In addition, as of May 24, 1996, options to purchase a total of 21,775 shares of Common Stock were outstanding under the former Transcend Services, Inc. stock option plan at a weighted average exercise price of $.19 per share. The following table sets forth information regarding individual grants of stock options under the Plan made during the year ended December 31, 1995 to the Named Executive Officers.
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION INDIVIDUAL GRANTS FOR OPTION TERM(3) -------------------------------------------------- -------------------- % OF TOTAL NUMBER OF OPTIONS/SAR'S SECURITIES GRANTED TO UNDERLYING EMPLOYEES EXERCISE OR OPTIONS/SAR'S IN FISCAL BASE PRICE EXPIRATION NAME GRANTED(#)(1) YEAR(2) ($/SHARE) DATE 5% 10% - ---- ------------- ------------- ----------- ---------- --------- ---------- Larry G. Gerdes......... -- -- -- -- -- -- Julian L. Cohen(4)...... 25,000 16.5% $3.31 3/21/05 $ 52,000 $ 132,000 20,000 5.00 12/20/05 63,000 159,000 David W. Murphy(5)...... 30,000 14.6% 2.25 02/23/05 43,000 108,000 10,000 5.00 12/20/05 31,000 80,000 G. Scott Dillon(6)...... 60,000 21.6% 3.50 08/15/05 132,000 335,000
OPTION GRANTS IN FISCAL 1995 - -------- (1) Stock options were granted with an exercise price equal to the fair market value of the Company's Common Stock on the date of grant. (2) The Company granted options to purchase 273,000 shares to employees in the year ended December 31, 1995. (3) The dollar amounts under these columns represent the potential realizable value of each grant of options assuming that the market price of the Company's Common Stock appreciates in value from the date of grant at the 5% and 10% annual rates prescribed by the Commission and therefore are not intended to forecast possible future appreciation, if any, of the price of the Company's Common Stock. 31 (4) Mr. Cohen was granted an option to purchase 25,000 shares on March 21, 1995 and an option to purchase 20,000 shares on December 20, 1995 which vest annually in equal increments over the subsequent four years beginning on the first anniversary of the date of grant. (5) Mr. Murphy was granted an option to purchase 30,000 shares on February 23, 1995 and an option to purchase 10,000 shares on December 20, 1995 which vest annually in equal increments over the subsequent four years beginning on the first anniversary of the date of grant. (6) Mr. Dillon was granted an option to purchase 60,000 shares on August 15, 1995 which vests annually in equal increments over the subsequent four years beginning on the first anniversary of the date of grant. The following table sets forth certain information concerning the unexercised stock options held by the Named Executive Officers. During the year ended December 31, 1995, only one of the individuals listed below exercised any options. Larry G. Gerdes exercised a Non-Qualified Stock Option to purchase 50,000 shares of Common Stock on December 1, 1995. The exercise price was $1.94 per share and the market value was $5.13 per share on the date of exercise. AGGREGATED OPTION EXERCISES IN FISCAL 1995 AND FISCAL YEAR END OPTION VALUES
VALUE OF UNEXERCISED OPTIONS AT FISCAL YEAR END --------------------------------------------------- NUMBER VALUE OF UNEXERCISED (1) OF SECURITIES IN-THE-MONEY OPTIONS SHARES UNDERLYING UNEXERCISED AT FY-END ($) ACQUIRED VALUE OPTIONS AT FY-END IN-THE-MONEY NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE - ---- ----------- -------- ------------------------- ------------------------- Larry G. Gerdes......... 50,000 $159,350 549,333 / 166,666 $2,065,069 / $635,330 Julian L. Cohen......... -- -- 25,000 / 120,000 96,875 / 366,562 David W. Murphy......... -- -- 5,000 / 55,000 19,375 / 170,625 G. Scott Dillon......... -- -- -- / 60,000 -- / 135,000
- -------- (1) Dollar values calculated by determining the difference between the fair market value of the underlying securities at December 31, 1995 ($5.75 per share) and the aggregate exercise price of the options. EMPLOYEE RETIREMENT SAVINGS PLAN The Company has established a savings and profit-sharing plan that qualifies as a tax-deferred savings plan under Section 401(k) of the Internal Revenue Code (the "401(k) Plan") for its salaried, clerical and hourly employees. Under the 401(k) Plan, eligible employees may contribute up to $9,240 of their gross salary to the 401(k) Plan. Each participating employee is fully vested in contributions made by such employee. The Company presently matches 10% of the amount contributed by an employee up to 6% of the employee's salary, but the Company's policy regarding matching contributions may be changed annually in the discretion of the Board of Directors. All amounts contributed under the 401(k) Plan are invested in one or more investment accounts administered by an independent plan administrator. EMPLOYEE STOCK PURCHASE PLAN The Company has adopted a 1990 Employee Stock Purchase Plan, as amended (the "Stock Purchase Plan"). The purpose of the Stock Purchase Plan is to provide an incentive for employees of the Company and its subsidiaries to acquire or increase their proprietary interests in the Company through the purchase of shares of Common Stock of the Company. The Stock Purchase Plan is administered by the Board of Directors of the Company, which has the authority to interpret the Stock Purchase Plan, to prescribe, amend and rescind rules and regulations relating to it and to establish the terms of each offering of Common Stock under the Stock Purchase Plan. All employees of the Company are eligible to participate in the Stock Purchase Plan with certain limited exceptions. Participants may direct the deduction of a specified percentage, as set by the Board of Directors, from their eligible compensation to be used to purchase Common Stock under the Stock Purchase Plan. The terms of the 32 Stock Purchase Plan provide for two offering periods each calendar year at the beginning of which eligible employees must elect to participate. At the end of each offering period, the Company uses the accumulated payroll deductions to purchase Common Stock for the participant. The price of Common Stock purchased with such payroll deductions during each offering period shall be the lesser of: (i) 85% of the mean between the bid and asked prices of the Common Stock at the beginning of each offering; or (ii) 85% of the mean between the bid and asked prices of the Common Stock on the last day of such offering period. The Company will not grant to any participant any right to purchase Common Stock under the Stock Purchase Plan if the exercise of such right would cause such participant to own 5% or more of the combined voting power or value of all classes of the Company's capital stock. In addition, an employee may not participate if such participation would permit the employee to purchase stock under all employee stock purchase plans of the Company and its subsidiaries to accrue at a rate which exceeds $25,000 of the fair market value of the stock for each calendar year in which an option to purchase stock under the Plan is outstanding at any time. An aggregate of 225,000 shares of Common Stock have been reserved for issuance under the Stock Purchase Plan. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In September 1994, the Company loaned the sum of $80,000 to Julian L. Cohen, the Chief Operating Officer of the Company, which was used by Mr. Cohen to purchase his residence. The loan to Mr. Cohen was in the form of a promissory note for the principal sum of $80,000, bearing interest at 7 3/4% per annum, payable on each January 1, April 1, July 1 and October 1, commencing on January 1, 1995, with the principal due in one lump sum on September 30, 1999. As of May 1, 1996, $80,000 remained outstanding under the note. The note is secured by Mr. Cohen's right to purchase shares of the Company's Common Stock pursuant to the Company's 1992 Stock Option Plan, as amended, and the shares of Common Stock underlying such rights. 33 DESCRIPTION OF CAPITAL STOCK GENERAL The Company is authorized to issue up to 30,000,000 shares of Common Stock, $.01 par value per share, and up to 21,000,000 shares of Preferred Stock $.01 par value per share. COMMON STOCK Subject to the rights of any holder of Preferred Stock, each holder of Common Stock is entitled to one vote per share for the election of directors as well as on other matters, to dividends as and when declared by the Company's Board of Directors, and upon liquidation to share in the net assets of the Company pro rata in accordance with his holdings. The Common Stock has no preemptive, redemption, conversion or subscription rights, and all outstanding shares of Common Stock are, and the shares of Common Stock offered by the Company hereby will be, fully paid and nonassessable. PREFERRED STOCK The Company is authorized to issue up to 21,000,000 shares of $.01 par value Preferred Stock, none of which is outstanding. The Board of Directors has the power, without further action by the stockholders, to divide any and all shares of Preferred Stock into series and to fix and determine the relative rights and preferences of the Preferred Stock, such as the designation of series and the number of shares constituting such series, dividend rights, redemption and sinking fund provisions, liquidating and dissolution preferences, conversion or exchange rights and voting rights, if any. Issuances of Preferred Stock by the Board of Directors may result in such shares having senior dividend and/or liquidation preferences to the holders of shares of Common Stock and may dilute the voting rights of such holders. Issuances of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, adversely affect the voting rights of holders of the Common Stock. In addition, the issuance of Preferred Stock could make it more difficult for a third party to acquire a majority of the outstanding voting stock. Accordingly, the issuance of Preferred Stock may be used as an "anti- takeover" device without further action on the part of the shareholders of the Company. No shares of Preferred Stock have been issued and the Company has no present plans to issue any shares of Preferred Stock. CERTAIN PROVISIONS OF CERTIFICATE OF INCORPORATION AND BYLAWS The Company's Bylaws permit it to indemnify a director and officer who was or is a party to any threatened, pending or completed action, suit or other type of proceeding, whether civil, criminal, administrative or investigative (other than an action by or any right of the Company) by reason of the fact that he or she is or was a director or officer or is or was serving at the request of the Company as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorney's fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding. These indemnification rights apply if the director or officer acted in good faith and in a manner in which he or she reasonably believed to be in or not opposed to the best interest of the Company and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. In addition, under the Bylaws, the Company may indemnify and hold harmless an officer or director who is a party in an action by or in the right of the Company against expenses (including attorney's fees) actually and reasonably incurred in connection with the defense or settlement of such proceeding. Such indemnification shall be authorized if the director or officer has acted in good faith and in a manner in which he or she reasonably believed to be in or not opposed to the best interest of the Company, except indemnification is not authorized where there is an adjudication of liability, unless the court in which such proceeding was brought, or any other Court of Chancery, shall determine, in view of all the circumstances, that such person is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper. The Company's Bylaws provide that indemnification of the costs and expenses of defending any action is required to be made to any officer or director who is successful (on the merits or otherwise) in defending an 34 action of the type referred to in the immediately preceding paragraph. Except with regard to the costs and expenses of successfully defending an action as may be ordered by a court, indemnification as described in the previous paragraph is only required to be made to a director or officer if a determination is made that indemnification is proper under the circumstances. Such determination shall be made: (i) by the Company's Board by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding; (ii) by independent legal counsel if such a quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs; or (iii) by the affirmative vote of a majority of shares entitled to vote. The Bylaws of the Company also permit the Company to purchase and maintain insurance on behalf of any director or officer of the corporation against any liability asserted against the director or officer and incurred in such capacity, whether or not the corporation would have the power to indemnify the director or officer against such liability. The Bylaws of the Company further provide that any expenses (including attorney's fees) incurred by any officer or director in defending a civil or criminal action, suit or proceeding may be paid by the Company in advance of the final disposition of such action upon receipt of an undertaking by such director or officer to repay all amounts advanced if it shall be determined that he or she is not entitled to be indemnified by the Company. Subject to certain limitations, the Company's executive officers and directors are insured against losses arising from claims made against them for wrongful acts which they may become obligated to pay or for which the Company may be required to indemnify them. Limitation of Liability. In addition, the Certificate of Incorporation also provides that directors of the Company will not be personally liable for monetary damages to the Company or its shareholders for certain breaches of their fiduciary duty as directors, unless they violated their duty of loyalty to the Company or its shareholders, acted in bad faith, knowingly or intentionally violated the law, authorized illegal dividends or redemptions or derived an improper personal benefit from their action as directors. This provision would have no effect on the availability of equitable remedies or non-monetary relief, such as an injunction or rescission for breach of the duty of care. In addition, the provision applies only to claims against a director arising out of his role as a director and not in any other capacity (such as an officer or employee of the Company). Further, liability of a director for violations of the federal securities laws will not be limited by this provision. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Company's Common Stock is First Interstate Bank of California. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, the Company will have outstanding 21,401,403 shares of Common Stock. Of these shares, a total of 21,341,403 shares, including all of the 3,000,000 shares of Common Stock sold in this offering, will be freely transferable without restriction or limitation under the Securities Act. The remaining 60,000 shares are "restricted" shares within the meaning of Rule 144 adopted under the Securities Act (the "Restricted Shares"). The Restricted Shares were issued and sold by the Company in private transactions in reliance upon exemptions from registration under the Securities Act and may not be sold except in compliance with the registration requirements of the Securities Act or pursuant to an exemption from registration, such as the exemption provided by Rule 144 under the Securities Act. None of the Restricted Shares are currently eligible for sale in the public market pursuant to Rule 144. In general, under Rule 144 as currently in effect, any person (or persons whose shares are aggregated), including an affiliate of the Company, who has held shares for at least a two-year period (as computed under Rule 144) is entitled to sell within any three-month period a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of the Company's Common Stock (approximately 184,014 shares) and (ii) the average weekly trading volume in the Company's Common Stock during the four calendar weeks immediately 35 preceding the date on which the notice of sale is filed with the Commission. Sales under Rule 144 are also subject to certain provisions relating to the manner of sale, the filing of a notice of sale and the availability of current public information about the Company. A person (or persons whose shares are aggregated) who is not deemed an affiliate of the Company at any time during the 90 days immediately preceding a sale and who has held shares for at least a three-year period (as computed under Rule 144), would be entitled to sell such shares under Rule 144(k) without regard to the volume limitation and other conditions described above. No prediction can be made as to the effect, if any, that market sales or the availability of such shares of sale will have on the market price of the Common Stock. Nevertheless, sales of substantial amounts of Common Stock in the public market may have an adverse impact on such market price. As of May 24, 1996, outstanding options to purchase 1,298,275 shares of Common Stock were held by certain officers, directors and employees of the Company pursuant to the Company's 1992 Stock Option Plan, as amended, and pursuant to the former Transcend Services, Inc. stock option plan, and an aggregate of 45,750 shares were available for the grant of future options under the Company's 1992 Stock Option Plan, as amended. The Company has filed registration statements to register shares of Common Stock issuable upon the exercise of stock options under the 1992 Stock Option Plan, as amended, and under the former Transcend Services, Inc. stock option plan. Shares issued upon the exercise of stock options will be available for sale in the open market. In addition, as of May 24, 1996, the Company had 8% Convertible Debentures outstanding which are convertible into an aggregate of 572,000 shares of Common Stock and one Warrant outstanding to purchase an aggregate of 25,000 shares of Common Stock. Shares issued upon the conversion of the Debentures and exercise of the Warrant will be eligible for sale in the open market in accordance with Rule 144 as described above. The Company and the Company's officers and directors, who beneficially own in the aggregate 6,241,440 shares of Common Stock (approximately 33.92% of the outstanding Common Stock) have agreed that, for a period of 120 days after the date of this Prospectus, they will not, without the prior written consent of Smith Barney Inc., offer, sell, contract to sell or otherwise dispose of any Common Stock (or any securities convertible into or exercisable or exchangeable for shares of Common Stock) (the "Lock-up Period"). Following the Lock-up Period, those shares will be eligible for sale in the public market, subject to the conditions and restrictions of Rule 144, as described above. REGISTRATION RIGHTS Holders of 60,000 shares of Common Stock, the Warrant to purchase 25,000 shares of Common Stock and the 8% Convertible Debentures which are convertible into an aggregate of 572,000 shares of Common Stock have certain rights with respect to the registration under the Securities Act of shares of Common Stock owned by them from time to time (the "Registrable Shares"). Each holder of Registrable Shares has "piggyback" registration rights, subject to certain limitations, in the event the Company proposes to register the sale of any of its securities for its own account or for the account of its shareholders. The Company is obligated to bear all expenses in connection with the registration of the Registrable Shares, except underwriting commissions and discounts and fees and disbursements of legal counsel to holders thereof. 36 UNDERWRITING Under the terms and subject to the conditions in the Underwriting Agreement dated the date hereof, each Underwriter named below has severally agreed to purchase, and the Company has agreed to sell to such Underwriter, shares of Common Stock which shall equal the number of shares set forth opposite the name of such Underwriter below.
NUMBER UNDERWRITER OF SHARES - ----------- --------- Smith Barney Inc...................................................... Dain Bosworth Incorporated............................................ --------- Total............................................................... 3,000,000 =========
The Underwriters are obligated to take and pay for all shares of Common Stock offered hereby (other than those covered by the over-allotment option described below) if any such shares are taken. The Underwriters, for whom Smith Barney Inc. and Dain Bosworth Incorporated are acting as Representatives, propose initially to offer part of the shares of the Common Stock directly to the public at the public offering price set forth on the cover page hereof and part to certain dealers at a price that represents a concession not in excess of $ per share under the public offering price. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to other Underwriters or to certain other dealers. After the initial offering, the public offering price and such concessions may be changed by the Underwriters. The Company has granted to the Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to an additional 450,000 shares of Common Stock at the price to the public set forth on the cover page hereof less underwriting discounts and commissions. The Underwriters may exercise such option to purchase additional shares solely for the purpose of covering over-allotments, if any, incurred in connection with the sale of the shares of Common Stock offered hereby. To the extent such option is exercised, the Underwriters will be obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares as the number of shares of Common Stock set forth opposite such Underwriter's name in the preceding table bears to the total number of shares of Common Stock in such table. The Company and the Underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. The rules of the Commission generally prohibit the Underwriters and other members of the selling group from making a market in the Common Stock during the two business days prior to commencement of sales in this offering (the "Cooling Off Period"). The Commission has, however, adopted Rule 10b-6A, which provides an exemption from such prohibition for certain passive market making transactions. Such passive market making transactions must comply with applicable price and volume limits and must be identified as passive market making transactions. In general, pursuant to Rule 10b-6A, a passive market maker must display its bid for a security at a price not in excess of the highest independent bid for the security. If all independent bids are lowered below the passive market maker's bid, however, such bid must then be lowered when certain purchase limits are 37 exceeded. Further, net purchases by a passive market maker on each day are generally limited to a specified percentage of the passive market maker's average daily trading volume in a security during a specified prior period and must be discontinued when such limit is reached. Pursuant to the exemption provided by Rule 10b-6A, certain of the Underwriters and selling group members may engage in passive market making in the Common Stock during the Cooling Off Period. Passive market making may stabilize the market price of the Common Stock at a level above that which might otherwise prevail, and if commenced, may be discontinued at any time. The Company and the Company's officers and directors, who beneficially own in the aggregate 6,241,440 shares of Common Stock (approximately 33.92% of the outstanding Common Stock) have agreed that, for a period of 120 days after the date of this Prospectus, they will not, without the prior written consent of Smith Barney Inc., offer, sell, contract to sell or otherwise dispose of any Common Stock (or any securities convertible into or exercisable or exchangeable for shares of Common Stock). LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Smith, Gambrell & Russell, Atlanta, Georgia, and for the Underwriters by Dewey Ballantine, New York, New York. EXPERTS The consolidated financial statements and schedule of Transcend Services, Inc. and subsidiaries, included and/or incorporated by reference in this Prospectus and elsewhere in the Registration Statement to the extent and for the periods indicated in their reports, have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. The financial statements of Medical Transcription of Atlanta, Inc., incorporated by reference in this Prospectus and elsewhere in the Registration Statement to the extent and for the periods indicated in their report, have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report thereto and are included herein in reliance upon the authority of said firm as experts in giving said reports. AVAILABLE INFORMATION The Company is subject to certain informational requirements of the Securities Exchange Act of 1934 (the "1934 Act") and, in accordance therewith, files reports and other information with the Securities and Exchange Commission (the "Commission"). Such reports and other information can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices located at 7 World Trade Center, 13th Floor, New York, New York 10048 and Midwest Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can also be obtained at prescribed rates by writing to the Securities and Exchange Commission, Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549. The Company has filed a Registration Statement on Form S-3 (together with all amendments and exhibits filed or to be filed in connection therewith, the "Registration Statement") under the Securities Act of 1933, as amended, with respect to the Common Stock offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. Statements contained herein concerning the provisions of documents are necessarily summaries of such documents, and each statement is qualified in its entirety by reference to the copy of the applicable document filed with the Commission. 38 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents previously filed with the Commission pursuant to the 1934 Act are hereby incorporated in this Prospectus by reference: 1. The Company's Annual Report on Form 10-K for the year ended December 31, 1995; 2. The Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996; 3. The Company's Current Report on Form 8-K dated May 2, 1995; 4. The Company's Amendment No. 1 on Form 8-K/A dated June 30, 1995 to its Current Report on Form 8-K dated May 2, 1995; 5. The Company's Amendment No. 2 on Form 8-K/A dated May 30, 1996 to its Current Report on Form 8-K dated May 2, 1995; and 6. The description of the Company's Common Stock contained in the Company's Registration Statement on Form 8-A as filed with the Commission on January 8, 1990. All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the 1934 Act subsequent to the date of this Prospectus and prior to the termination of this offering shall be deemed to be incorporated by reference into this Prospectus and to be a part hereof from the respective dates of filing of such documents. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified and superseded, to constitute a part of this Prospectus. The Company will provide without charge to each person to whom a Prospectus is delivered, upon written or oral request of such person, a copy of any and all of the information that has been incorporated by reference in this Prospectus (excluding exhibits unless such exhibits are specifically incorporated by reference into such documents). Please direct such requests to the Secretary of Transcend Services, Inc. at the Company's principal offices located at 3353 Peachtree Road, N.E., Suite 1000, Atlanta, Georgia 30326, telephone number (404) 364-8000. 39 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- TRANSCEND SERVICES, INC. Report of Arthur Andersen LLP, Independent Public Accountants............ F-2 Consolidated Balance Sheets at December 31, 1995 and 1994 and March 31, 1996 (unaudited)........................................................ F-3 Consolidated Statements of Operations for the years ended December 31, 1995, 1994 and 1993 and for the three months ended March 31, 1996 and 1995 (unaudited)........................................................ F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 1994 and 1993 for the three months ended March 31, 1996 (unaudited).............................................. F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993 and for the three months ended March 31, 1996 and 1995 (unaudited)........................................................ F-6 Notes to Consolidated Financial Statements............................... F-7
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Transcend Services, Inc.: We have audited the accompanying consolidated balance sheets of Transcend Services, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1994 and 1995 and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Transcend Services, Inc. and subsidiaries as of December 31, 1994 and 1995 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. Arthur Andersen LLP Atlanta, Georgia February 13, 1996 F-2 TRANSCEND SERVICES, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------------ MARCH 31, 1994 1995 1996 ----------- ----------- ----------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents............. $ 150,000 $ 1,073,000 $ 635,000 Trade accounts receivable, net of allowance for doubtful accounts of $15,000, $42,000 and $46,000 respectively................. 700,000 3,056,000 2,815,000 Prepaid expenses...................... 62,000 309,000 721,000 ----------- ----------- ----------- Total current assets................ 912,000 4,438,000 4,171,000 NET ASSETS RELATED TO DISCONTINUED OPERATIONS............................. -- 2,893,000 3,015,000 SECURITIES OF AMHEALTH.................. -- 2,050,000 2,050,000 OFFICE FURNITURE AND EQUIPMENT, at cost, less accumulated depreciation of $298,000, $1,059,000 and $1,235,000 respectively........................... 558,000 1,681,000 1,816,000 DEPOSITS AND OTHER ASSETS............... 130,000 408,000 381,000 GOODWILL AND OTHER INTANGIBLE ASSETS, less accumulated amortization of $381,000, $1,301,000 and $1,446,000 respectively........................... 1,080,000 5,363,000 5,218,000 ----------- ----------- ----------- $ 2,680,000 $16,833,000 $16,651,000 =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long term debt..... 2,025,000 208,000 108,000 Accounts payable...................... 783,000 1,268,000 1,173,000 Accrued compensation and employee benefits............................. 506,000 1,560,000 1,527,000 Other accrued liabilities............. 578,000 808,000 1,276,000 Current portion of capital lease obligation........................... 21,000 -- -- Deferred income taxes................. -- 133,000 103,000 ----------- ----------- ----------- Total current liabilities........... 3,913,000 3,977,000 4,187,000 ----------- ----------- ----------- LONG TERM DEBT.......................... -- 392,000 368,000 CONVERTIBLE DEBENTURES.................. -- 2,000,000 2,000,000 DEFERRED INCOME TAXES................... -- 543,000 540,000 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred stock, $.01 par value; 21,000,000 shares authorized; none outstanding.......................... -- -- -- Common stock, $.01 par value, 31,000,000 shares authorized, 9,733,000, 18,113,000 and 18,291,000 shares issued and outstanding as of December 31, 1994 and 1995 and March 31, 1996 respectively................ 97,000 181,000 183,000 Additional paid in capital............ 1,677,000 16,643,000 16,799,000 Accumulated deficit................... (3,007,000) (6,903,000) (7,426,000) ----------- ----------- ----------- Total shareholders' equity.......... (1,233,000) 9,921,000 9,556,000 ----------- ----------- ----------- $ 2,680,000 $16,833,000 $16,651,000 =========== =========== ===========
The accompanying notes are an integral part of these consolidated balance sheets. F-3 TRANSCEND SERVICES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------------------ ------------------------ 1993 1994 1995 1995 1996 ---------- ----------- ----------- ----------- ----------- (UNAUDITED) NET REVENUE............. $6,208,000 $12,393,000 $25,882,000 $ 4,897,000 $ 8,688,000 DIRECT COSTS............ 5,125,000 10,787,000 22,334,000 4,346,000 7,260,000 ---------- ----------- ----------- ----------- ----------- Gross profit........... 1,083,000 1,606,000 3,548,000 551,000 1,428,000 MARKETING AND SALES EXPENSES............... 378,000 929,000 2,186,000 437,000 641,000 GENERAL AND ADMINISTRATIVE EXPENSES............... 1,330,000 1,673,000 4,604,000 1,113,000 1,122,000 AMORTIZATION EXPENSE.... 310,000 357,000 633,000 145,000 145,000 ---------- ----------- ----------- ----------- ----------- Operating loss......... (935,000) (1,353,000) (3,875,000) (1,144,000) (480,000) OTHER INCOME (EXPENSES): Interest expense....... (135,000) (66,000) (96,000) -- (52,000) Interest income........ 3,000 1,000 75,000 36,000 9,000 Other.................. 101,000 25,000 -- -- -- ---------- ----------- ----------- ----------- ----------- (31,000) (40,000) (21,000) 36,000 (43,000) ---------- ----------- ----------- ----------- ----------- LOSS BEFORE PROVISION FOR INCOME TAXES....... (966,000) (1,393,000) (3,896,000) (1,108,000) (523,000) PROVISION FOR INCOME TAXES.................. -- 13,000 -- -- -- ---------- ----------- ----------- ----------- ----------- NET LOSS................ $ (966,000) $(1,406,000) $(3,896,000) $(1,108,000) (523,000) ========== =========== =========== =========== =========== Loss per common share.. $ (.11) $ (.14) $ (.22) $ (.06) $ (.03) ========== =========== =========== =========== =========== Weighted average common shares outstanding..... 8,866,000 9,733,000 17,818,000 17,533,000 18,217,000 ========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated statements. F-4 TRANSCEND SERVICES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ADDITIONAL TOTAL COMMON PAID-IN WARRANTS ACCUMULATED SHAREHOLDERS' STOCK CAPITAL OUTSTANDING DEFICIT EQUITY -------- ----------- ----------- ----------- ------------- BALANCE, December 31, 1992................... 72,000 840,000 -- (635,000) 277,000 Issuance of 2,103,847 shares of Common stock in stock offering..... 21,000 714,000 -- -- 735,000 Other issuances of common stock.......... 1,000 28,000 -- -- 29,000 Purchase of shares of common stock.......... -- (17,000) -- -- (17,000) Issuance of warrants... -- -- 104,000 -- 104,000 Net loss............... -- -- -- (966,000) (966,000) -------- ----------- -------- ----------- ----------- BALANCE, December 31, 1993................... 94,000 1,565,000 104,000 (1,601,000) 162,000 -------- ----------- -------- ----------- ----------- Issuance of 341,546 shares of common stock from exercise of warrants.............. 3,000 101,000 (104,000) -- -- Other issuance of common stock.......... -- 11,000 -- -- 11,000 Net loss............... -- -- -- (1,406,000) (1,406,000) -------- ----------- -------- ----------- ----------- BALANCE, December 31, 1994................... 97,000 1,677,000 -- (3,007,000) (1,233,000) -------- ----------- -------- ----------- ----------- Issuance of 7,792,446 shares of Common Stock with Merger........... 78,000 14,533,000 -- -- 14,611,000 Issuance of 60,000 shares of Common Stock in acquisition........ 1,000 171,000 -- -- 172,000 Issuance of 527,130 shares from exercise of options and other issuances............. 5,000 262,000 -- -- 267,000 Net loss............... -- -- -- (3,896,000) (3,896,000) -------- ----------- -------- ----------- ----------- BALANCE, December 31, 1995................... $181,000 $16,643,000 $ -- $(6,903,000) $ 9,921,000 -------- ----------- -------- ----------- ----------- Issuance of 178,000 shares from exercise of options and other issuances............. 2,000 156,000 -- -- 158,000 Net loss............... -- -- -- (523,000) (523,000) -------- ----------- -------- ----------- ----------- BALANCE, March 31, 1996. $183,000 $16,799,000 $ -- $(7,426,000) $ 9,556,000 ======== =========== ======== =========== ===========
The accompanying notes are an integral part of these consolidated statements. F-5 TRANSCEND SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------------------ ---------------------- 1993 1994 1995 1995 1996 ---------- ----------- ----------- ----------- --------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss................ $ (966,000) $(1,406,000) $(3,896,000) $(1,108,000) $(523,000) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization........... 396,000 530,000 1,134,000 255,000 322,000 Loss on disposal of assets................. 12,000 -- -- -- -- Loss on forgiveness of note receivable........ 60,000 -- -- -- -- Gain on sale of software division...... (100,000) -- -- -- -- Interest expense........ 104,000 -- -- -- -- Changes in assets and liabilities, net of acquisitions: Receivables............. 166,000 (226,000) (1,412,000) (145,000) 242,000 Prepaid expenses........ 4,000 (51,000) (187,000) (111,000) (412,000) Deposits and other assets................. (20,000) (101,000) (351,000) (17,000) 27,000 Accounts payable........ 109,000 539,000 (37,000) (929,000) (95,000) Accounts compensation and benefits........... -- -- -- 359,000 (34,000) Accrued expenses and other liabilities...... 619,000 255,000 291,000 (189,000) 467,000 Other................... 53,000 (119,000) 123,000 (36,000) (30,000) ---------- ----------- ----------- ----------- --------- Total adjustments....... 1,403,000 827,000 (439,000) (813,000) 487,000 ---------- ----------- ----------- ----------- --------- Net cash provided by (used in) continuing operations............. 437,000 (579,000) (4,335,000) (1,921,000) (36,000) ---------- ----------- ----------- ----------- --------- Net cash provided by discontinued operations............. -- -- 202,000 79,000 (122,000) ---------- ----------- ----------- ----------- --------- Net cash provided by (used in) operating activities............. 437,000 (579,000) (4,133,000) (1,842,000) (158,000) ---------- ----------- ----------- ----------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures.... (126,000) (440,000) (1,220,000) (472,000) (313,000) Proceeds from sale of assets................. 21,000 -- -- -- -- Proceeds from note receivable............. 12,000 -- -- -- -- Proceeds from sale of software division...... 100,000 -- -- -- -- Acquisitions............ (1,050,000) (1,000,000) (1,527,000) (966,000) -- Disposal and transfer of property............ -- -- 60,000 -- -- ---------- ----------- ----------- ----------- --------- Net cash used in investing activities... (1,043,000) (1,440,000) (2,687,000) (1,438,000) (313,000) ---------- ----------- ----------- ----------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowing from short-term debt........ 200,000 1,000,000 -- -- -- Borrowing under line of credit agreement....... 401,000 1,025,000 -- -- -- Principal payments on long-term debt......... (26,000) -- (60,000) -- (24,000) Principal payments on short-term debt........ (200,000) -- -- (1,007,000) (100,000) Principal payment on capital lease obligations............ (25,000) -- -- -- -- Repayments of line of credit................. (651,000) -- (2,025,000) (1,020,000) -- Purchase of common stock.................. (17,000) -- -- -- -- Proceeds from Convertible Debenture.. -- -- 2,000,000 -- -- Proceeds from stock options................ -- -- -- -- 157,000 Proceeds from common stock issuance......... 764,000 11,000 268,000 -- -- ---------- ----------- ----------- ----------- --------- Net cash provided by financing activities.... 446,000 2,036,000 183,000 (2,027,000) 33,000 ---------- ----------- ----------- ----------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............. (160,000) 17,000 (6,637,000) (5,307,000) (438,000) CASH ACQUIRED FROM ACQUISITIONS............ -- 2,000 7,560,000 7,486,000 -- CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD..... 291,000 131,000 150,000 150,000 1,073,000 ---------- ----------- ----------- ----------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 131,000 $ 150,000 $ 1,073,000 $ 2,329,000 $ 635,000 ========== =========== =========== =========== =========
The accompanying notes are an integral part of these consolidated statements. F-6 TRANSCEND SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993, 1994 AND 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS Transcend Services, Inc. (the "Company"), established in 1984, is engaged in the field of contract outsourcing of the health information management/medical records and patient access functions of hospitals. The Company offers operations evaluation, consulting, reimbursement coding, transcription, and other services generally resident in the medical records department of hospitals. Currently, it emphasizes three- to five-year contractual relationships for management of the entire hospital medical records and patient access departments. The Company's three largest hospital contracts accounted for approximately 58%, 50% and 24% of sales in 1993, 1994, and 1995, respectively. On January 10, 1995, TriCare, Inc., acquired Transcend Services, Inc., a Georgia corporation by the merger of Transcend into First Western Health Corporation ("Merger"). On May 31, 1995, Transcend Services, Inc., a California corporation following its January 10, 1995 merger into TriCare, and Veritas Healthcare Management, a California corporation owned by TriCare, merged into the TriCare corporation, whose name was then changed to "Transcend Services, Inc." Transcend Services, Inc. now operates as a Delaware corporation. Inasmuch as the Merger is being treated for financial accounting purposes as the acquisition of TriCare by Transcend, following the Merger, the historical financial statements of Transcend have become the financial statements of TriCare and include the businesses of both companies after the effective date of the merger. BASIS OF PRESENTATION The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. CASH AND CASH EQUIVALENTS The Company considers all highly-liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. ACCOUNTS RECEIVABLE An allowance for doubtful accounts has been established to provide for losses on uncollectible accounts based on management's estimates and historical collection. Bad debt expense amounted to $30,000, $9,000 and $0 in 1993, 1994 and 1995, respectively. REVENUE AND COST RECOGNITION Revenue is recognized monthly as the work is performed. One-time nonrefundable contract implementation fees have been amortized over the first three months of a contract to match when the costs are incurred for implementation. Direct costs are expensed as incurred. Gross margins vary by contract. Direct costs include contract labor costs related to medical records processing, transcription, coding costs and case management costs, as well as purchased services, such as microfilming, record storage, software licenses, etc. F-7 TRANSCEND SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1993, 1994 AND 1995 DEPRECIATION AND AMORTIZATION Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the respective assets which range from three to seven years. INCOME TAXES The Company follows Statement of Financial Accounting Standards No 109 ("SFAS 109"). Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. DEPOSITS AND OTHER ASSETS Deposits and other assets includes $360,000 in restricted cash used as collateral for a letter of credit related to a contract outsourcing agreement which expires in September, 1996. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill and other intangible assets are currently being amortized over periods ranging from three to thirty years. The Company periodically evaluates whether events and circumstances since acquisition have occurred that indicate that the remaining estimated useful life of goodwill may warrant revision or that the remaining balance of goodwill may not be recoverable. When factors (such as a change in law or regulatory environment or forecasts showing changing long-term profitability) indicate that goodwill should be evaluated for possible impairment, the Company uses an estimate of the related business unit's undiscounted net income over the remaining life of the goodwill to measure whether the goodwill is recoverable. FAIR VALUE OF DEBT In accordance with SFAS No. 107, "Disclosures About Fair Value of Financial Investments", the fair value of short-term debt is estimated to be its carrying value. The fair value of long-term debt is estimated based on approximate market interest rates for similar issues. The estimated fair value of long-term debt at December 31, 1995 was equal to the carrying amount included in the accompanying balance sheet. NET LOSS PER COMMON SHARE AND COMMON SHARE EQUIVALENT Net loss per common share has been computed based on the weighted average number of the Company's common shares outstanding as of December 31, 1993, 1994, and 1995. The common stock equivalents related to stock options were not included in the computation due to their antidilutive effect. INTERIM FINANCIAL STATEMENTS The Company has made all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the financial condition of the Company at March 31, 1996, and the results of operations and cash flows for the three months ended March 31, 1995 and 1996, as presented in the accompanying unaudited financial statements. RESTATEMENT OF PRIOR YEAR BALANCES Certain prior year balances have been restated to conform with current year presentation. F-8 TRANSCEND SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1993, 1994 AND 1995 2. DISCONTINUED OPERATIONS Legal Proceedings On September 17, 1993, TriCare and its healthcare subsidiaries (now part of Transcend) and the physician-owned medical groups that have contracts with the healthcare subsidiaries initiated a lawsuit in the Superior Court of the State of California, County of Los Angeles, against twenty-two insurance carriers seeking $115 million in compensatory damages claiming abuse of process, intentional interference with contractual and prospective economic relations and unfair business practices which led to the discontinuation of the business of TriCare's healthcare subsidiaries and their contracting associated medical groups in April 1993 (the "Lawsuit"). Certain of the defendants in the Lawsuit have filed cross complaints seeking restitution from TriCare, its healthcare subsidiaries and their associated managed medical groups for funds previously paid to the medical groups and other damages. The costs associated with the above claims cannot be ascertained with any certainty but are expected to be substantial. The Company intends to defer such costs until resolution of the litigation and has $479,000 of deferred legal fees included in net assets from discontinued operations at December 31, 1995. There can be no assurance as to the outcome of this litigation, including potential recovery, if any, of the Company's claims, or damages if any. Based upon facts and circumstances known to date, in the opinion of management, final resolution of the cross complaint will not have a material adverse effect on the Company's financial condition or results of operations. First Western/Veritas The net assets of the discontinued operations of Tricare's healthcare subsidiaries, First Western and Veritas (now part of Transcend), both of which ceased operations as of April 30, 1993, are shown on the combined balance sheet and the related statement of cash flows as a separate line item. The net assets related to the discontinued operations at December 31, 1995 were $2,893,000. This amount consisted of $479,000 in deferred legal fees and $2,414,000 in net accounts receivable. Collection liabilities of First Western and Veritas have been deducted in determining net accounts receivable. On October 14, 1995, the Company sold approximately 38% of its discontinued operations' gross accounts receivable balance to Medical Receivables Finance, LLC ("MRF"), a Delaware limited liability company for: . Approximately $932,000 in cash ($882,000 in cash at closing; $50,000 held in escrow) . An opportunity to share in future cash receipts based on MRF's collection activity. As a result, the Company closed its California-based collections operation. The future costs associated with the collection of the accounts receivable have been netted with the assets related to discontinued operations. The sale agreement with MRF did not result in any gain or loss for the Company. The Company will continue to re-evaluate the realizability of the net assets related to its discontinued operations which were not sold. Any such re-evaluation could result in an adjustment that may potentially be material to the carrying value of this asset. In addition to the above, the Company has contracted with MRF for the servicing and managing of the remaining 62% of the accounts receivable balance. Securities of AmHealth Prior to its acquisition by Transcend, TriCare sold substantially all of the assets and liabilities of its wholly-owned subsidiary, Occu-Care to AmHealth, Inc. ("AmHealth") for a purchase price of $4,000,000. The purchase price included $1,500,000 in cash paid at closing; AmHealth's Series A Note in the face amount of $1,500,000 bearing interest of 8% per annum commencing December 1, 1994, payable quarterly thereafter, with the principal payable on or prior to December 1, 1995; and AmHealth's Series B Note in the face amount of $1,000,000 bearing interest of 8% per annum commencing December 1, 1994, payable quarterly thereafter, with the principal payable in equal quarterly installments starting December 1, 1995 and continuing until September 1, 2000. TriCare did not receive its first interest payment on its $2,500,000 note receivable from its sale of the assets of Occu-Care, which constituted an event of default and, therefore, TriCare deferred recognition of the gain from F-9 TRANSCEND SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1993, 1994 AND 1995 the transaction in the amount of $450,000. On December 30, 1994, TriCare entered into negotiations with AmHealth which resulted in an agreement to exchange its note receivable of $2,500,000 for 2,500,000 shares of $1.00 convertible redeemable preferred stock which pay cumulative dividends at a rate of 6.5% per annum. In conjunction with the Merger on January 10, 1995, Transcend recorded these securities at their fair value of $2,050,000. Under certain circumstances and at the Company's option, the preferred stock is convertible into common stock of AmHealth. The preferred stock is subject to mandatory redemption as follows: 1,500,000 shares (less any shares previously converted) on December 1, 1995, and the balance in nineteen quarterly installments commencing December 1, 1995 which was consistent with the payment schedule of the original notes. The redemption on December 1, 1995 did not occur and discussions are underway with AmHealth to determine a future course of action with regard to the redemption of these securities. In December, 1995, AmHealth signed a Letter of Intent with CORE, Inc. (NASDAQ; CORE) for CORE to purchase substantially all the assets of AmHealth primarily in exchange for CORE stock. The transaction is expected to close by May, 1996. If the above transaction occurs, Transcend would likely settle AmHealth's $2.5 million obligation to Transcend in exchange for CORE stock. However, there can be no assurances that these transactions will take place. The amount the Company will ultimately realize could differ materially from the carrying value of the investments as reflected in the financial statements due to changes in the financial condition of the purchaser and/or the ultimate valuation of its obligation to Transcend in any purchase of AmHealth by Core, Inc. or any other third party. Unaudited Subsequent Event On May 10, 1996, AmHealth executed a definitive agreement with CORE, Inc., a public company, pursuant to which CORE would purchase for cash substantially all the assets of AmHealth in a transaction expected to close by July 1996. In anticipation of the consummation of the foregoing transaction, AmHealth and the Company are presently negotiating to settle AmHealth's obligation to the Company, but no agreement has been reached. There can be no assurance that the CORE/AmHealth transaction will close and there can be no assurance that the amount the Company will ultimately realize on the preferred stock will not be materially less than the carrying value of the investment as reflected in the Company's financial statements. 3. OFFICE FURNITURE AND EQUIPMENT The summary of office furniture and equipment at December 31, 1994 and 1995 is as follows:
1994 1995 --------- ----------- Office furniture and equipment....................... $ 856,000 $ 2,740,000 Less accumulated depreciation........................ (298,000) (1,059,000) --------- ----------- $ 558,000 $ 1,681,000 ========= ===========
4. INDEBTEDNESS Long-term debt is summarized as follows at December 31, 1994 and 1995;
1994 1995 ---------- -------- $1,200,000 revolving line of credit, interest computed at prime; repaid in 1995............................... $1,025,000 -- Promissory note, interest computed at prime; repaid in 1995................................................... 1,000,000 -- Note payable, interest computed at 8.5%; Note matures on January 1, 1996........................................ -- 100,000 Note payable, interest computed at 8.5% monthly payments of principal and interest at $11,284 beginning May 19, 1995; Note matures on May 19, 2000..................... -- 490,000 Other Notes payable..................................... -- 10,000 ---------- -------- -- 600,000 Less: Current Portion of Long-Term Debt................. 2,025,000 208,000 ---------- -------- $ -- $392,000 ========== ========
F-10 TRANSCEND SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1993, 1994 AND 1995 The revolving line of credit expired in January, 1995 and was not renewed. The outstanding balance of both credit facilities at the time of the merger of TriCare and Transcend was $2,200,000 and was paid off with cash received in the Merger (Note 1). The Company expended $1,232,000 in cash to acquire the medical transcription businesses of IDS and MTA in 1995 and, as a result, the Company issued $2.0 million in Subordinated Convertible Debt, which took place on August 15, 1995. Key terms of the debt are: Interest Rate: 8% Interest Paid: Semi-annually Term: Five (5) Years, due in full at maturity if not converted Secured Status: Unsecured and subordinated to all other indebtedness Convertible Features:
. Convertible for five (5) years at $3.50 per share of Transcend's common stock as recorded on August 15, 1995, the "Closing Price". . Convertible by the Company if Transcend's common stock trades at three (3) times the Closing Price for 30 consecutive trading days. Unaudited Subsequent Event On April 30, 1996, the Company established two separate credit facilities with Silicon Valley East (Wellesley, Massachusetts), a division of Silicon Valley Bank, a California-chartered bank (Santa Clara, CA). The aggregate credit available to the Company (under both facilities) is $5.75 million. The banking facilities are secured by all of the Company's assets. One of the facilities is a $5.0 million working capital credit line subject to an initial cap of $3.0 million. The cap is removed subject to the Company's compliance with several covenants going forward. The second facility is a $750,000 term facility set up to help the Company meet its capital investment requirements in the near term. This term note is subject to an initial cap of $250,000, with the cap being removed upon the Company's compliance with specific covenants. Both facilities will mature on April 30, 1997. 5. SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest was $31,000, $36,000 and $56,000 for 1993, 1994 and 1995, respectively. 6. LEASE COMMITMENTS AND CONTINGENCIES Lease Commitments The Company has entered into operating leases for certain office facilities. At December 31, 1994, the minimum rental payments due under noncancelable operating lease agreements are as follows:
YEAR ENDING DECEMBER 31 - ----------- 1996................................................................ $ 517,000 1997................................................................ 471,000 1998................................................................ 325,000 1999................................................................ 271,000 2000................................................................ 178,000 Thereafter.......................................................... -- ---------- $1,762,000 ==========
F-11 TRANSCEND SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1993, 1994 AND 1995 Rental expense for the operating leases amounted to approximately $97,000, $150,000 and $443,000 for 1993, 1994 and 1995, respectively. Litigation On June 22, 1995, an action was filed by Timothy S. Priest in his capacity as administrator of the estate of Robert V. Taylor against Carol Brown, Debbie Ostwald, Sullivan Health & Rehabilitation Management, Inc. ("Sullivan") and Fireman's Fund Insurance Company, in the Circuit Court of Franklin County, Tennessee, alleging breach of the duty to provide reasonably competent nursing care to an injured individual (now deceased). The Company's subsidiary, Sullivan, and a former employee of Sullivan are defendants in the case. The Plaintiff demands compensatory damages in the amount of $1 million and punitive damages in the amount of $2 million, plus costs. Management of the Company believes that Sullivan has meritorious defenses to the allegations and intends to vigorously contest liability in this matter. At the present time, management of the Company cannot predict the outcome of this litigation, but does not believe that the resolution of the litigation will have a material adverse effect on the Company's financial condition or results of operations. See Note 2 for additional litigation discussion. 7. RETIREMENT PLAN The Company sponsors a 401(k) retirement plan that covers substantially all employees after satisfying certain requirements as to length of service. Employees are eligible to contribute amounts to the plan subject to certain minimum and maximum limitations. The Company matches employee contributions on a discretionary basis as determined by the Company's board of directors. In 1993 and 1994, the Company matched employee contributions at a rate of 10% of employee contributions up to 6% of salary. For 1993, 1994 and 1995, the expense was approximately $6,000, $17,000 and $0 respectively. 8. TRANSACTIONS WITH RELATED PARTIES Approximately 23% of the subordinated debt (Note 4) is held by parties affiliated with certain members of the board of directors. During 1993, the Company paid $91,000 in management fees to a shareholder. During 1993, the Company issued warrants to purchase 146,000 shares to the controlling shareholders in consideration of such shareholders' personal guarantee of the loan to purchase dataLogix (Note 12). The warrants are exercisable at $.01 per warrant and were exercised during 1994. The difference between fair value and exercise price of these warrants of $104,000 was expensed in 1993. 9. SHAREHOLDERS' EQUITY The historical shareholders' equity of Transcend prior to the merger has been retroactively restated for the equivalent number of shares received in the Merger (2.34 to 1). Earnings per share for the periods prior to the Merger are restated to reflect the number of equivalent shares received. In 1995, the Company increased the authorized common stock to 30,000,000 shares. The Company has authorized 21,000,000 shares of preferred stock, $.01 par value. F-12 TRANSCEND SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1993, 1994 AND 1995 10. STOCK OPTIONS AND WARRANTS The Company has established a stock option plan for the employees of the Company. The plan authorizes the grant of "incentive stock options" and "nonstatutory options." Under this plan, options are granted for the Company's common stock at the approximate fair value, as defined in the option agreement. The following is a summary of transactions:
OPTIONS PRICE RANGE --------- -------------- OPTIONS OUTSTANDING, December 31, 1992............ 1,083,000 $ .07 to $ .10 Options granted during the year.................. 294,000 $ .07 to $ .30 Options canceled during the year................. (589,000) $ .09 Options exercised during the year................ (64,000) $ .09 --------- OPTIONS OUTSTANDING, December 31, 1993............ 724,000 $ .07 to $ .30 Options canceled during the year................. (31,000) $ .07 Options exercised during the year................ (10,000) $ .07 --------- OPTIONS OUTSTANDING, December 31, 1994............ 683,000 $ .07 to $ .30 Options issued in Merger (Note 1)................ 1,158,000 $1.87 to $3.75 Options issued, other............................ 331,000 $1.87 to $5.62 Options canceled during the year................. (161,000) $.068 to $3.13 Options exercised during the year................ (511,000) $.068 to $3.13 --------- Options Outstanding, December 31, 1995........... 1,500,000 ========= Options eligible for exercise at December 31, 1995............................................ 576,000 $ .07 to $3.75 =========
The directors who were not employees of the Company were granted non- qualified stock options to purchase shares of the Company's common stock prior to May 31, 1991. These options, which expire ten years from the date of grant, were granted at prices between $2.00 and $5.17 per share, the fair market value on the date of grant, and are all exercisable. During the twelve (12) months ended December 31, 1995, no options were exercised and options to purchase 7,500 shares are still outstanding. At December 31, 1995 there were a total of 159,000 shares of common stock reserved for this plan. 11. INCOME TAXES The components of the net deferred tax (liability) asset as of December 31, 1994 and 1995 were as follows:
1994 1995 --------- ----------- Deferred tax liabilities: Office furniture and equipment..................... $ -- $ (44,000) Goodwill and other intangibles..................... -- (290,000) Discontinued Operations............................ -- (1,128,000) ----------- (1,462,000) ----------- Deferred tax assets: Tax net operating loss............................. 454,000 3,122,000 Cash-basis deferral................................ 453,000 330,000 Accrued Liabilities................................ -- 331,000 Other.............................................. 27,000 186,000 Valuation allowance................................ (934,000) (1,831,000) --------- ----------- $ -- $ 676,000 ========= ===========
F-13 TRANSCEND SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1993, 1994 AND 1995 At December 31, 1995, the Company had net operating loss carryforwards of approximately $8,001,000 which can be used to reduce future income taxes. If not utilized these carryforwards will expire in 2007. The tax benefit differed from the amount computed using the statutory Federal income tax rate due primarily to the increase in the valuation allowance for the past three years. The Company has established a valuation allowance of $934,000 and $1,831,000 at December 31, 1994 and 1995, respectively due to the uncertainty regarding the realizability of certain deferred tax assets, including its net operating loss carryforward. 12. ACQUISITIONS On April 29, 1993, the Company acquired dataLogix, a supplier of medical record transcription services, for $1,100,000. The Company accounted for the acquisition under the purchase method of accounting. The results of operations for dataLogix are included in the statement of loss of the Company beginning on the date of acquisition. The fair value of tangible assets acquired and liabilities assumed was $315,000 and $37,000, respectively. The majority of the excess purchase price over net tangible assets relate to non-compete agreements and customer contracts which are being amortized over three years, using an accelerated method of amortization. On September 30, 1994, the Company acquired the assets of Script-Ease, Inc., a Pittsburgh-based medical transcription business for $1,000,000. The Company accounted for the acquisition under the purchase method of accounting. The results of operations for Script-Ease are included in the statement of loss of the Company beginning on the date of the acquisition. The fair value of tangible assets acquired and liabilities assumed was $259,000 and $161,000, respectively. The majority of the excess purchase price over net tangible assets related to customer lists, which is being amortized over seven years and a non-compete agreement that is being amortized over a three year period. The balance of the additional intangibles is goodwill which is being amortized over thirty years. On January 10, 1995, Transcend acquired TriCare, Inc. in a merger accounted for as a reverse merger (Note 1). The acquisition was treated as a purchase. There were approximately 7.7 million shares issued in the transaction resulting in goodwill of approximately $3.2 million. This goodwill is being amortized over twenty years. On June 15, 1994, TriCare had completed the acquisition of Sullivan for an adjusted purchase price of $3,285,000. Subsequent to the Merger, the Company issued a final payment of $285,000 in lieu of the $1,260,000 obligation which was payable in stock in January 1995 and July 1995, to the former owners of Sullivan Health and Rehabilitation in full satisfaction of its long-term obligation related to the acquisition of Sullivan and gave the former owners a release from any and all further liabilities in connection therewith. On January 31, 1995, the Company acquired the assets of International Dictating Services ("IDS"), a Boston based medical transcription business for approximately $832,000, which consisted of approximately $682,000 paid in cash at closing with the balance payable to the sellers over the next two years. The Company accounted for the acquisition under the purchase method of accounting. The results of operations for IDS are included in the statement of loss of the Company beginning on the date of acquisition. The fair value of tangible assets acquired and liabilities assumed was $245,000 and $86,000, respectively. The intangible related to customer lists is being amortized over seven years and a non-compete agreement is being amortized over a two year period. The balance of the additional intangible asset is goodwill which is being amortized over twenty years. On April 19, 1995, the Company acquired the assets of Medical Transcription of Atlanta, Inc. ("MTA") for $1,372,000, consisting of $550,000 paid in cash at closing, promissory notes of $650,000, and 60,000 shares of Transcend common stock valued at $172,000 at the time of the acquisition. The Company accounted for the acquisition under the purchase method of accounting. The results of operations for MTA are included in the F-14 TRANSCEND SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED) DECEMBER 31, 1993, 1994 AND 1995 statement of loss of the Company beginning on the date of acquisition. The fair value of tangible assets acquired and liabilities assumed was $363,000 and $27,000, respectively. The intangible related to customer lists is being amortized over seven years and a non-compete agreement is being amortized over a three-year period. The balance of the additional intangible is goodwill which is being amortized over twenty years. The following pro-forma amounts presented below represent the results of operations (excluding discontinued operations) of the Company adjusted to include TriCare; Script-Ease, Inc.; MTA and IDS as if these transactions had been consummated at the beginning of each period presented.
YEAR ENDED DECEMBER 31 ------------------------ 1994 1995 ----------- ----------- (UNAUDITED) Sales............................................. $20,705,000 $26,508,000 Net Income (Loss)................................. $(2,321,000) $(3,918,000) Net Loss per common Share......................... $ (0.13) $ (0.22) Weighted Average Shares Outstanding............... 17,743,000 17,836,000
F-15 MAP DEPICTING THE COMPANY'S OFFICES AND MANAGED SITE LOCATIONS. ================================================================================ NO DEALER, REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. ---------------- TABLE OF CONTENTS ----------------
PAGE ---- Prospectus Summary........................................................ 3 Risk Factors.............................................................. 5 The Company............................................................... 9 Use of Proceeds........................................................... 9 Price Range of Common Stock............................................... 10 Dilution.................................................................. 11 Dividend Policy........................................................... 11 Capitalization............................................................ 12 Selected Consolidated Financial Data...................................... 13 Management's Discussion and Analysis of Financial Condition and Results of Operations...................................... 14 Business.................................................................. 19 Management................................................................ 28 Certain Relationships and Related Transactions............................ 33 Description of Capital Stock.............................................. 34 Shares Eligible For Future Sale........................................... 35 Underwriting.............................................................. 37 Legal Matters............................................................. 38 Experts................................................................... 38 Available Information..................................................... 38 Incorporation of Certain Documents by Reference........................... 39 Index to Consolidated Financial Statements................................ F-1
================================================================================ ================================================================================ 3,000,000 Shares [LOGO OF TRANSCEND SERVICES, INC.] Common Stock -------- PROSPECTUS -------- Smith Barney Inc. Dain Bosworth Incorporated , 1996 ================================================================================ PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The estimated expenses of issuance and distribution of the Common Stock, other than underwriting discounts, are as follows: Securities and Exchange Commission Registration Fee................ 12,417 National Association of Securities Dealers, Inc. Filing Fee........ 4,101 Legal Fees and Expenses............................................ 100,000 Accounting Fees and Expenses....................................... 40,000 Printing and Engraving............................................. 35,000 Blue Sky Fees and Expenses......................................... 20,000 Miscellaneous...................................................... 13,482 -------- TOTAL............................................................ $225,000 ========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company's Bylaws permit it to indemnify a director and officer who was or is a party to any threatened, pending or completed action, suit or other type of proceeding, whether civil, criminal, administrative or investigative (other than an action by or any right of the Company) by reason of the fact that he or she is or was a director or officer or is or was serving at the request of the Company as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorney's fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding. These indemnification rights apply if the director or officer acted in good faith and in a manner in which he or she reasonably believed to be in or not opposed to the best interest of the Company and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. In addition, under the Bylaws, the Company may indemnify and hold harmless an officer or director who is a party in an action by or in the right of the Company against expenses (including attorney's fees) actually and reasonably incurred in connection with the defense or settlement of such proceeding. Such indemnification shall be authorized if the director or officer has acted in good faith and in a manner in which he or she reasonably believed to be in or not opposed to the best interest of the Company, except indemnification is not authorized where there is an adjudication of liability, unless the court in which such proceeding was brought, or any other Court of Chancery, shall determine, in view of all the circumstances, that such person is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper. The Company's Bylaws provide that indemnification of the costs and expenses of defending any action is required to be made to any officer or director who is successful (on the merits or otherwise) in defending an action of the type referred to in the immediately preceding paragraph. Except with regard to the costs and expenses of successfully defending an action as may be ordered by a court, indemnification as described in the previous paragraph is only required to be made to a director or officer if a determination is made that indemnification is proper under the circumstances. Such determination shall be made: (i) by the Company's Board by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding; (ii) by independent legal counsel if such a quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs; or (iii) by the affirmative vote of a majority of shares entitled to vote. The Bylaws of the Company also permit the Company to purchase and maintain insurance on behalf of any director or officer of the corporation against any liability asserted against the director or officer and incurred in such capacity, whether or not the corporation would have the power to indemnify the director or officer against such liability. The Bylaws of the Company also provide that any expenses (including attorney's fees) incurred II-1 by any officer or director in defending a civil or criminal action, suit or proceeding may be paid by the Company in advance of the final disposition of such action upon receipt of an undertaking by such director or officer to repay all amounts advanced if it shall be determined that he or she is not entitled to be indemnified by the Company. Subject to certain limitations, the Company's executive officers and directors are insured against losses arising from claims made against them for wrongful acts which they may become obligated to pay or for which the Company may be required to indemnify them. The indemnification provisions contained in the Company's Bylaws are substantially co-extensive with the provisions of Section 145 of the Delaware General Corporation Law, which sets forth the applicable terms, conditions and limitations governing the indemnification of officers, directors and other persons. Limitation of Liability. In addition, the Certificate of Incorporation provides that directors of the Company will not be personally liable for monetary damages to the Company or its shareholders for certain breaches of their fiduciary duty as directors, unless they violated their duty of loyalty to the Company or its shareholders, acted in bad faith, knowingly or intentionally violated the law, authorized illegal dividends or redemptions or derived an improper personal benefit from their action as directors. This provision would have no effect on the availability of equitable remedies or non-monetary relief, such as an injunction or rescission for breach of the duty of care. In addition, the provision applies only to claims against a director arising out of his role as a director and not in any other capacity (such as an officer or employee of the Company). Further, liability of a director for violations of the federal securities laws will not be limited by this provision. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 1 Form of Underwriting Agreement. 4 Specimen of Common Stock Certificate. 4.1 Subordinated Convertible Debenture Purchase Agreement, filed as Exhibit 4 to the Registrant's Form 10-Q for the quarter ended September 30, 1995, which exhibit is incorporated herein by reference. 5 Opinion of Smith, Gambrell & Russell. 23.1 Consent of Arthur Andersen LLP. 23.2 Consent of Smith, Gambrell & Russell (contained in their opinion filed as Exhibit 5). 24.1 Powers of Attorney.
ITEM 17. UNDERTAKINGS (1) The undersigned registrant hereby undertakes that, for purposes of determining liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offering therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (2) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling II-2 precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (3) The undersigned registrant hereby undertakes that: (a) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (b) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUND TO BELIEVE THAT IT MEETS ALL OF THE REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF ATLANTA, STATE OF GEORGIA, ON THIS 30TH DAY OF MAY, 1996. Transcend Services, Inc. /s/ Larry G. Gerdes By: _________________________________ LARRY G. GERDES PRESIDENT AND CHIEF EXECUTIVE OFFICER PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED. SIGNATURES TITLE DATE * Chairman of the May 30, 1996 - ------------------------------------- Board of Directors DONALD L. LUCAS /s/ Larry G. Gerdes President, Chief May 30, 1996 - ------------------------------------- Executive Officer LARRY G. GERDES and Director (Principal Executive Officer) /s/ David W. Murphy Chief Financial May 30, 1996 - ------------------------------------- Officer, Secretary DAVID W. MURPHY and Treasurer (Principal Financial and Accounting Officer) * Director May 30, 1996 - ------------------------------------- GEORGE B. CALDWELL * Director May 30, 1996 - ------------------------------------- WALTER S. HUFF, JR. * Director May 30, 1996 - ------------------------------------- CHARLES E. THOELE /s/ Larry G. Gerdes *By: ________________________________ LARRY G. GERDES, AS ATTORNEY-IN-FACT II-4 EXHIBIT INDEX
S-K REFERENCE NUMBER DESCRIPTION PAGE ------------- ----------- ---- 1 Form of Underwriting Agreement. 4 Specimen of Common Stock Certificate. 5 Opinion of Smith, Gambrell & Russell. 23.1 Consent of Arthur Andersen LLP. 24.1 Powers of Attorney.
EX-1 2 FORM OF UNDERWRITING AGREEMENT _________ SHARES TRANSCEND SERVICES, INC. COMMON STOCK UNDERWRITING AGREEMENT ---------------------- , 1996 Smith Barney Inc. Dain Bosworth Incorporated As Representatives of the Several Underwriters c/o Smith Barney Inc. 388 Greenwich Street New York, New York 10013 Dear Sirs: Transcend Services, a Delaware corporation (the "Company"), proposes to issue and sell an aggregate of _________ shares (the "Firm Shares") of its common stock, par value $0.01 per share (the "Common Stock"), to the several Underwriters named in Schedule I hereto (the "Underwriters"). In addition, solely for the purpose of covering over-allotments, the Company proposes to sell to the Underwriters, upon the terms and conditions set forth in Section 2 hereof, up to an additional _______ shares (the "Additional Shares") of Common Stock. The Firm Shares and the Additional Shares are hereinafter collectively referred to as the "Shares." The Company wishes to confirm as follows its agreement with you (the "Representatives") and the other several Underwriters on whose behalf you are acting, in connection with the several purchases of the Shares by the Underwriters. 1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder (collectively, the "Act"), a registration statement on Form S-3 under the Act (the "registration statement"), including a prospectus subject to completion, relating to the Shares. The term "Registration Statement" as used in this Agreement means the registration statement (including all financial schedules and exhibits) as amended at the time it becomes effective or, if the registration statement became effective prior to the execution of this Agreement, as supplemented or amended prior to the execution of this Agreement. If it is contemplated, at the time this Agreement is executed, that a post-effective amendment to the registration statement will be filed and must be declared effective before the offering of the Shares may commence, the term "Registration Statement" as used in this Agreement means the registration statement as amended by said post-effective amendment. If an additional registration statement is prepared and filed with the Commission in accordance with Rule 462(b) under the Act (an "Additional Registration Statement"), the term "Registration Statement" as used in this Agreement includes the Additional Registration Statement. The term "Prospectus" as used in this Agreement means the prospectus in the form included in the Registration Statement, or, if the prospectus included in the Registration Statement omits information in reliance on Rule 430A under the Act and such information is included in a prospectus filed with the Commission pursuant to Rule 424(b) under the Act, the term "Prospectus" as used in this Agreement means the prospectus in the form included in the Registration Statement as supplemented by the addition of the Rule 430A information contained in the prospectus filed with the Commission pursuant to Rule 424(b). The term "Prepricing Prospectus" as used in this Agreement means the prospectus subject to completion in the form included in the registration statement at the time of the initial filing of the registration statement with the Commission and as such prospectus shall have been amended from time to time prior to the date of the Prospectus. Any reference herein to the registration statement, the Registration Statement, any Prepricing Prospectus or the Prospectus shall be deemed to refer to and include the documents incorporated by reference therein pursuant to Form S-3 under the Act, as of the date of the registration statement, the Registration Statement, such Prepricing Prospectus or the Prospectus, as the case may be, and any reference to any amendment or supplement to the registration statement, the Registration Statement, any Prepricing Prospectus or the Prospectus shall be deemed to refer to and include any documents filed after such date under the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder (collectively, the "Exchange Act") and deemed incorporated by reference pursuant to Form S-3 under the Act. As used herein, the term "Incorporated Documents" means the documents which at the time are incorporated by reference in the registration statement, the Registration Statement, any Prepricing Prospectus, the Prospectus or any amendment or supplement thereto. 2. AGREEMENTS TO SELL AND PURCHASE. The Company hereby agrees, subject to all the terms and conditions set forth herein, to issue and sell to each Underwriter and, upon the basis of the representations, warranties and agreements of the Company herein contained and subject to all the terms and conditions set forth herein, each Underwriter agrees, severally and not jointly, to purchase from the Company, at a purchase price of $ per share (the "purchase price per share"), the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto (or such number of Firm Shares increased as set forth in Section 10 hereof). The Company also agrees, subject to all the terms and conditions set forth herein, to sell to the Underwriters, and, upon the basis of the representations, warranties and agreements of the Company herein contained and subject to all the terms and conditions set forth herein, the Underwriters shall have the right to purchase from the Company, at the purchase price per share, pursuant to an option (the "over-allotment option") which may be exercised at any time and from time to time prior to 9:00 p.m., New York City time, on the 30th day after the date of the Prospectus (or, if such 30th day shall be a Saturday or Sunday or a holiday, on the next business day thereafter when the New York Stock Exchange is open for trading), up to an aggregate of _______ Additional Shares from the Company. Additional Shares may be purchased only to cover over-allotments made in connection with the offering of the Firm Shares. Upon any exercise of the over-allotment option, each Underwriter, severally and not jointly, agrees to purchase from the Company the number of Additional Shares (subject to such adjustments as you may determine in order to avoid fractional shares) which bears the same proportion to the number of Additional Shares to be purchased by the Underwriters as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto (or such number of Firm Shares increased as set forth in Section 10 hereof) bears to the aggregate number of Firm Shares. 2 3. TERMS OF PUBLIC OFFERING. The Company has been advised by you that the Underwriters propose to make a public offering of their respective portions of the Shares as soon after the Registration Statement and this Agreement have become effective as in your judgment is advisable and initially to offer the Shares upon the terms set forth in the Prospectus. 4. DELIVERY OF THE SHARES AND PAYMENT THEREFOR. Delivery to the Underwriters of and payment for the Firm Shares shall be made at the office of Smith Barney Inc., 388 Greenwich Street, New York, New York 10013, at 10:00 A.M., New York City time, on , 1996 (the "Closing Date"). The place of closing for the Firm Shares and the Closing Date may be varied by agreement between you and the Company. Delivery to the Underwriters of and payment for any Additional Shares to be purchased by the Underwriters shall be made at the aforementioned office of Smith Barney Inc. at such time on such date (the "Option Closing Date"), which may be the same as the Closing Date but shall in no event be earlier than the Closing Date nor earlier than two nor later than ten business days after the giving of the notice hereinafter referred to, as shall be specified in a written notice from you on behalf of the Underwriters to the Company of the Underwriters' determination to purchase a number, specified in such notice, of Additional Shares. The place of closing for any Additional Shares and the Option Closing Date for such Shares may be varied by agreement between you and the Company. Certificates for the Firm Shares and for any Additional Shares to be purchased hereunder shall be registered in such names and in such denominations as you shall request by written notice, it being understood that a facsimile transmission shall be deemed written notice, prior to 9:30 A.M., New York City time, on the second business day preceding the Closing Date or any Option Closing Date, as the case may be. Such certificates shall be made available to you in New York City for inspection and packaging not later than 9:30 A.M., New York City time, on the business day next preceding the Closing Date or the Option Closing Date, as the case may be. The certificates evidencing the Firm Shares and any Additional Shares to be purchased hereunder shall be delivered to you on the Closing Date or the Option Closing Date, as the case may be, against payment of the purchase price therefor by certified or official bank check or checks payable in New York Clearing House (next day) funds to the order of the Company. 5. AGREEMENTS OF THE COMPANY. The Company agrees with the several Underwriters as follows: (a) If, at the time this Agreement is executed and delivered, it is necessary for the registration statement or a post-effective amendment thereto or any Additional Registration Statement to be declared effective before the offering of the Shares may commence, the Company will endeavor to cause the Registration Statement or such post-effective amendment or Additional Registration Statement to become effective as soon as possible and will advise you promptly and, if requested by you, will confirm such advice in writing, when the Registration Statement or such post-effective amendment or Additional Registration Statement has become effective. 3 (b) The Company will advise you promptly and, if requested by you, will confirm such advice in writing: (i) of any request by the Commission for amendment of or a supplement to the Registration Statement, any Prepricing Prospectus or the Prospectus or for additional information; (ii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the suspension of qualification of the Shares for offering or sale in any jurisdiction or the initiation of any proceeding for such purpose; and (iii) within the period of time referred to in paragraph (f) below, of any change in the Company's condition (financial or other), business, prospects, properties, net worth or results of operations, or of the happening of any event, which makes any statement of a material fact made in the Registration Statement or the Prospectus (as then amended or supplemented) untrue or which requires the making of any additions to or changes in the Registration Statement or the Prospectus (as then amended or supplemented) in order to state a material fact required by the Act or the regulations thereunder to be stated therein or necessary in order to make the statements therein not misleading, or of the necessity to amend or supplement the Prospectus (as then amended or supplemented) to comply with the Act or any other law. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, the Company will make every reasonable effort to obtain the withdrawal of such order at the earliest possible time. (c) The Company will furnish to you, without charge, four signed copies of the registration statement as originally filed with the Commission and of each amendment thereto, including financial statements and all exhibits and Incorporated Documents thereto and will also furnish to you, without charge, such number of conformed copies of the registration statement as originally filed and of each amendment thereto, but without exhibits, and Incorporated Documents thereto as you may request. (d) The Company will not (i) file any amendment to the Registration Statement or make any amendment or supplement to the Prospectus of which you shall not previously have been advised or to which you shall object after being so advised or (ii) so long as, in the opinion of counsel for the Underwriters, a prospectus is required to be delivered in connection with sales by any Underwriter or dealer, file any information, documents or reports pursuant to the Exchange Act which upon filing becomes an Incorporated Document, without delivering a copy of such information, documents or reports to you, as Representatives of the Underwriters, prior to or concurrently with such filing. (e) Prior to the execution and delivery of this Agreement, the Company has delivered or will deliver to you, without charge, in such quantities as you have requested or may hereafter request, copies of each form of the Prepricing Prospectus. The Company consents to the use, in accordance with the provisions of the Act and with the securities or Blue Sky laws of the jurisdictions in which the Shares are offered by the several Underwriters and by dealers, prior to the date of the Prospectus, of each Prepricing Prospectus so furnished by the Company. (f) As soon after the execution and delivery of this Agreement as possible and thereafter from time to time for such period as in the opinion of counsel for the Underwriters a prospectus is required by the Act to be delivered in connection with sales by any Underwriter or dealer, the Company will expeditiously deliver to each Underwriter and each dealer, without charge, as many copies of the Prospectus (and of any amendment or supplement thereto) as you may request. The Company consents to the use of the Prospectus (and of any amendment or supplement thereto) in accordance with the provisions of the Act and with the securities or Blue Sky laws of the jurisdictions in which the Shares are offered by the several Underwriters and by all dealers to whom Shares may be sold, both in connection with the offering and sale of the Shares and for such period of time thereafter as the Prospectus is required by the Act to be delivered in connection with sales by any Underwriter or dealer. If during such period of time any event shall occur that in the judgment of the Company or in 4 the opinion of counsel for the Underwriters is required to be set forth in the Prospectus (as then amended or supplemented) or should be set forth therein in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary to supplement or amend the Prospectus, or to file under the Exchange Act any document which upon filing becomes an Incorporated Document, to comply with the Act, the Exchange Act or any other law, the Company will forthwith prepare and, subject to the provisions of paragraph (d) above, file with the Commission an appropriate supplement or amendment thereto or Incorporated Document and will expeditiously furnish copies thereof to the Underwriters and dealers in such quantities as you shall request. In the event that the Company and you, as Representatives of the several Underwriters, agree that the Prospectus should be amended or supplemented, or that a document should be filed under the Exchange Act which upon filing becomes an Incorporated Document, the Company, if requested by you, will promptly issue a press release announcing or disclosing the matters to be covered by the proposed amendment or supplement. (g) The Company will cooperate with you and with counsel for the Underwriters in connection with the registration or qualification of the Shares for offering and sale by the several Underwriters and by dealers under the securities or Blue Sky laws of such jurisdictions as you may designate and will file such consents to service of process or other documents necessary or appropriate in order to effect such registration or qualification; provided that in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not now so qualified or to take any action that would subject it to service of process in suits, other than those arising out of the offering or sale of the Shares, in any jurisdiction where it is not now so subject. (h) The Company will make generally available to its security holders a consolidated earnings statement, which need not be audited, covering a twelve- month period commencing after the effective date of the Registration Statement and ending not later than 15 months thereafter, as soon as practicable after the end of such period, which consolidated earnings statement shall satisfy the provisions of Section 11(a) of the Act. (i) During the period of five years hereafter, the Company will furnish to you (i) as soon as available, a copy of each report of the Company mailed to stockholders or filed with the Commission and (ii) from time to time such other information concerning the Company as you may reasonably request. (j) If this Agreement shall terminate or shall be terminated after execution pursuant to any provisions hereof (otherwise than pursuant to the second paragraph of Section 10 hereof or by notice given by you terminating this Agreement pursuant to Section 10 or Section 11 hereof), or if this Agreement shall be terminated by the Underwriters because of any failure or refusal on the part of the Company to comply with the terms or fulfill any of the conditions of this Agreement, the Company agrees to reimburse the Representatives for all out- of-pocket expenses (including fees and expenses of counsel for the Underwriters) incurred by you in connection herewith. (k) The Company will apply the net proceeds from the sale of the Shares substantially in accordance with the description set forth in the Prospectus. (l) If Rule 430A of the Act is employed, the Company will timely file the Prospectus pursuant to Rule 424(b) under the Act and will advise you of the time and manner of such filing. (m) Except as provided in this Agreement, the Company will not sell, offer to sell, contract to sell or otherwise transfer or dispose of any Common Stock (or any securities convertible into 5 or exercisable or exchangeable for Common Stock), or grant any options or warrants to purchase Common Stock, for a period of 180 days after the date of the Prospectus, without the prior written consent of Smith Barney Inc. (n) The Company has furnished or will furnish to you "lock-up" letters, in form and substance satisfactory to you, signed by each of its current officers and directors and each of its stockholders designated by you. (o) Except as stated in this Agreement and in the Prepricing Prospectus and Prospectus, the Company has not taken, nor will it take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. (p) The Company will timely file with The Nasdaq Stock Market a notification form for listing of additional shares on the Nasdaq National Market with respect to the Shares. 6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to each Underwriter that: (a) Each Prepricing Prospectus included as part of the registration statement as originally filed or as part of any amendment or supplement thereto, or filed pursuant to Rule 424 under the Act, complied when so filed in all material respects with the provisions of the Act. The Commission has not issued any order preventing or suspending the use of any Prepricing Prospectus. (b) The Company meets the requirements for use of Form S-3 under the Act. The registration statement in the form in which it became or becomes effective and also in such form as it may be when any post-effective amendment thereto or any Additional Registration Statement shall become effective, and the Prospectus and any supplement or amendment thereto when filed with the Commission under Rule 424(b) under the Act, complied or will comply in all material respects with the provisions of the Act and did not or will not at any such times contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, except that this representation and warranty does not apply to statements in or omissions from the registration statement or the Prospectus made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by or on behalf of any Underwriter through you expressly for use therein. (c) All the outstanding shares of capital stock of the Company have been duly authorized and validly issued, are fully paid and nonassessable, are free of any preemptive or similar rights (other than such rights as shall terminate upon completion of the offering contemplated hereby, as set forth in the Registration Statement and the Prospectus) and have been issued and sold in compliance with all Federal and state securities laws; the Shares have been duly authorized and, when issued and delivered to the Underwriters against payment therefor in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and free of any preemptive or similar rights; and the capital stock of the Company conforms to the description thereof in the Registration Statement and the Prospectus. (d) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus, 6 and is duly registered and qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure so to register or qualify does not have a material adverse effect on the condition (financial or other), business, prospects, properties, net worth or results of operations of the Company and the Subsidiaries (as hereinafter defined) taken as a whole (a "Material Adverse Effect"). (e) All the Company's subsidiaries (as defined in the Act), are listed in an exhibit to the Registration Statement and are referred to herein individually as a "Subsidiary" and collectively as the "Subsidiaries." Each Subsidiary is a corporation duly organized, validly existing and in good standing in the jurisdiction of its incorporation, with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus and is duly registered and qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure so to register or qualify would not have a Material Adverse Effect. All the outstanding shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable, and are wholly- owned by the Company directly or indirectly through one of the other Subsidiaries, free and clear of any lien, adverse claim, security interest, equity or other encumbrance, except as disclosed in the Registration Statement and the Prospectus (or any amendment or supplement thereto). (f) There are no legal or governmental proceedings pending or, to the knowledge of the Company, threatened, against the Company or any of the Subsidiaries, or to which the Company or any of the Subsidiaries or any of their respective properties is subject, that are required to be described in the Registration Statement or the Prospectus but are not described as required. There are no agreements, contracts, indentures, leases or other instruments that are required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement or an Incorporated Document that are not described or filed as required by the Act or the Exchange Act. Neither the Company nor any of the Subsidiaries is involved in any strike, job action or labor dispute, and to the Company's best knowledge no such action or dispute is threatened. (g) Neither the Company nor any of the Subsidiaries is (i) in violation of its certificate of incorporation or by-laws, or of any law, ordinance, administrative or governmental rule or regulation applicable to the Company or any of the Subsidiaries or of any decree of any court or governmental agency or body having jurisdiction over the Company or any of the Subsidiaries, or (ii) in default in the performance of any obligation, agreement or condition contained in any bond, debenture, note or any other evidence of indebtedness or in any agreement, indenture, lease or other instrument to which the Company or any of the Subsidiaries is a party or by which any of them or any of their respective properties may be bound. (h) Neither the issuance and sale of the Shares, the execution, delivery or performance of this Agreement by the Company nor the consummation by the Company of the transactions contemplated hereby (i) requires any consent, approval, authorization or other order of, or registration or filing with, any court, regulatory body, administrative agency or other governmental body, agency or official (except such as may be required for the registration of the Shares under the Act, which has been or will be effected in accordance with this Agreement, and compliance with the securities or Blue Sky laws of various jurisdictions) or conflicts or will conflict with or constitutes or will constitute a breach of, or a default under, the certificate of incorporation or bylaws, or other organizational documents, of the Company or any of the Subsidiaries or (ii) conflicts or will conflict with or constitutes or will 7 constitute a breach of, or a default under, any agreement, indenture, lease or other instrument to which the Company or any of the Subsidiaries is a party or by which the Company or any of the Subsidiaries or any of their respective properties may be bound, or violates or will violate any statute, law, regulation or filing or judgment, injunction, order or decree applicable to the Company or any of the Subsidiaries or any of their respective properties, or will result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of the Subsidiaries pursuant to the terms of any agreement or instrument to which any of them is a party or by which any of them may be bound or to which any of their respective property or assets is subject. (i) The accountants, Arthur Andersen LLP, who have certified or shall certify the financial statements filed or to be filed as part of the Registration Statement or the Prospectus (or any amendment or supplement thereto), are independent public accountants as required by the Act and the Exchange Act. (j) The financial statements, together with the related schedules and notes forming part of the Registration Statement and the Prospectus (and any amendment or supplement thereto), comply with the requirements of the Act and the Exchange Act and present fairly the consolidated financial position, results of operations and changes in stockholders' equity and cash flows of the Company on the basis stated in the Registration Statement at the respective dates or for the respective periods to which they apply; such statements and related schedules and notes have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved, except as disclosed therein; and the other financial and statistical information and data set forth in the Registration Statement and the Prospectus (and any amendment or supplement thereto) are accurately presented and prepared on a basis consistent with such financial statements and the books and records of the Company. (k) The Company has all requisite power and authority to execute, deliver and perform its obligations under this Agreement; the execution and delivery of, and the performance by the Company of its obligations under, this Agreement have been duly and validly authorized by the Company, and this Agreement has been duly executed and delivered by the Company and constitutes the valid and legally binding agreement of the Company, enforceable against the Company in accordance with its terms, except as rights to indemnity and contribution hereunder may be limited by federal or state securities laws or principles of public policy and subject to the qualification that the enforceability of the Company's obligations hereunder may be limited by bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium and other laws relating to or affecting creditors' rights generally and by general equitable principles. (l) Except as disclosed in the Registration Statement and the Prospectus (or any amendment or supplement thereto), subsequent to the respective dates as of which such information is given in the Registration Statement and the Prospectus (or any amendment or supplement thereto), neither the Company nor any of the Subsidiaries has incurred any liability or obligation, direct or contingent, or entered into any transaction that is material to the Company and the Subsidiaries taken as a whole, and there has not been any change in the capital stock, or material increase in the consolidated short-term or long-term debt, of the Company, or any material adverse change, or any development involving or which may reasonably be expected to involve a prospective material adverse change, in the condition (financial or other), business, prospects, properties, net worth or results of operations of the Company and the Subsidiaries taken as a whole. (m) The Company and each of the Subsidiaries has good and marketable title to all property (real and personal) described in the Prospectus as being owned by it, free and clear of all liens, 8 claims, security interests or other encumbrances except such as are described in the Registration Statement and the Prospectus or in a document filed as an exhibit to the Registration Statement or an Incorporated Document, and all the property described in the Prospectus as being held under lease by the Company or any of the Subsidiaries is held by it under valid, subsisting and enforceable leases. (n) The Company has not distributed and, prior to the later to occur of the Closing Date and completion of the distribution of the Shares, will not distribute any offering material in connection with the offering and sale of the Shares other than the Registration Statement, the Prepricing Prospectus, the Prospectus or other materials, if any, permitted by the Act. (o) The Company and each of the Subsidiaries has such permits, licenses, franchises, authorizations and clearances ("Permits") of governmental or regulatory authorities, including, without limitation, such Permits relating to the provision of healthcare services by the Company or any of the Subsidiaries, as are necessary to own, lease and operate its properties and to conduct its business in the manner described in the Prospectus, subject to such qualifications as may be set forth in the Prospectus; subject to such qualifications as may be set forth in the Prospectus, the Company and each of the Subsidiaries has fulfilled and performed all its material obligations with respect to the Permits, and no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination thereof or results in any other material impairment of the rights of the holder of any Permit, subject in each case to such qualification as may be set forth in the Prospectus. Except as described in the Prospectus, none of the Permits contains any restriction that is materially burdensome to the Company or any of the Subsidiaries. The Company's and each Subsidiary's business practices do not violate any federal or state laws regarding physician ownership of (or financial relationship with) and referral to entities providing healthcare-related goods or services, or laws requiring disclosure of financial interests held by physicians in entities to which they may refer patients for the provisions of health care related goods or services. (p) The Company and the Subsidiaries own or possess all patents, trademarks, trademark registrations, service marks, service mark registrations, trade names, copyrights, licenses, inventions, trade secrets and rights described in the Prospectus as being owned by any of them or necessary for the conduct of their respective businesses, and the Company is not aware of any claim to the contrary or any challenge by any other person to the rights of the Company and the Subsidiaries with respect to the foregoing. (q) The Company has not received nor is it aware of any communication (written or oral) relating to the termination or modification or threatened termination or modification of the agreements described or referred to in the Prospectus under the caption "Risk Factors-Nature of Contracts" nor is it aware of any communication (written or oral) relating to any determination or threatened determination not to renew or extend any agreement described or referred to under such caption at the end of the current term of any such agreement. (r) The property, assets and operations of the Company and the Subsidiaries comply in all material respects with all applicable federal, state and local laws, rules, orders, decrees, judgments, injunctions, licenses, permits or regulations relating to environmental matters (the "Environmental Laws"). To the Company's best knowledge, none of the Company's nor any of the Subsidiaries property, assets or operations is the subject of any federal, state or local investigation evaluating whether any remedial action is needed to respond to a release of any substance regulated by or form the basis of liability under any Environmental Laws (a "Hazardous Material") into the environment or is in contravention of any federal, state, local or foreign law, order or regulation. Neither the Company nor 9 any of the Subsidiaries has received any notice or claim, nor are there any pending or, to the Company's best knowledge, threatened or reasonably anticipated lawsuits against the Company or any of the Subsidiaries with respect to violations of an Environmental Law or in connection with the release of any Hazardous Material into the environment. Neither the Company nor any of the Subsidiaries has any material contingent liability in connection with any release of Hazardous Material into the environment. (s) The Company and the Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are customary in the businesses in which they are engaged; (ii) all policies of insurance insuring the Company or any of the Subsidiaries or their respective businesses, assets, employees, officers and directors are in full force and effect; (iii) the Company and the Subsidiaries are in compliance with the terms of such policies and instruments in all material respects; and (iv) there are no claims by the Company or any of the Subsidiaries under any such policy or instrument as to which any insurance company is denying liability or defending under a reservation of rights clause. (t) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (u) Neither the Company nor any of the Subsidiaries nor, to the Company's best knowledge, any employee or agent of the Company or any of the Subsidiaries has made any payment of funds of the Company or received or retained any funds in violation of any law, rule or regulation, which payment, receipt or retention of funds is of a character required to be disclosed in the Prospectus. (v) The Company and the Subsidiaries have filed all federal, state, local and foreign tax returns and tax forms required to be filed; such returns and forms are complete and correct in all material respects; and all taxes shown by such returns or otherwise assessed that are due or payable have been paid, except such taxes as are being contested in good faith and as to which adequate reserves have been provided. All payroll withholdings required to be made by the Company with respect to employees have been made. The charges, accruals and reserves on the books of the Company and the Subsidiaries in respect of any tax liability for any year not finally determined are adequate to meet any assessments or reassessments for additional taxes; and there have been no tax deficiencies asserted and, to the best knowledge of the Company, no tax deficiency might be reasonably asserted and threatened against the Company or any of the Subsidiaries that could, singularly or in the aggregate, have a Material Adverse Effect. (w) No holder of any security of the Company has any right to require (not heretofore waived) registration of shares of Common Stock or any other security of the Company because of the filing of the registration statement or the consummation of the transactions contemplated by this Agreement and, except as disclosed in the Prospectus, no person has the right to require registration under the Act of any shares of Common Stock or other securities of the Company. No person has the right, contractual or otherwise, to cause the Company to permit such person to underwrite the sale of any of the Shares. Except as described in or contemplated by the Prospectus, there are no outstanding options, warrants or other rights calling for the issuance of, and there are no commitments, plans or arrangements to issue, any shares of capital stock of the Company or any of the Subsidiaries or any 10 security convertible into or exchangeable or exercisable for capital stock of the Company or any of the Subsidiaries. (x) Neither the Company nor any of the Subsidiaries is, and, upon the sale of the Shares to be issued and sold by it hereunder and application of the net proceeds from such sale as described in the Prospectus under the caption "Use of Proceeds," will not be an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (y) The Company and each of the Subsidiaries is in compliance with all provisions of Florida Statutes (S) 517.075 and the regulations thereunder, relating to issuers doing business with Cuba. (z) The Incorporated Documents heretofore filed were filed in a timely manner and, when they were filed (or, if any amendment with respect to any such document was filed, when such document was filed), conformed with the requirements of the Exchange Act and did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and any further Incorporated Documents will, when so filed, be filed in a timely manner and conform with the requirements of the Exchange Act and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. 7. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to indemnify and hold harmless each of you and each other Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages, liabilities and expenses (including reasonable costs of investigation) arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in any Prepricing Prospectus or in the Registration Statement or the Prospectus or in any amendment or supplement thereto, or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or expenses arise out of or are based upon any untrue statement or omission or alleged untrue statement or omission which has been made therein or omitted therefrom in reliance upon and in conformity with the information relating to such Underwriter furnished in writing to the Company by or on behalf of any Underwriter through you expressly for use in connection therewith; provided, however, that the indemnification contained in this paragraph (a) with respect to any Prepricing Prospectus shall not inure to the benefit of any Underwriter (or to the benefit of any person controlling such Underwriter) on account of any such loss, claim, damage, liability or expense arising from the sale of Shares by such Underwriter to any person if (i) a copy of the Prospectus shall not have been delivered or sent to such person within the time required by the Act and the untrue statement or alleged untrue statement or omission or alleged omission of a material fact contained in such Prepricing Prospectus was corrected in the Prospectus and (ii) the Company has delivered the Prospectus to the several Underwriters in requisite quantity on a timely basis to permit such delivery or sending. The foregoing indemnity agreement shall be in addition to any liability which the Company may otherwise have. (b) If any action, suit or proceeding shall be brought against any Underwriter or any person controlling any Underwriter in respect of which indemnity may be sought against the Company, such Underwriter or such controlling person shall promptly notify the Company, and the Company shall assume the defense thereof, including the employment of counsel and payment of all fees and expenses. Such Underwriter or any such controlling person shall have the right to employ separate counsel in any such action, suit or proceeding and to participate in the defense thereof, but the fees and expenses of such 11 counsel shall be at the expense of such Underwriter or such controlling person unless (i) the Company has agreed in writing to pay such fees and expenses, (ii) the Company has failed to assume the defense and employ counsel or (iii) the named parties to any such action, suit or proceeding (including any impleaded parties) include both such Underwriter or such controlling person and the Company and such Underwriter or such controlling person shall have been advised by its counsel that representation of such indemnified party and the Company by the same counsel would be inappropriate under applicable standards of professional conduct (whether or not such representation by the same counsel has been proposed) due to actual or potential differing interests between them (in which case the Company shall not have the right to assume the defense of such action, suit or proceeding on behalf of such Underwriter or such controlling person). It is understood, however, that the Company shall, in connection with any one such action, suit or proceeding or separate but substantially similar or related actions, suits or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of only one separate firm of attorneys (in addition to any local counsel) at any time for all such Underwriters and controlling persons not having actual or potential differing interests with you or among themselves, which firm shall be designated in writing by Smith Barney Inc., and that all such fees and expenses shall be reimbursed as they are incurred. The Company shall not be liable for any settlement of any such action, suit or proceeding effected without its written consent, but if settled with such written consent, or if there be a final judgment for the plaintiff in any such action, suit or proceeding, the Company agrees to indemnify and hold harmless any Underwriter and any such controlling person, to the extent provided in the preceding paragraph, from and against any loss, claim, damage, liability or expense by reason of such settlement or judgment. (c) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, its officers who sign the Registration Statement, and any person who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, to the same extent as the foregoing indemnity from the Company to each Underwriter, but only with respect to information relating to such Underwriter furnished in writing to the Company by or on behalf of such Underwriter through you expressly for use in the Registration Statement, the Prospectus or any Prepricing Prospectus, or any amendment or supplement thereto. If any action, suit or proceeding shall be brought against the Company, any of its directors, any such officer or any such controlling person based on the Registration Statement, the Prospectus or any Prepricing Prospectus, or any amendment or supplement thereto, and in respect of which indemnity may be sought against any Underwriter pursuant to this paragraph (c), such Underwriter shall have the rights and duties given to the Company by paragraph (b) above (except that if the Company shall have assumed the defense thereof such Underwriter shall not be required to do so, but may employ separate counsel therein and participate in the defense thereof, but the fees and expenses of such counsel shall be at such Underwriter's expense), and the Company, its directors, any such officer, and any such controlling person shall have the rights and duties given to the Underwriters by paragraph (b) above. The foregoing indemnity agreement shall be in addition to any liability which the Underwriters may otherwise have. (d) If the indemnification provided for in this Section 7 is unavailable to an indemnified party under paragraphs (a) or (c) hereof in respect of any losses, claims, damages, liabilities or expenses referred to therein, then an indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other hand from the offering of the Shares, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and the Underwriters on the other 12 hand in connection with the statements or omissions that resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other hand shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus; provided that, in the event that the Underwriters shall have purchased any Additional Shares hereunder, any determination of the relative benefits received by the Company and the Underwriters from the offering of the Shares shall include the net proceeds (before deducting expenses) received by the Company, and the underwriting discounts and commissions received by the Underwriters, from the sale of such Additional Shares, in each case computed on the basis of the respective amounts set forth in the notes to the table on the cover page of the Prospectus. The relative fault of the Company on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or by the Underwriters on the other hand and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. (e) The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by a pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in paragraph (d) above. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities and expenses referred to in paragraph (d) above shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating any claim or defending any such action, suit or proceeding. Notwithstanding the provisions of this Section 7, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price of the Shares underwritten by it and distributed to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 7 are several in proportion to the respective numbers of Firm Shares set forth opposite their names in Schedule I hereto (or such numbers of Firm Shares increased as set forth in Section 10 hereof) and not joint. (f) No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened action, suit or proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such action, suit or proceeding. (g) Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or contribution under this Section 7 shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred. The indemnity and contribution agreements contained in this Section 7 and the representations and warranties of the Company set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, the Company, its directors or officers or any person controlling the Company, 13 (ii) acceptance of any Shares and payment therefor hereunder, and (iii) any termination of this Agreement. A successor to any Underwriter or any person controlling any Underwriter, or to the Company, its directors or officers, or any person controlling the Company, shall be entitled to the benefits of the indemnity, contribution and reimbursement agreements contained in this Section 7. 8. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several obligations of the Underwriters to purchase the Firm Shares hereunder are subject to the following conditions: (a) If, at the time this Agreement is executed and delivered, it is necessary for the registration statement or a post-effective amendment thereto or an Additional Registration Statement to be declared effective before the offering of the Shares may commence, the registration statement or such post- effective amendment or Additional Registration Statement shall have become effective not later than 5:30 P.M., New York City time, on the date hereof, or at such later date and time as shall be consented to in writing by you, and all filings, if any, required by Rules 424 and 430A under the Act shall have been timely made. (b) Subsequent to the effective date of this Agreement, there shall not have occurred (i) any change, or any development involving a prospective change, in or affecting the condition (financial or other), business, prospects, properties, net worth, or results of operations of the Company not contemplated by the Prospectus, which in your opinion, as Representatives of the several Underwriters, would materially, adversely affect the market for the Shares, or (ii) any event or development relating to or involving the Company or any of the Subsidiaries, or any officer or director of the Company or any of the Subsidiaries, which makes any statement made in the Prospectus untrue or which, in the opinion of the Company and its counsel or the Underwriters and their counsel, requires the making of any addition to or change in the Prospectus in order to state a material fact required by the Act or any other law to be stated therein or necessary in order to make the statements therein not misleading, if amending or supplementing the Prospectus to reflect such event or development would, in your opinion, as Representatives of the several Underwriters, materially, adversely affect the market for the Shares. (c) You shall have received on the Closing Date an opinion of Smith, Gambrell & Russell, special counsel for the Company, dated the Closing Date and addressed to you, as Representatives of the several Underwriters, that: (i) The Company is a corporation duly incorporated and validly existing in good standing under the laws of the State of Delaware with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus (and any amendment or supplement thereto), and is duly registered and qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure so to register or qualify does not have a Material Adverse Effect; (ii) Each Subsidiary is a corporation duly incorporated and validly existing and in good standing under the laws of the jurisdiction of its organization, with full corporate power and authority to own, lease, and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus (and any amendment or supplement thereto); each Subsidiary is duly registered and qualified to conduct its business and is in good standing as a foreign corporation in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure 14 so to register or qualify or to be in good standing would not have a Material Adverse Effect; and all the outstanding shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable, and are owned of record by the Company directly, or indirectly through one of the other Subsidiaries, free and clear of any perfected security interest or, to such counsel's knowledge, any other lien, adverse claim, equity or other encumbrance, except as disclosed in the Registration Statement and the Prospectus (or any amendment or supplement thereto); (iii) The authorized capital stock of the Company is as set forth under the caption "Capitalization" in the Prospectus, and the authorized capital stock of the Company conforms in all material respects to the description contained in the Prospectus under the caption "Description of Capital Stock"; (iv) All the shares of capital stock of the Company outstanding prior to the issuance of the Shares have been duly authorized and validly issued, are fully paid and nonassessable and were issued and sold in compliance with all applicable federal and state securities laws; (v) The Shares have been duly authorized and, when issued and delivered to the Underwriters against payment therefor in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and free of (A) any preemptive rights arising under the Company's certificate of incorporation or the Delaware General Corporation Law or (B) to the knowledge of such counsel, similar rights that entitle or will entitle any person to acquire any shares of capital stock of the Company upon the issuance and sale of the Shares by the Company; (vi) The form of certificate for the Shares conforms to the requirements of the Delaware General Corporation Law; (vii) The Registration Statement and all post-effective amendments, if any, have become effective under the Act and, to the knowledge of such counsel, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose are pending before or contemplated by the Commission; and any required filing of the Prospectus pursuant to Rule 424(b) has been made in accordance with Rule 424(b); (viii) The Company has the corporate power and authority to enter into this Agreement and to issue, sell and deliver the Shares to the Underwriters as provided herein, and this Agreement has been duly authorized, executed and delivered by the Company and is a valid, legal and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as enforcement of rights to indemnity and contribution hereunder may be limited by federal or state securities laws or principles of public policy and subject to the qualification that the enforceability of the Company's obligations hereunder may be limited by bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium and other laws relating to or affecting creditors' rights generally and by general equitable principles; (ix) To the knowledge of such counsel, neither the Company nor any of the Subsidiaries is in violation of its certificate of incorporation or bylaws, or other organizational documents, or in default in the performance of any material obligation, agreement or condition contained in any bond, debenture, note or other evidence of indebtedness made an exhibit to the Registration Statement or any Incorporated Document; 15 (x) Neither the offer, sale or delivery of the Shares, the execution, delivery or performance of this Agreement, compliance by the Company with the provisions hereof nor consummation by the Company of the transactions contemplated hereby conflicts or will conflict with or constitutes or will constitute a breach of, or a default under, the certificate of incorporation or bylaws, or other organizational documents, of the Company or any of the Subsidiaries or any agreement, indenture, lease or other instrument to which the Company or any of the Subsidiaries is a party or by which the Company or any of the Subsidiaries or any of their respective properties is bound that is an exhibit to the Registration Statement or any Incorporated Document, or is known to such counsel after reasonable inquiry, or to the knowledge of such counsel will result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of the Subsidiaries, nor will any such action result in any violation of any existing law, regulation, ruling (assuming compliance with all applicable state securities and Blue Sky laws), judgment, injunction, order or decree known to such counsel and applicable to the Company or any of the Subsidiaries or any of its properties; (xi) No consent, approval, authorization or other order of, or registration or filing with, any court, regulatory body, administrative agency or other governmental body, agency, or official is required on the part of the Company or any of the Subsidiaries (except as have been obtained under the Act or such as may be required under state securities or Blue Sky laws governing the purchase and distribution of the Shares) for the valid issuance and sale of the Shares to the Underwriters as contemplated by this Agreement; (xii) To the knowledge of such counsel, (A) there are no legal or governmental proceedings pending or threatened against the Company or any of the Subsidiaries, or to which the Company or any of the Subsidiaries or any of their respective properties is subject, which are required to be described in the Registration Statement or Prospectus (or any amendment or supplement thereto) that are not described as required and (B) there are no agreements, contracts, indentures, leases or other instruments that are required to be described in the Registration Statement or the Prospectus (or any amendment or supplement thereto) or to be filed as an exhibit to the Registration Statement or any Incorporated Document that are not described or filed as required, as the case may be; (xiii) To the knowledge of such counsel, neither the Company nor any of the Subsidiaries is in violation of any law, ordinance, administrative or governmental rule or regulation applicable to the Company or any of the Subsidiaries the violation of which would have a Material Adverse Effect or of any decree of any court or governmental agency or body having jurisdiction over the Company or any of the Subsidiaries; (xiv) The Company and each of the Subsidiaries has full corporate power and authority and all necessary Permits (except where the failure to so have any such Permits, individually or in the aggregate, would not have a Material Adverse Effect to own its properties and to conduct its business as now being conducted as described in the Prospectus; (xv) The Registration Statement and the Prospectus and any supplements or amendments thereto (except for the financial statements and the notes thereto and the schedules and other financial and statistical data included therein, as to which such counsel need not express any opinion) comply as to form in all material respects with the requirements of the Act; and 16 (xvi) The statements in the Registration Statement and Prospectus, insofar as they are descriptions of contracts, agreements or other legal documents, or refer to statements of law or legal conclusions, are accurate and present fairly the information purported to be shown. (xvii) Except as described in the Prospectus, such counsel does not know of any holder of any securities of the Company or any of the Subsidiaries or any other person who has the right, contractual or otherwise, to cause the Company to sell or otherwise issue to them, or to permit them to underwrite the sale of, any of the Shares or the right to have any Common Stock or other securities of the Company included in the Registration Statement or the right, as a result of the filing of the Registration Statement, to require the Company to register under the Act any shares of Common Stock or other securities of the Company, and any registration rights in connection with the offering contemplated hereby have been waived; (xviii) Neither Company nor any of the Subsidiaries is an "investment company" or a person "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended; and (xix) All documents incorporated by reference in the Prospectus (excluding any financial statements and footnotes thereto and other financial or statistical data included or incorporated by reference therein, as to which such counsel need express no opinion), at the time they were filed with the Commission, complied as to form in all material respects with the requirements of the Exchange Act; In addition, such counsel shall state that although such counsel has not undertaken, except as otherwise indicated in their opinion, to determine independently, and does not assume any responsibility for, the accuracy, completeness or fairness of the statements in the Registration Statement, such counsel has participated in the preparation of the Registration Statement and the Prospectus, including review and discussion of the contents thereof, and nothing has come to the attention of such counsel that has caused it to believe that the Registration Statement, at the time the Registration Statement became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus, as of its date and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or that any amendment or supplement to the Prospectus, as of its date, and as of the Closing Date or the Option Closing Date, as the case may be, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no opinion with respect to the financial statements and the notes thereto and the schedules and other financial and statistical data included in the Registration Statement or the Prospectus). In addition, such counsel shall state that (A) although such counsel has not undertaken, except as otherwise indicated in their opinion, to determine independently, and does not assume any responsibility for, the accuracy, completeness or fairness of the statements in the Registration Statement, such counsel has participated in the preparation of the Registration Statement and the Prospectus, including review and discussion of the contents thereof, and nothing has come to the attention of such counsel that has caused it to believe that the Registration Statement, at the time the Registration Statement became effective, contained an untrue statement of a material fact or omitted to state a material fact 17 required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus, as of its date and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or that any amendment or supplement to the Prospectus, as of its date, and as of the Closing Date or the Option Closing Date, as the case may be, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no opinion with respect to the financial statements and the notes thereto and the schedules and other financial and statistical data included in the Registration Statement or the Prospectus); and (B) such counsel has no reason to believe that any Incorporated Documents (other than the financial statements and footnotes thereto or other financial or statistical data contained in any such Incorporated Document, as to which such counsel expresses no belief), when they were filed with the Commission, contained any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such documents were so filed, not misleading. (d) You shall have received on the Closing Date an opinion of Dewey Ballantine, counsel for the Underwriters, dated the Closing Date and addressed to you, as Representatives of the several Underwriters, with respect to the matters referred to in clauses (v) (other than subclause (B) thereof), (vii), (viii), (xv) and the penultimate paragraph of Section 8(c) hereof and such other related matters as you may request. (e) You shall have received letters addressed to you and dated the date hereof and the Closing Date from Arthur Andersen LLP, independent certified public accountants, substantially in the forms heretofore approved by you. (f)(i) No stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or, to the knowledge of the Company, contemplated by the Commission at or prior to the Closing Date and any request of the Commission for additional information (to be included in the registration statement or the prospectus or otherwise) shall have been complied with; (ii) there shall not have been any change in the capital stock of the Company nor any material increase in the consolidated short-term or long-term debt of the Company from that set forth or contemplated in the Registration Statement or the Prospectus (or any amendment or supplement thereto); (iii) there shall not have been, since the respective dates as of which information is given in the Registration Statement and the Prospectus (or any amendment or supplement thereto), except as may otherwise be stated in the Registration Statement and Prospectus (or any amendment or supplement thereto), any material adverse change in the condition (financial or other), business, prospects, properties, net worth or results of operations of the Company and the Subsidiaries, taken as a whole; (iv) neither the Company nor any of the Subsidiaries shall have any liabilities or obligations, direct or contingent (whether or not in the ordinary course of business), that are material to the Company and the Subsidiaries, taken as a whole, other than those reflected in or contemplated by the Registration Statement or the Prospectus (or any amendment or supplement thereto); and (v) all the representations and warranties of the Company contained in this Agreement shall be true and correct in all material respects on and as of the date hereof and on and as of the Closing Date as if made on and as of the Closing Date, and you shall have received a certificate, dated the Closing Date and signed by the chief executive officer and the chief financial officer of the Company (or such other officers as are acceptable to you), as to the matters set forth in this Section 8(f) and in Section 8(g) hereof. 18 (g) The Company shall not have failed at or prior to the Closing Date to have performed or complied with any of its agreements herein contained and required to be performed or complied with by it hereunder at or prior to the Closing Date. (h) The Company shall have furnished or caused to be furnished to you such further certificates and documents as you shall have reasonably requested. All such opinions, certificates, letters and other documents will be in compliance with the provisions hereof only if they are satisfactory in form and substance to you, as Representatives of the Underwriters, and counsel for the Underwriters. Any certificate or document signed by any officer of the Company and delivered to you, as Representatives of the several Underwriters, or to counsel for the Underwriters, shall be deemed a representation or warranty by the Company to each Underwriter as to the statements made therein. The several obligations of the Underwriters to purchase Additional Shares hereunder are subject to the satisfaction on and as of any Option Closing Date of the conditions set forth in this Section 8, except that, if any Option Closing Date is other than the Closing Date, the certificates, opinions and letters referred to in paragraphs (c) through (f) and paragraph (h) shall be dated the Option Closing Date in question and the opinions called for by paragraphs (c) and (d) shall be revised to reflect the sale of Additional Shares. 9. EXPENSES. The Company agrees to pay the following costs and expenses and all other costs and expenses incident to the performance by it of its obligations hereunder: (i) the preparation, printing or reproduction, and filing with the Commission of the registration statement (including financial statements and exhibits thereto), each Prepricing Prospectus, the Prospectus, and each amendment or supplement to any of them; (ii) the printing (or reproduction) and delivery (including postage, air freight charges and charges for counting and packaging) of such copies of the registration statement, each Prepricing Prospectus, the Prospectus, the Incorporated Documents and all amendments or supplements to any of them as may be reasonably requested for use in connection with the offering and sale of the Shares; (iii) the preparation, printing, authentication, issuance and delivery of certificates for the Shares, including any stamp taxes in connection with the offering of the Shares; (iv) the printing (or reproduction) and delivery of this Agreement, the preliminary and supplemental Blue Sky Memoranda and all other agreements or documents printed (or reproduced) and delivered in connection with the offering of the Shares; (v) the registration of the Common Stock under the Exchange Act and the listing of the Shares on the Nasdaq National Market; (vi) the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of the several states as provided in Section 5(g) hereof (including the reasonable fees, expenses and disbursements of counsel for the Underwriters relating to the preparation, printing or reproduction, and delivery of the preliminary and supplemental Blue Sky Memoranda and such registration and qualification); (vii) the filing fees and the reasonable fees and expenses of counsel for the Underwriters in connection with any filings required to be made with the National Association of Securities Dealers, Inc. in connection with the offering; (viii) the transportation and other expenses incurred by or on behalf of representatives of the Company in connection with presentations to prospective purchasers of the Shares; (ix) the fees and expenses of the Company's accountants and the fees and expenses of counsel (including local and special counsel) for the Company; and (x) the performance by the Company of its other obligations under this Agreement. 10. EFFECTIVE DATE OF AGREEMENT. This Agreement shall become effective: (i) upon the execution and delivery hereof by the parties hereto; or (ii) if, at the time this Agreement is executed and 19 delivered, it is necessary for the registration statement or a post-effective amendment thereto or an Additional Registration Statement to be declared effective before the offering of the Shares may commence, when notification of the effectiveness of the registration statement or such post-effective amendment or Additional Registration Statement has been released by the Commission. Until such time as this Agreement shall have become effective, it may be terminated by the Company, by notifying you, or by you, as Representatives of the several Underwriters, by notifying the Company. If any one or more of the Underwriters shall fail or refuse to purchase Shares which it or they have agreed to purchase hereunder, and the aggregate number of Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the aggregate number of Shares which the Underwriters are obligated to purchase on the Closing Date, each non-defaulting Underwriter shall be obligated, severally, in the proportion which the number of Firm Shares set forth opposite its name in Schedule I hereto bears to the aggregate number of Firm Shares set forth opposite the names of all non-defaulting Underwriters or in such other proportion as you may specify in accordance with Section 20 of the Master Agreement Among Underwriters of Smith Barney, Harris Upham & Co. Incorporated (predecessor of Smith Barney Inc.), to purchase the Shares which such defaulting Underwriter or Underwriters agreed, but failed or refused, to purchase. If any Underwriter or Underwriters shall fail or refuse to purchase Shares which it or they are obligated to purchase on the Closing Date and the aggregate number of Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Shares which the Underwriters are obligated to purchase on the Closing Date and arrangements satisfactory to you and the Company for the purchase of such Shares by one or more non-defaulting Underwriters or other party or parties approved by you and the Company are not made within 36 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or the Company. In any such case which does not result in termination of this Agreement, either you or the Company shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and the Prospectus or any other documents or arrangements may be effected. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any such default of any such Underwriter under this Agreement. The term "Underwriter" as used in this Agreement includes, for all purposes of this Agreement, any party not listed in Schedule I hereto who, with your approval and the approval of the Company, purchases Shares which a defaulting Underwriter agreed, but failed or refused, to purchase. Any notice under this Section 10 may be given by telegram, telecopy or telephone but shall be subsequently confirmed by letter. 11. TERMINATION OF AGREEMENT. This Agreement shall be subject to termination in your absolute discretion, without liability on the part of any Underwriter to the Company, by notice to the Company, if prior to the Closing Date or any Option Closing Date (if different from the Closing Date and then only as to the Additional Shares), as the case may be, (i) trading in securities generally on the New York Stock Exchange, the American Stock Exchange or the Nasdaq National Market shall have been suspended or materially limited, (ii) a general moratorium on commercial banking activities in New York shall have been declared by either federal or state authorities, or (iii) there shall have occurred any outbreak or escalation of hostilities or other international or domestic calamity, crisis or change in political, financial or economic conditions, the effect of which on the financial markets of the United States is such as to make it, in your judgment, impracticable or inadvisable to commence or continue the offering of the Shares at the offering price to the public set forth on the cover page of the Prospectus or to enforce contracts for the resale of the Shares by the Underwriters. Notice of such termination may be given by telegram, telecopy or telephone and shall be subsequently confirmed by letter. 20 12. INFORMATION FURNISHED BY THE UNDERWRITERS. The statements set forth in the last paragraph on the cover page, the stabilization legend on the inside front cover page and the statements in the first and third paragraphs under the caption "Underwriting" in any Prepricing Prospectus and in the Prospectus constitute the only information furnished by or on behalf of the Underwriters through you as such information is referred to in Sections 6(b) and 7 hereof. 13. MISCELLANEOUS. Except as otherwise provided in Sections 5, 10 and 11 hereof, notice given pursuant to any provision of this Agreement shall be in writing and shall be delivered (i) if to the Company, at the office of the Company at 3353 Peachtree Road, N.E., Suite 1000, Atlanta, Georgia, Attention: Larry G. Gerdes, President and Chief Executive Officer, with a copy to Smith, Gambrell & Russell, 3343 Peachtree Road, N.E., Suite 1800, Atlanta, Georgia 30326, Attention: Helen T. Ferraro, Esq., or (ii) if to you, as Representatives of the several Underwriters, care of Smith Barney Inc., 388 Greenwich Street, New York, New York 10013, Attention: Manager, Investment Banking Division, with a copy to Dewey Ballantine, 1301 Avenue of the Americas, New York, New York 10019, Attention: Frederick W. Kanner, Esq. This Agreement has been and is made solely for the benefit of the several Underwriters, the Company, its directors, its officers who sign the Registration Statement and the controlling persons referred to in Section 7 hereof and, to the extent provided herein, their respective successors and assigns and no other person shall acquire or have any right under or by virtue of this Agreement. Neither the term "successor" nor the term "successors and assigns" as used in this Agreement shall include a purchaser from any Underwriter of any of the Shares in his status as such purchaser. 14. APPLICABLE LAW; COUNTERPARTS. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed within the State of New York. This Agreement may be signed in various counterparts which together constitute one and the same instrument. If signed in counterparts, this Agreement shall not become effective unless at least one counterpart hereof shall have been executed and delivered on behalf of each party hereto. 21 Please confirm that the foregoing correctly sets forth the agreement between the Company and the several Underwriters. Very truly yours, TRANSCEND SERVICES By: /s/ Larry G. Gerdes --------------------------------------- Larry G. Gerdes President and Chief Executive Officer Confirmed as of the date first above-mentioned on behalf of themselves and the other several Underwriters named in Schedule I hereto. Smith Barney Inc. Dain Bosworth Incorporated As Representatives of the Several Underwriters By: Smith Barney Inc. By: -------------------------- Managing Director 22 SCHEDULE I TRANSCEND SERVICES, Inc. Number of Underwriter Firm Shares - ----------- ----------- Smith Barney Inc...................... Dain Bosworth Incorporated............ ----------- Total................... =========== 23 EX-4 3 SPECIMEN OF COMMON STOCK CERTIFICATE NUMBER SHARES TR 0777 TRANSCEND - ------- SERVICES, INC. ------------- CUSIP 893929 10 9 INCORPORATED UNDER THE LAWS OF THE SEE REVERSE SIDE FOR STATE OF DELAWARE CERTAIN DEFINITIONS THIS IS TO CERTIFY That is the owner of FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, $.01 PAR VALUE PER SHARE, OF - ---------------------------- TRANSEND SERVICES, INC. -------------------------- transferable only on the books of the Corporation in person or by attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar. WITNESS the facsimile seal of the Corporation and signatures of its duly authorized officers. Dated: TRANSCEND SERVICES, INC. CORPORATE SEAL DELAWARE /s/ David W. Murphy /s/ Larry Gerdes - -------------------------------- ------------------------------- SECRETARY PRESIDENT Countersigned and Registered: FIRST INTERSTATE Bank of California Transfer Agent and Registrar By --------------------------------------- Authorized Signature TRANSCEND SERVICES, INC. The Corporation is authorized to issue Common Stock and Preferred Stock. The Board of Directors of the Corporation has authority to fix the number of shares and the designation of any series of Preferred Stock and to determine or alter the rights, preferences, privileges, and restrictions granted to or imposed upon any unissued series of Preferred Stock. This certificate and the shares represented hereby shall be subject to all of the provisions of the Certificate of Incorporation of this Corporation and of the amendments thereto, by all of which the holder by acceptance hereof is bound. The Corporation will furnish without charge to the holders hereof upon request a statement of the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights as established, from time to time, by the Certificate of Incorporation of the Corporation and by any certificate of designation,and the number of shares constituting each such class and series. Any such request should be made at the principal office of the Corporation. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM -- as tenants in common TEN ENT -- as tenants by the entireties JT TEN -- as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT-- Custodian ------------------- --------------------- (Cust) (Minor) under Uniform Gifts to Minors Act -------------------------- (State) UNIF TRF MIN ACT -- Custodian (until age ) -------------- ----- (Cust) under Uniform Transfers -------------- (Minor) to Minors Act ---------------------- (State) Additional abbreviations may also be used though not in the above list. For Value Received, hereby sell, assign and transfer unto ----------------------- PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - -------------------------------------- | | - -------------------------------------- - -------------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Shares - ------------------------------------------------------------------------ of the Common Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint - -------------------------------------------------------------------- Attorney to transfer the said Stock on the books of the within named Corporation with full power of substitution in the premises. Dated: Signatures(s): ---------------------- --------------------------------- ----------------------------------------------- NOTICE: The signature to this assignment must correspond with the name as written upon the face of the certificate, in every particular, without alteration or enlargement or any change whatever. Signature(s) Guarantee: -------------------------------------------------------- THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. EX-5 4 OPINION OF SMITH, GAMBRELL & RUSSELL May 30, 1996 Board of Directors Transcend Services, Inc. 3353 Peachtree Road, N.E. Suite 1000 Atlanta, Georgia 30326 Re: Transcend Services, Inc. Registration Statement on Form S-3 Shares of Common Stock Gentlemen: We have acted as counsel for Transcend Services, Inc. (the "Company") in connection with the proposed public offering of the shares of its Common Stock covered by the above-described Registration Statement. In connection therewith, we have examined the following: (1) The Certificate of Incorporation of the Company, certified by the Secretary of State of the State of Delaware; (2) The Bylaws of the Company, certified as complete and correct by the Secretary of the Company; (3) The minute book of the Company, certified as correct and complete by the Secretary of the Company; and (4) Certificate of Good Standing with respect to the Company, issued by the Delaware Secretary of State. Based upon such examination and upon examination of such other instruments and records as we have deemed necessary, we are of the opinion that: (A) The Company has been duly incorporated under the laws of the State of Delaware and is validly existing and in good standing under the laws of that state. (B) The 3,450,000 shares of Common Stock covered by the Registration Statement have been legally authorized and when issued in accordance with the terms described in said Registration Statement, will be validly issued, fully paid and nonassessable. We consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to this firm under the caption "Legal Matters" in the Prospectus. In giving this consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, or the rules and regulations of the Securities and Exchange Commission thereunder. Sincerely, Smith, Gambrell & Russell /s/ Helen T. Ferraro _____________________________________ Helen T. Ferraro HTF:wp EX-23 5 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports and to all references to our firm included in or made a part of this registration statement. Arthur Andersen LLP Atlanta, Georgia May 29, 1996 EX-24 6 POWER OF ATTORNEY STATE OF GEORGIA COUNTY OF FULTON POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I, Donald L. Lucas, a Director of TRANSCEND SERVICES, INC., a Delaware corporation, do constitute and appoint Larry G. Gerdes and David W. Murphy my true and lawful attorneys-in-fact, each with full power of substitution, for me in any and all capacities, to sign, pursuant to the requirements of the Securities Act of 1933, a Registration Statement on Form S-3 for TRANSCEND SERVICES, INC., and to file the same with the Securities and Exchange Commission, together with all exhibits thereto and other documents in connection therewith, and to sign on my behalf and in my stead, in any and all capacities, any amendments to said Registration Statement, incorporating such changes as said attorneys-in-fact deem appropriate, hereby ratifying and confirming all that said attorneys-in-fact, or their substitute or substitutes, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 30th day of April, 1996. /s/ Donald L. Lucas _____________________________________ [name] ACKNOWLEDGMENT BEFORE me this 30th day of April, 1996, came Donald L. Lucas, personally known to me, who in my presence did sign and seal the above and foregoing Power of Attorney and acknowledged the same as his true act and deed. /s/ Jennifer Kirk _____________________________________ NOTARY PUBLIC State of Georgia My Commission Expires: 12-29-99 STATE OF GEORGIA COUNTY OF FULTON POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I, George B. Caldwell, a Director of TRANSCEND SERVICES, INC., a Delaware corporation, do constitute and appoint Larry G. Gerdes and David W. Murphy my true and lawful attorneys-in-fact, each with full power of substitution, for me in any and all capacities, to sign, pursuant to the requirements of the Securities Act of 1933, a Registration Statement on Form S-3 for TRANSCEND SERVICES, INC., and to file the same with the Securities and Exchange Commission, together with all exhibits thereto and other documents in connection therewith, and to sign on my behalf and in my stead, in any and all capacities, any amendments to said Registration Statement, incorporating such changes as said attorneys-in-fact deem appropriate, hereby ratifying and confirming all that said attorneys-in-fact, or their substitute or substitutes, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 30th day of April, 1996. /s/ George B. Caldwell _____________________________________ [name] ACKNOWLEDGMENT BEFORE me this 30th day of April, 1996, came George B. Caldwell, personally known to me, who in my presence did sign and seal the above and foregoing Power of Attorney and acknowledged the same as his true act and deed. /s/ Jennifer Kirk _____________________________________ NOTARY PUBLIC State of Georgia My Commission Expires: 12-29-99 STATE OF GEORGIA COUNTY OF FULTON POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I, Walter S. Huff, Jr., a Director of TRANSCEND SERVICES, INC., a Delaware corporation, do constitute and appoint Larry G. Gerdes and David W. Murphy my true and lawful attorneys-in-fact, each with full power of substitution, for me in any and all capacities, to sign, pursuant to the requirements of the Securities Act of 1933, a Registration Statement on Form S-3 for TRANSCEND SERVICES, INC., and to file the same with the Securities and Exchange Commission, together with all exhibits thereto and other documents in connection therewith, and to sign on my behalf and in my stead, in any and all capacities, any amendments to said Registration Statement, incorporating such changes as said attorneys-in-fact deem appropriate, hereby ratifying and confirming all that said attorneys-in-fact, or their substitute or substitutes, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 30th day of April, 1996. /s/ Walter S. Huff, Jr. _____________________________________ [name] ACKNOWLEDGMENT BEFORE me this 30th day of April, 1996, came Walter S. Huff, Jr., personally known to me, who in my presence did sign and seal the above and foregoing Power of Attorney and acknowledged the same as his true act and deed. /s/ Jennifer Kirk _____________________________________ NOTARY PUBLIC State of Georgia My Commission Expires: 12-29-99 STATE OF GEORGIA COUNTY OF FULTON POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I, Charles E. Thoele, a Director of TRANSCEND SERVICES, INC., a Delaware corporation, do constitute and appoint Larry G. Gerdes and David W. Murphy my true and lawful attorneys-in-fact, each with full power of substitution, for me in any and all capacities, to sign, pursuant to the requirements of the Securities Act of 1933, a Registration Statement on Form S-3 for TRANSCEND SERVICES, INC., and to file the same with the Securities and Exchange Commission, together with all exhibits thereto and other documents in connection therewith, and to sign on my behalf and in my stead, in any and all capacities, any amendments to said Registration Statement, incorporating such changes as said attorneys-in-fact deem appropriate, hereby ratifying and confirming all that said attorneys-in-fact, or their substitute or substitutes, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 30th day of April, 1996. /s/ Charles E. Thoele _____________________________________ [name] ACKNOWLEDGMENT BEFORE me this 30th day of April, 1996, came Charles E. Thoele, personally known to me, who in my presence did sign and seal the above and foregoing Power of Attorney and acknowledged the same as his true act and deed. /s/ Jennifer Kirk _____________________________________ NOTARY PUBLIC State of Georgia My Commission Expires: 12-29-99 -----END PRIVACY-ENHANCED MESSAGE-----