<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
MARK ONE
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------- ----------------
Commission File Number 0-18217
TRANSCEND SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0378756
(State or other jurisdiction (I.R.S Employer
of incorporation) Identification No.)
3353 PEACHTREE ROAD, N.E., SUITE 1000, ATLANTA, GEORGIA 30326
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (404) 364-8000
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of the Registrant's common
stock as of the latest practicable date.
Class Outstanding at April 30, 1996
----- -----------------------------
Common Stock, $.01 par value 18,388,000
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<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
December 31, 1995 and March 31, 1996 1
Consolidated Statements of Operations for the
Three Months Ended March 31, 1995 and 1996 2
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1995 and 1996 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 5
PART II. OTHER INFORMATION
Item 6. Exhibits 11
SIGNATURES 12
</TABLE>
<PAGE> 3
TRANSCEND SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1995 1996
------------ ---------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . $ 1,073,000 $ 635,000
Accounts receivable, net of allowance for
doubtful accounts of $42,000 and
$46,000 respectively . . . . . . . . . . . . . . 3,056,000 2,815,000
Prepaid expenses, supplies and other . . . . . . . . 309,000 721,000
----------- -----------
Total current assets . . . . . . . . . . . . . . 4,438,000 4,552,000
NET ASSETS RELATED TO DISCONTINUED
OPERATIONS . . . . . . . . . . . . . . . . . . . . .
2,893,000 3,015,000
SECURITIES FROM SALE OF OCCU-CARE . . . . . . . . . . . .
2,050,000 2,050,000
EQUIPMENT AND LEASEHOLD IMPROVEMENTS,
at cost net of accumulated depreciation
and amortization . . . . . . . . . . . . . . . . . . 1,681,000 1,816,000
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . 408,000 381,000
GOODWILL AND OTHER INTANGIBLE ASSETS,
net of accumulated amortization . . . . . . . . . . . 5,363,000 5,218,000
----------- -----------
Total assets . . . . . . . . . . . . . . . . . . $16,833,000 $16,651,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and
financing leases . . . . . . . . . . . . . . . . $ 208,000 $ 108,000
Accounts payable . . . . . . . . . . . . . . . . . . 1,268,000 1,173,000
Accrued compensation and employee benefits . . . . . 1,560,000 1,527,000
Other accrued liabilities . . . . . . . . . . . . . . 808,000 1,276,000
Deferred income taxes . . . . . . . . . . . . . . . . 133,000 103,000
----------- -----------
Total current liabilities . . . . . . . . . . . 3,977,000 4,187,000
----------- -----------
CONVERTIBLE DEBENTURES . . . . . . . . . . . . . . . . . 2,000,000 2,000,000
LONG TERM DEBT . . . . . . . . . . . . . . . . . . . . . 392,000 368,000
DEFERRED INCOME TAXES . . . . . . . . . . . . . . . . . 543,000 541,000
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value:
Authorized - 21,000,000 shares
No shares outstanding
Common Stock, $.01 par value:
Authorized - 31,000,000 shares
Issued and outstanding 18,113,000 shares at
December 31, 1995 and 18,291,000 shares
at March 31, 1996 . . . . . . . . . . . . . 181,000 183,000
Additional paid-in capital . . . . . . . . . . . . . 16,643,000 16,799,000
Retained earnings (deficit) . . . . . . . . . . . . . (6,903,000) (7,426,000)
----------- -----------
Total stockholders' equity . . . . . . . . . . . 9,921,000 9,566,000
----------- -----------
Total liabilities and stockholders' equity . . . $16,833,000 $16,651,000
=========== ===========
</TABLE>
1
<PAGE> 4
TRANSCEND SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1995 1996
---- ----
(Unaudited)
<S> <C> <C>
SALES . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,897,000 $ 8,688,000
DIRECT EXPENSES . . . . . . . . . . . . . . . . . . . . . 4,346,000 7,260,000
------------ ------------
GROSS PROFIT . . . . . . . . . . . . . . . . . . . . 551,000 1,428,000
MARKETING AND SALES EXPENSE . . . . . . . . . . . . . . . 437,000 641,000
GENERAL AND ADMINISTRATIVE EXPENSES . . . . . . . . . . . 1,113,000 1,122,000
AMORTIZATION EXPENSE . . . . . . . . . . . . . . . . . . 145,000 145,000
------------ ------------
OPERATING LOSS . . . . . . . . . . . . . . . . . . . (1,144,000) (480,000)
OTHER INCOME (EXPENSES):
Interest Expense . . . . . . . . . . . . . . . . . . -- (52,000)
Interest Income . . . . . . . . . . . . . . . . . . . 36,000 9,000
Other . . . . . . . . . . . . . . . . . . . . . . . . -- --
------------ ------------
TOTAL OTHER INCOME (EXPENSE) . . . . . . . . . . . . 36,000 (43,000)
------------ ------------
NET LOSS . . . . . . . . . . . . . . . . . . . . . . . . $ (1,108,000) $ (523,000)
============ ============
NET LOSS PER COMMON SHARE AND COMMON
SHARE EQUIVALENT . . . . . . . . . . . . . . . . . . $ (0.06) $ (0.03)
============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING . . . . . . . . . . . . . . . . . . . . 17,533,000 18,217,000
============ ============
</TABLE>
2
<PAGE> 5
TRANSCEND SERVICES, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1995 1996
---- ----
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) . . . . . . . . . . . . . . . . . . . . ($1,108,000) ($523,000)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . 255,000 322,000
Changes in assets and liabilities, net of acquisitions:
Accounts receivable . . . . . . . . . . . . . . . . . (145,000) 242,000
Prepaid expenses . . . . . . . . . . . . . . . . . . (111,000) (412,000)
Deposits and other assets . . . . . . . . . . . . . . (17,000) 27,000
Accounts payable . . . . . . . . . . . . . . . . . . (929,000) (95,000)
Accounts compensation and benefits . . . . . . . . . 359,000 (34,000)
Accrued expenses . . . . . . . . . . . . . . . . . . (189,000) 467,000
Deferred income taxes . . . . . . . . . . . . . . . . (36,000) (30,000)
------------- -----------
Total adjustments . . . . . . . . . . . . . . . . . . (813,000) 487,000
------------- -----------
Net Cash provided by (used in) continuing operations . . (1,921,000) (36,000)
------------- -----------
Net Cash provided by (used in) discontinued operations . 79,000 (122,000)
------------- -----------
Net Cash provided by (used in) operating activities . . . (1,842,000) (158,000)
------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures . . . . . . . . . . . . . . . . (472,000) (313,000)
Purchase of Sullivan . . . . . . . . . . . . . . . . (285,000) --
Acquisitions . . . . . . . . . . . . . . . . . . . . (681,000) --
------------- -----------
Net Cash provided by (used in) investing activitie . . . (1,438,000) (313,000)
------------- -----------
NET CASH FROM FINANCING ACTIVITIES:
Borrowings from debt . . . . . . . . . . . . . . . . -- --
Payments on debt . . . . . . . . . . . . . . . . . . (1,007,000) (124,000)
Payments under line of credit agreement . . . . . . . (1,020,000) --
Proceeds - Common Stock, net . . . . . . . . . . . . -- --
Proceeds - Stock Options, net . . . . . . . . . . . . -- 157,000
------------- -----------
Net Cash provided by (used in) financing activities . . . (2,027,000) 33,000
------------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . (5,307,000) (438,000)
CASH AND CASH EQUIVALENTS, at
beginning of period . . . . . . . . . . . . . . . . . 150,000 1,073,000
CASH ACQUIRED FROM ACQUISITIONS . . . . . . . . . . . . . 7,486,000 --
------------- ------------
CASH AND CASH EQUIVALENTS, at end of period . . . . . . . $ 2,329,000 $ 635,000
============= ============
</TABLE>
3
<PAGE> 6
TRANSCEND SERVICES, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995 AND 1996
(1) The unaudited financial information furnished herein in the opinion of
management reflects all adjustments which are necessary to fairly state the
Company's financial position, the results of its operations and its cash flows.
For further information refer to the consolidated financial statements and
footnotes thereto included in the Company's Form 10-K for the year ended
December 31, 1995. Footnote disclosures which would substantially duplicate
the disclosure contained in those documents have been omitted.
(2) Net loss per common share has been computed based on the weighted
number of the Company's common shares and common share equivalents (dilutive
stock options) outstanding. The common stock equivalents related to stock
options were not included in the computation due to their antidilutive effect.
Fully diluted net loss per share has not been presented since it is not
materially different from primary net loss per share.
(3) On January 10, 1995, TriCare acquired Transcend Services, Inc., a
Georgia corporation ("Transcend") by the merger of Transcend into First Western
Health Corporation ("Merger"). Inasmuch as the merger is being treated for
financial accounting purposes as the acquisition of TriCare by Transcend,
following the merger, the historical financial statements of Transcend have
become the financial statements of TriCare and include the businesses of both
companies after the effective date of the merger.
(4) 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."
4
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On January 10, 1995, TriCare acquired Transcend Services, Inc., a
Georgia corporation ("Transcend") by the merger of Transcend into First Western
Health Corporation ("Merger"). Inasmuch as the Merger is being treated for
financial accounting purposes as the acquisition of TriCare by Transcend,
following the merger, the historical financial statements of Transcend have
become the financial statements of TriCare and include the businesses of both
companies after the effective date of the merger. Transcend is a hospital
services company focused on the outsourcing of Health Information Management
(HIM) for health care providers. Note the paragraph below for more information
on TriCare and discontinued operations.
TriCare was incorporated in California in 1976 and was reorganized as
a Delaware corporation in 1988. The Company's applicant related service
businesses of First Western Health Corporation ("First Western") and Veritas
Healthcare Management ("Veritas") were discontinued on April 30, 1993 and
substantially all of the assets and liabilities of another subsidiary,
Occu-Care, Inc. ("Occu-Care") were sold on September 16, 1994. The net assets
of discontinued operations are shown on the consolidated balance sheet and the
related statement of cash flows as a separate line item and include the
discontinued operations of First Western, Veritas and Occu-Care. See
"Discontinued Operations" below for further information.
All inter-entity accounts and transactions have been eliminated in
the accompanying consolidated financial statements.
QUARTER ENDED MARCH 31, 1996 COMPARED TO QUARTER ENDED MARCH 31, 1995
The following discussion should be read in conjunction with the
consolidated financial statements of the Company contained elsewhere herein.
The following table sets forth for the Company's quarter ended March
31, 1995 and 1996, the dollar amount of its total revenues from each of its
principal lines of business during this three month period, as well as the
corresponding dollar and percentage changes between the two reporting periods:
<TABLE>
<CAPTION>
Three Months Ended
March 31
-----------------------------------------------
(In Thousands)
% Of
1995 1996 Change Change
---- ---- ------ ------
<S> <C> <C> <C> <C>
Contract Management/Outsourcing . . . . . . . . . . . . $2,807 $5,297 $2,490 88.7%
Medical Transcription . . . . . . . . . . . . . . . . . 1,208 2,001 793 65.6%
Consulting and Coding . . . . . . . . . . . . . . . . . 158 219 61 38.6%
Case Management & Rehabilitation
Services . . . . . . . . . . . . . . . . . . . . . 724 1,171 447 61.7%
------ ------ ------ ----
TOTAL . . . . . . . . . . . . . . . . . . . . . . $4,897 $8,688 $3,791 77.4%
====== ====== ====== ====
</TABLE>
5
<PAGE> 8
The increase in total revenues for the quarter is attributable to the
following:
. Medical transcription operations increased primarily
as a result of the acquisition made on April 19,
1995 of Medical Transcription of Atlanta, ("MTA").
. Contract management/outsourcing increased as six (6)
contracts were signed in August and September, 1995
and two (2) contracts were signed in February and
March, 1996.
Gross profit increased 77.4% to $1,428,000 for the quarter ended
March 31, 1996 from $551,000 in the first quarter of the prior year. Gross
profit as a percentage of revenues increased to 16.4% for the three months
ended March 31, 1996 from 11.3% in the same prior year period. This increase
was primarily attributable to:
. An improvement in the gross margin performance of
the contract management outsourced sites. As the
Company implemented new procedures and department
reorganizations, margins at the contract sites
increased from 13.3% in 1995 (as a percentage of
revenues) to 16.6% in 1996.
. In Medical Transcription, gross profits as a
percentage of revenues increased from 11.6% in the
first quarter ended March 31, 1995, to 17.3% in the
first quarter ended March 31, 1996.
. In Case Management, Sullivan's gross profit margins
improved from 13.4% for the quarter ended March 31,
1995 to 27.1% for the quarter ended March 31, 1996.
The Company believes that contract management profit margins from any
particular medical records management contract should increase over the life of
the contract, due both to the nature of the Company's pricing of its contract
management services and to operating efficiencies expected to be achieved over
the life of the contract. The Company negotiates its contract management fees
on a basis which will represent, at contract inception, immediate savings to
the contracting hospital over historical costs of operating the managed
functions, and for this purpose, the Company utilizes fixed installment fee
payment arrangements. In the early term of such a contract, the Company's
expenses in providing the contract services remain relatively high, as a
percentage of contract revenues received, as set-up and training costs are
incurred, new procedures and departmental reorganizations are implemented.
Completion of such steps should result in lower operating expenses, which in
turn should increase the profit margin on a constant revenue stream over time.
Assuming increases in the number of its contract management clients, possible
centralization of certain of the services provided to multiple clients, as well
as related economies of scale, profit margins on contract management revenues
should trend higher.
The Company continues to focus its efforts on improving gross margins
through a) the achievement of greater operating efficiencies in its contract
outsourcing, transcription and case management sites through the implementation
of new procedures (i.e., Best Practices) and departmental reorganizations; b)
the use of technological tools (i.e., optical scanning; a national
transcription software platform) to lower cost and improve service deliverables
and c) through the expansion of its consulting, physician liaison and coding
optimization service lines.
Marketing and sales expenses increased 46.7% to $641,000 in the three
months ended March 31, 1996 from $437,000 in the same prior year period and
decreased as a percentage of revenues to 7.4% for the quarter
6
<PAGE> 9
ended March 31, 1996 from 8.9% for the quarter ended March 31, 1995. The
increase in sales and marketing expenses from the first quarter 1995 to 1996 is
primarily attributable to a) a larger national sales force in place in the 1996
quarter; b) an increase in expenditures for telemarketing and market analysis
to provide the Company better sales lead qualification and more accurate target
marketing opportunities; and c) sales commissions paid on two (2) new contracts
sold in first quarter 1996 vs. only one (1) new contract sold in first quarter
1995. The Company has historically paid and expensed 100% of its sales
commission upon contract signing. With much of the Company's investment in a
national sales force, telemarketing and marketing/advertising now in place,
sales and marketing expenses, as a percentage of revenues, should decline as
revenues increase.
General and administrative expenses remained at a constant level with
$1,122,000 for the three months ended March 31, 1996 from $1,113,000 in the
same prior year period and decreased as a percentage of revenues, to 12.9% for
the quarter ended March 31, 1996 from 22.7% in the first quarter of the prior
year. The significant decline in general and administrative expenses as a
percentage of revenues (in the quarter-to-quarter comparison) is a result of
the Company's investment over the past 18-24 months in building the corporate
structure necessary to support the Company's growth needs for the reasonably
foreseeable future. As revenues increase, general and administrative expenses,
as a percentage of revenues, should decline.
The Company's loss from operations decreased to $480,000 for the
quarter ended March 31, 1996 from $1,144,000 in the first quarter of the prior
year period. This $480,000 quarterly loss compares to an operating loss of
$502,000 for the quarter ended December 31, 1995 and an operating loss of
$834,000 for the quarter ended September 30, 1995.
Other expenses increased to $43,000 for the quarter ended March 31,
1996 from other income of $36,000 in the first quarter of the prior year
period, primarily due to the impact of interest expense related to the
subordinated convertible debenture placement that occurred on August 15, 1995.
On the Company's Balance Sheet:
. Prepaid Assets (from Continuing Operations) increased $412,000
primarily as a result of general insurance, maintenance
agreements and software license renewals incurred in the first
quarter that are amortized over a twelve month period.
. Other Assets (including deposits) 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.
DISCONTINUED OPERATIONS
First Western / Veritas
The net assets of the discontinued operations of TriCare's healthcare
subsidiaries, First Western and Veritas, both of which ceased operations as of
April 30, 1993, are shown on the consolidated balance sheet and the related
statement of cash flows as a separate line item.
The net assets related to the discontinued operations at March 31,
1996 were $3,015,000. This amount consisted of $608,000 in prepaid legal fees
and expenses and $2,407,000 in net accounts receivable. For the first quarter
ended March 31, 1996, there was $122,000 in prepaid legal fees and expenses
accounted for as an increase in net assets related to the discontinued
operations. The collection liabilities of First Western & Veritas
7
<PAGE> 10
have been deducted in determining net accounts receivable.
The Company has contracted with Medical Receivables Finance, LLC
("MRF"), a Delaware limited liability company, to have MRF service and manage
the remaining TriCare accounts receivable balance for a set fee. This should
allow for some additional net cash to be received by the Company from its
discontinued operations in the future.
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.
On September 17, 1993, TriCare and its healthcare subsidiaries and the
physician-owned medical groups that have contracts with the healthcare
subsidiaries initiated a lawsuit in the Superior Court of the State of
California, County of Los Angeles, against twenty-two insurance carriers
seeking $115 million in compensatory damages claiming abuse of process,
intentional interference with contractual and prospective economic relations
and unfair business practices which led to the discontinuation of the business
of TriCare's healthcare subsidiaries and their contracting associated medical
groups in April 1993 (the "Lawsuit"). Certain of the defendants in the Lawsuit
have filed cross complaints seeking restitution from TriCare, its healthcare
subsidiaries and their associated managed medical groups for funds previously
paid to the medical groups and other damages. The costs associated with the
above claims cannot be ascertained with any certainty but are expected to be
substantial. The Company intends to defer such costs until resolution of the
litigation, with all legal costs and expenses associated with the civil Lawsuit
being accounted for as prepaid legal fees in the net assets related to the
discontinued operations. There can be no assurance as to the outcome of this
litigation, including potential recovery, if any, of the Company's claims, or
damages if any. Based upon facts and circumstances known to date, in the
opinion of management, final resolution of this matter will not have a material
adverse effect on the Company's financial condition or results of operations.
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 estimated fair value of $2,050,000. Under certain
circumstances and at the Company's option, the preferred stock is convertible
into common stock of AmHealth. The preferred stock is subject to mandatory
redemption as follows: 1,500,000 shares (less any shares previously converted)
on December 1, 1995, and the balance in nineteen quarterly installments
commencing December 1, 1995 which was consistent with the payment schedule of
the original notes. The redemption on December 1, 1995 did not occur and
discussions are underway with AmHealth to determine a future course of action
with regard to the redemption of these securities.
8
<PAGE> 11
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
July, 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.
The securities from the sale of Occu-Care and the accrued liabilities
related to the sale of Occu-Care are shown as separate line items on the
balance sheet. The related statement of cash flows is shown as a separate line
item along with First Western and Veritas as discontinued operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash are its cash on hand, internally
generated funds and the net assets of the Company's discontinued operations,
the remainder of which is expected to be collected over the next several years
under provisions of the service agreement signed with MRF.
The Company's working capital position decreased during the three
months ended March 31, 1996 from $461,000 at December 31, 1995 to $367,000 at
March 31, 1996. This decrease in the Company's working capital position arises
from a combination of two (2) factors: first, the financing from current cash
sources of capital expenditures for equipment during the three months ended
March 31, 1996, as described below; and second, the continued funding of losses
from the Company's operations.
Net cash used by discontinued operations for the three months ended
March 31, 1996 was $122,000. The majority of the cash contributed from
discontinued operations was generated by the collection of accounts receivable
from the discontinued applicant medical/legal evaluation business of First
Western and Veritas, under an on-going service agreement that the Company
signed with MRF pertaining to a specific portfolio of old receivables from
discontinued operations, offset by cash used to fund the Company's on-going
civil lawsuit. Management believes the ultimate collectability of its
accounts receivable has been properly reflected in the Company's financial
statements and that the subsequent agreement entered into between the Company
and MRF on October 14, 1995 for the service of its discontinued operation's
accounts receivable balances did not result in a gain or loss to the Company.
The Company continues to experience negative cash flow from
operations. For the three months ended March 31, 1996, negative cash flow
from operations was $158,000. In addition, there were cash outlays for
capital expenditures of $313,000 and payment on debt of $124,000. Cash
provided by financing included $157,000 from stock options proceeds.
Notwithstanding the foregoing, the Company anticipates that positive cash flow,
as a result of margin contribution, will come from: expected new contract
outsourcing sales; expected new sales opportunities in transcription and
consulting; expected new case management sales from Sullivan; and increasing
margins from existing operations (contract outsourcing, transcription,
consulting and coding and Sullivan case management). Moreover, the Company's
selling, general and administrative costs as a percentage of revenues is
expected to decrease. All of the above are projected to position the Company
during 1996 to slow the negative cash flow from operations and achieve positive
cash flow from operations during 1996.
On April 30, 1996, the company established two (2) separate credit
facilities with Silicon Valley East
9
<PAGE> 12
(Wellesley, Massachusetts) a division of Silicon Valley Bank, a
California-chartered bank (Santa Clara, CA). The aggregate credit available
(under both facilities) is $5.75 million to the company. The banking
facilities are secured by all of the company's assets. One of the facilities
is a $5.0 million working capital credit line subject to an initial cap of $3.0
million. The cap is removed subject to the company's compliance with several
covenants going forward. The second facility is a $750,000 term facility set
up to help the Company meet any of its capital investment requirements in the
near term. This term note is subject to an initial cap of $250,000, with the
cap being removed upon the Company's compliance with specific covenants. Both
facilities have a one-year revolving maturity date.
The Company anticipates that cash on hand, together with internally
generated funds, cash collected from discontinued operations and the Company's
access to banking facilities (as described above) will be sufficient to finance
continuing operations and the cash requirements associated with its civil
litigation action against certain insurance carriers for the next twelve
months. Although the Company's goal is to achieve positive cash flow in 1996,
there can be no assurances in that regard.
The Company will continue to pursue strategic acquisitions and they
could be funded through the issuance, in all or in part, of its securities, the
issuance of promissory notes to sellers and/or the payment of cash, either from
the Company's existing cash resources or through its credit facility.
10
<PAGE> 13
PART II. OTHER INFORMATION
ITEM
ITEM 1. LEGAL PROCEEDINGS
Information required herein is incorporated by reference from
the section entitled "Discontinued Operations" in the
"Management's Discussion and Analysis of Financial Condition
and Results of Operations" included in PART I - FINANCIAL
INFORMATION on this Form 10-Q.
ITEM 6. EXHIBITS
a. 11 Computation of per share net income (loss).
27 Financial Data Schedule (for SEC use only).
b. Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
March 31, 1996.
11
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 15, 1996 By:/s/ Larry G. Gerdes
-------------------------------
Larry G. Gerdes
President, Chief Executive Officer
(Principal Executive Officer)
Date: May 15, 1996 By:/s/ David W. Murphy
-------------------------------
David W. Murphy
Chief Financial Officer
(Principal Financial Officer)
12
<PAGE> 1
EXHIBIT 11
TRANSCEND SERVICES, INC.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1995 1996
---- ----
<S> <C> <C>
Net income (Loss)........................ ($1,108,000) ($523,000)
=========== ===========
Average Shares Outstanding............... 17,533,000 18,217,000
Common stock equivalents assuming
exercise of stock options............. - -
----------- -----------
17,533,000 18,217,000
=========== ===========
Net income (loss) per common share and
common share equivalent................ ($0.06) ($0.03)
=========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF TRANSCEND SERVICES, INC. FOR THE YEAR ENDED DECEMBER 31,
1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 635
<SECURITIES> 0
<RECEIVABLES> 2,861
<ALLOWANCES> (46)
<INVENTORY> 0
<CURRENT-ASSETS> 4,552
<PP&E> 3,051
<DEPRECIATION> (1,235)
<TOTAL-ASSETS> 16,651
<CURRENT-LIABILITIES> 4,187
<BONDS> 2,000
0
0
<COMMON> 183
<OTHER-SE> 9,373
<TOTAL-LIABILITY-AND-EQUITY> 16,651
<SALES> 0
<TOTAL-REVENUES> 8,688
<CGS> 7,260
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,908
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (52)
<INCOME-PRETAX> (523)
<INCOME-TAX> 0
<INCOME-CONTINUING> (523)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (523)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
