<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
MARK ONE
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------- ----------------
Commission File Number 0-18217
TRANSCEND SERVICES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 33-0378756
(State or other jurisdiction (I.R.S Employer
of incorporation) Identification No.)
</TABLE>
3353 PEACHTREE ROAD, N.E., SUITE 1000, ATLANTA, GEORGIA 30326
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (404) 364-8000
TriCare, Inc.
3353 Peachtree Road, N.E., Suite 1000, Atlanta, Georgia 30326
May 31, 1994
(Former Name, Former Address and Former Fiscal Year)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of the Registrant's common
stock as of the latest practicable date.
<TABLE>
Class Outstanding at July 31, 1995
----- ----------------------------
<S> <C>
Common Stock, $.01 par value 17,678,000
===========================================================================================
</TABLE>
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 1
Consolidated Statements of Operations 2
Consolidated Statements of Cash Flows 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6
PART II. OTHER INFORMATION
Item 6. Exhibits 13
SIGNATURES 15
</TABLE>
<PAGE> 3
TRANSCEND SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(SEE NOTE 3)
<TABLE>
<CAPTION>
DECEMBER 31,
DECEMBER 31, 1994 JUNE 30
1994 PROFORMA 1995
---------- ----------- -----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................... $150,000 $7,632,000 $641,000
Accounts receivable, net of allowance for doubtful accounts
of $15,000 at December 31, 1994 , actual and proforma,
and $81,000 at June 30, 1995........................................... 700,000 1,285,000 1,904,000
Prepaid expenses, supplies and other........................................ 62,000 142,000 293,000
---------- ----------- -----------
Total current assets.............................................. 912,000 9,059,000 2,838,000
NET ASSETS RELATED TO DISCONTINUED OPERATIONS.................................... - 3,923,000 3,425,000
SECURITIES FROM SALE OF OCCU-CARE................................................ - 2,050,000 2,050,000
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost,
net of accumulated depreciation and amortization............................ 558,000 850,000 1,356,000
OTHER ASSETS..................................................................... 130,000 13,000 21,000
GOODWILL AND OTHER INTANGIBLE ASSETS,
net of accumulated amortization............................................. 1,080,000 4,321,000 5,771,000
---------- ----------- -----------
Total assets...................................................... $2,680,000 $20,216,000 $15,461,000
========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and financing leases...................... $21,000 28,000 198,000
Accounts payable............................................................ 783,000 1,305,000 793,000
Accrued compensation and employee benefits.................................. 506,000 702,000 962,000
Other accrued liabilities................................................... 578,000 1,363,000 991,000
Accrued liabilities related to sale of Occu-Care............................ - 498,000 313,000
Bank line of credit......................................................... 1,000,000 1,000,000 -
Note payable................................................................ 1,025,000 1,025,000 442,000
Deferred income taxes....................................................... - 45,000 11,000
---------- ----------- -----------
Total current liabilities......................................... 3,913,000 5,966,000 3,710,000
---------- ----------- -----------
DEFERRED INCOME TAXES RELATED TO
DISCONTINUED OPERATIONS..................................................... - 873,000 667,000
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value :
Authorized - 21,000,000 shares
No shares outstanding
Common Stock, $.01 par value :
Authorized - 30,000,000 shares
Issued and outstanding 9,733,000 shares at December 31, 1994
and 17,678,000 shares at June 30, 1995............................... 209,000 175,000 177,000
Additional paid-in capital.................................................. 1,565,000 16,209,000 16,414,000
Retained earnings (deficit)................................................. (3,007,000) (3,007,000) (5,507,000)
---------- ----------- -----------
Total stockholders' equity............................................. (1,233,000) 13,377,000 11,084,000
---------- ----------- -----------
Total liabilities and stockholders' equity............................. $2,680,000 $20,216,000 $15,461,000
========== =========== ===========
</TABLE>
1
<PAGE> 4
TRANSCEND SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1994 1995 1994 1995
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
SALES............................... $2,934,000 $5,520,000 $5,489,000 $10,417,000
DIRECT COSTS........................ 2,424,000 4,919,000 4,606,000 9,265,000
--------- ---------- --------- ----------
GROSS PROFIT................... 510,000 601,000 883,000 1,152,000
MARKETING AND SALES EXPENSE......... 196,000 587,000 365,000 1,024,000
GENERAL AND ADMINISTRATIVE EXPENSES. 390,000 1,241,000 714,000 2,354,000
AMORTIZATION EXPENSE................ 88,000 167,000 185,000 312,000
--------- ---------- --------- ----------
OPERATING LOSS................. (164,000) (1,394,000) (381,000) (2,538,000)
OTHER INCOME (EXPENSES):
Interest income................ - 10,000 0 47,000
Interest expense............... (7,000) (9,000) (11,000) (9,000)
Other.......................... - - 25,000 -
--------- ---------- --------- ----------
TOTAL OTHER INCOME (EXPENSE) (7,000) 1,000 14,000 38,000
--------- ---------- --------- ----------
LOSS BEFORE PROVISION FOR
INCOME TAXES................... (171,000) (1,393,000) (367,000) (2,500,000)
PROVISION FOR (BENEFIT FROM)
INCOME TAXES................... - - - -
--------- ---------- --------- ----------
NET LOSS............................ ($171,000) ($1,393,000) ($367,000) (2,500,000)
========= ========== ========= ==========
NET LOSS PER COMMON SHARE AND
COMMON SHARE EQUIVALENT........ ($0.02) ($0.08) ($0.04) ($0.14)
========= ========== ========= ==========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING.................... 9,733,000 17,605,000 9,733,000 17,605,000
========= ========== ========= ==========
</TABLE>
2
<PAGE> 5
TRANSCEND SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
1994 1995
-------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ($367,000) ($2,500,000)
Adjustments to reconcile net loss to
net cash provided by
(used in) operating activities:
Depreciation and amortization............. 240,000 565,000
Changes in assets and liabilities,
net of acquisitions:
Accounts receivable.................. (21,000) (258,000)
Prepaid expenses..................... (57,000) (152,000)
Deposits and other assets............ 14,000 18,000
Accounts payable..................... (40,000) (511,000)
Accounts compensation and benefets... (24,000) 296,000
Accrued expenses..................... (230,000) (471,000)
Deferred income taxes................ - (35,000)
Other................................ - (15,000)
-------- ----------
Total adjustments.................... (118,000) (563,000)
-------- ----------
Net Cash provided by (used in)
continuing operations........... (485,000) (3,063,000)
-------- ----------
Net Cash provided by (used in)
discontinued operations......... - 107,000
-------- ----------
Net Cash provided by (used in)
operating activities............ (485,000) (2,956,000)
-------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures................. (307,000) (649,000)
Disposal and transfer of
property........................... - 59,000
Purchase of Sullivan................. - (285,000)
Acquisitions......................... - (2,054,000)
-------- ----------
Net Cash provided by (used in)
investing activities............ (307,000) (2,929,000)
-------- ----------
NET CASH FROM FINANCING ACTIVITIES:
Borrowings from debt................. 880,000 648,000
Payments on debt..................... - (2,040,000)
Proceeds-Common stock, net........... - 173,000
Proceeds-Stock options, net.......... - 35,000
Net Cash provided by (used in)
-------- ----------
financing activities............ 880,000 (1,184,000)
-------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS..................... 88,000 (7,069,000)
CASH AND CASH EQUIVALENTS,
at beginning of period............... 131,000 150,000
CASH ACQUIRED
FROM ACQUSITIONS..................... - 7,560,000
-------- ----------
CASH AND CASH EQUIVALENTS,
at end of period..................... $219,000 $ 641,000
======== ==========
</TABLE>
3
<PAGE> 6
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1994 AND 1995
(1) References to the Company mean the Registrant. The term Transcend
Services, Inc. refers to the operation of Transcend Services, Inc., which was
acquired by the Company in January, 1995 via merger (the "Merger"; see (4)
below). The term TriCare refers to the operations of the Registrant prior to
the Merger.
(2) The unaudited financial information furnished herein in the opinion of
management reflects all adjustments which are necessary to fairly state the
Company's financial position, the results of its operations and its cash flows.
For further information refer to the combined financial statements and
footnotes thereto included in the Company's Form 10-K for the year ended
December 31, 1994. Footnote disclosure which would substantially duplicate the
disclosure contained in those documents have been omitted.
(3) Net loss per common share has been computed based on the weighted
number of the Company's common shares and common share equivalents (dilutive
stock options) outstanding. The common stock equivalents related to stock
options were not included in the computation due to their antidilutive effect.
Fully diluted net loss per share has not been presented since it is not
materially different from primary net loss per share.
(4) On January 10, 1995, TriCare acquired Transcend Services, Inc., a
Georgia corporation ("Transcend") by the merger of Transcend into First Western
Health Corporation ("Merger"). 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.
(5) On January 31, 1995, the Company acquired the assets of International
Dictating Services ("IDS"), a Boston based medical transcription business for
approximately $831,000, which consisted of approximately $681,000 paid in cash
at closing with the balance payable to the sellers over the next two years.
The intangibles 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 intangibles is goodwill which is being amortized over
twenty years.
(6) 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 $100,000 and $550,000, and 60,000
shares of Transcend common stock valued at $172,000 at the time of the
acquisition. The intangibles related to customer lists are being amortized
over seven years and a non-compete agreement is being amortized over a
three-year period. The balance of the additional intangibles is goodwill which
is being amortized over twenty years.
4
<PAGE> 7
(7) 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."
(8) The pro-forma amounts presented below represent, for the Company, the
results of operations for the six months ended June 30, 1994 adjusted to
include Sullivan Health & Rehabilitation, Inc., Script-Ease, Inc., MTA and the
additional overhead expenses for the entire period as compared to the six
months ended June 30, 1995 as if they had occurred for all periods presented.
<TABLE>
<CAPTION>
Six Months Ended
June 30
-----------------------------------------------
1994 1995
---- ----
(Unaudited)
<S> <C> <C>
Sales $9,028,000 $10,923,000
Net Income (Loss) $ (729,000) $(2,457,000)
Net Income (Loss) Per Share $(0.04) $ (0.14)
Weighted Average Common
Shares Outstanding 17,533,000 17,605,000
</TABLE>
5
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On January 10, 1995, TriCare acquired Transcend Services, Inc., a
Georgia corporation ("Transcend") by the merger of Transcend into First Western
Health Corporation ("Merger"). 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. As a result, the operations
of Sullivan prior to January 1995 are excluded from the historical financial
statements. Transcend is a hospital services company focused on the
outsourcing of Health Information Management (HIM) for health care providers.
Note the paragraph below for more information on TriCare and discontinued
operations.
TriCare was incorporated in California in 1976 and was reorganized as
a Delaware corporation in 1988. The Company's applicant related service
businesses of First Western Health Corporation ("First Western") and Veritas
Healthcare Management ("Veritas") were discontinued on April 30, 1993 and
substantially all of the assets and liabilities of another subsidiary,
Occu-Care, Inc. ("Occu-Care") were sold on September 16, 1994. The net assets
of discontinued operations is shown on the combined balance sheet and the
related statement of cash flows as a separate line item and includes the
discontinued operations of First Western, Veritas and Occu-Care. See
"Discontinued Operations" below for further information. On June 15, 1994,
TriCare acquired Sullivan Health and Rehabilitation, Inc. a healthcare case
management company ("Sullivan").
All interentity accounts and transactions have been eliminated in the
accompanying combined financial statements.
RESULTS OF OPERATIONS FOR THE QUARTER ENDING JUNE 30, 1995
The following discussion should be read in conjunction with the
combined financial statements of the Company contained elsewhere herein.
The following table sets forth for the Company's quarter ending June
30, 1994 and 1995, the dollar amount of its total revenues from each of its
principal lines of business during this three month period:
<TABLE>
<CAPTION>
Three Months Ended
June 30
------------------
(In Thousands)
1995
<S> <C> <C>
Contract Management/Outsourcing . . . . . . . . . . . . $2,313 $2,751
Medical Transcription . . . . . . . . . . . . . . . . . 474 1,755
Consulting and Coding . . . . . . . . . . . . . . . . . 147 143
Case Management & Rehabilitation
Services ("Sullivan") . . . . . . . . . . . . . . -- 873
------ ------
TOTAL . . . . . . . . . . . . . . . . . . . $2,934 $5,522
====== ======
</TABLE>
6
<PAGE> 9
Revenue increased 88.1% to $5,520,000 in the three months
ended June 30, 1995 from $2,934,000 in the same prior year period. The
increase in net revenues is primarily attributable to the Company's
transcription operations' three acquisitions of Script-Ease on September 1,
1994; IDS on January 31, 1995; and MTA on April 19, 1995. The increase also
included the impact of Sullivan's case management revenue and the addition of
two outsourcing contracts (in the medical records' departments of hospitals)
with start dates of June 1, 1994 and January 1, 1995.
Gross profit increased 17.8% to $601,000 for the quarter ended
June 30, 1995 from $510,000 in the second quarter of the prior year. Gross
profit as a percentage of revenues declined to 10.9% for the three months ended
June 30, 1995 from 17.4% in the same prior year period. This decrease was
primarily attributable to:
- A temporary decline in gross margins in the
Pittsburgh (Script-Ease) and Boston (IDS)
transcription operations. Some of this decrease in
gross margin reflects Transcend's investment in
improving operations post-acquisition. The Company
has implemented necessary changes with respect to
these two (2) sites.
- Contract outsourcing profit margins decreased in the
second quarter of 1995 (from 15.6% in 1994 to 6.7%
in 1995) due to a limited number of sites
experiencing a temporary increase in labor costs.
Sullivan's performance year to date in 1995 shows its gross profit margins
improving from 13.4% for the quarter ending March 31, 1995 to 18% for the
quarter ending June 30, 1995.
The Company believes that, with respect to contract management
revenues from any particular medical records management contract, its profit
margin should increase over the life of the contract, due both to the nature of
the Company's pricing of its contract management services and to operating
efficiencies expected to be achieved over the life of such a contract. The
Company negotiates its contract management fees on a basis which will
represent, at contract inception, immediate savings to the contracting hospital
over historical costs of operating the managed functions, and for this purpose,
the Company utilizes fixed installment fee payment arrangements. 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 implemented. 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. Assuming
increases in the number of its contract management clients, possible
centralization of certain of the services provided to multiple clients, as well
as related economies of scale, profit margins on contract management revenues
should trend higher.
The Company is seeking to alleviate its current declining trend of
profit margins as a percentage of total revenues through (i) the achievement of
greater operating efficiencies in its contract outsourcing, transcription and
Sullivan case management sites; (ii) the implementation of new procedures and
departmental reorganizations in its selling and administrative functions; and
(iii) by increasing the amount of its medical transcription revenues, which
historically have enjoyed higher profit margins than the contract outsourcing
and Sullivan case management operations.
Marketing and sales expenses increased 200% to $587,000 in the three
months ended June 30, 1995 from $196,000 in the same prior year period and
increased as a percentage of revenues to 10.6% for the quarter
7
<PAGE> 10
ended June 30, 1995 from 6.7% in the quarter ending June 30, 1994. The
increase reflects increased expenses associated with heightened marketing of
the contract outsourcing services, including expansion of its sales force and
the additional marketing and sales costs related to case management services of
Sullivan. Management expects this staffing level will be sufficient to
support the Company's growth needs for the reasonably foreseeable future.
General and administrative expenses increased 218.2% to $1,241,000 in
the three months ended June 30, 1995 from $390,000 in the same prior year
period and increased as a percentage of revenues, to 22.5% for the quarter
ended June 30, 1995 from 13.3% in the second quarter of the prior year. The
increase reflects additional expense for increased management and support staff
to support the Company's present and future growth and the additional overhead
of TriCare and Sullivan due to the Merger that occurred on January 10, 1995.
Management expects this corporate structure will be sufficient to support the
Company's growth needs for the reasonably foreseeable future.
The increase in amortization expenses to $167,000 from $88,000 in the
second quarter of the prior year reflects the impact of the intangible assets
associated with the acquisition of Script-Ease, IDS, MTA and the additional
amortization expense related to the Merger which occurred on January 10, 1995.
The Company's loss from operations increased to $1,394,000 for the
quarter ended June 30, 1995 from $164,000 in the second quarter of the prior
year period.
Other income increased to $1,000 in for the quarter ended June 30,
1995 from ($7,000) in the second quarter of the prior year period, primarily as
the result of the impact of interest income.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1995
The following discussion should be read in conjunction with the
combined financial statements of the Company contained elsewhere herein.
The following table sets forth for the Company's six month period
ending June 30, 1994 and 1995, the dollar amount of its total revenues from
each of its principal lines of business during this six month period:
<TABLE>
<CAPTION>
Six Months Ended
June 30
--------------------
(In Thousands)
1994 1995
---- ----
<S> <C> <C>
Contract Management/Outsourcing . . . . . . . . . . . . $4,209 $ 5,557
Medical Transcription . . . . . . . . . . . . . . . . . 932 2,961
Consulting and Coding . . . . . . . . . . . . . . . . . 348 302
Case Management & Rehabilitation
Services ("Sullivan") . . . . . . . . . . . . . . -- 1,597
------ -------
TOTAL . . . . . . . . . . . . . . . . . . . $5,489 $10,417
====== =======
</TABLE>
8
<PAGE> 11
Revenue increased 89.8% to $10,417,000 for the six months ended June
30, 1995 from $5,489,000 in the same prior year period. As previously stated,
the increase is primarily attributable to the Company's transcription
operations which reflected an increase of 217.7% related to three acquisitions
from September 1, 1994 to June 30, 1995. Revenues from contract outsourcing
increased 32% due to the addition of two new outsourcing contracts. 32.6% of
the overall revenue increase came from the addition of Sullivan's case
management revenues.
Gross profit increased 30.5% to $1,152,000 for the six months ended
June 30, 1995 from $883,000 in the same prior year period. Gross profit as a
percentage of revenues declined to 11.1% for the six months ended June 30, 1995
from 16.1% in the same prior year period. The decrease is primarily
attributable to a decline in the average transcription margins as a result of
the Script-Ease and IDS acquisitions. As stated previously, this decline is
expected to be temporary as changes have been implemented that should
positively impact gross margin levels at these two sites. Gross margins in
contract outsourcing remained stable at 13% for 1994 and 1995 and Sullivan's
case management margins are currently at 15.9% for the six month period ended
June 30, 1995. As previously stated, Sullivan's performance year to date in
1995 shows its gross profit margins improving from 13.4% for the quarter ending
March 31, 1995 to 18% for the quarter ending June 30, 1995.
Marketing and sales expenses increased 180.5% to $1,024,000 for the
six months ended June 30, 1995 from $365,000 in the same prior year period and
increased as a percentage of revenues to 9.83% for the six month period ending
June 30, 1995 from 6.6% for the same prior year period. As stated in the
quarterly review, the increase is attributable to expenses associated with
heightened marketing of contract outsourcing including expansion of its sales
force and the additional sales costs related to the case management services of
Sullivan.
General and administrative expenses increased 229.7% to $2,354,000 for
the six months ended June 30, 1995 from $714,000 in the same prior year period
and increased as a percentage of revenues to 22.6% from 13%, respectively. As
stated in the quarterly review, the increase reflects additional expense for
increased management and support staff to position the Company for future
growth, as well as the additional overhead of TriCare and Sullivan due to the
Merger.
The increase in amortization expenses to $312,000 from $185,000 for
the six months ended June 30, 1995 is a result of additional intangible assets
associated with the three named medical transcription acquisitions and the
additional amortization expense related to the Merger.
The Company's loss from operations increased to $2,538,000 for the six
months ended June 30, 1995 from $381,000 for the same prior year period.
Other income increased to $38,000 for the six months ended June 30,
1995 from $14,000 for the same prior year period primarily as a result of
interest income due to the Merger.
DISCONTINUED OPERATIONS
First Western/Veritas
The net assets of the discontinued operations of TriCare's healthcare
subsidiaries, First Western and Veritas, 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.
9
<PAGE> 12
The net assets related to the discontinued operations at June 30, 1995
were $3,425,000. This amount consisted of $5,053,617 in net accounts
receivable and $1,628,862 in accrued liabilities, which consisted primarily of
amounts accrued for the cost of collections, rental obligations and
miscellaneous future obligations and liabilities of First Western and Veritas.
The Company intends to continue vigorously pursuing the collection of its
accounts receivable and expects to realize substantially all of its net assets
over the next several years. The Company will continue to evaluate the net
realizability of the net assets related to discontinued operations. Any such
evaluation could result in an adjustment that may potentially be material to
the carrying value of this asset.
On September 17, 1993, TriCare and its healthcare subsidiaries 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. 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 this matter will not have a material adverse
effect on the company's financial condition or results of operations.
Occu-Care
Pursuant to an Asset Acquisition Agreement dated September 16, 1994,
TriCare sold substantially all of the assets and liabilities of its
wholly-owned subsidiary, Occu-Care to AmHealth, Inc. ("AmHealth") for a sales
price of $4,000,000, consisting of $1,500,000 in cash paid at closing and
$2,500,000 in notes receivable.
TriCare did not receive its first interest payment on its $2,500,000
notes receivable from its sale of the assets of Occu-Care, which constituted
an event of default. Therefore, TriCare has deferred recognition of the gain
from the transaction in the amount of $450,000. Any recognition of the
deferred gain will be determined under the cost recovery method. TriCare also
has not recognized any interest income from the notes receivable. TriCare
entered into negotiations with the buyer, and on December 30, 1994, TriCare
entered into an agreement to exchange its notes receivable of $2,500,000 for
2,500,000 shares of $1.00 convertible redeemable preferred stock. The dividend
is cumulative at a rate of 6.5% per annum. Under certain circumstances and at
TriCare's option, the preferred stock is convertible into common stock of
AmHealth, Inc. The preferred stock is subject to mandatory redemption as
follows: 1,500,000 shares (less any shares previously converted) are to be
redeemed on December 1, 1995, and the balance redeemed in nineteen quarterly
installments commencing December 1, 1995 which was consistent with the payment
schedule of the original notes. 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.
The securities from the sale of Occu-Care and the accrued liabilities
related to the sale of Occu-Care are shown as separate line items on the
balance sheet. The related statement of cash flow is shown as a separate line
item along with First Western and Veritas as discontinued operations.
10
<PAGE> 13
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, which it expects
to collect over the next several years, together with its cash on hand.
In addition, as the Company expended $2,050,000 in cash to acquire
the medical transcription businesses of IDS and MTA in 1995, the Company is now
in the process of strengthening its working capital base to support operations
by raising $2.0 million in cash through the private placement of subordinated
convertible debt. Written and signed subscription commitments for the entire
$2.0 million have been received and funding is scheduled to occur August 15,
1995. Key terms of the Private Placement include:
<TABLE>
<S> <C>
Funding Date: August 15, 1995
Face Value of Debentures: $2.0 million
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 for Money Borrowed
Convertible Features:
</TABLE>
- Convertible for five (5) years at the per share price 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 (as recorded on August
15, 1995) for 30 consecutive trading days.
The Company's working capital position improved during the six months
ended June 30, 1995, from a deficit position of approximately $3,000,000 at
December 31, 1994 to a deficit position of $872,000 at June 30, 1995. This
improvement in the Company's working capital position for the six months ended
June 30, 1995, as compared with the period ended December 31, 1994, arises from
the combination of several factors. The Merger increased working capital by
$6,195,000, which was offset by the following: first, the acquisition of two
additional transcription businesses (IDS and MTA) as described below; second,
the financing from current cash sources of capital expenditures for equipment
during the six months ended June 30, 1995, as described below; and finally, the
continued funding of losses from Transcend's operations. The latter factor
results from increases in Transcend's administrative and marketing departments,
which increased significantly in the fourth quarter of 1994, in anticipation of
targeted increases in Transcend's contract management business as well as
11
<PAGE> 14
some temporary costs associated with the Pittsburgh (Script-Ease) and Boston
(IDS) transcription acquisitions. Such cost increases should be offset by
operating revenues as the number of Transcend's outsourcing contracts increase,
although there can be no assurances in that regard.
During the six months ended June 30, 1995, Transcend's cash balance
increased by $491,000, from $150,000 to $641,000. This change resulted
primarily from $7,486,000 cash received from the Merger, offset by using cash
reserves to repay Transcend's outstanding indebtedness under both of
Transcend's bank credit facilities totaling $2,025,000; $3,063,000 used in
operating activities including approximately $450,000 in merger costs; capital
expenditures of $649,000 (principally computer and optical imaging equipment);
$285,000 for the final payment related to the acquisition of Sullivan and
approximately $2,050,000 related to the acquisitions of IDS and MTA in January
and April respectively.
Net cash provided by discontinued operations for the six months ended
June 30, 1995 was $107,000. The majority of the cash contributed from
discontinued operations was generated by the collection of accounts receivable
from the discontinued applicant medical/legal evaluation business of First
Western and Veritas and offset by the related costs of First Western and
Veritas and the pay down of liabilities related to the sale of Occu-Care.
Management believes that TriCare has experienced unreasonable delays from some
insurance carriers in making payments on claims for receivables from
discontinued operations of First Western and Veritas. Based upon existing
legislation, management believes the ultimate collectability of its accounts
receivable has been properly reflected in the Company's financial statements.
However, there are no assurances that changes in state workers' compensation
laws or interpretations of administrative rules will not occur which would
further lengthen the collection process beyond management's expectations, or
otherwise impair ultimate collectability.
Transcend continues to experience negative cash flow from operations.
For the six months ended June 30, 1995, negative cash flow from operations was
$2,956,000, which included a paydown of approximately $500,000 of higher than
normal aging of Transcend's payables immediately following the Merger and
$450,000 in Merger costs. Notwithstanding the foregoing, the Company
anticipates that margin contribution will come from: expected new contract
outsourcing sales; recently acquired transcription businesses (i.e., MTA,
acquired on April 19, 1995, is profitable and has contributed to the Company's
operating margin); expected new case management sales from Sullivan; and
increasing margins from existing operations (contract outsourcing,
transcription and Sullivan case management). Moreover, the Company's selling,
general and administrative costs as a percentage of revenue will decrease. All
of the above mentioned are expected to position the Company during the second
half of 1995 to slow the rate of negative cash flow from operations recently
experienced by the Company and achieve positive cash flow from operations by
the end of 1995.
Based on the foregoing, the Company anticipates that cash on hand,
together with internally generated funds, cash collected from discontinued
operations and the proceeds from the subordinated convertible debenture
offering will be sufficient to finance continuing operations and the cash
requirements of its discontinued operations for the next twelve months.
Although the Company's goal is to achieve positive cash flow by the end of
1995, there can be no assurances in that regard.
The Company will continue to pursue strategic acquisitions subject to
having the necessary resources to fund any specific transaction. Such funding
could include the issuance, in all or in part, of its securities, the
establishment of promissory notes to sellers and/or the payment of cash, either
from the Company's existing cash resources or through a credit facility
established to help finance the acquisition. At the current time, no such
credit facility exists for the Company.
12
<PAGE> 15
PART II. OTHER INFORMATION
ITEM (Numerical Sequence as governed by SEC)
ITEM 1. LEGAL PROCEEDINGS
Information required herein is incorporated by reference to
Discontinued Operations in the "Management's Discussion and
Analysis of Financial Condition and Results of Operations"
included in PART I - FINANCIAL INFORMATION on this Form 10-Q.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a. The Annual meeting of Stockholders of Transcend Services, Inc.
was held on May 10, 1995. There were present at said meeting
in person or by proxy, stockholders of the Corporation who
were the holders of 16,940,263 shares or 96.61% of the Common
Stock entitled to vote thereat.
b. The following directors were elected to hold office until the
next annual meeting of stockholders or until their successors
are elected and qualified, with the vote for each director
being reflected below:
<TABLE>
<CAPTION>
Votes Votes Broker
For Withheld Non Vote
------ -------- --------
<S> <C> <C> <C> <C>
George B. Caldwell 16,925,240 15,023 0
Larry G. Gerdes 16,922,345 17,918 0
Walter S. Huff, Jr. 16,926,240 14,023 0
Donald L. Lucas 16,923,351 16,912 0
Charles E. Thoele 16,919,240 21,023 0
</TABLE>
The affirmative vote of the holders of a majority of Common
Stock represented at the meeting was required to elect each
Director.
c. The appointment of Arthur Andersen LLP as independent public
accountants to audit the accounts of the Company and its
subsidiaries for the year ending December 31, 1995, was
ratified with the votes as follow: 16,922,290 affirmative
votes, 11,053 negative votes cast, 6,920 abstentions, and no
broker votes. An affirmative vote of the holders of a
majority of the outstanding shares of Common Stock represented
at the meeting was required to ratify the appointment of
Arthur Andersen LLP.
ITEM 6. EXHIBITS
a. Exhibits:
3 Certificate of Incorporation
11 Computation of per share net income (loss).
27 Financial Data Schedule (for SEC use only)
13
<PAGE> 16
b. Reports on Form 8-K
During the quarter ended June 30, 1995, the Company filed a
Form 8-K dated May 2, 1995 reporting under Item 2 the
acquisition of MTA. The following financial statements and
proforma financial statements (unaudited) were included in
such filing.
- Independent Auditor's Report
- Balance Sheets as of December 31, 1993 and 1994
- Statements of Income and Retained Earnings for
the years ended December 31, 1993 and 1994
- Statements of Cash Flows for the years ended
December 31, 1993 and 1994
- ProForma Combined Condensed Statement of
Operations for the year ended December 31,
1994 and the quarter ended March 31, 1995
- ProForma Combined Condensed Balance Sheet as
of March 31, 1995.
14
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 11, 1995 By: /s/ Larry G. Gerdes
----------------------------------
Larry G. Gerdes
President, Chief Executive Officer
(Principal Executive Officer)
Date: August 11, 1995 By: /s/ David W. Murphy
----------------------------------
David W. Murphy
Chief Financial Officer
(Principal Financial Officer)
15
<PAGE> 1
EXHIBIT 3
CERTIFICATE OF INCORPORATION
OF
TRANSCEND SERVICES, INC.
I.
The name of the Corporation is Transcend Services, Inc.
II.
The location of the registered office of the Corporation in the State
of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle. The name of its registered agent at that
address is The Corporation Trust Company.
III.
The nature of the business to be conducted or promoted is to engage in
any lawful act or activity for which corporations may be organized under the
General Corporation Law of the State of Delaware.
IV.
The total number of shares of common stock which the Corporation shall
have authority to issue is Thirty Million (30,000,000) and the par value of
such shares is One Cent ($.01).
The total number of shares of preferred stock which the Corporation
shall have the authority to issue is Twenty-One Million (21,000,000), and the
par value of such shares is One Cent ($.01) per share. Such shares of such
preferred stock may be issued from time to time in one or more series, with the
Board of Directors being hereby authorized to fix by resolution or resolutions
the designation of the preferred stock and the rights, powers, preferences, and
the relative participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, including, without
limiting the generality of the foregoing, such provisions as may be desired
concerning voting or consent, redemption, dividends, dissolution or the
distribution of assets, conversion or exchange, and such other subjects or
matters as may be fixed by resolution or resolutions of the Board of Directors
under the General Corporation Law of the State of Delaware.
<PAGE> 2
V.
The name and mailing address of the incorporator are as follows:
Lisa Anne Stater
56 Perimeter Center East
Suite 500
Atlanta, Georgia 30346
VI.
In furtherance of and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, alter or
repeal the by-laws of the Corporation.
VII.
To the fullest extent permitted by the Delaware General Corporation
Law as the same exists, a Director of this Corporation shall not be liable to
the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
Director's duty of loyalty to the Corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which the Director derived
any improper personal benefit.
2
<PAGE> 1
Exhibit 11
TRANSCEND SERVICES, INC.
Computation of Earnings (Loss) Per Share of Common Stock
For the Three and Six Month Periods Ended June 30, 1994 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------------------------
1994 1995 1994 1995
<S> <C> <C> <C> <C>
Net Income (Loss) ($171,000) ($1,393,000) ($367,000) ($2,500,000)
======================== ========================
Average Shares Outstanding 9,733,000 17,605,000 9,733,000 17,605,000
Common stock equivalents assuming
exercise of stock options - - - -
Net income (loss) per common share and
common share equivalent ($0.02) ($0.08) ($0.04) ($0.14)
======================== ========================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF TRANSCEND SERVICES, INC. FOR THE SIX MONTHS ENDED JUNE
30, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 641
<SECURITIES> 0
<RECEIVABLES> 1,985
<ALLOWANCES> (81)
<INVENTORY> 0
<CURRENT-ASSETS> 2,838
<PP&E> 2,229
<DEPRECIATION> (873)
<TOTAL-ASSETS> 15,461
<CURRENT-LIABILITIES> 3,710
<BONDS> 0
<COMMON> 177
0
0
<OTHER-SE> 10,907
<TOTAL-LIABILITY-AND-EQUITY> 15,461
<SALES> 0
<TOTAL-REVENUES> 10,417
<CGS> 9,265
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,024
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,500)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,500)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,500)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> 0
</TABLE>
