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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________
FORM 10-K/A
______________________________________________
Amendment No. 1 to
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1995
______________________________________________
Commission File No. 0-18217
TRANSCEND SERVICES, INC.
A Delaware Corporation
(IRS Employer Identification No. 33-0378756)
3353 Peachtree Road, N.E.
Suite 1000
Atlanta, Georgia 30326
(404) 364-8000
The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of its Annual Report on Form 10-K for the
fiscal year ended December 31, 1995:
(List all such items, financial statements, exhibits or other portions amended)
Item 1. Business.
Item 2. Properties.
Item 3. Legal Proceedings.
Item 6. Selected Financial Data.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Item 8. Financial Statements and Supplementary Data.
Item 10. Directors and Executive Officers of the Registrant.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Item 13. Certain Relationships and Related Transactions.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
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PART I
ITEM 1. BUSINESS
GENERAL
Transcend Services, Inc. (the "Company" or "Transcend") is a healthcare
services company focused on the emerging field of healthcare information
management ("HIM") services to hospitals and other associated healthcare
providers. The Company provides a range of HIM services, including: (i) contract
management ("outsourcing") of the healthcare information or medical records
function, as well as the admissions function; (ii) transcription of physicians'
dictated medical notes; and (iii) consulting services relating to medical
records and reimbursement coding. As of July 1, 1996, the Company operated, on a
contract management basis, the medical records and certain other HIM functions
of 18 general acute care hospitals located in 11 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 healthcare industry is undergoing significant and rapid change.
Hospitals and other healthcare 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 healthcare industry has recognized the need for improvement in the
processing of healthcare information, and to achieve this improvement, there
has been a dramatic increase in the development of technological solutions
offered by third party vendors of computer hardware and software. Although
there have been significant advances in the management of medical information
in general, little progress has been made introducing technology to the
management of the medical records departments, patient admissions or other
affiliated departments of hospitals that handle the flow of patient
information. The Company believes that there is a need, and therefore an
emerging market, for third party service providers to assist hospitals and
other healthcare providers in (i) the effective implementation of the
available technological tools for healthcare information management, (ii) the
process of managing healthcare information across the pre-admission to post-
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discharge continuum of the healthcare delivery system and (iii) the management
and training of personnel in healthcare information departments. By managing
the entire flow of patient information through the hospital, errors,
inefficiencies and their associated costs can be minimized.
INDUSTRY OVERVIEW
The healthcare industry is undergoing significant and rapid change.
Hospitals and other healthcare 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 healthcare
information, and to achieve this improvement, there has been a dramatic
increase in the development of technological solutions offered by third party
vendors of computer hardware and software. Although there have been
significant advances in the management of medical information in general,
little progress has been made introducing technology to the management of the
medical records departments, patient admissions or other affiliated
departments of hospitals that handle the flow of patient information.
Healthcare 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.
Many hospitals are finding that their medical records departments are in
many respects inadequate and that outsourcing healthcare information functions
and related departments can result in competitive advantages by reducing costs
such as employee training and technology and equipment upgrades.
Hospitals have outsourced basic services including housekeeping, laundry and
food preparation for a number of years to reduce operating costs and ensure
quality of service 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
healthcare 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 healthcare
providers in processing and managing healthcare information across the pre-
admission to post-discharge continuum.
HISTORY OF THE COMPANY
The Company was incorporated in California in 1976 and was reorganized as a
Delaware corporation in 1988. On January 10, 1995, the Company, formerly known
as "TriCare, Inc.," acquired Transcend Services, Inc., then a Georgia
corporation, by the merger of Transcend Services, Inc. into First Western
Health Corporation ("First Western"), a subsidiary of the Company (the
"Merger"). 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 operating subsidiary, Sullivan Health and Rehabilitation
Services, Inc. ("Sullivan").
BUSINESS STRATEGY
The Company's business strategy focuses on the application of advanced
technological tools and HIM expertise to improve the efficiency and
productivity of HIM 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 Outsourcing Market. The Company is focused on
increasing its penetration of the healthcare information 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 detailed consultations with potential customers
("operational assessments") through the four month period ended April 30, 1996
as compared to a total of 16 operational
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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 healthcare providers as
part of the integrated healthcare 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 healthcare 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, 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 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 healthcare 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 HIM services
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 healthcare 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. As of July 1, 1996, the Company managed patient
admissions for five hospitals, but managed no business office functions for any
customers. 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 healthcare 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 healthcare
information, 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
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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.
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
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
outsourcing marketplace.
The Company believes that the application of better technology in contract
management will reshape the way information is managed across the healthcare
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 worked 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 has a non-exclusive agreement with the imaging
company to use such company's hardware and software products, and obtain
maintenance and support services, pursuant to a set fee schedule, and such
company has agreed to make certain modifications to its products at the
request of the Company. 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 healthcare provider customers
which helps them compete in a managed care environment. The Company also
believes that healthcare 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 healthcare 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 healthcare 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 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 medical
records management 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, as of July 1, 1996, the Company had 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.
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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. The Company has hired an
outside consultant to assist the Company in the development of a design for
the work flow processes of the ISC and related equipment requirements. The
Company expects the consultant's assessment to be completed by the end of
August 1996. Under the model, once the Company has signed contracts with a
group of healthcare 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 HIM services 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 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 healthcare 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
healthcare 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 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.
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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, 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 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 healthcare
information functions, 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 Company to
offer consultation services to physicians who are interested in improving
their coding and reimbursement practices.
Healthcare 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 healthcare providers and the insurance carriers,
seeking to ensure the provision of optimal healthcare with an efficient use of
resources. Case management typically involves routine onsite visits to the
patient and monthly reporting to the insurance carriers. In addition, the
Company 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 healthcare providers, and the Company's marketing efforts are
designed to eventually expand its customer profile to include larger clinics,
sub-acute care facilities, HMOs, skilled nursing facilities and others.
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 medical records management technology increases in the future,
the Company believes that three levels of healthcare 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
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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.
Principal Customers. Based on its revenues for the fiscal year ended
December 31, 1993, fees paid by each of the following hospitals accounted for
10% or more of the Company's revenues in such period: Good Samaritan Hospital,
Downers Grove, Illinois (37%); Greater Southeast Community Hospital,
Washington, D.C. (including Fort Washington Medical Center, Fort Washington,
Maryland) (11%); Tulane University Hospital and Clinic, New Orleans, Louisiana
(10%). Based on its revenues for the fiscal year ended December 31, 1994, fees
paid by each of the following hospitals accounted for 10% or more of the
Company's revenues in such period: Good Samaritan Hospital, Downers Grove,
Illinois (14%); Greater Southeast Community Hospital, Washington, D.C.
(including Fort Washington Medical Center, Fort Washington, Maryland) (15%);
Tulane University Hospital and Clinic, New Orleans, Louisiana (16%); and
Memorial Medical Center of Jacksonville, Jacksonville, Florida (15%). Based on
revenues for the fiscal year ended December 31, 1995, no hospitals had fees
paid to the Company which amounted to or exceeded 10% of the Company's
revenues.
SALES AND MARKETING
As of July 1, 1996, the Company employed 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 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
Management of the Company believes that the success of its outsourcing
business is dependant upon the acceptance by hospitals and other healthcare
providers of the concept of outsourcing medical records, admissions and other
affiliated departments. Because this is an emerging field in the healthcare
industry, the Company's greatest competition presently comes from existing,
internal medical records departments of hospitals, which often resist the
outsourcing concept. Acceptance by hospitals of the outsourcing of medical
records and related departments will depend in part on the ability of the
Company to alleviate concerns of hospital management related to outsourcing,
including loss of control of the outsourced function, information quality and
integrity
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concerns, and a bias against outsourcing due to previous poor experiences. As of
July 1, 1996, there was one national firm, HealthTask, Inc. (a 50/50 joint
venture between Ernst & Young and Norrell) and one regional firm, Pyramid, Inc.
(Southern California based), 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
healthcare information management consultants; coding consultants; multi-
specialty healthcare 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 healthcare 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 including Comprehensive
Rehabilitation Associates, CorVel, Intracorp and Genex, Inc., 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
healthcare services are regulated by federal or state statutes and
regulations, by rules and regulations of state medical boards and state and
local boards of health and by codes established by various medical
associations. The Company has attempted to structure its operations to comply
with these regulations. The Company is not presently subject to direct
regulation as an outsourcing services provider. Future government regulation
of the practice of medicine and the provision of healthcare services may
impact the Company and require it to restructure its operations in order to
comply with such regulations. In addition, in connection with its case
management business, certain of the Company's employees and independent
contractors 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 July 1, 1996, the Company had approximately 717 full-time employees
and 165 part-time employees, including 27 administrative and executive
employees at its headquarters office in Atlanta, Georgia; 26 employees in
sales and marketing or consultative functions; and 536 employees at
outsourcing sites (includes 181 employees from Pinnacle Health System, a
contract which terminated on August 1, 1996) as well as 293 employees in its
medical transcription operations. As of that date, Sullivan had 46 full-time
employees, seven part-time employees and contracts with over 29 registered
nurses who are not employees of the Company. The Company also supervises an
additional 139 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
9
<PAGE>
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.
DISCONTINUED OPERATIONS
At December 31, 1995, the net assets related to the discontinued operations of
the Company's healthcare subsidiaries, First Western and Veritas, both of
which ceased operations as of April 30, 1993, were $2,893,000, including
deferred legal costs related to the Lawsuit and $2,414,000 in net accounts
receivable. The collection liabilities of First Western and Veritas have been
deducted in determining net accounts receivable. In October 1995, the Company
sold approximately 38% of the gross accounts receivable to a third party with
which the Company has also contracted with to service and manage the remaining
accounts receivable balance for a set fee. The net accounts receivable from the
discontinued operations represent reimbursements that are owed the Company by
certain insurance companies for applicant medical/legal evaluation services
provided by FWHC Medical Group, Inc. and Veritas Medical Group, Inc., two
managed medical groups associated with the Company's former subsidiaries, First
Western and Veritas. The Company expects to collect the accounts receivable from
discontinued operations over the next several years under the provisions of the
sale and service agreement that the Company has entered into with the third
party for servicing and managing the remaining accounts receivable balance.
Payment of a portion of the remaining gross receivables, however, is contested
by the insurance companies. The collection of these contested accounts
receivable is therefore subject to resolution by the California Workers
Compensation Appeals Board, an administrative body charged with determining an
insurance company's liability for the payment of medical/legal evaluation
services. In estimating net accounts receivable, the Company believes that it
has made adequate provisions as to the estimated amount of gross receivables
that the Company can expect to collect upon resolution by the California Workers
Compensation Appeals Board of the collectibility of the disputed portion of the
receivables. The Company will continue to re-evaluate the net realizability of
the net assets related to discontinued operations on an ongoing basis. Any such
re-evaluation could result in an adjustment that may potentially be material to
the carrying value of the 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 (using a discounted cash flow approach).
AmHealth defaulted on a December 1, 1995 mandatory redemption of a portion of
the preferred stock. However, in December 1995, AmHealth executed a Letter of
Intent with CORE, Inc., a public company, pursuant to which, in exchange for
CORE stock, CORE would purchase substantially all the assets of AmHealth in a
transaction expected to close by May 1996. If the above transaction occurs, the
Company would likely settle AmHealth's $2.5 million obligation to Transcend in
exchange for CORE stock. 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."
ITEM 2. 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.
ITEM 3. LEGAL PROCEEDINGS.
The Company is subject to certain claims in the ordinary course of business
which are not material.
On September 17, 1993, the Company and its healthcare subsidiaries, First
Western Health Corporation and Veritas Healthcare Management, and the
physician-owned medical groups, FWHC Medical Group, Inc. and Veritas Medical
Group, Inc., which had contracts with the 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, which lawsuit was subsequently amended to name 16 defendants
(including State Compensation Insurance Fund, Continental Casualty Company,
California Compensation Insurance Company, Zenith National Insurance
Corporation and Pacific Rim Assurance Company). The action seeks $115 million
in compensatory damages plus punitive damages. The plaintiffs claim abuse of
process, intentional interference with contractual and prospective business
relations, negligent interference and unlawful or unfair business practices
which led to the discontinuation in April 1993 of the former business of the
Company's healthcare subsidiaries and their contracting associated medical
groups (the "Lawsuit"). The claims arise out of the Company's former business,
which prior to the merger with Transcend Services, Inc., included 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,
results of operations or liquidity. See Note 2 of "Notes to Consolidated
Financial Statements."
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,
results of operations or liquidity.
10
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PART II
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company for the periods indicated, which data has been derived from the
Company's consolidated financial statements 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 18. 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. 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.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1991 1992 1993 1994 1995
------ ------ ------ ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA(1)(2):
Net revenues............ $1,854 $1,702 $6,208 $12,393 $25,882
Direct costs............ 1,074 893 5,125 10,787 22,334
------ ------ ------ ------- -------
Gross profit............ 780 809 1,083 1,606 3,548
Marketing and sales ex-
pense.................. 362 209 378 929 2,186
General and administra-
tive expense........... 538 715 1,330 1,673 4,604
Amortization expense of
intangible assets...... -- -- 310 357 633
------ ------ ------ ------- -------
Operating loss.......... (120) (115) (935) (1,353) (3,875)
Interest, net........... (40) (16) (132) (65) (21)
Other................... -- (2) 101 25 --
------ ------ ------ ------- -------
Total other income (ex-
penses)................ (40) (18) (31) (40) (21)
------ ------ ------ ------- -------
Pre-Tax loss............ (160) (133) (966) (1,393) (3,896)
Provision for income
tax.................... -- -- -- 13 --
------ ------ ------ ------- -------
Net loss................ $ (160) $ (133) $ (966) $(1,406) $(3,896)
====== ====== ====== ======= =======
Net loss per share...... $ (.04) $ (.02) $ (.11) $ (.14) $ (.22)
Weighted average shares
outstanding............ 3,774 7,162 8,866 9,733 17,818
<CAPTION>
DECEMBER 31,
----------------------------------------
1991 1992 1993 1994 1995
------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......... $ 384 $ 202 $ (552) $(3,001) $ 461
Total assets............ $ 922 $ 790 $1,191 $ 2,680 $16,833
Long-term debt and capi-
tal lease obligations.. $ 355 $ 300 $ -- $ -- $ 2,392
Shareholders' equity.... $ 411 $ 277 $ 162 $(1,233) $ 9,921
</TABLE>
- --------
(1) On January 10, 1995, the Company acquired a Georgia corporation then
known as "Transcend Services, Inc." by the merger of Transcend into a
subsidiary of the Company. The merger was treated for financial
accounting purposes as the acquisition of the Company by the former
Transcend and the historical financial statements of the former Transcend
have become the financial statements of the Company and include the
business of both companies after the effective date of the merger. See
Note 12 of "Notes to Consolidated Financial Statements."
(2) The Company has completed several acquisitions that could affect the
comparability of the information reflected in the table. See Note 12 of
"Notes to Consolidated Financial Statements."
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements of the Company (including the notes thereto) contained
elsewhere in this Report.
OVERVIEW
Transcend is a healthcare services company focused on the emerging field of
healthcare information management ("HIM") services to hospitals and other
associated healthcare providers. The Company provides a range of HIM services,
including: (i) contract management ("outsourcing") of the healthcare information
or medical records function, as well as the admissions function; (ii)
transcription of physicians' dictated medical notes; and (iii) consulting
services relating to medical records and reimbursement coding. As of December
31, 1995, the Company operated on a contract management basis, the medical
records and certain other HIM functions of 14 general acute care hospitals
located in 11 states and the District of Columbia and, as of July 1, 1996, the
Company operated on a contract management basis, the medical records and certain
other HIM functions of 18 general acute care hospitals located in 11 states and
the District of Columbia. The Company also provides case management and
disability management services to insurance carriers, third party administrators
and self-insured employers.
The Company intends to expand the range of its contract management services
to include management of other functional areas of hospitals, such as
management of patient access (admissions), utilization review, quality
assurance and the business office. As of December 31, 1995 and July 1, 1996, the
Company provided full contract management outsourcing services in the admissions
departments for five of the 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 130 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 had
contract management contracts covering the medical records departments of 14
hospitals as of December 31, 1995 and 16 hospitals as of July 1, 1996, 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 at the present time
to assess or predict its contract renewal rate.
The Company negotiates its contract management fees on a fixed installment
basis which represents, at contract inception, an immediate savings to the
contracting hospital as compared to its historical costs. In the early term of
such a contract, the Company's expenses in providing the contract services
remain relatively high, as a percentage of contract revenues received, as set-
up and training costs are incurred, new procedures are implemented and
departmental reorganizations are initiated. Completion of such steps should
result in lower operating expenses, which in turn should increase the profit
margin of a constant revenue stream over time. Due to the Company's limited
operating history in the contract management business, however, there can be
no assurances that operating expenses will sufficiently decrease over the life
of such contracts to achieve profitability.
The Company is considering an alternative volume-based pricing structure,
based upon a hospital's activity levels such as weighted average number of
annual patient discharges, or a "per member per month" ("PMPM") capitated
pricing option similar to current pricing mechanisms used by managed healthcare
groups. As of July 1, 1996, the Company had signed one contract based on a
volume oriented pricing structure tied to weighted annual patient discharges.
There is an opportunity to realize higher margins on an activity-based pricing
structure. The principal advantage of a volume-based pricing mechanism is that
as a hospital's volume of business increases, the Company's revenues will
increase at a faster rate than operating expenses. However, if a customer's
business volume decreases, the Company's revenues will also decrease at a faster
rate than its operating expenses.
12
<PAGE>
The Company is typically paid for its transcription services on a production
basis at rates determined on a per-line-transcribed basis. Where transcription
services are included as part of the services provided in the Company's
outsourcing contracts, however, the services are provided by the Company as
part of a set contract fee. The Company is paid for its consulting and coding
services on a negotiated fee for services basis. In addition, the Company is
paid for its healthcare case management services primarily on an hourly basis.
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 "Business--History of
the Company."
RESULTS OF OPERATIONS
The Company's losses from operations in 1993, 1994 and 1995 were $935,000,
$1,353,000 and $3,875,000, respectively. Management believes that the Company's
operating losses are primarily attributable to the significant expenses incurred
by the Company to build a larger sales and management organization to support an
increased number of outsourcing contracts and the expansion of the Company's
services to healthcare institutions. In fiscal 1993, 1994 and 1995, the
Company's marketing and sales expenses were $378,000, $929,000 and 2,186,000,
respectively. In addition, the Company's general and administrative expenses for
fiscal 1993, 1994 and 1995 were $1,330,000, $1,673,000 and $4,604,000,
respectively. The buildup of the Company's management infrastructure has been
necessary in order for the Company to manage the planned growth in its
outsourcing business and will allow it to grow revenues significantly from
current levels without increasing selling, general and administrative costs by
the same proportion. At the present time, the Company's revenues are not
sufficient to support these expenses and generate profits. The Company will be
required to increase its revenues from contract management and other services
and effectively manage its costs to achieve profitability. In addition, the
Company's pricing mechanism on most of its outsourcing contracts requires the
Company to increase operating efficiencies over the life of the contract in
order to increase profit margins. The Company will also be required to procure a
critical mass of such contracts and be able to renew such contracts on favorable
terms. There can be no assurance that the Company will be able to attain the
required operating efficiencies or increase the number of outsourcing contracts
to the level needed to become profitable.
13
<PAGE>
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.
Contract management revenues grew 54.8% from 1994 to 1995 and represented 74.6%
of the Company's total revenues in 1994 as compared to 55.3% of total revenues
in 1995. Medical transcription revenues grew from $2,428,000 in 1994 to
$6,662,000 for 1995, primarily due to the acquisition of International Dictating
Services, Inc. ("IDS") and Medical Transcription of Atlanta, Inc. ("MTA").
Medical transcription revenues represented 19.6% of the Company's total revenues
in 1994 as compared to 25.7% of total revenues in 1995. Sullivan's 1994 revenues
are not included as they were prior to the Merger; therefore, $4,141,000 of the
$13,489,000 total revenue increase in the Company's revenues between 1994 and
1995 is due to the inclusion of Sullivan in 1995.
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 of approximately $80,000
associated with the efforts to heighten market awareness of the Company and
contract outsourcing, the expansion of the Company's sales force by the
addition of one person, an increase in commission compensation of
approximately $156,000 relating to the six new contract management contracts
signed in the third quarter and the additional sales costs of approximately
$765,000 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 of approximately $874,000
for expanded management and support staff incurred to position the Company for
future growth, as well as the additional overhead of approximately $761,000
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.
Total current assets increased 386.7% to $4,438,000 in 1995 from $912,000 in
1994 and trade accounts receivable increased 336.6% to $3,056,000 in 1995 from
$700,000 in 1994. This increase in current assets and accounts receivable is
attributable to a number of factors including the Merger, the acquisition of
Sullivan, the addition of new outsourcing contracts, the growth of the Company's
transcription business following the acquisitions of MTA and IDS and the
increase in the Company's consulting and coding business during this period. In
addition, in connection with the growth of the Company's transcription and its
consulting and coding businesses, accounts receivable increased for fiscal 1995
because it took transcription and consulting and coding accounts receivable
approximately 30 days to turn in 1995 as compared to approximately 20 days in
1994.
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 of $5,376,000, reflecting the full
year impact of five new outsourcing contracts entered into in 1993 and one
outsourcing contract entered into on June 1994. Contract management revenues
represented 62.3% of the Company's total revenues in 1993 as compared to 74.6%
of total revenues in 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. Medical transcription revenues
represented 18.3% of the Company's total revenues in 1993 as compared to 19.6%
of total revenues in 1994. Consulting and coding revenues represented 19.4% of
the Company's total revenues in 1993, which percentage decreased to 5.8% of
total revenues in 1994. Consulting and coding revenue decreased from $1,204,000
in fiscal 1993 to $719,000 in fiscal 1994 as the Company continued its
transition from a strictly consulting organization to a company whose core
business is primarily the contract management of health information functions.
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.
14
<PAGE>
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 of approximately $551,000
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 of approximately $343,000
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
$935,000 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 cash flows from continuing operations provided net cash of
$437,000 in 1993 but required the use of cash of $579,000 and $3,445,000 in
1994 and 1995, respectively. Cash has been used to continue funding the
Company's operating losses and, in 1995, to finance the growth of certain of the
Company's acquisitions' working capital needs. See "Consolidated Statements of
Cash Flows."
Discontinued operations contributed cash of $202,000 for 1995. The majority of
cash contributed from discontinued operations was generated by the collection of
accounts receivable and include net cash contributed of $882,000 received upon
the sale of approximately 38% of the gross accounts receivable to a third party
with which the Company has also contracted with to service and manage the
remaining accounts receivable balance. The accounts receivable from the
discontinued operations represent reimbursements that are owed the Company by
certain insurance companies for applicant medical/legal evaluation services
provided by FWHC Medical Group, Inc. and Veritas Medical Group, Inc., two
managed medical groups associated with the Company's former subsidiaries, First
Western and Veritas. The Company expects to collect the accounts receivable from
discontinued operations over the next several years under the provisions of the
sale and service agreement that the Company has entered into with a third party
for servicing and managing the remaining accounts receivable balance. Payment of
a portion of the remaining gross receivables, however, is contested by the
insurance companies. The collection of these accounts receivable is therefore
subject to resolution by the California Workers Compensation Appeals Board, an
administrative body charged with determining an insurance company's liability
for the payment of medical/legal evaluation services. In estimating net accounts
receivable, the Company believes that it has made adequate provisions as to the
estimated amount of gross receivables that the Company can expect to collect
upon resolution by the California Workers Compensation Appeals Board of the
collectibility of the disputed portion of the receivables. The Company will
continue to re-evaluate the net realizability of the net assets related to
discontinued operations on an ongoing basis. Any such re-evaluation could result
in an adjustment that may potentially be material to the carrying value of the
assets. See "Business-Discontinued Operations."
The Company's working capital position improved during the twelve months ended
December 31, 1995, from a deficit position of approximately ($3,000,000) at
December 31, 1994 to $870,000 at December 31, 1995. This improvement in the
Company's working capital position arises from a combination of several
factors including the Merger, which increased working capital by $6,195,000 and
the private placement of Debentures, which increased working capital by
$2,000,000. Such increases were offset by the acquisition of IDS and MTA, the
financing from current cash sources of capital expenditures for equipment during
the twelve months ended December 31, 1995, and the continued funding of losses
from the Company's operations. The latter factor results from increases in the
Company's administrative and marketing cost structures (relative to actual new
sales realized), which increased significantly beginning in the fourth quarter
of 1994, in anticipation of targeted increases in the Company's contract
management business, as well as some temporary costs associated with the Script-
Ease and IDS transcription acquisitions. Although the Company has a negative
cash flow, the Company's accounts receivable turn faster than related payables,
allowing the Company to operate and grow its business. Under the terms of its
contract management fixed-fee pricing schedules, the Company receives the annual
fee in monthly payments in advance (due on the first day of the month), prior to
actually incurring any of the month's fixed and/or variable operating expenses.
This results in accounts receivables for contract management turning in
approximately seven days. The Company also receives an up-front implementation
fee prior to incurring any costs associated with the actual start-up of a
contract management site.
The Company's cash flows from investing activities used cash of $1,043,000
and $1,438,000 in 1993 and 1994, respectively, and provided cash of $4,873,000
in 1995. The Company's principal uses of cash for investing purposes are for
capital expenditures and for acquisitions. The Company does not currently have
any material commitments for capital expenditures. In 1995, in connection with
the Company's acquisition of TriCare, it acquired approximately $7.5 million
of cash.
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
15
<PAGE>
subordinated to all other debt of the Company. The interest rate on the
Debentures is 8%, payable semi-annually, and the principal amount is due in
full on August 15, 2000. The Debentures are convertible into Common Stock by
the holder at any time prior to August 15, 2000 at a rate of 286 shares of
Common Stock for each $1,000 in principal amount and are convertible by the
Company at any time when the Common Stock trades at $10.50 per share for 30
consecutive trading days. The Company may redeem the Debentures at any time
upon 30 to 60 days notice to the holder of a Debenture.
Cash flows from financing activities provided $446,000, $2,036,000, and
$183,000 in 1993, 1994, and 1995, respectively. The Company's primary
sources of cash over the past several years have been proceeds from a line of
credit and pursuant to the exercise of stock options. In 1995, the Company
retired its line of credit and issued $2 million of convertible debentures as
discussed above.
The Company anticipates that cash on hand, together with internally generated
funds and cash collected from discontinued operations should be sufficient to
finance continuing operations for at least the next 24 months 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.
16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following financial statements are filed with this report:
Report of Arthur Andersen LLP, Independent Public Accountants
Consolidated Balance Sheets at December 31, 1995 and 1994
Consolidated Statements of Operations for the years ended December 31, 1995,
1994 and 1993
Consolidated Statements of Stockholders' Equity for the years ended December
31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the years ended December 31, 1995,
1994 and 1993
Notes to Consolidated Financial Statements
17
<PAGE>
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
18
<PAGE>
TRANSCEND SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............. $ 150,000 $ 1,073,000
Trade accounts receivable, net of al-
lowance for doubtful accounts of
$15,000 and $42,000, respectively.... 700,000 3,056,000
Prepaid expenses...................... 62,000 309,000
----------- -----------
Total current assets................ 912,000 4,438,000
NET ASSETS RELATED TO DISCONTINUED OPER-
ATIONS................................. -- 2,893,000
SECURITIES OF AMHEALTH.................. -- 2,050,000
OFFICE FURNITURE AND EQUIPMENT, at cost,
less accumulated depreciation of
$298,000 and $1,059,000, respectively.. 558,000 1,681,000
DEPOSITS AND OTHER ASSETS............... 130,000 408,000
GOODWILL AND OTHER INTANGIBLE ASSETS,
less accumulated amortization of
$381,000 and $1,301,000, respectively.. 1,080,000 5,363,000
----------- -----------
$ 2,680,000 $16,833,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long term debt..... 2,025,000 208,000
Accounts payable...................... 783,000 1,268,000
Accrued compensation and employee ben-
efits................................ 506,000 1,560,000
Other accrued liabilities............. 578,000 808,000
Current portion of capital lease obli-
gation............................... 21,000 --
Deferred income taxes................. -- 133,000
----------- -----------
Total current liabilities........... 3,913,000 3,977,000
----------- -----------
LONG TERM DEBT.......................... -- 392,000
CONVERTIBLE DEBENTURES:
Held by related parties............... -- 450,000
Held by others........................ -- 1,550,000
DEFERRED INCOME TAXES................... -- 543,000
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 and 18,113,000 shares
issued and outstanding as of
December 31, 1994 and 1995,
respectively......................... 97,000 181,000
Additional paid in capital............ 1,677,000 16,643,000
Accumulated deficit................... (3,007,000) (6,903,000)
----------- -----------
Total shareholders' equity.......... (1,233,000) 9,921,000
----------- -----------
$ 2,680,000 $16,833,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
19
<PAGE>
TRANSCEND SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1993 1994 1995
---------- ----------- -----------
<S> <C> <C> <C>
NET REVENUE............. $6,208,000 $12,393,000 $25,882,000
DIRECT COSTS............ 5,125,000 10,787,000 22,334,000
---------- ----------- -----------
Gross profit........... 1,083,000 1,606,000 3,548,000
MARKETING AND SALES
EXPENSES............... 378,000 929,000 2,186,000
GENERAL AND
ADMINISTRATIVE
EXPENSES............... 1,330,000 1,673,000 4,604,000
AMORTIZATION EXPENSE.... 310,000 357,000 633,000
---------- ----------- -----------
Operating loss......... (935,000) (1,353,000) (3,875,000)
OTHER INCOME
(EXPENSES):
Interest expense....... (135,000) (66,000) (96,000)
Interest income........ 3,000 1,000 75,000
Other.................. 101,000 25,000 --
---------- ----------- -----------
(31,000) (40,000) (21,000)
---------- ----------- -----------
LOSS BEFORE PROVISION
FOR INCOME TAXES....... (966,000) (1,393,000) (3,896,000)
PROVISION FOR INCOME
TAXES.................. -- 13,000 --
---------- ----------- -----------
NET LOSS................ $ (966,000) $(1,406,000) $(3,896,000)
========== =========== ===========
Loss per common share.. $ (.11) $ (.14) $ (.22)
========== =========== ===========
Weighted average common
shares outstanding..... 8,866,000 9,733,000 17,818,000
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
20
<PAGE>
TRANSCEND SERVICES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN WARRANTS ACCUMULATED SHAREHOLDERS'
STOCK CAPITAL OUTSTANDING DEFICIT EQUITY
-------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
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
-------- ----------- -------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
21
<PAGE>
TRANSCEND SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1993 1994 1995
---------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................... $ (966,000) $(1,406,000) $(3,896,000)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization.......................................... 396,000 530,000 1,134,000
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)
Prepaid expenses....................................................... 4,000 (51,000) (187,000)
Deposits and other assets.............................................. (20,000) (101,000) (351,000)
Accounts payable....................................................... 109,000 539,000 (37,000)
Accounts compensation and benefits..................................... -- -- --
Accrued expenses and other liabilities................................. 619,000 255,000 291,000
Other.................................................................. 53,000 (119,000) 123,000
---------- ----------- -----------
Total adjustments...................................................... 1,403,000 827,000 (439,000)
---------- ----------- -----------
Net cash provided by (used in) continuing operations................... 437,000 (579,000) (4,335,000)
---------- ----------- -----------
Net cash provided by discontinued operations........................... -- -- 202,000
---------- ----------- -----------
Net cash provided by (used in) operating activities.................... 437,000 (579,000) (4,133,000)
---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................................... (126,000) (440,000) (1,220,000)
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)
Cash acquired from acquisitions........................................ -- 2,000 7,560,000
Disposal and transfer of property...................................... -- -- 60,000
---------- ----------- -----------
Net cash used in investing activities.................................. (1,043,000) (1,438,000) (4,873,000)
---------- ----------- -----------
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)
Principal payments on short-term debt.................................. (200,000) -- --
Principal payment on capital lease obligations......................... (25,000) -- --
Repayments of line of credit........................................... (651,000) -- (2,025,000)
Purchase of common stock............................................... (17,000) -- --
Proceeds from Convertible Debenture.................................... -- -- 2,000,000
Proceeds from stock options............................................ -- -- --
Proceeds from common stock issuance.................................... 764,000 11,000 268,000
---------- ----------- -----------
Net cash provided by financing activities............................... 446,000 2,036,000 183,000
---------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................... (160,000) 19,000 (923,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........................ 291,000 131,000 150,000
---------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.............................. $ 131,000 $ 150,000 $ 1,073,000
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
22
<PAGE>
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%, 46% and 25% 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.
<TABLE>
<CAPTION>
SERVICE LINE REVENUE RECOGNITION
------------ -------------------
<C> <S>
Contract Management (Outsourcing): Monthly; 1/12th of annual fixed fee
received on the first day of the month
during which services are to be per-
formed.
Transcription: Monthly; revenue recognized on a per
line/per character basis for actual
dictation.
Consulting & Coding: Monthly; revenue recognized for work
incurred on time and material basis.
Case Management: Monthly; revenue recognized as work is
incurred; usually on fixed cost per
hour per case.
</TABLE>
23
<PAGE>
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
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.
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.
24
<PAGE>
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
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.
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,
results of operations or liquidity.
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 consolidated balance
sheet and the related statement of cash flows as a separate line item. These
net assets were acquired in January 1995. See Note 12.
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.
25
<PAGE>
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
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
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 (using a
discounted cash flow approach). 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.
26
<PAGE>
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
3. OFFICE FURNITURE AND EQUIPMENT
The summary of office furniture and equipment at December 31, 1994 and 1995
is as follows:
<TABLE>
<CAPTION>
1994 1995
--------- -----------
<S> <C> <C>
Office furniture and equipment....................... $ 856,000 $ 2,740,000
Less accumulated depreciation........................ (298,000) (1,059,000)
--------- -----------
$ 558,000 $ 1,681,000
========= ===========
</TABLE>
4. INDEBTEDNESS
Long-term debt is summarized as follows at December 31, 1994 and 1995;
<TABLE>
<CAPTION>
1994 1995
---------- --------
<S> <C> <C>
$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
========== ========
</TABLE>
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:
<TABLE>
<S> <C>
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 Fea-
tures:
</TABLE>
. 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.
27
<PAGE>
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
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:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31
- -----------
<S> <C>
1996................................................................ $ 517,000
1997................................................................ 471,000
1998................................................................ 325,000
1999................................................................ 271,000
2000................................................................ 178,000
Thereafter.......................................................... --
----------
$1,762,000
==========
</TABLE>
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.
28
<PAGE>
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
8. TRANSACTIONS WITH RELATED PARTIES
Approximately 23% of the subordinated debt (Note 4) is held by parties
related to 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.
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:
<TABLE>
<CAPTION>
OPTIONS PRICE RANGE
--------- --------------
<S> <C> <C>
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
=========
</TABLE>
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
29
<PAGE>
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
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:
<TABLE>
<CAPTION>
1994 1995
--------- -----------
<S> <C> <C>
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) (3,183,000)
--------- -----------
$ -- $ (676,000)
========= ===========
</TABLE>
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 $3,183,000
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.
30
<PAGE>
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
DECEMBER 31, 1993, 1994 AND 1995
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 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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1994 1995
----------- -----------
(UNAUDITED)
<S> <C> <C>
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
</TABLE>
31
<PAGE>
PART III
ITEM 10. Directors and Executive Officers of the Registrant.
The following table sets forth certain information regarding executive
officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
<S> <C> <C>
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
</TABLE>
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 healthcare
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 25 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.
32
<PAGE>
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.
There are no family relationships between any director or executive officer
and any other director or executive officer of the 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.
33
<PAGE>
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, executive officers and persons who own more than 10% of the
outstanding common stock of the Company, to file with the Securities and
Exchange Commission reports of changes in ownership of the common stock of the
Company held by such persons. Officers, directors and greater than 10%
shareholders are also required to furnish the Company with copies of all forms
they file under this regulation. To the Company's knowledge, based solely on a
review of the copies of such reports furnished to the Company and
representations that no other reports were required, during the year ended
December 31, 1995, all Section 16(a) filing requirements applicable to its
officers, directors and greater than 10% shareholders were complied with.
ITEM 11. 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
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------- ----------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION YEAR(1) SALARY($) BONUS($) OPTIONS/SAR'S(#)
- --------------------------- -------- --------- -------- ----------------
<S> <C> <C> <C> <C>
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 -- --
</TABLE>
- --------
(1) Information relates to the fiscal years ended May 31, 1994 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.
In August 1995, the Company raised $2 million in cash through the private
placement of 8% Subordinated Convertible Debentures. In connection with this
private placement, the Walter S. Huff, Jr. Charitable Foundation, of which
Walter S. Huff, Jr.'s adult children are trustees, purchased a Debenture in the
principal amount of $200,000 with respect to which Mr. Huff disclaims
beneficial ownership. The Debenture is secured and subordinated to all other
debt of the Company. The interest rate on the Debenture is 8%, payable semi-
annually, and the principal amount is due in full on August 15, 2000. As of
July 1, 1996, $200,000 remained outstanding under the Debenture. The Debenture
is convertible into Common Stock 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 is
convertible by the Company at any
34
<PAGE>
time when the Common Stock trades at $10.50 per share for 30 consecutive
trading days. The Company may redeem the Debenture at any time upon 30 to 60
days' notice to the holder. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
During fiscal 1993, the Company paid $91,000 in management fees to a
shareholder of the Company, Gerdes Huff Investments, a general partnership the
sole partners of which are Larry G. Gerdes, an executive officer and director
of the Company, and Walter S. Huff, Jr. These management fees were paid to the
partnership prior to the Merger in connection with consulting services
provided to the Company by Messrs. Gerdes and Huff.
During Fiscal 1993, the Company also issued warrants to purchase 146,000
shares of Common Stock to Gerdes Huff Investments. The warrants were issued in
consideration of Messrs. Gerdes' and Huff's personal guaranty of a loan made
to the Company in connection with the Company's purchase of dataLogix, a
supplier of medical record transcription services. The warrants were
exercisable at $.01 per warrant and were exercised during 1994. The difference
between the fair value and exercise price of these warrants of $104,000 was
expensed by the Company in 1993.
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. The Plan was amended at a
special meeting of shareholders held on June 5, 1996, increasing the number of
shares reserved for issuance under the Plan by 400,000 shares such that the Plan
currently provides for the grant of incentive and non-qualified stock options to
purchase up to 2,000,000 shares of Common Stock.
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 "Executive Compensation--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 July 8, 1996, options to purchase a total of 1,256,500 shares of
Common Stock were outstanding at a weighted average exercise price of $2.70
per share. In addition, as of July 8, 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 $.19
per share.
The following table sets forth information regarding individual grants of
stock options under the Plan made during the year ended December 31, 1995 to
the Named Executive Officers.
35
<PAGE>
OPTION GRANTS IN FISCAL 1995
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT
ASSUMED ANNUAL RATES
OF STOCK PRICE
APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(3)
-------------------------------------------------- --------------------
% OF TOTAL
NUMBER OF OPTIONS/SAR'S
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES EXERCISE OR
OPTIONS/SAR'S IN FISCAL BASE PRICE EXPIRATION
NAME GRANTED(#)(1) YEAR(2) ($/SHARE) DATE 5% 10%
- ---- ------------- ------------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
- --------
(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.
(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 $5.13 per share on the date
of exercise.
AGGREGATED OPTION EXERCISES IN FISCAL 1995 AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED OPTIONS AT FISCAL YEAR END
---------------------------------------------------
NUMBER VALUE OF UNEXERCISED (1)
OF SECURITIES IN-THE-MONEY OPTIONS
SHARES UNDERLYING UNEXERCISED AT FY-END ($)
ACQUIRED VALUE OPTIONS AT FY-END IN-THE-MONEY
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ----------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
- --------
(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.
36
<PAGE>
EMPLOYEE RETIREMENT SAVINGS PLAN
The Company has established a savings and retirement 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 $9,500 of their gross
salary to the 401(k) Plan in 1996. 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 Stock
Purchase Plan provide for two six month offering periods each calendar year in
which eligible employees may 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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables sets forth information regarding the beneficial ownership
of the Common Stock as of July 30, 1996, with respect to (i) each person known
by the Company to own beneficially more than 5% of the outstanding shares of
Common Stock, (ii) each of the Company's directors, (iii) each of the Named
Executive Officers, and (iv) all directors and executive officers as a group.
Unless otherwise indicated, each of the stockholders has sole voting and
investment power with respect to the shares beneficially owned.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
NAME AND ADDRESS BENEFICIAL PERCENT OF
OF BENEFICIAL OWNER OWNERSHIP/(1)/ CLASS/(1)/
------------------- -------------- ----------
<S> <C> <C>
Gerdes Huff Investments................. 3,500,001/(2)/ 18.7%
3353 Peachtree Road, N.E.
Suite 1030
Atlanta, Georgia 30326
Donald L. Lucas......................... 604,645/(3)/ 3.2%
Larry G. Gerdes......................... 4,795,146/(4)/ 24.6%
3353 Peachtree Road, N.E.
Suite 1000
Atlanta, Georgia 30326
George C. Caldwell...................... 61,723/(5)/ * %
Walter S. Huff, Jr...................... 4,274,315/(6)/ 22.8%
3353 Peachtree Road, N.E.
Suite 1000
Atlanta, Georgia 30326
Charles E. Thoele....................... 35,658/(7)/ * %
Julian L. Cohen......................... 32,034/(8)/ * %
David W. Murphy......................... 15,404/(9)/ * %
G. Scott Dillon......................... 250/(10)/ * %
All Directors and Officers as a group
(8 persons)........................... 6,319,174/(11)/ 32.1%
</TABLE>
____________________
* Represents less than 1%
/(1)/ "Beneficial Ownership" includes shares for which an individual, directly
or indirectly, has or shares voting or investment power or both and also
includes Debentures which are presently convertible into shares of common
stock and options which are exercisable within sixty days of the date
hereof. Beneficial ownership as reported in the above table has been
determined in accordance with Rule 13d-3 of the Securities Exchange Act
of 1934. The percentages are based upon 18,753,172 shares outstanding,
except for certain parties who hold presently exercisable options to
purchase shares or Debentures that are presently convertible into shares.
The percentages for those parties who hold presently exercisable options
or presently convertible Debentures are based upon the sum of 18,753,172
shares plus the number of shares subject to presently exercisable options
or presently convertible Debentures held by them, as indicated in the
following notes. Unless otherwise indicated, each person has sole voting
and dispositive power with respect to all shares listed opposite his
name.
/(2)/ Such shares are owned of record by Gerdes Huff Investments, a general
partnership the sole general partners of which are Messrs. Gerdes and
Huff. As a result, each of Messrs. Gerdes and Huff are deemed the
beneficial owner of all of such shares.
/(3)/ Includes 410,664 shares with respect to which Mr. Donald L. Lucas is
trustee of the Donald L. Lucas and Lygia S. Lucas Trust dated December 3,
1984; 45,000 shares with respect to which Mr. Lucas is Successor
Trustee of the Donald L. Lucas Profit Sharing Trust; 21,481 shares held
by the Donald L. Lucas Remuneration Account dated July 7, 1993; 56,000
shares which Mr. Lucas has the right to acquire pursuant to presently
exercisable stock options; and 71,500 shares which may be acquired upon
the conversion of an 8% Convertible Debenture held by the Richard M.
Lucas Cancer Foundation, of which Mr. Lucas is the Chairman.
/(4)/ Includes 3,500,001 shares held by Gerdes Huff Investments, a general
partnership of which Mr. Gerdes is a general partner; 93,600 shares held
by Mr. Gerdes' spouse and 94,155 shares held by Mr. Gerdes as custodian
for his minor children; and 716,000 shares purchasable pursuant to
presently exercisable stock options.
/(5)/ Includes 10,000 shares which Mr. Caldwell has the right to acquire
pursuant to presently exercisable stock options.
/(6)/ Includes 3,500,001 shares held by Gerdes Huff Investments, a general
partnership of which Mr. Huff is a general partner; 62,650 shares held by
Laumar Corporation which is wholly owned by Mr. Huff, 22,000 shares
purchasable pursuant to presently exercisable options; and 56,300 shares
held by the Larry G. Gerdes Trust of which Mr. Huff is the trustee.
Excludes 57,200 shares with respect to which Mr. Huff disclaims
beneficial ownership and which may be acquired upon the conversion of an
8% Convertible Debenture held by the Walter S. Huff, Jr. Charitable
Foundation, of which Mr. Huff's adult children are trustees.
/(7)/ Includes 22,000 shares purchasable pursuant to presently exercisable
stock options.
/(8)/ Includes 25,000 shares purchasable pursuant to presently exercisable
options and 120,000 options not yet vested.
/(9)/ Includes 12,500 shares purchasable pursuant to presently exercisable
options and 47,500 options not yet vested.
/(10)/ Includes 250 shares held by Mr. Dillon's minor daughter.
/(11)/ Includes shares purchasable pursuant to presently exercisable stock
options, Debentures presently convertible into shares of common stock and
shares held by all current directors and officers.
ITEM 13. 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 July 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.
In August 1995, the Company raised $2 million in cash through a private
placement of 8% Subordinated Convertible Debentures. In connection with this
private placement, the Richard M. Lucas Cancer Foundation, of
37
<PAGE>
which Donald L. Lucas, a director of the Company, is the Chairman, purchased a
Debenture in the principal amount of $250,000. The Debenture is unsecured and
subordinated to all other debt of the Company. The interest rate on the
Debenture is 8%, payable semi-annually, and the principal amount is due in
full on August 15, 2000. As of July 1, 1996, $250,000 remained outstanding
under the Debenture. The Debenture is 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 is 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 Debenture at any time upon 30 to 60
days' notice to the holder of the Debenture. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
See "Executive Compensation--Compensation Committee Interlocks and Insider
Participation" which describes certain transactions between the Company and
Walter S. Huff, Jr., a director of the Company, and between the Company and
Larry G. Gerdes, an executive officer and director of the Company.
38
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Annual Report for
Transcend Services, Inc.:
(1) Financial Statements - Transcend
The Combined Financial Statements, the Notes to Combined Financial
Statements and the Report of Independent Public Accountants listed
below appear as Item 8.
Report of Independent Public Accountants.
Consolidated Balance Sheets as of December 31, 1995 and 1994.
Consolidated Statements of Loss for the years ended December
31, 1995 ,1994 and 1993.
Consolidated Statements of Shareholder's Equity for the years
ended December 31, 1995, 1994 and 1993.
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993.
Notes to Consolidated Financial statements
No financial statement schedules are required
(b) Reports on Form 8-K. Since the last quarter of the period covered by
-------------------
this report, the Company has not filed reports on Form 8-K.
(c) Exhibits.
--------
The following exhibits are filed with or incorporated by reference
into this report. The exhibits which are denominated by an asterisk (*) were
previously filed as a part of, and are hereby incorporated by reference from,
either (i) a Registration Statement on Form S-1 under the Securities Act of 1933
for the Company, Registration No. 33-32587, filed on December 14, 1989 (referred
to as "1989 S-1"); (ii) a Registration Statement on Form S-1 under the
Securities Act of 1933 for the Company, Registration No. 33-41361, filed on June
26, 1991 (referred to as "1991 S-1"); (iii) a Registration Statement on Form S-4
under the Securities Act of 1933 for the Company, Registration No. 33-83344,
filed on December 2, 1993 (referred to as "S-4"); (iv) a Registration Statement
on Form S-8 under the Securities Act of 1933 for the Company, Registration No.
33-37685, filed on November 8, 1990 (referred to as "1990 S-8"); (v) a
Registration Statement on Form S-8 under the Securities Act of 1933 for the
Company, Registration No. 33-57072, filed on January 15, 1993 (referred to as
"1993 S-8"); (vi) the Company's Current Report on Form 8-K relating to an event
which occurred on March 1, 1992 (referred to as "3/1/92 8-K"); (vii) the
Company's Current Report on Form 8-K relating to an event which occurred June
15, 1994 (referred to as "6/15/94 8-K"); (viii) the Company's Current Report on
Form 8-K relating to an event which occurred September 16, 1994 (referred to as
"9/16/94 8-K"); (ix) the Company's Annual Report on Form 10-K for the year ended
May 31, 1990 (referred to as "1990 10-K"); (x) the Company's Annual Report on
Form 10-K for the year ended May 31, 1992 (referred to as "1992 10-K"); (xi) the
Company's Annual Report on form 10-K for the year ended May 31, 1993 (referred
to as "1993 10-K"); (xii) the Company's Quarterly Report on Form 10-Q for the
quarter ended November 30, 1995 (referred to as "11/30/95 10-Q"); and (xiii) the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995
(referred to as "6/30/95 10-Q").
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------------------------------------------------------------
<S> <C> <C>
*2.1 - Acquisition of Industrial Plus Health Network, Inc. by Occu-Care,
Inc. (3/31/92 8-K, Exhibit 2(a))
*2.2 - Stock Purchase Agreement between TriCare, Inc., and Dorothy C.
Sullivan and Timothy Sullivan for the purchase and sale of all
issued and outstanding capital stock of Sullivan Health &
Rehabilitation Management, Inc. (6/15/94 8-K, Exhibit 2(a))
*2.3 - Asset Acquisition Agreement, executed on September 16, 1994 by and
among Occu-Care, Inc. ("OCI"), a wholly owned subsidiary of
TriCare, Inc., Industrial PlusHealth Network, a wholly-owned
subsidiary of OCI, together with AmHealth, Inc. (9/16/94 8-K,
Exhibit 2(a))
*2.4 - Agreement and Plan of Merger dated as of May 13, 1994 by and among
TriCare, Inc., First Western Health Corporation and Transcend
Services, Inc., as amended (included as Appendix A to the
Prospectus contained in Part I of the S-4)
*2.5 - Letter Agreement, dated December 30, 1994, between AmHealth, Inc.
and Occu-Care, Inc. to exchange AmHealth Inc. convertible
redeemable preferred stock for the existing junior promissory notes
held by Occu-Care and issued by AmHealth (11/30/95 10-Q, Exhibit
2(a))
*3.1.1 - Certificate of Incorporation, as amended (1989 S-1, Exhibit 3(a))
*3.1.2 - Certificate of Incorporation (6/30/95 10-Q, Exhibit 3)
*3.2 - Bylaws (as restated) (1993 10-K, Exhibit 3(a))
*4.1 - 1990 Employee Stock Purchase Plan (1990 S-8, Exhibit 4)
*4.2 - 1992 Stock Option Plan, as amended (1993 S-8, Exhibit 4(a))
*4.3 - Subordinated Convertible Debenture Purchase Agreement (9/30/95 10-
Q, Exhibit 4)
*4.4 - 1986 Incentive Stock Option Plan, as amended (1989 S-1, Exhibit
10(i))
*10.1 - Form of Non-qualified Stock Option Agreement (1989 S-1, Exhibit
10(g))
*10.2 - Form of Incentive Stock Option Agreement (1989 S-1, Exhibit 10(j))
*10.3 - Restated Rental and Management Agreement between First Western
Health Corporation and FWHC Medical Group, Inc. dated January 17,
1990 (1989 S-1, Exhibit 10(l))
*10.4 - Form of Covenants Not to Compete between Occu-Care and each of the
other parties to the Acquisition Agreement (1990 10-K, Exhibit
10(c))
*10.5 - Management Agreement between Veritas Healthcare Management and
Veritas Medical Group, Inc. dated as of January 1, 1991 (1991 S-1,
Exhibit (10(b))
*10.6 - Rental and Management Agreement between Occu-Care, Inc. and Occu-
Care Medical Group, Inc. dated as of May 31, 1990, as amended (1991
S-1, Exhibit 10(a))
*10.7 - Rental and Management Agreement between Occu-Care, Inc. and Del Amo
Industrial Medical Clinic dated as of March 1, 1992 (1992 10-K,
Exhibit 10(a))
*10.8 - Form of indemnification agreement (1993 10-K, Exhibit 10(a))
11 - Statement re: Computation of earnings per share
</TABLE>
39
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TRANSCEND SERVICES, INC.
Dated: August 2, 1996 By: /s/ David W. Murphy
------------------------------------
David W. Murphy
Chief Financial Officer
<PAGE>
EXHIBIT 11
TRANSCEND SERVICES, INC.
COMPUTATIONS OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Net loss (966,000) (1,406,000) (3,896,000)
Weighted Average Shares Outstanding (2) 8,866,000 9,733,000 17,818,000
Net loss per common share ($0.11) ($0.14) ($0.22)
</TABLE>
(2) In 1993, 1994 and 1995, the common stock equivalents related to stock
options were not included in the computation due to there being an
antidilutive effect.
