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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
MARK ONE
(X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
(FEE REQUIRED)
For the fiscal year ended December 31, 1995
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
(NO FEE REQUIRED)
For the transition period from to
Commission File Number 0-18217
TRANSCEND SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0378756
(State or other jurisdiction (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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
------ ------
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Parts III of this Form 10-K or any
amendment to this Form 10-K. [X]
Aggregate market value of the voting stock held by non-affiliates of
the Registrant, computed using the closing price on NASDAQ for the Registrant's
common stock on March 11, 1996 was $118,642,690.
Indicate the number of shares outstanding of the Registrant's common
stock as of the latest practicable date.
Class Outstanding at March 11, 1996
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Common Stock, $.01 par value 18,252,722
Documents Incorporated by Reference: Portions of the Proxy Statement relating
to the Annual Meeting of Shareholders scheduled to be held on or about April
30, 1996 are incorporated herein by reference in response to certain items
specified in Part III.
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PART I.
ITEM 1. BUSINESS
BACKGROUND
On January 10, 1995, TriCare acquired Transcend Services, Inc., a
Georgia corporation ("Transcend") 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. As a result, the operations of Sullivan
(acquired by TriCare in June, 1994) prior to January 1995 are excluded from the
historical financial statements. Transcend is a hospital services company
focused on the outsourcing of Health Information Management (HIM) for health
care providers.
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 combined balance sheet and the
related statement of cash flows as a separate line item and included the
discontinued operations of First Western and Veritas.
TRANSCEND
GENERAL
Transcend provides health information management services (also
referred to as "outsourcing"), medical transcription services and consulting
and reimbursement coding services to hospitals. In addition, Transcend,
through its 100% wholly-owned subsidiary Sullivan Health and Rehabilitation
Services, provides healthcare case management and cost containment and
rehabilitation services to the insurance and risk management industry.
Transcend currently operates, on a contract management basis, the
health information management, or medical records departments of fourteen (14)
general acute care hospitals, located in
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eleven states and the District of Columbia. In addition, Transcend provides
full contract management outsourcing services in the patient access (admitting)
departments for five (5) of those fourteen hospitals. Transcend also provides,
through outsourcing as well as other contracts, medical records transcription
services through computer and telephone links from centralized facilities to
approximately 100 hospital customers. Transcend also serves as an independent
consultant to hospitals, providing health information management and
reimbursement coding services to multiple accounts.
Transcend was organized in 1984 and was initially engaged in the
business of providing consulting services regarding medical records management,
quality and utilization management, and records coding, as well as development
of records management software until 1992 when the strategic direction of
Transcend was changed to focus on total outsourcing, or contract management, of
hospital medical records departments. The resulting change in orientation and
emphasis of Transcend's business necessitated a period of development, testing
and marketing of concepts new to Transcend's traditional lines of business,
which extended through most of 1992. Transcend entered into its first long-
term agreement for management of a hospital's medical records department at the
end of 1992. During 1993, Transcend sold its records management software
division, and acquired a medical transcription business, dataLogix (which now
operates as a division of Transcend). Transcend purchased the assets of a
second medical transcription business, Script-Ease, on September 30, 1994; a
third, International Dictating Services, Inc. on January 31, 1995; and a
fourth, Medical Transcription of Atlanta, Inc., on April 19, 1995. Through
its January 10, 1995 Merger with TriCare, Transcend owns 100% of Sullivan
Health and Rehabilitation Services.
The following table sets forth for Transcend's fiscal years ending
December 31, 1994 and December 31, 1995, the dollar amount of its total
revenues from each of its principal lines of business during such periods:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
DECEMBER 31,
-----------------------
(UNAUDITED)
1994 1995
------- -------
(in thousands)
<S> <C> <C>
Contract Management Outsourcing . . . . . . . . . . . . . . . $ 9,242 $14,300
Medical Transcription . . . . . . . . . . . . . . . . . . . . 2,428 6,662
Consulting and Coding . . . . . . . . . . . . . . . . . . . . 723 768
Case Management & Rehabilitation Services ("Sullivan") . . . -- 4,152
------- -------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . $12,393 $25,882
======= =======
</TABLE>
Transcend has committed to a strategy of growth in its contract
management, medical transcription and its consulting business. Transcend has
expanded the range of its contract management services to include management of
other functional areas of hospitals associated with health information
management, such as management of patient access (admissions), utilization
review and quality assurance. For example, Transcend began managing the
patient intake services at one of its existing hospital sites in October, 1994.
Transcend is actively seeking engagements to provide this expanded range of
service to its current and future hospital customers. Furthermore, consistent
with its overall
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expansion strategy, Transcend is exploring the uses of additional technological
tools, such as electronic data management using optical imaging equipment, in
connection with its management service offerings. Transcend has successfully
partnered with a small imaging company to develop and beta test an electronic
data management product (trademarked "TransChart"). Transcend has now
installed this optical scanning product in two (2) of its contract management
sites. Transcend will either use its own TransChart product or partner with
qualified technology providers to establish optical scanning capabilities at
its sites in an effort to achieve optimal customer service levels and superior
financial performance. It is the belief of management that the integration of
these and similar information management functions and tools, and their
operation by experienced information management personnel on a fixed-cost
contract basis, will prove attractive to hospitals operating in a managed care
environment.
CONTRACT MANAGEMENT OF MEDICAL RECORDS DEPARTMENTS
Transcend's principal source of revenues is from long-term contracts
for outsourcing, or contract management, of the health information services, or
medical records, departments of hospitals. Transcend currently has contracts
covering fourteen (14) hospitals ranging in bed size from 56 beds to 541 beds;
one of these contracts also covers an additional 33-bed satellite hospital. The
initial contract terms of Transcend'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. Transcend's
existing contracts currently have remaining terms ranging from approximately
one to five years. Due to its limited operating history in medical records
management, Transcend is unable to assess or predict its contract renewal rate.
Under the terms of its outsourcing contracts, Transcend is obligated
to provide 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, Transcend's outsourcing
contracts are of two types. The first is a "Management Only" contract in which
Transcend provides a Department Director, having a designated level of training
and experience in medical records management and coding, to supervise a
hospital's health information management/medical records department, and
employs the departmental supervisory personnel. All other employees of the
department remain on the hospital's payroll. Five (5) of Transcend's 14
contracts are "Management Only" with most of those signed in the 1993-1994
timeframe. The second type is a full contract management services agreement in
which Transcend provides not only a records-management director but also hires
all the employees of the department as Transcend's employees. Transcend
prefers, whenever possible, to transition all the department staff of a
contract department to employment by Transcend. Six (6) of the last eight (8)
outsourcing contracts signed and nine (9) of the 14 total contracts have been
full contract management service agreements
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where Transcend has initially transitioned all of the employees to its payroll.
Under each of its current contracts, Transcend is paid a fixed annual
fee for its contract management services. Transcend's contracts currently
provide for management fees ranging from $420,000 per year to $6,504,000 per
year. For most of its contracts, Transcend has also charged a one-time
implementation fee (ranging from $10,000 to $75,000, depending on the size of
the hospital) for its initial costs in setting up its management systems.
Transcend has sought to negotiate its fees on a basis which will represent an
immediate savings to the contracting hospital over its historical cost of
operating the medical records/health information management function. For this
purpose, Transcend has elected to utilize fixed-installment fee arrangements
which do not parallel the operating efficiencies which Transcend expects to
achieve over time in the long-term operation of an outsourced department. As a
result, Transcend's management anticipates that a disproportionate share of any
profit in its long-term outsourcing contracts will be realized in the later
portions of such contracts. Management believes that the effects of this
pricing strategy on Transcend's overall operations should be alleviated in the
future as Transcend obtains outsourcing contracts with a larger number of
hospitals and begins to experience renewals from existing hospital clients.
Under the terms of five contracts, Transcend has undertaken to provide
not only health information management (medical records) services, but also to
manage that hospital's patient access (admissions/registration) function, as
well as its social services, utilization management and quality management
functions. Transcend believes that management of multiple information
management and processing functions on an integrated basis, as contemplated by
these contracts, will permit it to provide more efficient and cost effective
services to the healthcare institutions, thus permitting more effective and
predictable cost-control for such functions. Management believes that
increasing emphasis on cost containment, throughout the healthcare industry,
will make such integrated-services outsourcing increasingly attractive.
Accordingly, it is the intention of Transcend to seek more outsourcing
contracts providing fully-integrated health information management, across
multiple departments of the same institution, for a single fee. Transcend
management believes that such contracts will prove not only attractive to
healthcare provider institutions, but ultimately provide a larger revenue base
and greater profit opportunity to Transcend. There can be no assurance, in
light of Transcend's lack of any prior experience with such integrated
outsourcing arrangements, that such arrangements will meet Transcend's current
expectations.
MEDICAL TRANSCRIPTION SERVICES
Transcend entered the medical transcription business on April 29,
1993, when the Company acquired, for a cash purchase price of $1,100,000,
substantially all of the assets of dataLogix Transcription, Inc., a medical
transcription service which now operates as a division of Transcend. On
September 30, 1994, Transcend acquired the assets of Script-Ease, Inc.
("Script-Ease"), a medical transcription business based in Pittsburgh,
Pennsylvania, for an acquisition price of approximately $1,300,000. On January
31, 1995, Transcend acquired the assets of International Dictating Services,
Inc. ("IDS"), a Boston-based transcription service company for an acquisition
price of approximately
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$832,000. On April 19, 1995, the Company acquired the assets of Medical
Transcription of Atlanta, Inc. ("MTA") for approximately $1,372,000.
Script-Ease, IDS and MTA, as with dataLogix, are operated by the transcription
division of Transcend.
Transcend 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 dictations at remote locations, and
transmission via modem or similar telephone link into the computer data base of
the contracting hospital. As a result, while it currently provides services to
over 100 different medical institutions in the eastern half of the United
States (including nine (9) hospitals with which Transcend has outsourcing
contracts), 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.
Transcend 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
Transcend's outsourcing contracts for health information management, the
transcription services are provided internally by Transcend's transcription
sites as part of the overall services provided by Transcend for a set contract
fee. Transcend seeks wherever possible to cross-market its transcription
services with its outsourcing contract services, and to use the institutions
with which it has such contracts as a base for generation of additional
transcription business.
Transcend is seeking other opportunities through acquisitions in the
healthcare services industry predominantly in the area of medical transcription
services. Although it presently has no agreements with any party regarding any
such acquisition, additional sources of financing may be required by the
Company to complete future acquisitions, if any, see "Liquidity and Capital
Resources - TriCare/Transcend" below for further information.
CONSULTING AND CODING SERVICES
Transcend continues to offer its services as an independent
consultant, on a case by case basis, providing advice with respect to
management and operations of medical records departments and related health
information management, particularly reimbursement coding (or "optimization"
services). Transcend also provides 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. Transcend's consulting and coding department includes
specialists in various aspects of records coding and management.
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SALES AND MARKETING
Transcend currently employs eight full time sales personnel in the
contract management area of its business. Because Transcend's outsourcing
services are relatively new in the hospital industry, marketing of those
services has, to date, proceeded principally on the basis of personal contacts
by Transcend's sales personnel with hospital administrators and Health
Information Management directors, as well as referrals from its consulting
clients. Beginning in early 1996, Transcend has added a telemarketing program
in an effort to significantly improve qualified sales leads and shorten the
overall sales cycle. Each of Transcend's sales and marketing personnel is
compensated through a combination of salary with commissions and bonuses based
on the volume of outsourcing contract business sold. Having established its
initial base of outsourcing contract clientele, Transcend expects to increase
its sales force by at least one additional employee in 1996, seeking to
establish sales force coverage in each of the principal geographic regions of
the country. Transcend's 1995 marketing program has recently been changed in
favor of a more comprehensive 1996 marketing campaign. This new campaign
includes targeted advertising in industry trade publications, direct mailings,
customer testimonials and other literature that emphasizes Transcend's market
leadership position, its management expertise and its track record with current
clients.
Transcend'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, Transcend has begun to
implement a broader marketing campaign for its transcription services,
particularly in those markets in which its transcription offices are located.
PRINCIPAL CUSTOMERS
Based on revenues for the fiscal year ended December 31, 1995, the
same hospitals continued to account for more than five percent (5%) of
Transcend's total revenues, but in differing percentages, as follows: Good
Samaritan (9%), Greater Southeast Community (including Fort Washington Medical
Center) (8%), Tulane University Hospital and Clinic (8%) and Memorial Medical
Center of Jacksonville (6%). Based on its revenues for the fiscal year ended
December 31, 1994, fees paid by each of the following hospitals accounted for
more than five percent (5%) of Transcend'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%). The "same hospital" percentage of revenue
comparisons listed here (from 1994 to 1995) have declined significantly and as
long-term outsourcing contracts are secured in the future and as the Company
expands in the transcription area, management expects the percentages of
Transcend's revenues represented by business from any single institution to
continue to decline significantly.
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COMPETITION
While the concept of contract management of clinical, housekeeping and
dietary departments is well established, Transcend's management believes that
outsourcing or contract management of health information services departments
is still a relatively new concept in the hospital industry. Management
believes that while Transcend is clearly a pioneer in developing outsourcing of
health information management functions on a national basis, there are
currently 3-4 regional/national firms currently engaged in the same business
(but believed by management to hold significantly fewer outsourcing contracts
than Transcend). Transcend expects that as the concept of outsourcing becomes
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.
Transcend 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. While Transcend
believes that it can be competitive in these areas, it should be noted that
some of its potential competitors (as described above) are larger, better known
and better capitalized than Transcend, and such factors could affect
Transcend's ability to withstand such competition over the long term.
Transcend 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. Management 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, Transcend
will be, in some cases, competing against larger, better known and better
capitalized competitors.
SULLIVAN
On June 15, 1994, TriCare completed the acquisition of Sullivan Health
& Rehabilitation Services. Sullivan operates as a 100% wholly owned subsidiary
of Transcend. Sullivan provides healthcare case management and cost
containment and rehabilitation services to the insurance and risk management
industry, primarily in the Southeast. Sullivan maintains offices in Decatur,
Georgia; St. Petersburg, Florida and Dallas, Texas.
Medical case management, which is the core business for Sullivan,
provides assessment, care planning, recommendations, and care coordination
services for injured and ill persons covered by insurance carriers or self-
insured employers. Sullivan employs or contracts with registered nurses who
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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.
Sullivan has been providing medical case management services since 1982.
Sullivan provides vocational evaluations and computerized skills assessments
for clients covered by insurance programs, workers' compensation, long-term
disability and Social Security disability.
Sullivan is a smaller, regional competitor with most of its case
management business concentrated in the workers' compensation insurance market
with larger employers (Fortune 1000 companies).
DISCONTINUED OPERATIONS
First Western / Veritas
The net assets of the discontinued operations of TriCare's healthcare
subsidiaries, First Western and Veritas (now part of Transcend), both of which
ceased operations as of April 30, 1993, are shown on the combined balance sheet
and the related statement of cash flows as a separate line item.
The net assets related to the discontinued operations at December 31,
1995 were $2,893,000. This amount consisted of $479,000 in prepaid legal fees
and $2,414,000 in net accounts receivable. The collection liabilities of First
Western & Veritas have been deducted in determining net accounts receivable.
On October 14, 1995, the Company sold approximately 38% of it's
discontinued operations' gross accounts receivable balance to Medical
Receivables Finance, LLC ("MRF"), a Delaware limited liability company for:
- Approximately $932,000 in cash ($882,000 in cash at
closing; $50,000 held in escrow)
- An opportunity to share in future cash receipts based
on MRF's collection activity.
As a result, the Company closed its California-based collections
operation. The future costs associated with the collection of the accounts
receivable have been netted with the assets related to discontinued operations.
The sale agreement with MRF is not expected to result in any material
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 to have
MRF for the servicing
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and managing of the remaining 62% of the accounts receivable balance.
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. There can be no assurance as to the outcome of this
litigation, including potential recovery, if any, of the Company's claims, or
damages if any. Based upon facts and circumstances known to date, in the
opinion of management, final resolution of the cross complaint will not have a
material adverse effect on the Company's financial condition or results of
operations.
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. 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
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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 AmHealth and the accrued liabilities
related to the sale of AmHealth 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.
EMPLOYEES
As of December 31, 1995, Transcend had approximately 569 full-time
employees and 137 part-time employees, including 14 administrative and
executive employees at its headquarters office in Atlanta, Georgia; 20
employees in sales and marketing or consultative functions; and 307 employees
at outsourcing sites, as well as 157 employees in its medical transcription
operations. Sullivan has 71 full-time employees and contracts with over 52
part-time registered nurses who are not employees of the Company. Transcend
also supervises an additional 162 employees of contracting hospitals at
outsourcing sites, pursuant to the terms of its outsourcing agreements.
Neither Transcend nor any of the employees it supervises is currently a party
to any collective bargaining agreement; the hospital employees at one
outsourcing site have been solicited by union representatives, but no
definitive action toward representation has been taken. Transcend has not
experienced any strikes or work stoppages, and believes that its relations with
its employees are good.
EXECUTIVE OFFICERS
The following table contains information regarding executive officers
who are not directors of the Company. See "Item 10. Directors and Executive
Officers of the Registrant".
<TABLE>
<CAPTION>
Name Age Position With the Company
---- --- -------------------------
<S> <C> <C>
Larry G. Gerdes 47 Chief Executive Officer
Julian L. Cohen 40 Chief Operating Officer
G. Scott Dillon 45 Chief Development Officer
David W. Murphy 38 Chief Financial Officer, Secretary and Treasurer
</TABLE>
Larry G. Gerdes (age 47) has served as Chief Executive Officer of
Transcend since May, 1993. Since 1991, Mr. Gerdes has been a general partner
of Gerdes Huff Investments ("GHI"), an Atlanta-based partnership which invests
in predominantly southeastern based early to middle stage companies. For the
five years prior to 1991, Mr. Gerdes held various executive positions with HBO
& Company,
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a provider of information services to the healthcare industry, the last of
which was Executive Vice President. Mr. Gerdes has served as a director of
Transcend since June 1985. Mr. Gerdes also serves as a director of Delphi
Information Systems, Inc.
Julian L. Cohen (age 40) joined the Company in October 1994 as
President and Chief Executive Officer of Sullivan. Mr. Cohen's current
position with Transcend is Chief Operating Officer. 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 has his
Bachelor's Degree and Masters in Public Health from the University of
Pittsburgh.
G. Scott Dillon (age 45) joined the Company in September, 1995 as
Chief Development Officer. Mr. Dillon served as Executive Vice President and
Chief Development Officer for Coastal Physician Services from September 1992 to
August 1995. Mr. Dillon has his undergraduate degree from Drake University and
his graduate degree from North Dakota State University.
David W. Murphy (age 38) joined the Company in September, 1994, as
Vice-President of Acquisitions and became Chief Financial Officer of Transcend
in May, 1995. Prior to joining the Company, Mr. Murphy was a founder and
General Partner of an investment company and served in various financial,
operating and M&A positions with companies such as Hutchinson SA (France),
First Boston and International Paper Company. Mr. Murphy received his
Bachelor's degree from the University of Notre Dame and his Masters in Business
Administration from Dartmouth's Amos Tuck Graduate School of Business.
Executive Officers are elected by and serve at the pleasure of the
Board of Directors of the Company.
ITEM 2. PROPERTIES
Transcend leases the space for its principal offices in Atlanta,
Georgia, and space for satellite sales office 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.
Transcend also leases space for it case management business (Sullivan)
in Decatur, Georgia; St. Petersburg, Florida; and Dallas, Texas.
Transcend's lease obligation in Irvine, California, which it assumed
from TriCare in the Merger, expires May, 1996.
12
<PAGE> 13
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to certain claims in the ordinary course of
business which are not material. Prior to Coastal, Mr. Dillon served as
Executive Vice President of the Fischer Mangold Group from January 1991 to
September 1992.
On September 17, 1993, the Company 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 the Company'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
the Company, its healthcare subsidiaries and their associated managed medical
groups for funds previously paid to the medical groups and other damages. The
costs associated with the above claims cannot be ascertained with any certainty
but are expected to be substantial. The Company intends to defer such costs
until resolution of the litigation. There can be no assurance as to the
outcome of this litigation, including potential recovery, if any, of the
Company's claims, or damages if any. Based upon facts and circumstances known
to date, in the opinion of management, final resolution of this cross complaint
will not have a material adverse effect on the Company's financial condition or
results of operations.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
last quarter of the twelve month period ended December 31, 1995.
13
<PAGE> 14
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Transcend Common Stock is quoted on the NASDAQ-NM. As of March 11,
1996 there were approximately 450 holders of record of Transcend Common Stock.
The table below sets forth for the fiscal periods indicated the high and low
bid prices per share of Transcend Common Stock as reported on the NASDAQ-NM.
The policy of the Board of Directors of the Company is to retain earnings for
the expansion and development of the Company's business. Future dividend
policy and the payment of dividends, if any, will be determined by the Board of
Directors in light of circumstances then existing, including the Company's
earnings, financial condition and other factors deemed relevant by the Board.
<TABLE>
<CAPTION>
PRICE PER SHARE OF
COMMON STOCK
------------
HIGH LOW
---- ---
<S> <C> <C>
Year Ended December 31, 1995
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4-1/8 $1-9/16
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3-11/16 $2-1/2
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7-1/2 $2-1/2
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7-1/8 $4-3/4
Year Ended December 31, 1994
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3-1/2 $2
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3-1/4 $2-3/8
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3 $1-3/4
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2-3/4 $1-l/2
</TABLE>
ITEM 6. SELECTED COMBINED FINANCIAL DATA
On January 10, 1995, TriCare acquired Transcend by the merger of
Transcend into First Western Health 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
business of both companies after the effective date of the Merger (January 10,
1995).
14
<PAGE> 15
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical consolidated
financial data of Transcend for the periods indicated, derived from the
consolidated financial statements of Transcend. The selected financial data
should be read in conjunction with "TRANSCEND MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and Transcend's
consolidated financial statements and notes thereto included elsewhere.
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
DECEMBER 31
----------------------------------------------------------
1991 1992 1993 1994 1995
------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Statement of Operations:
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 Expense . . . . . . . . . . . 362 209 378 929 2,186
General and Administrative Expense . . . . . . . 538 715 1,330 1,673 4,604
Amortization Expense of Intangible
Assets . . . . . . . . . . . . . . . . . . . . . -- -- 310 357 633
------ ------ ------ ------- -------
Operating Income (Loss) . . . . . . . . . . . . . (120) (115) (935) (1,353) (3,875)
Other Income (Loss)
Interest Expense . . . . . . . . . . . . . . . . (41) (29) (135) (66) (96)
Interest Income . . . . . . . . . . . . . . . . 1 13 3 1 75
Other . . . . . . . . . . . . . . . . . . . . . -- (2) 101 25 --
------ ------ ------ ------- -------
(40) (18) (31) (40) (21)
------ ------ ------ ------- -------
Pre-Tax Income (Loss) . . . . . . . . . . . . . . (160) (133) (966) (1,393) (3,896)
Provision For Income Tax . . . . . . . . . . . . -- -- -- 13 ---
------ ------ ------ ------- -------
Net Income (Loss) . . . . . . . . . . . . . . . . $ (160) $ (133) $ (966) $(1,406) $(3,896)
====== ====== ====== ======= =======
Net Income (Loss) Per Share . . . . . . . . . . . $ (.04) $ (.02) $ (.11) $ (.14) $ (.22)
====== ====== ====== ======= =======
Weighted Average Shares Outstanding . . . . . . . 3,774 7,162 8,866 9,733 17,818
====== ====== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and Cash Equivalents . . . . . . . . . . . . $541 $291 $ 131 $ 150 $ 1,073
Accounts Receivable, Net . . . . . . . . . . . . $253 $318 $ 281 $ 640 $ 2,961
Net Assets Related to Discontinued Operations . . -- -- -- -- $ 2,893
Total Assets . . . . . . . . . . . . . . . . . . $922 $790 $1,191 $ 2,680 $ 16,833
Long-Term Debt and Financing Leases . . . . . . . $355 $300 $ -- $ -- $ 2,392
Shareholders' Equity . . . . . . . . . . . . . . $411 $277 $ 162 $(1,233) $ 9,921
</TABLE>
15
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Transcend is an organization committed to the outsourcing of Health
Information along a continuum spanning patient access (admitting) through
health information management (medical records) and extending to the business
office of a health care provider. The Company provides long term value to its
health care provider customers through i) the cost efficient management of
services, guaranteeing its contract management customers operating cost savings
through a capitated fixed fee pricing structure while at the same time
guaranteeing service deliverables and ii) by converting data into quality
information to allow them to effectively compete in a dynamic marketplace.
Transcend provides value-add along four (4) distinct service lines:
- Contract Management: The management of patient
information - both clinical and financial - from
pre-admission to post discharge. The health care
provider outsources the Health Information Management
(HIM) function to Transcend in the form of a 3-5 year
contract. Transcend assumes full responsibility for
the daily operation of the HIM department, Patient
Access and/or Business Office, including having all
of the hospital employees become employees of
Transcend.
- Medical Transcription: The transcription service
allows for the transcribing of physician dictation
and provides Transcend the opportunity to
significantly impact the quality of service (i.e.,
accuracy, turnaround time) and the margin it achieves
for its Contract Management (CM) outsourced
customers. In addition, medical transcription is
currently being delivered to 100+ non-CM customers.
- Consulting and Coding: Transcend continues to offer
its services as an independent consultant, on a case
by case basis, providing advice with respect to
management and operations of medical records
departments and related health information
management, particularly reimbursement coding (or
"optimization" services). Transcend also provides
consultation services regarding the health
information aspects of hospitals' utilization
management and quality management functions.
16
<PAGE> 17
- Case Management: Through its Sullivan subsidiary, the
Company provides Worker's Compensation Case
Management and Disability Management. Sullivan's
primary customers include: insurance carriers, third
party administrators and self-insured employers.
Transcend is a service company and refrains from
researching/developing any of its own proprietary technology; rather, it
chooses to work closely with outside partners to develop the tools (i.e.,
technology) required to deliver its services at optimal cost and quality
levels.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements of Transcend contained elsewhere herein. See
Item 8.
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 the Company's
contract management division, contributing $5,058,000 of the overall increase
due to the addition of six (6) new outsourcing contracts helped revenues
increase from $9,242,000 in 1994 to $14,300,000 in 1995. Medical Transcription
grew from $2,428,000 in 1994 revenues to $6,662,000 in revenues for 1995,
primarily due to the acquisition of IDS and MTA. Sullivan's 1994 revenues are
not included as they were prior to the TriCare/Transcend Merger (January,
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
12.9% 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 outsourcing increased to 14% from 11% in 1994.
Average transcription margins decreased from 19% to 14% as a result of the
Script- Ease and IDS acquisitions. This decline is expected to be temporary as
changes have been implemented that should positively impact gross margin levels
at these two sites. As an example, gross margin in the transcription
division, as a percentage of total revenue, were 17.4% in the fourth quarter of
1995.
Transcend believes that, with respect to contract outsourcing revenues
from any particular medical records management contract, the Company's profit
margin should increase over the life of the contract, due both to the nature of
Transcend's pricing of its contract outsourcing services and to operating
efficiencies expected to be achieved over the life of such a contract.
Transcend 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,
Transcend utilizes fixed installment fee payment arrangements. In the early
term of such a contract,
17
<PAGE> 18
Transcend's expenses in providing the contract services remain relatively high
(as a percentage of contract revenues received) as set-up and training costs
are incurred, new procedures are implemented and departmental reorganizations
are implemented. Completion of such steps can be expected to result in lower
operating expenses, which in turn should increase the profit margin of a
constant revenue stream over time. Also, as Transcend increases the number of
its contract outsourcing clients and builds to a customer base with critical
mass in some geographic areas, the potential exists for the possible
centralization of certain of the services provided to multiple clients, as
well as related economies of scale, and this could also contribute to a trend
of higher profit margins on contract outsourcing revenues.
Marketing and sales expenses increased 135% to $2,186,000 in 1995 from
$929,000 in 1994 and increased as a percentage of revenues to 8.4% from 7.5% in
1994. The increase is attributable to expenses associated with the
concentrated effort in sales to heighten market awareness of Transcend and
contract outsourcing; the expansion of Transcend's sales force; an increase in
commission compensation relating to the six new outsourcing contracts in the
third quarter and the additional sales costs related to the case management
services of transcription and Sullivan.
General and administrative expenses increased 175% to $4,604,000 in
1995 from $1,673,000 in 1994 and increased as a percentage of revenues to 17.8%
from 13.5%. The increase reflects additional expense for increased management
and support staff to position the Company for future growth, as well as the
additional overhead of TriCare and Sullivan due to the January 10, 1995 Merger.
The increase in amortization expenses to $633,000 in 1995 from
$357,000 in 1994 reflects the full impact of the intangible assets associated
with the three named medical transcription acquisitions and the additional
amortization expense related to the Merger.
Transcend's loss from operations increased to $3,875,000 in 1995 from
$1,353,000 in 1994; however, the Company realized an improving trend with
regard to minimizing its loss from operations beginning in the second quarter,
1995. Transcend'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, and this compares to a fourth quarter loss
from operations of $527,000 for the quarter ended December 31, 1995.
Other expense decreased to $21,000 in 1995 from $40,000 in 1994,
primarily as the result of Transcend's recognition of higher interest income as
applied against interest expense.
Year Ended December 31, 1994 Compared With Year Ended December 31, 1993
Net revenues increased 99.6% to $12,393,000 in 1994 from $6,208,000 in
1993. This increase in net revenues is primarily attributable to increased
sales in the contract outsourcing division, reflecting the full year impact of
contracts to manage the records department in five hospitals entered into in
1993 and another hospital contract entered into on June 1, 1994 and to a lesser
extent the transcription
18
<PAGE> 19
acquisition of Script-Ease on September 1, 1994 and the full year impact of
the 1993 dataLogix acquisition.
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 12.9% in 1994 from
17.5% in 1993. This decrease was primarily attributable to an increase in the
portion of the overall revenue mix provided by contract management revenues.
Transcend believes that with respect to revenues from any particular medical
records management contract, Transcend's profit margin should increase over the
life of the contract as a result of operating efficiences expected to be
achieved over the life of such a contract. Transcription profit margins
increased from 12% in 1993 to 20% in 1994 due to efficiencies implemented in
1994 at the transcription office in Chicago. Consulting and coding margins
declined in 1994 due to a greater emphasis on contract management.
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. The increase reflects increased expenses associated with additional
marketing efforts in the contract management division and expansion of the
contract management/outsourcing sales force. A majority of the increase in
costs in this category was in the form of additional salaries and sales
commissions. It is expected that these expenses will continue to increase in
1995.
General and administrative expenses increased 25.8% to $1,673,000 in
1994 from $1,330,000 in 1993 but decreased as a percentage of revenues, to
13.5% from 21.4%. The increase reflects additional expense for increased
management and support staff to support Transcend'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 transcription business, which was acquired in April 1993 and
the additional amortization expense related to the acquisition of Script-Ease
which occurred on September 30, 1994.
Transcend's loss from operations increased to $1,353,000 in 1994 from
$953,000 in 1993.
Other expense increased to $40,000 in 1994 from $31,000 in 1993,
primarily as the result of Transcend's recognition of a gain of $100,000 from
the sale of the software division in April 1993 vs. the recognition of only a
$25,000 gain in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash are its cash on hand, internally
generated funds and collections from the net assets of the Company's
discontinued operations (expected to be collected over the next several years
under provisions of the sale and service agreements signed with MRF).
19
<PAGE> 20
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
raised $2.0 million in cash through the private placement of 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 Features:
</TABLE>
- Convertible, by the holder, 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.
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. The Merger increased working capital by
$6,195,000 and the private placement by $2,000,000, which was offset by the
following: first, the acquisition of two additional transcription businesses
(IDS and MTA) as described below; second, the financing from current cash
sources of capital expenditures for equipment during the twelve months ended
December 31, 1995, as described below; and finally, the continued funding of
losses from Transcend's operations. The latter factor results from increases
in Transcend's administrative and marketing cost structures (relative to actual
new sales realized), which increased significantly beginning in the fourth
quarter of 1994, in anticipation of targeted increases in Transcend's contract
management business, as well as some temporary costs associated with the
Script-Ease and IDS transcription acquisitions. Such cost increases should be
offset by operating contributions from the Company's continued growth in its
contract management/outsourcing, medical transcription and case management
businesses, although there can be no assurances in that regard.
During the twelve months ended December 31, 1995, Transcend's cash
balance increased from $150,000 to $1,073,000. This change resulted primarily
from $7,483,000 in cash received from the Merger; $77,000 received in cash from
the IDS and MTA acquisitions; $2,000,000 in cash received from the subordinated
convertible debt placement; $268,000 in cash proceeds received from the
20
<PAGE> 21
exercise of employee stock options; offset by: the use of cash reserves to
repay Transcend's outstanding indebtedness under both of Transcend's bank
credit facilities totaling $2,025,000; $4,133,000 used in operating activities
including approximately $450,000 in merger costs; capital expenditures of
$1,220,000 (principally computer and optical imaging equipment); $285,000 for
the final payment related to the acquisition of Sullivan; and approximately
$1,232,000 related to the acquisitions of IDS and MTA in January and April,
1995, respectively.
<TABLE>
<S> <C>
Beginning Cash, 12-31-94: $ 150,000
Add:
Cash from Merger 7,483,000
Cash from Acquisitions 77,000
Private Placement Proceeds 2,000,000
Stock Option Proceeds 268,000
Less
Pay down of Bank Line 2,025,000
Adjusted Operating Loss 3,692,000
Merger Costs 450,000
Final Sullivan Acquisition Cost 285,000
Acquisition of IDS and MTA 1,232,000
Capital Expenditures 1,221,000
---------
Ending Cash, 12-31-95 $1,073,000
=========
</TABLE>
Net cash provided by discontinued operations for the twelve months
ended December 31, 1995 was $202,000. 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, including net cash contributed of $932,000 ($882,000
in cash received at Closing; $50,000 placed in Escrow) received upon the sale
of certain accounts receivable to MRF, offset by the related costs of First
Western and Veritas. Going forward, net cash contributed from discontinued
operations will consist of any future cash collected under 1) a shared
arrangement under the sales agreement based on MRF achieving certain collection
targets and 2) the on-going service agreement that the Company signed with MRF
pertaining to a specific portfolio of old receivables from discontinued
operations. Management believes the ultimate collectability of its accounts
receivable has been properly reflected in the Company's financial statements
and that the subsequent agreements entered into between the Company and MRF on
October 14, 1995 for the sale and 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 twelve months ended December 31, 1995, negative cash flow
from operations was $4,133,000, which included
21
<PAGE> 22
a payment of approximately $500,000 of aged payables immediately following the
Merger (January, 1995) and $450,000 in Merger costs. There were also cash
outlays for acquisitions totaling $1,232,000 and capital expenditures of
$1,221,000. Notwithstanding the foregoing, the Company anticipates that 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.
To illustrate this point, the chart below highlights a favorable trend
with regard to the Company's cash flow beginning in the second quarter of 1995:
<TABLE>
<CAPTION>
Second Quarter Third Quarter Fourth Quarter
Ended Ended Ended
6-30-95 9-30-95 12-31-95
-------------- --------------- -------------
<S> <C> <C> <C>
Net Cash Flow (Loss)
From Operations: $(1,392,000) $(867,000) $(527,000)
Selling Costs as a % of
Total Revenue: 10.6% 9.9% 5 .5%
General and Administrative
Costs as a % of Total
Revenue: 22.5% 16.1% 13.2%
</TABLE>
Based on the foregoing, the Company anticipates that cash on hand,
together with internally generated funds and cash collected from discontinued
operations 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.
The Company will continue to pursue strategic acquisitions subject to
having the necessary resources to fund any specific transaction. Such funding
could include the issuance, in all or in part, of its securities, the issuance
of promissory notes to sellers and/or the payment of cash, either from the
Company's existing cash resources or through a credit facility established to
help finance the acquisition. At the current time, no such credit facility
exists for the Company, though the Company is in the process of negotiating
with several financial institutions about providing a line of credit facility.
There can be no assurances, however, that any such credit facility will be
established.
22
<PAGE> 23
INFLATION
Inflation has not had a material effect on the Company to date.
However, the effects of inflation on future operating results will depend in
part, on the Company's ability to increase prices and/or lower expenses in
amounts offsetting inflationary cost increases and on reimbursement levels
established by state authorities.
23
<PAGE> 24
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
24
<PAGE> 25
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 allowance 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 OPERATIONS . . . . . . . . . . . -- 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 for 1994
and 1995, 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 for 1994 and
1995, 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 benefits . . . . . . . . . . . 506,000 1,560,000
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . 578,000 808,000
Current portion of capital lease obligation . . . . . . . . . . . 21,000 -0-
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . -- 133,000
---------- ----------
Total current liabilities . . . . . . . . . . . . . . . . . . . 3,913,000 3,977,000
---------- ----------
LONG TERM DEBT . . . . . . . . . . . . . . . . . . . . . . . . . . -- 392,000
CONVERTIBLE DEBENTURES . . . . . . . . . . . . . . . . . . . . . . -- 2,000,000
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, 30,000,000 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.
25
<PAGE> 26
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.
26
<PAGE> 27
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.
27
<PAGE> 28
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)
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)
Disposal and transfer of property . . . .
-- -- 60,000
--------- -------- ----------
Net cash used in investing
activities . . . . . . . . . . . . . . (1,043,000) (1,440,000) (2,687,000)
--------- -------- ----------
</TABLE>
28
<PAGE> 29
TRANSCEND SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM
FINANCING ACTIVITIES:
Borrowings from short-term debt . . . . . 200,000 1,000,000 --
Borrowings 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 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) 17,000 (6,637,000)
CASH ACQUIRED FROM ACQUISITIONS . . . . . -- 2,000 7,560,000
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.
29
<PAGE> 30
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Transcend Services, Inc. (the "Company"), established in 1984, is
engaged in the field of contract outsourcing of the health information
management/medical records and patient access functions of hospitals. The
Company offers operations evaluation, consulting, reimbursement coding,
transcription, and other services generally resident in the medical records
department of hospitals. Currently, it emphasizes three- to five-year
contractual relationships for management of the entire hospital medical records
and patient access departments. The Company's three largest hospital contracts
accounted for approximately 58%, 50% and 24% of sales in 1993, 1994, and 1995,
respectively.
On January 10, 1995, TriCare, Inc., acquired Transcend Services, Inc.,
a Georgia corporation by the merger of Transcend into First Western Health
Corporation ("Merger"). On May 31, 1995, Transcend Services, Inc., a
California corporation following its January 10, 1995 merger into TriCare, and
Veritas Healthcare Management, a California corporation owned by TriCare,
merged into the TriCare corporation, whose name was then changed to "Transcend
Services, Inc." Transcend Services, Inc. now operates as a Delaware
corporation. Inasmuch as the Merger is being treated for financial accounting
purposes as the acquisition of TriCare by Transcend, following the Merger, the
historical financial statements of Transcend have become the financial
statements of TriCare and include the businesses of both companies after the
effective date of the merger.
BASIS OF PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
30
<PAGE> 31
CASH AND CASH EQUIVALENTS
The Company considers all highly-liquid debt instruments purchased
with an original maturity of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE
An allowance for doubtful accounts has been established to provide for
losses on uncollectible accounts based on management's estimates and historical
collection. Bad debt expense amounted to $30,000, $9,000 and $0 in 1993, 1994
and 1995, respectively.
REVENUE AND COST RECOGNITION
Revenue is recognized monthly as the work is performed. One-time
nonrefundable contract implementation fees have been amortized over the first
three months of a contract to match when the costs are incurred for
implementation. Direct costs are expensed as incurred. Gross margins vary by
contract. Direct costs include contract labor costs related to medical records
processing, transcription, coding costs and case management costs, as well as
purchased services, such as microfilming, record storage, software licenses,
etc.
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
31
<PAGE> 32
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.
RESTATEMENT OF PRIOR YEAR BALANCES
Certain prior year balances have been restated to conform with current
year presentation.
32
<PAGE> 33
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 prepaid legal fees included in net assets
from discontinued operations at December 31, 1995. There can be no assurance
as to the outcome of this litigation, including potential recovery, if any, of
the Company's claims, or damages if any. Based upon facts and circumstances
known to date, in the opinion of management, final resolution of the cross
complaint will not have a material adverse effect on the Company's financial
condition or results of operations.
FIRST WESTERN/VERITAS
The net assets of the discontinued operations of Tricare's healthcare
subsidiaries, First Western and Veritas (now part of Transcend), both of which
ceased operations as of April 30, 1993, are shown on the combined balance sheet
and the related statement of cash flows as a separate line item.
The net assets related to the discontinued operations at December 31,
1995 were $2,893,000. This amount consisted of $479,000 in prepaid 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.
33
<PAGE> 34
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. 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.
34
<PAGE> 35
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).
35
<PAGE> 36
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
</TABLE>
Convertible Features:
- Convertible for five (5) years at $3.50 per share of
Transcend's common stock as recorded on August 15,
1995, the "Closing Price".
- Convertible by the Company if Transcend's common
stock trades at three (3) times the Closing Price for
30 consecutive trading days.
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>
<S> <C>
YEAR ENDING DECEMBER 31
-----------------------
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 517,000
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 471,000
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 325,000
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271,000
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178,000
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --
----------
$1,762,000
==========
</TABLE>
36
<PAGE> 37
Rental expense for the operating leases amounted to approximately
$97,000, $150,000 and $443,000 for 1993, 1994 and 1995, respectively.
LITIGATION
On June 22, 1995, an action was filed by Timothy S. Priest in his
capacity as administrator of the estate of Robert V. Taylor against Carol
Brown, Debbie Ostwald, Sullivan Health & Rehabilitation Management, Inc.
("Sullivan") and Fireman's Fund Insurance Company, in the Circuit Court of
Franklin County, Tennessee, alleging breach of the duty to provide reasonably
competent nursing care to an injured individual (now deceased). The Company's
subsidiary, Sullivan, and a former employee of Sullivan are defendants in the
case. The Plaintiff demands compensatory damages in the amount of $1 million
and punitive damages in the amount of $2 million, plus costs. Management of
the Company believes that Sullivan has meritorious defenses to the allegations
and intends to vigorously contest liability in this matter. At the present
time, management of the Company cannot predict the outcome of this litigation,
but does not believe that the resolution of the litigation will have a material
adverse effect on the Company's financial condition or results of operations.
See Note 2 for additional litigation discussion.
7. RETIREMENT PLAN
The Company sponsors a 401(k) retirement plan that covers
substantially all employees after satisfying certain requirements as to length
of service. Employees are eligible to contribute amounts to the plan subject
to certain minimum and maximum limitations. The Company matches employee
contributions on a discretionary basis as determined by the Company's board of
directors . In 1993 and 1994, the Company matched employee contributions at a
rate of 10% of employee contributions up to 6% of salary. For 1993, 1994 and
1995, the expense was approximately $6,000, $17,000 and $0 respectively.
8. TRANSACTIONS WITH RELATED PARTIES
Approximately 23% of the subordinated debt (Note 4) is held by parties
affiliated with certain members of the board of directors.
During 1993, the Company paid $91,000 in management fees to a
shareholder.
During 1993, the Company issued warrants to purchase 146,000 shares to
the controlling
37
<PAGE> 38
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>
38
<PAGE> 39
The directors who were not employees of the Company were granted
non-qualified stock options to purchase shares of the Company's common stock
prior to May 31, 1991. These options, which expire ten years from the date of
grant, were granted at prices between $2.00 and $5.17 per share, the fair market
value on the date of grant, and are all exercisable. During the twelve (12)
months ended December 31, 1995, no options were exercised and options to
purchase 7,500 shares are still outstanding.
At December 31, 1995 there were a total of 159,000 shares of common
stock reserved for this plan.
11. INCOME TAXES
The components of the net deferred tax (liability) asset as of
December 31, 1994 and 1995 were as follows:
<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) (1,831,000)
--------- ------------
$ -- $ 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
$1,831,000 at December 31, 1994 and 1995, respectively due to the uncertainty
regarding the realizability of certain deferred tax assets, including its net
operating loss carryforward.
12. ACQUISITIONS
On April 29, 1993, the Company acquired dataLogix, a supplier of
medical record transcription services, for $1,100,000. The Company accounted
for the acquisition under the purchase method of accounting. The results of
operations for dataLogix are included in the statement of loss of the Company
beginning on the date of acquisition. The fair value of tangible assets
acquired and liabilities assumed was $315,000 and $37,000, respectively. The
majority of the excess purchase price over net
39
<PAGE> 40
tangible assets relate to non-compete agreements and customer contracts which
are being amortized over three years, using an accelerated method of
amortization.
On September 30, 1994, the Company acquired the assets of Script-Ease,
Inc., a Pittsburgh-based medical transcription business for $1,000,000. The
Company accounted for the acquisition under the purchase method of accounting.
The results of operations for Script-Ease are included in the statement of loss
of the Company beginning on the date of the acquisition. The fair value of
tangible assets acquired and liabilities assumed was $259,000 and $161,000,
respectively. The majority of the excess purchase price over net tangible
assets related to customer lists, which is being amortized over seven years and
a non-compete agreement that is being amortized over a three year period. The
balance of the additional intangibles is goodwill which is being amortized over
thirty years.
On January 10, 1995, Transcend acquired TriCare, Inc. in a merger
accounted for as a reverse merger (Note 1). The acquisition was treated as a
purchase. There were approximately 7.7 million shares issued in the
transaction resulting in goodwill of approximately $3.2 million. This goodwill
is being amortized over twenty years. On June 15, 1994, TriCare had completed
the acquisition of Sullivan for an adjusted purchase price of $3,285,000.
Subsequent to the Merger, the Company issued a final payment of $285,000 in
lieu of the $1,260,000 obligation which was payable in stock in January 1995
and July 1995, to the former owners of Sullivan Health and Rehabilitation in
full satisfaction of its long-term obligation related to the acquisition of
Sullivan and gave the former owners a release from any and all further
liabilities in connection therewith.
On January 31, 1995, the Company acquired the assets of International
Dictating Services ("IDS"), a Boston based medical transcription business for
approximately $832,000, which consisted of approximately $682,000 paid in cash
at closing with the balance payable to the sellers over the next two years.
The Company accounted for the acquisition under the purchase method of
accounting. The results of operations for IDS are included in the statement of
loss of the Company beginning on the date of acquisition. The fair value of
tangible assets acquired and liabilities assumed was $245,000 and $86,000,
respectively. The intangible related to customer lists is being amortized over
seven years and a non-compete agreement is being amortized over a two year
period. The balance of the additional intangible asset is goodwill which is
being amortized over twenty years.
On April 19, 1995, the Company acquired the assets of Medical
Transcription of Atlanta, Inc. ("MTA") for $1,372,000, consisting of $550,000
paid in cash at closing, promissory notes of $650,000, and 60,000 shares of
Transcend common stock valued at $172,000 at the time of the acquisition. The
Company accounted for the acquisition under the purchase method of accounting.
The results of operations for MTA are included in the 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.
40
<PAGE> 41
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 17,818,000
</TABLE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the caption "Election of Directors" in
the Company's Proxy Statement for the 1996 Annual Meeting of Stockholders which
will be filed within 120 days of December 31, 1995 and the information in Part
I of this Form 10-K set forth under the caption "Executive Officers of the
Registrant", is hereby incorporated by reference in response to this item.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the captions "Election of Directors,
and "Executive Compensation" in the Company's Proxy Statement for the Annual
Meeting of Stockholders which will be filed within 120 days of December 31,
1995 is hereby incorporated by reference in response to this item.
41
<PAGE> 42
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the captions "Security Ownership of
Certain Beneficial Owners and Management" in the Company's Proxy Statement for
the 1996 Annual Meeting of Stockholders which will be filed within 120 days of
December 31, 1995, is hereby incorporated by reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Transactions" in
the Company's Proxy Statement for the 1996 Annual Meeting of Stockholders which
will be filed within 120 days of December 31, 1995 is hereby incorporated by
reference in response to this item.
PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(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 Reports of Independent Public Accountants listed
below appear as Item 8.
Reports of Independent Public Accountants.
Consolidated Balance Sheets as of December 31, 1994 and 1995.
Consolidated Statements of Loss for the three years ended December
31, 1995.
Consolidated Statements of Shareholder's Equity for the three years
ended December 31, 1995
Consolidated Statements of Cash Flows for the three years ended
December 31, 1995.
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.
42
<PAGE> 43
(c) Exhibits (each management contract or compensation plan or
arrangement required to be filed as an exhibit is marked with an asterisk). The
following exhibits are filed as part of this Form 10-K:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<S> <C> <C>
11 -- Statement re: Computation of earnings per share
23(a) -- Consent of Arthur Andersen LLP
27 -- Financial Data Schedule (for SEC use only)
</TABLE>
The following exhibits filed with the Securities and Exchange Commission are
incorporated by reference as shown below.
The following exhibit is incorporated by reference to Transcend's Form 10-Q for
the quarter ended September 30, 1995;
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<S> <C> <C>
4 -- Subordinated Convertible Debenture Purchase Agreement
</TABLE>
The following exhibit is incorporated by reference to Transcend's Form 10-Q for
the quarter ended June 30, 1995;
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<S> <C> <C>
3 -- Certificate of Incorporation
</TABLE>
The following exhibit is incorporated by reference to Transcend's Form 10-Q for
the quarter ended November 30, 1995;
43
<PAGE> 44
<TABLE>
<S> <C>
EXHIBIT
NO. DESCRIPTION
--- -----------
2(a) -- 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.
</TABLE>
The following exhibits are incorporated by reference to the Company's
registration statement on Form S-4 (file No. 33-83344) as declared effective
by the Commission on December 2, 1993:
<TABLE>
<S> <C> <C>
EXHIBIT
NO. DESCRIPTION
--- -----------
2 -- 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 this Registration Statement)
</TABLE>
The following exhibit is incorporated by reference to TriCare's Form
8-K relating to an event which occurred September 16, 1994:
<TABLE>
<S> <C> <C>
EXHIBIT
NO. DESCRIPTION
--- -----------
2(a) -- 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.
</TABLE>
The following exhibits are incorporated by reference to TriCare's Form
8-K relating to an event which occurred June 15, 1994.
<TABLE>
<S> <C> <C>
EXHIBIT
NO. DESCRIPTION
--- -----------
2(a) -- 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.
</TABLE>
44
<PAGE> 45
The following exhibits are incorporated by reference to TriCare's Form
10-K for the fiscal year ended May 31, 1993.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<S> <C> <C>
3(a) -- Bylaws (as restated)
* 10(a) -- Form of indemnification agreement
</TABLE>
The following exhibits are incorporated by reference to TriCare's Form
10-K for the fiscal year ended May 31, 1992.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<S> <C> <C>
10(a) -- Rental and Management Agreement between Occu-Care, Inc. and Del Amo Industrial Medical Clinic
dated as of March 1, 1992.
</TABLE>
The following exhibit is incorporated by reference to TriCare's
registration statement on Form S-8 (File No. 33-57072) filed with the
Commission on January 15, 1993.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<S> <C> <C>
* 4(a) -- 1992 Stock Option Plan, as amended
</TABLE>
The following exhibit is incorporated by reference to TriCare's Form
8-K relating to an event which occurred March 1, 1992;
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<S> <C> <C>
2(a) -- Acquisition of Industrial Plus Health Network, Inc. by Occu-Care, Inc.
</TABLE>
The following exhibits are incorporated by reference to TriCare's
Registration Statement on Form S-1 (File No. 33-41361) filed with the
Commission on June 26, 1991, as amended.
45
<PAGE> 46
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<S> <C> <C>
10(a) -- Rental and Management Agreement between Occu-Care, Inc. and Occu-Care Medical Group, Inc.
dated as of May 31, 1990, as amended.
10(b) -- Management Agreement between Veritas Healthcare Management and Veritas Medical Group, Inc.
dated as of January 1, 1991.
</TABLE>
The following exhibit is incorporated by reference to TriCare's
Registration Statement on Form S-8 (File No. 33-37685) filed with the
Commission on November 8, 1990.
<TABLE>
<S> <C> <C>
EXHIBIT
NO. DESCRIPTION
--- -----------
* 4 -- 1990 Employee Stock Purchase Plan
</TABLE>
The following exhibits are incorporated by reference to TriCare's Form
10-K for the year ended May 31, 1990.
<TABLE>
<S> <C> <C>
EXHIBIT
NO. DESCRIPTION
--- -----------
10(c) -- Form of Covenants Not to Compete between Occu-Care and each of the other parties to the
Acquisition Agreement.
</TABLE>
The following exhibits are incorporated by reference to TriCare's
Registration Statement on Form S-1 (File No. 33-32587) filed with the
Commission on December 14, 1989, as amended:
<TABLE>
<S> <C> <C>
EXHIBIT
NO. DESCRIPTION
--- -----------
3(a) -- Certificate of Incorporation, as amended
* 10(g) -- Form of Non-qualified Stock Option Agreement
* 10(i) -- 1986 Incentive Stock Option Plan, as amended
* 10(j) -- Form of Incentive Stock Option Agreement
10(l) -- Restated Rental and Management Agreement between First Western Health Corporation and FWHC
Medical Group, Inc. dated January 17, 1990
</TABLE>
46
<PAGE> 47
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TRANSCEND SERVICES, INC.
Date: March 25, 1996 By: /s/ LARRY G. GERDES
-----------------------------------
Larry G. Gerdes
President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ DONALD L. LUCAS Chairman of the Board March 25, 1996
- ----------------------------------
Donald L. Lucas
/s/ LARRY G. GERDES President, Chief March 25, 1996
- ---------------------------------- Executive Officer and
Larry G. Gerdes Director
(Principal Executive Officer)
/s/ DAVID W. MURPHY Chief Financial Officer, March 25, 1996
- ---------------------------------- Treasurer and Secretary
David W. Murphy (Principal Financial Officer)
/s/ GEORGE B. CALDWELL Director March 25, 1996
- ----------------------------------
George B. Caldwell
/s/ WALTER S. HUFF, JR. Director March 25, 1996
- ----------------------------------
Walter S. Huff, Jr.
/s/ CHARLES E. THOELE Director March 25, 1996
- ----------------------------------
Charles E. Thoele
</TABLE>
47
<PAGE> 1
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 17,576,000
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.
<PAGE> 1
Exhibit 23(a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K into the Company's previously filed
Registration Statement File Nos. 33-57072, 33-41361, 33-37685 and 33-32587.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 22, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,073
<SECURITIES> 0
<RECEIVABLES> 3,098
<ALLOWANCES> (42)
<INVENTORY> 0
<CURRENT-ASSETS> 4,438
<PP&E> 2,740
<DEPRECIATION> (1,059)
<TOTAL-ASSETS> 16,833
<CURRENT-LIABILITIES> 3,977
<BONDS> 0
0
0
<COMMON> 181
<OTHER-SE> 9,740
<TOTAL-LIABILITY-AND-EQUITY> 16,833
<SALES> 0
<TOTAL-REVENUES> 25,882
<CGS> 22,334
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,423
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (96)
<INCOME-PRETAX> (3,896)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,896)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,896)
<EPS-PRIMARY> ($0.22)
<EPS-DILUTED> ($0.22)
</TABLE>
