ACQUISITIONS

In the third quarter of 2011 we finalized our adjustments to the purchase price allocation of the October 2010 acquisition of Spryance, Inc. ("Heartland"). We identified three main adjustments:


1.	A possible uncertain tax position of approximately $6.8 million related to pre-acquisition tax returns filed by Heartland. In accordance with FASB ASC 740, we have established a liability of $6.8 million for this uncertain tax position which increases goodwill by $7.0 million and reduces the acquired deferred tax assets by $225,000. See Note 11 for further discussion.


2.	A $210,000 increase in goodwill and the tax contingent liability related to transfer-pricing with India.


3.	A $72,000 decrease in goodwill and a corresponding increase in the deferred tax asset related to completion of the limitation study of allowable net operating losses. See Note 11 for further discussion.

A reconciliation of the Heartland goodwill balance is as follows:



Balance December 31, 2010	$	4,580,000
Purchase price allocation adjustments	7,122,000
Balance September 30, 2011	$	11,702,000

On April 29, 2011, we entered into an Agreement and Plan of Merger with DTS America, Inc. ("DTS") and certain principal stockholders and acquired DTS America, Inc. through a merger of DTS Acquisition Corporation (a wholly-owned subsidiary of Transcend Services, Inc.) into DTS America, Inc. The aggregate consideration was $9,500,000, consisting of cash at closing of $8,900,000, $200,000 payable after receipt of financial statements and $400,000 payable one year after closing. As of September 30, 2011, none of the remaining $600,000 has been paid and is included in Other Accrued Liabilities on the Balance Sheet. There is no earn-out provision in the purchase agreement and no debt was assumed.

Founded in 1995, DTS was a medical transcription company that served approximately 30 hospitals plus a number of clinics and surgery centers in 13 states and generated approximately $12 million of annual revenue at the date of acquisition. We purchased DTS to capitalize on the potential for the acquired business to grow and leverage our fixed overhead costs across a larger revenue base.

We allocated the purchase price between goodwill, customer relationships and related deferred tax liability, covenant not to compete and net identifiable assets. We have included the results of DTS operations in our financial statements from the close date forward.

The following is a detailed list of the fair value of identifiable assets acquired and liabilities assumed in the DTS acquisition:



Cash	$	119,000
Accounts receivable	1,179,000
Fixed assets	147,000
Deferred tax asset	3,721,000
Other assets	22,000
Total identifiable assets	5,188,000
Accounts payable	336,000
Benefits payable	377,000
Other liabilities	116,000
Total identifiable liabilities	829,000
Net identifiable assets	$	4,359,000

The fair value of accounts receivable acquired approximated gross contractual amounts receivable. There were no assets arising from contingencies that were acquired in the transaction.

Goodwill of $3.2 million was recorded for the DTS acquisition. This consisted primarily of the synergies and economies of scale expected from combining the operations of Transcend and DTS and the value of the DTS assembled workforce. We have initially allocated the purchase price between goodwill, customer relationships and related deferred tax liability, and net identifiable assets. Since this transaction was a stock purchase, goodwill and intangibles will not be deductible for income tax purposes. As permitted, we expect to finalize the purchase price allocation within one year of the purchase date. We do not expect any changes to the purchase price allocation to materially increase or decrease amortization expenses, but there could be an impact on the allocation between goodwill and the deferred tax asset. As of September 30, 2011, the purchase price was allocated as follows:



Net identifiable assets	$	4,359,000
Customer relationships	3,000,000
Covenant not to compete	70,000
Goodwill	3,205,000
Deferred tax liability	(1,134,000		)
Total purchase price	$	9,500,000

Intangible assets, except for goodwill, are amortized over their useful lives. The customer list is being amortized over ten years and the covenant not to compete over five years.

DTS revenue of $2,938,000 and $4,984,000 are included in our Consolidated Statement of Operations for the three and nine months ended September 30, 2011, respectively. Since we have fully integrated the DTS operations, it is impossible to segregate net income related to the DTS operations for the three and nine months ended September 30, 2011.

On July 29, 2011, we entered into an Agreement and Plan of Merger with Salar, Inc. ("Salar") and certain principal stockholders and acquired Salar through a merger of Salar Acquisition Corporation (a wholly-owned subsidiary of Transcend Services, Inc.) into Salar. The aggregate consideration was $11,000,000, consisting of cash at closing of $11,000,000, $1,000,000 of which is being held in escrow for a period of one year. There is no earn-out provision in the purchase agreement and no debt was assumed.

Founded in 1999, Salar is a software development and services company whose solutions are used by leading academic and community hospitals. Salar generated approximately $4 million of annual revenue at the date of acquisition. Salar's product solutions provide a highly customizable and physician-friendly interface that integrates easily with existing electronic medical record systems. We purchased Salar for their expertise in clinical documentation and their technology, which we plan to integrate with our speech recognition products to give our customers added functionality and greater flexibility.

We allocated the purchase price between goodwill, customer relationships and related deferred tax liability, covenant not to compete, technology, trademarks and net identifiable assets. We have included the results of Salar operations in our financial statements from the close date forward.

The following is a detailed list of the fair value of identifiable assets acquired and liabilities assumed in the Salar acquisition:



Cash	$	19,000
Accounts receivable	885,000
Unbilled revenue	386,000
Fixed assets	25,000
Other assets	35,000
Total identifiable assets	1,350,000
Benefits payable	80,000
Other liabilities	294,000
Total identifiable liabilities	374,000
Net identifiable assets	$	976,000

The fair value of accounts receivable acquired approximated gross contractual amounts receivable. There were no assets arising from contingencies that were acquired in the transaction.

Goodwill of $7.9 million was recorded for the Salar acquisition. This consisted primarily of the value of the Salar workforce. We have initially allocated the purchase price between goodwill, customer relationships and related deferred tax liability, covenant not to compete, technology, trademarks and net identifiable assets. Since this transaction was a stock purchase, goodwill and intangibles will not be deductible for income tax purposes. As permitted, we expect to finalize the purchase price allocation within one year of the purchase date. We do not expect any changes to the purchase price allocation to materially increase or decrease amortization expenses, but there could be an impact on the allocation between goodwill and other intangible assets. As of September 30, 2011, the purchase price was allocated as follows:



Net identifiable assets	$	976,000
Customer relationships	1,800,000
Covenant not to compete	190,000
Technology	1,340,000
Trademarks	80,000
Goodwill	7,936,000
Deferred tax liability	(1,322,000		)
Total purchase price	$	11,000,000

Intangible assets, except for goodwill, are amortized over their useful lives. The customer list is being amortized over eight years, the covenant not to compete over four years, the technology over five years and the trademarks over two years.

Salar revenue and net income of $577,000 and $93,000 respectively, are included in our Consolidated Statement of Operations for the three and nine months ended September 30, 2011. The net income excludes $103,000 of our transaction costs incurred.

Unaudited pro forma revenue and net income of the combined entity had the DTS and Salar acquisitions been completed on January 1, 2010 are as follows:



	SUPPLEMENTAL PRO FORMA INFORMATION
	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Revenue	$	32,381,000	$	26,952,000	$	99,710,000	$	80,754,000
Net Income	$	3,332,000	$	2,488,000	$	11,403,000	$	6,068,000

Adjustments have been made to move transaction costs to January 1, 2010 and to recognize the amortization of intangible assets and the related income tax impact in the periods presented. The pro forma information presented does not purport to be indicative of the results that would have been achieved had the acquisitions been made as of January 1, 2010.