10-K405 1 d10k405.txt FORM 10-K405 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 For the fiscal year ended December 31, 2001 or |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________ Commission File Number 0-18217 TRANSCEND SERVICES, INC. (Exact name of registrant as specified in its charter) Delaware 33-0378756 (State or other jurisdiction of incorporation) (IRS Employer Identification No.) 945 East Paces Ferry Road, N.E., Suite 1475, Atlanta, Georgia 30326 (Address of principal executive offices and zip code) (404) 836-8000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.05 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 last sale price as reported for the Registrant's common stock by the Nasdaq SmallCap Market on February 28, 2002 was $4,383,689. For purposes of this response, officers, directors and holders of more than 5% of the Registrant's common stock are considered the affiliates of the Registrant at that date. Indicate the number of shares outstanding of the Registrant's common stock as of the latest practicable date. Class Outstanding at February 28, 2002 ----- -------------------------------- Common Stock, $.05 par value 4,513,143 ========= DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's proxy statement to be filed in connection with the 2002 Annual Meeting of Stockholders to be held May 7, 2002, are incorporated by reference herein in response to Part III of this report. TRANSCEND SERVICES, INC. FORM 10-K INDEX
PART I .......................................................................................... 3 ITEM 1. BUSINESS ...................................................................... 3 ITEM 2. PROPERTIES .................................................................... 7 ITEM 3. LEGAL PROCEEDINGS ............................................................. 7 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ........................... 8 PART II ......................................................................................... 8 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS ........ 8 ITEM 6. SELECTED FINANCIAL DATA ....................................................... 8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS .................................................................... 9 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .................... 13 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ................................... 13 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. ................................................................... 28 PART III ........................................................................................ 29 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ............................ 29 ITEM 11. EXECUTIVE COMPENSATION ........................................................ 29 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ................ 29 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ................................ 29 PART IV ......................................................................................... 29 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K ............... 29 SIGNATURES ...................................................................................... 32
2 PART I ITEM 1. BUSINESS Certain statements related to financial results and plans for future business development activities contained in this filing are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Potential risks and uncertainties include, but are not limited to, competitive pressures, the mix of service revenue, changes in pricing policies, delays in sales revenue recognition, lower-than-expected demand for the Company's products and services, business conditions in the integrated health care delivery network market, general economic conditions, and the risk factors detailed from time to time in the Company's filings with the Securities and Exchange Commission. GENERAL Transcend Services, Inc. (the "Company" or "Transcend") provides medical transcription services and coding and abstracting software to the healthcare industry. Powered by its web-based voice and data distribution technology, the Company's home-based medical transcription professionals document patient care by converting physicians' voice recordings into electronic medical record documents. The Company's wholly owned subsidiary, Cascade Health Information Software, Inc. ("Cascade"), provides state-of-the-art software for the coding and abstracting of patient medical records. On October 13, 2000, the Company sold both its remote coding business ("CodeRemote"), which helped healthcare providers code their medical records, and its facility management business ("Co-Sourcing"), which provided on-site management of hospital medical records operations, to Provider HealthNet Services, Inc. The markets for the Company's medical transcription services and software products are sizable. Management estimates the total market potential exceeds $6 billion in medical transcription and $375 million in medical coding and abstracting software and related services. While competition is significant with over 1,000 transcription services companies nationally, the Company believes that it is among the four largest transcription service providers and one of only several national companies that operates on a single, Internet-based technology. Competition for medical coding and abstracting software is also significant. The Company's strongest competition traditionally has been from local and national companies who provide coding and classification software, off-site coding services and on-site coding services. Government regulation, managed care and labor resource constraints are shaping new opportunities for the Company and other healthcare service and software providers. Breakthroughs in telecommunications technologies and the growing acceptance of the Internet are enabling home-based professionals to provide more and more services to meet the needs of healthcare. New applications, such as voice recognition and digital imaging, are also emerging which allows for increased productivity, capacity and quality. In addition, compliance requirements have increased the demand for coding, classification and abstracting of patient medical records at all levels of the healthcare industry. Most recently, the Health Insurance Portability and Accountability Act ("HIPAA") has provided the Company with both a challenge to comply with HIPAA's evolving security and confidentiality requirements and the opportunity to differentiate itself, in particular with its foreign competitors. As a result of these factors and trends, specialized healthcare service and software companies, like Transcend Services, Inc., are leveraging technology to increase their value to healthcare providers. INDUSTRY OVERVIEW The healthcare industry continues to undergo rapid change. Government regulation and managed care have increased the focus on quality of care, quality of data, billing compliance and patient privacy. Healthcare providers have come under increased scrutiny from regulators and third-party payors. Reimbursement pressures from managed-care growth have fueled industry consolidation and the formation of various forms of healthcare integration from integrated delivery networks to managed service organizations. Documentation requirements have significantly increased resulting in an increase in the need for dictation and transcription of medical notes. Compliance requirements have increased the demand for the coding, classification and abstracting of patient medical records in a timely and accurate manner. As a result of breakthroughs in technology, telecommunications, the growing acceptance of the Internet, and new applications, such as digital imaging systems and voice recognition systems, healthcare providers are relying on new technologies and outsourcing, as well as specialized software applications, to help them be competitive. Advances in telecommunications, Internet technologies, and voice recognition capabilities are emerging, thereby creating opportunities to apply these technological advances to outsource certain medical record functions, such as medical transcription. 3 These technologies enable the digital movement of voice, images and data that allows for the cost-effective, off-site completion of the medical transcription function. The ability to process transcription services off-site allows for faster turnaround times, increased availability of scarce skilled professionals, improved quality and lower costs. In addition, the continuing demand for timely and accurate patient medical records creates a market need for specialized software applications, such as coding, classification and abstracting software. HISTORY OF THE COMPANY The Company was incorporated in California in 1976 and was reorganized as a Delaware corporation in 1988. On January 10, 1995, the Company, formerly known as TriCare, Inc., acquired Transcend Services, Inc., then a Georgia corporation, by the merger of Transcend Services, Inc. into First Western Health Corporation ("First Western"), a subsidiary of the Company (the "Merger"). On May 31, 1995, Transcend Services, Inc. and Veritas Healthcare Management ("Veritas"), another subsidiary of the Company, merged into the Company, whose name was then changed to Transcend Services, Inc. The Merger was treated for financial accounting purposes as the acquisition of TriCare, Inc. by Transcend Services, Inc. The historical financial statements of the former Transcend Services, Inc. became the financial statements of the Company and include the businesses of both companies as of the effective date of the Merger. Prior to the Merger, Transcend Services, Inc., which was originally organized in 1984, provided consulting services for medical records management, quality and utilization management and records coding. In 1992, the former Transcend Services, Inc. developed, tested and marketed new lines of business intended to capitalize on the increasing need for the outsourcing of medical records, and by the end of 1992 had entered into its first long-term agreement for the management of a hospital's medical records department. On March 16, 1998, Transcend sold the net assets of Transcend Case Management, Inc., its wholly owned subsidiary, to TCM Services, Inc., a wholly owned subsidiary of CORE, Inc. ("CORE"), a publicly traded company. On December 23, 1998, the Company re-acquired TCM from CORE and filed an arbitration claim against CORE after learning of CORE's intent to discontinue the business. In February 2000, an arbitrator ruled that CORE breached its purchase contract with Transcend and ordered CORE to compensate Transcend for damages. The Company ceased TCM's operations effective December 31, 1999. On June 1, 1998, Transcend completed the acquisition of Health Care Information Systems, Inc. ("HCIS"). The acquisition was accounted for under the pooling of interests method of accounting. Transcend has merged HCIS into a wholly owned subsidiary, Cascade Health Information Software, Inc. ("Cascade"), the product name formerly used by HCIS which is widely recognized in the industry. On November 11, 1999, the Company's Board of Directors approved management's plan to restructure the business to focus on medical transcription using the Company's Internet-based transcription technology. In November and December 1999, the Company sold its Utah and Northeast-based transcription operations and certain of its transcription contracts that did not operate using the Company's Internet-based transcription technology. On October 13, 2000, the Company sold its CodeRemote business, which provided remote coding services, and its Co-Sourcing business, which provided on-site management of hospital medical records operations, to Provider HealthNet Services, Inc. On March 13, 2001, the Company announced the termination of its efforts to sell Cascade. Accordingly, the Company now provides medical transcription services and coding and abstracting software to the healthcare industry. BUSINESS STRATEGY The Company intends to focus on two major lines of business by providing medical transcription services and coding and abstracting software to the healthcare industry. A key factor in executing its medical transcription services strategy will be to add new customers to efficiently utilize the capacity of the Company's proprietary Internet-based transcription platform (the "Platform") and its established customer-oriented support organization. A key factor in executing its coding and abstracting software strategy will be to web-enable Cascade's application software, which would enable Cascade to become an Application Service Provider ("ASP") as a means of enhancing market penetration. Increase Market Penetration The Company believes that it has a tested and proven infrastructure which will allow it to expand it business to serve substantially more customers. While continuing to focus on day-to-day customer satisfaction, the Company intends to focus on adding new accounts to its existing customer base. The Company has hired an experienced sales team to focus exclusively on new account sales of medical transcription services. The Company's established account management organization will continue to sell 4 additional services to the existing customers. Cascade has an established team of sales professionals focused on both new account and additional sales to existing accounts. Cascade believes that its state-of-the-art, 32-bit Windows coding and abstracting software positions it as the technological leader in its market. To further enhance market penetration, Cascade intends to web-enable its products for delivery as an ASP thereby making its product more affordable to a broader market. Maintain and Enhance Customer Satisfaction The Company believes that its best sales force is its customers, who provide sales leads and references. Accordingly, the Company has an ongoing program to monitor customer satisfaction. This program includes continuous monitoring of transcription production statistics relative to contracted standards, periodic transcription customer surveys and, most importantly, dedicated customer support organizations who maintain regular, oftentimes daily, contact with both transcription and Cascade customers. Maintain Technological Leadership Positions The Company intends to utilize the most effective technology available to improve the medical transcription process and the features and functionality of coding and abstracting application software. The Company believes the application of advanced technology will reshape the way patient information is managed across the healthcare delivery system in the future and provide margin expansion. The Company has converted all of its transcription operations to its Internet-based platform that is expected to provide significant advantages in recruiting, workflow management, and production control. The Company will continue to invest in improving its technology to yield faster turnaround times, better workflow management, and increased productivity by evaluating new technologies such as voice recognition and natural language processing for its medical transcription business. The Company has also made a concerted effort to ensure that its information remains confidential and secure. Cascade believes that it is currently well positioned with its Windows-based products, but intends to enhance its technological leadership position with an ASP offering. Attract and Retain Professional Staff One of the Company's critical success factors is the recruitment and retention of the industry's best knowledge workers (medical transcriptionists, software developers and service and sales professionals). The Company believes that there will be a shortage of qualified professionals in the future. The solution to this shortage will be to attract and retain a core group of knowledge workers by offering excellent pay and benefits and, in the case of medical transcriptionists, the opportunity to work from home. This core group of knowledge workers may support less skilled production employees and may complete documents that have been translated using voice recognition software. Rapid Internal Growth The Company intends to grow internally through its direct sales force focused on new accounts and its account manager organization focused on the existing customer base. The Company intends to add sales resources and personnel as necessary to concentrate on revenue growth. Maximize Value of Patient Documentation Information The Company believes the patient information it captures and documents has the potential to create value many times the current value of its services. Current processes capture patient information in the form of free-flow electronic text documents. These electronic documents require human intervention to interpret the patient information. The Company has been storing these electronic documents in a data repository but has not yet offered data extraction and analysis services. The Company does offer secure Internet access to documents. The Company believes that data extraction and analysis services may provide tremendous value to its customers and potentially create new revenue channels for the Company. In addition, the Company may offer decision support solutions to its customers to provide them information, which may assist in evaluating physician practice patterns, physician utilization, and in improving control of their medical transcription costs. The Company has no definitive plans to offer data extraction and analysis services or decision support solutions at this time. SERVICES AND PRODUCTS Medical Transcription Services. Powered by its web-enabled voice and data distribution technology, the Company's home-based professionals convert physicians' voice recordings into electronic medical record documents. Physicians may access the Company's technology from any phone where they can dictate patient medical records information. The information is captured digitally in the Company's central voice hub in Atlanta, Georgia. The digital voice files are then compressed, encrypted and stored. The Company's home-based medical transcriptionists access these files over the Internet, play back the voice recordings using 5 headsets and footpedals, and transcribe the recorded voice to create electronic documents. The completed electronic documents are then returned to the Atlanta hub over the Internet. The documents may then be accessed by remote quality assurance personnel, if necessary, and delivered electronically to the healthcare provider. Typically, documents are produced and delivered within 24 hours of the physicians' dictation. Documents requiring faster turnaround times, as quickly as four hours for STAT requests, are priced at a premium. The Company's transcription operations run around the clock, every day of the year. Cascade. The Company's wholly owned subsidiary, Cascade Health Information Software, Inc., provides state-of-the-art software for the coding, abstracting and reporting of patient information. Cascade offers perpetual software licenses with recurring annual support and upgrade fees. Cascade also offers annual software licenses which include support and software upgrades. Cascade differentiates itself by its product usability, its powerful and flexible reporting capabilities, and its reputation for customer service. CUSTOMERS The Company currently delivers dictation and transcription services to over 40 hospitals and clinics with recurring revenue under long-term contracts or other arrangements. The typical medical transcription customer generates approximately $600,000 in annual revenue. Cascade has approximately 250 active licenses of its coding and abstracting software operational in 84 customer sites. Based on revenue for the fiscal years ended December 31, 2001, 2000 and 1999, no single customer paid fees to the Company that amounted to or exceeded 10% of the Company's revenue in the respective periods. SALES AND MARKETING The Company currently employs five full-time sales professionals focused on transcription and three full-time sales professionals focused on coding and abstracting software. The Company's prospects and sales have emerged principally from personal contacts by the Company's sales professionals with senior hospital executives as well as referrals from its clients. The Company's marketing strategy includes targeted advertising in industry trade publications, direct mailings, hosting regionally-based sales events, exhibiting in key industry shows, exploiting its web site presence, leveraging business partnership relationships, as well as utilizing customer testimonials to generate new sales leads. The Company also intends to offer incentives to Cascade's customers for use of the Company's transcription services. COMPETITION The Company experiences competition from many local, and several regional and national businesses. The medical transcription services market, estimated to be over $6 billion, is highly fragmented, with over 1,000 transcription companies nationally. Recently, the medical transcription industry in the United States has experienced overseas competition, primarily from India due to its low-wage workforce. The Company believes that its top three domestic competitors are MedQuist, Inc., the EDiX division of IDX Systems Corporation and HealthScribe, Inc. Over the past several years, the medical transcription industry has been undergoing consolidation by MedQuist, Inc. and others. The outsourcing decision in transcription is influenced by shortages of qualified medical transcriptionists, by the unique management challenges of managing a 7 by 24 operation and by technology advances which allow transcription companies to leverage technology and eliminate capital expenditures for their customers. The Company believes the principal historical competitive factors of price and quality (timeliness and accuracy) will expand as major transcription companies use technology to increase the value of transcription services. Management believes the ability to recruit personnel nationally and internationally, coupled with the use of Internet communications, will lead to further outsourcing and only those competitors prepared to compete using resources outside the local market will prosper. Competition for Cascade's software products comes primarily from the market leader, 3M's Health Care division, HSS, Inc. and QuadraMed Corporation. Competition for transcription software comes largely from SoftMed Systems, Inc. with their Chartscript product. GOVERNMENT REGULATION Virtually all aspects of the practice of medicine and the provision of healthcare services are regulated by federal or state 6 statutes and regulations, by rules and regulations of state medical boards and state and local boards of health, and by codes established by various medical associations. The Company has attempted to structure its operations to comply with these regulations. The Company is not presently subject to direct regulation as an outsourcing services and software provider. Future government regulation of the practice of medicine and the provision of healthcare services and software may impact the Company and required restructuring of its operations in order to comply with such regulations. EMPLOYEES As of December 31, 2001, the Company had 239 full-time and 53 part-time employees, including 211 full-time and 50 part-time employees dedicated to the medical transcription business; 21 full-time and 2 part-time Cascade employees; and 7 full-time and 1 part-time executive, accounting and administrative employees at its headquarters office in Atlanta, Georgia. Neither the Company nor any of its employees is currently a party to any collective bargaining agreement. The Company has not experienced any strikes or work stoppages, and believes that its relations with its employees are good. ITEM 2. PROPERTIES. The Company leases the space for its principal offices in Atlanta, Georgia. Cascade Health Information Software, Inc. leases space for its principal office in Beaverton, Oregon. The Company also leases space in Chicago, Illinois where it has closed and consolidated its transcription operations into the Atlanta hub. The leased space in Chicago, Illinois is subleased through its expiration date in September 2002. ITEM 3. LEGAL PROCEEDINGS. On April 5, 2001, Our Lady of the Lakes Hospital, Inc. ("OLOL") filed a lawsuit against the Company. The lawsuit, styled "Our Lady of the Lakes Hospital, Inc. v. Transcend Services, Inc." was filed in the 19/th/ Judicial District Court, Parish of East, State of Louisiana, Civil Case Number 482775, Div. A. The lawsuit alleges, among other things, that the Company breached certain contracts entered into between OLOL and the Company, including a staffing and management servicing contract, a transcription platform agreement and a marketing agreement. OLOL is seeking an unspecified amount of monetary damages. On May 30, 2001, the Company filed a timely Answer that generally denied all liability, and the Company filed a counterclaim against OLOL primarily seeking fees owed by OLOL for services performed by the Company and interest on unpaid invoices. OLOL has subsequently added Transcend's insurance carrier as defendants to the lawsuit. The Company intends to vigorously defend all claims made by OLOL. The lawsuit is in a very early procedural stage, however, and therefore it is not possible at this time to determine the outcome of the actions or the effect, if any, that their outcome may have on the Company's results of operations and financial condition. There can be no assurances that this litigation will not have a material adverse effect on the Company's results of operations and financial condition. On July 9, 2001, Provider HealthNet Services, Inc. ("PHNS") made a written demand for payment from Transcend in the amount of approximately $750,000. The demand was based on allegations that Transcend had breached certain representations and warranties contained in an Asset Purchase Agreement between PHNS and Transcend entered into on October 13, 2000. Thereafter, Transcend made a counter-demand against PHNS for payment of approximately $93,000 owed under that same Asset Purchase Agreement. The parties have subsequently submitted all disputes in this matter to binding arbitration, which was held on January 23 and 24, 2002. The results of this arbitration have not been finalized and it is not possible at this time to determine the outcome of this arbitration or the effect, if any, that the outcome may have on the Company's results of operations and financial condition. There can be no assurances that this litigation will not have a material adverse effect on the Company's results of operations and financial condition. On September 14, 2001, the Company filed a lawsuit against Palmer & Cay Consulting Group, Inc. ("P&C"), the Company's former insurance broker. The lawsuit, styled "Transcend Services, Inc. v. Palmer & Cay Consulting Group, Inc." was filed in the Superior Court of Fulton County, State of Georgia, Civil Action File No.: 2001-CV-42725. The lawsuit alleges that P&C negligently failed to advise Transcend of, or otherwise failed to make arrangements to cover, Transcend's potential liability for certain health care claims submitted by Transcend's employees. Transcend is seeking damages of $450,000 plus attorneys' fees and interest. The case is in the preliminary stages of discovery and it is not possible at this time to determine an outcome of the lawsuit or the effect, if any, that the outcome may have on the Company's results of operations and financial condition. In addition, the Company is a party to various lawsuits encountered in the normal course of business and believes that it has meritorious defenses to the related claims and assertions, however, there can be no assurance that the Company will be successful in defending such claims and assertions. 7 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the security holders during the quarter ended December 31, 2001. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Transcend Common Stock is quoted on the Nasdaq SmallCap Market under the symbol "TRCR". As of February 15, 2002 there were approximately 182 holders of record of Transcend Common Stock. The table below sets forth for the fiscal periods indicated the high and low closing sales price per share of Transcend Common Stock as reported on the Nasdaq SmallCap Market for the periods indicated. The prices have been adjusted, as appropriate, to give effect to the 1-for-5 reverse stock split that was effected on January 14, 2000. These quotations also reflect inter-dealer prices without retail mark-ups, mark-downs, or commissions, and may not necessarily represent actual transactions. Price Per Share of Common Stock ------------ High Low ---- --- Year Ended December 31, 2001 First Quarter .............................. $2.813 $1.344 Second Quarter ............................. $2.820 $2.063 Third Quarter .............................. $2.650 $1.300 Fourth Quarter ............................. $1.810 $1.100 Year Ended December 31, 2000 First Quarter .............................. $ 4.813 $ 2.313 Second Quarter ............................. $ 3.500 $ 2.313 Third Quarter .............................. $ 4.188 $ 2.703 Fourth Quarter ............................. $ 3.813 $ 1.344 DIVIDEND POLICY The policy of the Board of Directors (the "Board") of the Company is to retain earnings for the expansion and development of the Company's business and the Board does not anticipate paying cash dividends on the Common Stock in the foreseeable future. Future dividend policy and the payment of dividends, if any, will be determined by the Board in light of circumstances in existence, including among other things, future earnings, operations, capital requirements, contractual restrictions, the general financial condition of the Company, general business conditions and other factors deemed relevant by the Board. RECENT SALES OF UNREGISTERED SECURITIES On December 28, 2001, the Company sold 100,000 shares of its unregistered common stock to certain of the Company's officers at market value of $126,000 as determined by the closing price reported on the Nasdaq SmallCap Market System on that date. As consideration for the sale, the officers issued interest-bearing, secured promissory notes payable to the Company with a maturity date of January 15, 2003. The issuance of securities described above was made in reliance on the exemption from registration provided by Section 4(2) of the Securities Act of 1933 as a transaction by an issuer not involving a public offering. The securities were acquired by the recipients thereof for investment and with no view toward the resale or distribution thereof. The offers and sales of the above securities were made without any public solicitation and the stock certificates bear restrictive legends. No underwriting was involved in the transaction and no commissions were paid. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected consolidated financial data of the Company for the periods indicated, which data has been derived from the Company's consolidated financial statements. The report of Miller Ray & Houser, independent public accountants, with respect to such consolidated financial statements as of December 31, 2001 and for the year ended December 31, 2001 is included in Item 8. In addition, the report of Arthur Andersen LLP, independent public accountants, with respect to such consolidated financial statements as of December 31, 2000 and for the two years ended December 31, 2000 is also included in Item 8. This selected financial data should be read in conjunction with the consolidated financial statements, related notes, and other financial information included and incorporated by reference herein. 8 Selected Financial Data (in thousands, except per share data)
1997 1998 1999 2000 2001 ----------------------------------------------------------------------------------------------------------------------------------- Results of Operations: (1) (2) (3) Revenue $41,552 $53,314 $ 49,515 $26,262 $13,785 ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) from operations (189) 964 (7,975) (840) (663) ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before discontinued operations (622) 382 (3,056) (710) (588) ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before discontinued operations per common $ (0.17) $ (0.03) $ (0.81) $ (0.27) $ (0.24) share Basic and diluted weighted average shares of common stock (3) 4,056 4,224 4,386 4,341 4,404 Financial Position At Year End: Total assets $20,294 $22,896 $ 17,892 $ 5,679 $ 3,591 Total debt $ 7,091 $ 8,536 $ 7,026 $ 614 $ -- Stockholder's equity $ 7,913 $ 7,512 $ 2,568 $ 2,176 $ 2,009 ----------
(1) The Company has completed several acquisitions and divestitures that could affect the comparability of the information reflected in the table. See Note 11 of Notes to Consolidated Financial Statements. (2) Certain prior year results have been reclassified both to income (loss) from discontinued operations and from income (loss) from discontinued operations, as appropriate, for comparative purposes. See Notes 1 and 2 of Notes to Consolidated Financial Statements. (3) Basic and diluted weighted average shares of common stock have been restated to show the effects of the 1-for-5 reverse stock split effected on January 14, 2000. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Report contains forward-looking statements that involve a number of risks and uncertainties. Among the important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are competitive pressures, the mix of service revenue, changes in pricing policies, delays in sales revenue recognition, lower-than-expected demand for the Company's products and services, business conditions in the integrated health care delivery network market, general economic conditions, and the risk factors detailed from time to time in the Company's periodic reports and registration statements filed with the Securities and Exchange Commission. The following discussion should be read in conjunction with the consolidated financial statements of the Company, including the notes thereto, contained elsewhere in this Report. OVERVIEW Transcend Services, Inc. ("the Company") provides medical transcription services and coding and abstracting software to the healthcare industry. Powered by its web-based voice and data distribution technology, the Company's home-based medical transcription professionals document patient care by converting physician's voice recordings into electronic medical record documents. The Company's wholly owned subsidiary, Cascade Health Information Software, Inc. ("Cascade"), provides state-of-the-art software for the coding and abstracting of patient medical records. On October 13, 2000, the Company sold both its remote coding business ("CodeRemote"), which helped healthcare providers code their medical records, and its facility management business ("Co-Sourcing"), which provided on-site management of hospital medical records operations. Transcend Case Management, Inc. ("TCM"), a wholly owned subsidiary that provided case management services to insurance carriers and others, ceased operations and is presented as discontinued operations in 1999. RESULTS OF OPERATIONS The results of operations include the operations of Transcend Services, Inc. and its subsidiaries. The information for 1999 is presented both including and excluding the effect of certain non-recurring charges ("NRC") incurred in December 1999 pursuant to a restructuring of operations. The Co-Sourcing and CodeRemote businesses were sold on October 13, 2000 and the results of their operations are not included in the information presented below after that date. 9
(in 000's) Percent Change 1999 -------------- ---------------------------------------------- Including Effect of Excluding 2000 2001 2000 NRC NRC NRC 2001 w/o NRC ---- ---- --- --- --- ---- ------- Revenue: Transcription Services $11,817 $13,666 $24,085 $24,085 -14% -43% Cascade 1,968 2,255 2,234 2,234 -13% 1% Co-Sourcing 9,678 22,868 (76) 22,792 -100% -58% Code-Remote 663 328 328 -100% 102% -------------------------------------------------------------------------- Total revenue $13,785 26,262 49,515 (76) 49,439 -48% -47% -------------------------------------------------------------------------- Gross profit: Transcription Services 2,939 2,128 599 1,310 1,909 38% 11% Cascade 1,000 1,416 1,431 1,431 -29% -1% Co-Sourcing 1,179 1,377 1,120 2,497 -100% -53% Code-Remote 54 0 0 -100% N/A -------------------------------------------------------------------------- Total gross profit 3,939 4,777 3,407 2,430 5,837 -18% -18% -------------------------------------------------------------------------- Operating expenses: Marketing and sales 852 936 2,107 (17) 2,090 -9% -55% Research and development 870 1,152 1,733 (1,025) 708 -24% 63% General and administrative 2,880 3,470 7,369 (2,072) 5,297 -17% -34% Amortization 59 173 173 -100% -66% -------------------------------------------------------------------------- Total operating expenses 4,602 5,617 11,382 (3,114) 8,268 -18% -32% -------------------------------------------------------------------------- Loss from operations $ (663) $ (840) $(7,975) $5,544 $(2,431) -21% -65% ==========================================================================
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 Revenue decreased $12.5 million, or 48%, from $26.3 million in 2000 to $13.8 million in 2001. This decrease is attributable to several factors: (1) The Co-Sourcing and CodeRemote businesses that were sold on October 13, 2000 contributed revenue of $10.3 million in 2000. (2) Transcription Services revenue declined $1.8 million, or 14%, to $11.8 million in 2001 compared to 2000 as a result of the Company's restructuring activities in late 1999 and 2000. At that time, the Company determined that it was not prudent to convert certain transcription customer accounts to its T2K technology. The Transcription Services revenue of $13.7 million in 2000 includes revenue of $2.3 million from 11 transcription service agreements that were terminated by the Company during 2000. Accordingly, Transcription Services revenue attributable to current customers increased approximately $500,000 in 2001. (3) Cascade's revenue decreased $287,000, or 13%, to $2.0 million in 2001 compared to 2000 due primarily to relatively low software revenue generated from new customer accounts during 2001. While gross profit decreased $838,000, or 18%, from $4.8 million in 2000 to $3.9 million in 2001, gross profit as a percentage of revenue increased from 18% in 2000 to 29% in 2001. The decrease in the dollar amount of gross profit is primarily attributable to the sale of the Co-Sourcing and CodeRemote business units, which contributed gross profit of $1.2 million in 2000. In addition, Cascade's gross profit decreased by $416,000 in 2001 compared to 2000 due primarily to the lower level of high-gross margin software revenue in 2001 compared to 2000. Partially offsetting the reduced gross profit contributions by these three business units was an increase in Transcription Services' gross profit by $811,000 due in large part to the restructuring activity referred to above. Accordingly, as a percentage of revenue, while Cascade's gross profit margin dropped from 63% in 2000 to 51% in 2001, Transcription Services' gross profit margin increased from 16% in 2000 to 25% in 2001. A software business, like Cascade, typically has a higher gross profit margin as a percentage of revenue, than a service business, like Transcription Services. Marketing and sales expenses decreased $84,000, or 9%, from $936,000 in 2000 to $852,000 in 2001, but increased as a percentage of revenue from 4% in 2000 to 6% in 2001. The Company revamped and reduced the size of its Transcription Services' sales force following the sale of the Co-Sourcing and CodeRemote business units. The size of Cascade's sales force was substantially the same between years. Research and development expenses decreased $282,000, or 24%, from $1.2 million in 2000 to $870,000 in 2001, but increased as a percentage of revenue from 4% in 2000 to 6% in 2001. As a result of the completion of the T2K development project and the sale of the Co-Sourcing and CodeRemote business units, the Company revamped and reduced the size of its research and development staff in Transcription Services during 2000. The size of Cascade's research and development staff was substantially 10 the same between years. The Company believes that the current size of its research and development staff is sufficient to accomplish its planned research and development activities for the foreseeable future. General and administrative expenses decreased $590,000, or 17%, from $3.5 million in 2000 to $2.9 million in 2001 as the Company substantially reduced its infrastructure expense required to handle its lower level of operating activity and revenue. Amortization expense was reduced from $59,000 in 2000 to zero in 2001 as a result of the write-off of the remaining net book value of goodwill and other intangible assets pursuant to the sale of the Company's Co-Sourcing and CodeRemote business units in 2000. Net interest expense decreased from $420,000 in 2000 to $18,000 in 2001 due to: (1) the reduction of debt using a portion of the proceeds from the sale the Co-Sourcing and CodeRemote business units during October 2000; (2) the reduction of debt using a portion of the proceeds from the sale of the short-term investment during April 2001 (see Note 1 in "Notes to Consolidated Financial Statements"); (3) the elimination of debt using a portion of the proceeds received during December 2001 from the collection of a note receivable and an earn-out payment both of which related to an asset sale in 1999; (4) the recognition of interest income of approximately $43,000 during the third quarter of 2001 upon the Company's determination of its ultimate collectibility; (5) the nationwide reduction in the prime interest rate; and (6) the below-prime borrowing rate on the Company's line of credit made possible by the personal guarantees of the Company's Chief Executive Officer and one of its Directors. Both the loss and gain on legal settlement in 2001 and 2000, respectively, relate to a legal settlement on TCM. The Company ceased TCM's operations effective December 31, 1999. The reported gain on legal settlement of $461,000 in 2000 represents the excess of the $1.7 million arbitration award over the Company's cost incurred related to the reacquisition and subsequent closing of the Company's TCM operations. The reported loss on legal settlement of $576,000 in 2001 represents the realized loss on the sale of the unregistered common stock received in this legal settlement. The gain on sale of assets represents an earn-out payment related to the sale of the Company's Utah and Northeast-based medical transcription services operations and certain other contracts for transcription services in December 1999. The Company reported an income tax benefit of $116,000 in 2001 due to the elimination of deferred income tax liabilities of $121,000 established in prior years that are no longer required, offset slightly by state income taxes of $5,000. The Company has available net operating loss carry-forwards in excess of approximately $21 million. In November 1997, the Company issued 212,800 shares of Series A Convertible Preferred Stock with a dividend of 9%. The net loss to common stockholders includes preferred stock dividends of $479,000 and $478,000 in 2001 and 2000, respectively. Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 Revenue decreased $23.2 million, or 47%, from $49.5 million in 1999 to $26.3 million in 2000. This decrease is attributable to several factors: (1) The Co-Sourcing and CodeRemote business units were sold on October 13, 2000. The combined monthly revenue of these business units averaged approximately $2.2 million in 2000 prior to the sale. Based on this average combined monthly revenue, approximately $5.5 million of the revenue decrease in 2000 is attributable to this sale. (2) The remainder of the total $13 million decrease in Co-Sourcing revenue is primarily attributable to the Company terminating certain unprofitable and marginally profitable contracts and converting some Co-Sourcing contracts to "transcription only" services during 1999 and 2000. (3) During the fourth quarter of 1999, the Company terminated 21 transcription contracts with annual revenue of approximately $3.3 million after determining that the conversion of those accounts to the Company's new technology was not prudent. (4) In November 1999, the Company sold four transcription contracts with annual revenue of approximately $1.4 million. (5) Effective December 1, 1999, the Company sold its Utah and Northeast transcription operations with combined annual revenue of approximately $6.1 million. All of the Company's transcription operations were converted to the Company's standard technology platform as of December 31, 1999. Cascade's revenue increased slightly to $2.3 million in 2000 from $2.2 million in 1999, however approximately $150,000 of contracted business was deferred for revenue recognition purposes until 2001. CodeRemote's revenue increased 102% in 2000, which represents an increase of $335,000 relative to 1999, when it commenced operations during April 1999. 11 As a result of the Company's restructuring efforts in the latter part of 1999, all of the business units, except Cascade, reported improved gross profit as a percentage of revenue in 2000. The gross profit as a percentage of revenue for the transcription business improved to 16% in 2000 from 2% (including the NRC) and 8% (excluding the NRC) in 1999. Cascade's gross profit as a percentage of revenue dropped slightly to 63% in 2000 from 64% in 1999. The gross profit as a percentage of revenue for Co-Sourcing improved to 12% in 2000 from 6% (including the NRC) and 11% (excluding the NRC) in 1999. As discussed above, CodeRemote was a start-up operation in 1999. CodeRemote improved its gross profit as a percentage of revenue to 8% in 2000 from breakeven in 1999. Marketing and sales expenses decreased $1.2 million, or 56%, from $2.1 million in 1999 to $936,000 in 2000. This decrease is due to the reduction in sales staffing associated with the Company's restructuring of its operations to focus on medical transcription services and coding and abstracting software. Research and development expenses decreased $581,000, or 34%, from $1.7 million in 1999 to $1.2 million in 2000 primarily due to the overall restructuring efforts by the Company in the latter part of 1999, which resulted in a non-recurring charge related to research and development activities of approximately $1.0 million in 1999. General and administrative expenses decreased $3.9 million, or 53%, from $7.4 million in 1999 to $3.5 million in 2000 due primarily to the overall restructuring efforts by the Company in the latter part of 1999, which resulted in a non-recurring charge related to general and administrative activities of approximately $2.1 million in 1999. Amortization expense decreased to from $173,000 in 1999 to $59,000 in 2000 reflecting the effect of the sale of the Utah and Northeast transcription operations in December 1999. Net interest expense decreased from $855,000 in 1999 to $420,000 in 2000 primarily due to the reduced level of borrowing made possible by the issuance of the Series B Convertible Preferred Stock, which eliminated $1.5 million of debt bearing interest at 10% per annum, and the retirement of certain debt with a portion of the proceeds from the sale of certain transcription operations in late 1999 and from the sale of the Co-Sourcing and CodeRemote business units during October 2000. The gain on legal settlement of $461,000 in 2000 represents the excess of the $1.7 million arbitration award over the Company's costs incurred related to the reacquisition and subsequent closing of the Company's TCM operations. The gain on sale of assets of $89,000 in 2000 represents the gain on the sale of the Co-Sourcing and CodeRemote business units to Provider HealthNet Services, Inc. ("PHNS") on October 13, 2000. The gain on sale of assets of $5.8 million in 1999 resulted from the sale of net assets and contracts of the Utah and Northeast-based transcription services. The Company reported a loss before income taxes and discontinued operations of $710,000 in 2000 compared to a loss of $3.1 million in 1999. This improvement of $2.3 million reflects the results of the Company's restructuring efforts during the latter part of 1999 that are manifested in higher gross profit margins and reduced operating expenses. The loss from discontinued operations of $1.5 million in 1999 was primarily due to non-recurring charges of $1.3 million in connection with the settlement of the civil lawsuit against certain insurance companies in the state of California that was settled in December 1999. In November 1997, the Company issued 212,800 shares of Series A Convertible Preferred Stock with a dividend of 9%. The net loss to common stockholders includes preferred stock dividends of $478,000 and $480,000 in 2000 and 1999, respectively. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 2001, the Company has cash and cash equivalents of $304,000, working capital of $221,000, no long-term debt outstanding and no borrowings under its $1.5 million line of credit, which expires on March 31, 2002, but is expected to be renewed. Net cash provided by continuing operations totaled approximately $1.5 million in 2001 due primarily to the receipt of approximately $1.2 million from the sale of the common stock of CORE, Inc. that was received in a legal settlement related to TCM in 2000. In addition, the Company operated on an EBITDA positive basis and effectively managing its working capital, especially the collection of accounts receivable. Net cash used in investing activities of $110,000 in 2001 includes the budgeted level of capital expenditures to support 12 operations offset somewhat by the proceeds of an earn-out payment related to an asset sale in 1999. Net cash used in financing activities of $1.1 million in 2001 is primarily due to the elimination of debt and the scheduled quarterly payments of Preferred Stock dividends. The Company is a defendant in separate litigation matters with PHNS and OLOL. See "Item 3. Legal Proceedings". The outcome of the binding arbitration in the PHNS matter should be determined during the first quarter of 2002. It is unlikely that the outcome of the OLOL matter will be known in 2002. Further, if the OLOL outcome were unfavorable, the Company would most likely appeal the verdict. Nonetheless, the PHNS and the OLOL legal actions could have a material adverse effect on the Company's results of operations and financial condition in the future. The Company anticipates that cash on hand, together with internally generated funds and cash available under its line of credit should be sufficient to finance operations, make capital investments in the normal and ordinary course of business, meet its Series A Preferred Stock dividend payment requirements and fund any award, if any, resulting from the arbitration with PHNS during 2002. IMPACT OF INFLATION Inflation has not had a material effect on the Company to date. However, the effects of inflation on future operating results will depend in part, on the Company's ability to increase prices or lower expenses, or both, in amounts that offset inflationary cost increases. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company has no material exposure to market risk from derivatives or other financial instruments as of December 31, 2001. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following financial statements are filed with this report: Reports of Independent Public Accountants Consolidated Balance Sheets as of December 31, 2001 and 2000 Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001, 2000 and 1999 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 Notes to Consolidated Financial Statements 13 REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS To Transcend Services, Inc.: We have audited the accompanying consolidated balance sheet of Transcend Services, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2001 and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. 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 audit provides 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, 2001 and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States. /s/ Miller Ray & Houser LLP Atlanta, Georgia January 24, 2002 To Transcend Services, Inc.: We have audited the accompanying consolidated balance sheet of Transcend Services, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2000 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the two years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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, 2000 and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP Atlanta, Georgia February 27, 2001, except with respect to Note 4, as to which the date is March 30, 2001 14 TRANSCEND SERVICES, INC. CONSOLIDATED BALANCE SHEETS
December 31, --------------------------------------- ASSETS 2001 2000 ---- ---- Current assets: Cash and cash equivalents $ 304,000 $ 6,000 Short-term investment -- 870,000 Accounts receivable, net of allowances for doubtful accounts of $89,000 and $542,000 at December 31, 2001 and 2000, respectively 1,351,000 1,974,000 Prepaid expenses and other current assets 148,000 165,000 ------------ ------------ Total current assets 1,803,000 3,015,000 ------------ ------------ Property and equipment: Computer equipment 3,346,000 2,975,000 Software development 1,787,000 1,550,000 Furniture and fixtures 275,000 220,000 ------------ ------------ Total property and equipment 5,408,000 4,745,000 Accumulated depreciation (3,667,000) (2,487,000) ------------ ------------ Property and equipment, net 1,741,000 2,258,000 ------------ ------------ Notes receivable and other assets 47,000 406,000 ------------ ------------ Total assets $ 3,591,000 $ 5,679,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 180,000 $ 1,059,000 Accrued compensation and benefits 350,000 399,000 Other accrued liabilities 1,052,000 1,310,000 Deferred income taxes -- 121,000 ------------ ------------ Total current liabilities 1,582,000 2,889,000 ------------ ------------ Borrowings under line of credit -- 614,000 ------------ ------------ Commitments and contingencies (Note 5) Stockholders' equity: Preferred stock, $.01 par value; 21,000,000 shares authorized: Series A Convertible Preferred Stock, 212,800 shares issued and outstanding at December 31, 2001 and 2000 2,000 2,000 Series B Convertible Preferred Stock, 60,000 shares issued and outstanding at December 31, 2001 and 2000 1,000 1,000 Common stock, $.05 par value, 6,000,000 shares authorized, 4,513,000 and 4,383,000 shares issued and outstanding at December 31, 2001 and 2000, respectively 230,000 224,000 Additional paid-in capital 28,136,000 28,602,000 Less - Subscription receivable for the purchase of 100,000 shares of common stock (126,000) -- Less - Treasury stock, at cost, 100,000 shares -- (620,000) Unrealized loss on short-term investment -- (866,000) Accumulated deficit (26,234,000) (25,167,000) ------------ ------------ Total stockholders' equity 2,009,000 2,176,000 ------------ ------------ Total liabilities and stockholders' equity $ 3,591,000 $ 5,679,000 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 15 TRANSCEND SERVICES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, --------------------------------------------------- 2001 2000 1999 ---- ---- ---- Revenue $ 13,785,000 $ 26,262,000 $ 49,515,000 Direct costs 9,846,000 21,485,000 46,108,000 -------------------------------------------------- Gross profit 3,939,000 4,777,000 3,407,000 -------------------------------------------------- Operating expenses: Marketing and sales 852,000 936,000 2,107,000 Research and development 870,000 1,152,000 1,733,000 General and administrative 2,880,000 3,529,000 7,542,000 -------------------------------------------------- Total operating expenses 4,602,000 5,617,000 11,382,000 -------------------------------------------------- Loss from operations (663,000) (840,000) (7,975,000) -------------------------------------------------- Other (expense) income: Interest expense, net (18,000) (420,000) (855,000) (Loss) gain on legal settlement (576,000) 461,000 -- Gain on sale of assets 553,000 89,000 5,774,000 -------------------------------------------------- Total other (expense) income (41,000) 130,000 4,919,000 -------------------------------------------------- Loss before income taxes and discontinued operations (704,000) (710,000) (3,056,000) Income tax benefit 116,000 -- -- -------------------------------------------------- Loss before discontinued operations (588,000) (710,000) (3,056,000) Loss from discontinued operations -- -- (1,452,000) -------------------------------------------------- Net loss (588,000) (710,000) (4,508,000) Dividends on preferred stock (479,000) (478,000) (480,000) -------------------------------------------------- Net loss attributable to common stockholders $ (1,067,000) $ (1,188,000) $ (4,988,000) ================================================== Basic and diluted net loss per share: From continuing operations $ (0.24) $ (0.27) $ (0.81) From discontinued operations 0.00 0.00 (0.33) -------------------------------------------------- Net loss per share attributable to common stockholders $ (0.24) $ (0.27) $ (1.14) ================================================== Weighted average common shares outstanding 4,404,000 4,341,000 4,386,000 ==================================================
The accompanying notes are an integral part of these consolidated financial statements. 16 TRANSCEND SERVICES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
UNREALIZED ADDITIONAL LOSS ON PREFERRED STOCK COMMON TREASURY PAID-IN SUBSCRIPTION SHORT-TERM --------------------- SERIES A SERIES B STOCK STOCK CAPITAL RECEIVABLE INVESTMENT -------- -------- ----- ----- ------- ---------- ---------- Balance, December 31, 1998 $2,000 $ -- $215,000 $ -- $26,286,000 $ -- $ -- Issuance of 100,000 shares of Common Stock in private placement -- -- 5,000 -- 620,000 (620,000) -- Treasury Stock purchases -- -- -- (620,000) -- 620,000 -- Issuance of 11,670 shares of Common Stock from exercise of options and other issuances -- -- -- -- 39,000 -- -- Net loss attributable to common stockholders -- -- -- -- -- -- -- --------------------------------------------------------------------------------------- Balance, December 31, 1999 2,000 -- 220,000 (620,000) 26,945,000 -- -- Comprehensive loss: Net loss attributable to common stockholders -- -- -- -- -- -- -- Unrealized loss on short-term investment -- -- -- -- -- -- (866,000) Comprehensive loss -- -- -- -- -- -- -- Conversion of convertible debt to Preferred Stock -- 1,000 -- -- 1,499,000 -- -- Issuance of 27,900 shares of Common Stock from exercise of options -- -- 4,000 -- 158,000 -- -- --------------------------------------------------------------------------------------- Balance, December 31, 2000 2,000 1,000 224,000 (620,000) 28,602,000 -- (866,000) Comprehensive loss: Net loss attributable to common stockholders -- -- -- -- -- -- -- Reverse valuation reserve on short-term investment -- -- -- -- -- -- 866,000 Comprehensive loss -- -- -- -- -- -- -- Issuance of 100,000 shares of Common Stock in private placement -- -- 5,000 -- 121,000 (126,000) -- Issuance of 40,000 shares of Common Stock from exercise of options and other issuance -- -- 1,000 -- 33,000 -- -- Retirement of Treasury Stock -- -- -- 620,000 (620,000) -- -- --------------------------------------------------------------------------------------- Balance, December 31, 2001 $2,000 $1,000 $230,000 $ -- $28,136,000 $(126,000) $ -- ======================================================================================= ACCUMULATED STOCKHOLDERS' COMPREHENSIVE DEFICIT EQUITY LOSS ------- ------ ---- Balance, December 31, 1998 $(18,991,000) $ 7,512,000 Issuance of 100,000 shares of Common Stock in private placement -- 5,000 Treasury Stock purchases -- -- Issuance of 11,670 shares of Common Stock from exercise of options and other issuances -- 39,000 Net loss attributable to common stockholders (4,988,000) (4,988,000) --------------------------- Balance, December 31, 1999 (23,979,000) 2,568,000 Comprehensive loss: Net loss attributable to common stockholders (1,188,000) (1,188,000) $(1,188,000) Unrealized loss on short-term investment -- (866,000) (866,000) ----------------- Comprehensive loss -- -- $(2,054,000) ================= Conversion of convertible debt to Preferred Stock -- 1,500,000 Issuance of 27,900 shares of Common Stock from exercise of options -- 162,000 --------------------------- Balance, December 31, 2000 (25,167,000) 2,176,000 Comprehensive loss: Net loss attributable to common stockholders (1,067,000) (1,067,000) $(1,067,000) Reverse valuation reserve on short-term investment -- 866,000 866,000 ----------------- Comprehensive loss -- -- $ (201,000) ================= Issuance of 100,000 shares of Common Stock in private placement -- -- Issuance of 10,000 shares of Common Stock from exercise of options -- 34,000 Retirement of Treasury Stock -- -- --------------------------- Balance, December 31, 2001 $(26,234,000) $ 2,009,000 ===========================
The accompanying notes are an integral part of these consolidated financial statements. 17 TRANSCEND SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ---------------------------------------------------- 2001 2000 1999 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss attributable to common shareholders $(1,067,000) $(1,188,000) $(4,988,000) ---------------------------------------------------- Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 1,180,000 1,972,000 5,155,000 Loss related to discontinued operations -- -- 1,452,000 Loss (gain) on legal settlement 576,000 (461,000) -- Gain on sale of assets (553,000) (89,000) (5,774,000) Preferred Stock dividends 479,000 478,000 480,000 Changes in assets and liabilities: Short-term investment 1,160,000 -- -- Accounts receivable, net 623,000 2,687,000 1,670,000 Prepaid expenses 17,000 108,000 632,000 Notes receivable and other assets 359,000 317,000 116,000 Accounts payable (879,000) (1,118,000) (449,000) Accrued liabilities (428,000) (5,566,000) 2,321,000 ------------------------------------------- Total adjustments 2,534,000 (1,672,000) 5,603,000 ------------------------------------------- Net cash provided by (used in) continuing operations 1,467,000 (2,860,000) 615,000 Net cash provided by discontinued operations -- -- 914,000 ------------------------------------------- Net cash provided by (used in) operating activities 1,467,000 (2,860,000) 1,529,000 ------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (663,000) (994,000) (3,593,000) Proceeds from disposition of assets 553,000 4,700,000 7,378,000 ------------------------------------------- Net cash (used in) provided by investing activities (110,000) 3,706,000 3,785,000 ------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings from short-term debt -- -- 1,500,000 Repayments (borrowings) under line of credit agreement (614,000) 614,000 (2,740,000) Borrowings from long-term debt -- -- 400,000 Principal payments on long-term debt -- (5,526,000) (100,000) Preferred Stock dividends (479,000) (478,000) (480,000) Proceeds from stock options and other issuances 34,000 162,000 44,000 ------------------------------------------- Net cash used in financing activities (1,059,000) (5,228,000) (1,376,000) ------------------------------------------- Net change in cash and cash equivalents 298,000 (4,382,000) 3,938,000 Cash and cash equivalents, at beginning of year 6,000 4,388,000 450,000 ------------------------------------------- Cash and cash equivalents, at end of year $ 304,000 $ 6,000 $ 4,388,000 =========================================== Supplemental cash flow information: Cash paid for interest expense $ 60,000 $ 420,000 $ 721,000 =========================================== Noncash investing and financing activities: Receipt of secured promissory notes receivable for the issuance of Common Stock $ 126,000 $ -- $ -- =========================================== Receipt of short-term investment in legal settlement $ -- $ 1,736,000 $ -- =========================================== Conversion of convertible notes payable to a related party to Series B Preferred Stock $ -- $ 1,500,000 $ -- ===========================================
The accompanying notes are an integral part of these consolidated financial statements. 18 TRANSCEND SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS Transcend Services, Inc. ("the Company") provides medical transcription services and coding and abstracting software to the healthcare industry. Powered by its web-based voice and data distribution technology, the Company's home-based professionals document patient care by converting physician's voice recordings into electronic medical record documents. The Company's subsidiary, Cascade Health Information Software, Inc. ("Cascade"), provides state-of-the-art software for the management of patient medical records. The Company has experienced operating losses as a result of decreasing revenue over the past few years. The Company has divested certain business lines (see Note 11) in an effort to return to profitability. Although the Company has been able to arrange debt and equity financing to date, there can be no assurance that sufficient debt or equity financing will continue to be available in the future or that it will be available on terms acceptable to the Company. Management believes that the Company is now positioned to achieve and sustain profitability and positive cash flow. BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Transcend Case Management, Inc. ("TCM") and Cascade. The results of operations include the Company's Co-Sourcing and CodeRemote businesses until their sale on October 13, 2000 (see Note 11). TCM is presented as discontinued operations (see Note 2). On March 13, 2001, the Company announced the termination of its efforts to sell Cascade, which had previously been reported as discontinued operations in the Company's consolidated financial statements, due to market conditions. All information presented has been restated to show the reclassification of Cascade from discontinued to continuing operations. All significant intercompany accounts and transactions have been eliminated in consolidation. Common shares and per share data have been restated to include the 1-for-5 reverse stock split effected by the Company on January 14, 2000. ACCOUNTING ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures in the Company's financial statements and accompanying notes. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS All highly liquid investments purchased with an original maturity of three months or less are classified as cash equivalents. SHORT-TERM INVESTMENT The Company follows Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity Securities. SFAS No. 115 mandates that a determination be made of the appropriate classification for debt and equity securities with readily determinable fair value at the time of purchase and a reevaluation of such designation as of each balance sheet date. The Company considered its short-term investment, which consisted of unregistered common stock of a publicly traded company acquired in a legal settlement effective March 31, 2000, as "available for sale". The cost basis of this short-term investment was approximately $1,736,000 and its fair market value was $870,000 as of December 31, 2000 resulting in an unrealized loss of $866,000 in 2000, which is presented as a reduction of stockholders' equity in the accompanying consolidated balance sheet as of that date. On April 2, 2001, the Company sold this short-term investment for approximately $1,160,000, net of commission expense of $10,000, resulting in a realized loss of approximately $576,000, which is presented as the loss on legal settlement in the accompanying consolidated statement of operations for the year ended December 31, 2001. The valuation reserve of $866,000 that was established for this short-term investment as of December 31, 2000 was reversed at the time of the sale resulting in a net increase in stockholders' equity of approximately $290,000 during 2001 due to this sale. 19 ACCOUNTS RECEIVABLE Accounts receivable are recorded net of an allowance for doubtful accounts established to provide for losses on uncollectible accounts based on management's estimates and historical collection. The provisions for doubtful accounts were $28,000, $67,000 and $1,018,000 in 2001, 2000 and 1999, respectively. Charges for bad debts were $481,000, $244,000 and $608,000 in 2001, 2000 and 1999, respectively. REVENUE AND COST RECOGNITION Service revenue includes system implementation, software support and software maintenance fees. Implementation fee revenue is recognized as the work is performed. Software support and maintenance revenue is recognized monthly over the service period. Software license fee revenue is recognized in accordance with Statement of Position ("SOP") 97-2, Software Revenue Recognition, SOP 98-9, Software Revenue Recognition with Respect to Certain Transactions and Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. Accordingly, the Company recognizes software license fee revenue when: (1) a software license agreement exists; (2) delivery and installation have occurred; (3) the fee is fixed or determinable; and (4) collectibility is probable. All service-related costs are expensed as incurred. PROPERTY AND EQUIPMENT Property and equipment is stated at cost, less accumulated depreciation. Charges for depreciation of capital assets are computed using the straight-line method over their estimated useful lives, which range from three to five years, and are included in direct costs and general and administrative expenses in the accompanying consolidated statements of operations. All costs in the software development process that are classified as research and development are expensed as incurred until technological feasibility has been established. Once technological feasibility has been established, such costs are considered for capitalization. The Company's policy is to amortize these costs using the straight-line method over the remaining estimated economic life of the product, not to exceed five years. NOTES RECEIVABLE AND OTHER ASSETS Notes receivable relate to the sale of transcription services. Notes receivable were approximately $357,000 at December 31, 2000. These notes receivable and 7% accrued interest of approximately $43,000 thereon were collected when due during December 2001. Other assets consist of deposits for rented facilities in the approximate amounts of $47,000 and $49,000 at December 31, 2001 and 2000, respectively. GOODWILL AND OTHER INTANGIBLE ASSETS Prior to 2000, goodwill and other intangible assets were amortized over periods ranging from three to eighteen years. As a result of the sale of the Company's Co-Sourcing and CodeRemote business units in 2000 (see Note 11), the remaining net book value of such goodwill and other intangible assets were written-off as the goodwill related to entities that were sold. IMPAIRMENT The Company accounts for long-lived assets under the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell. In management's opinion, the long-lived assets are appropriately valued in the accompanying balance sheets. FAIR VALUE OF DEBT In accordance with SFAS No. 107, "Disclosures About Fair Value of Financial Instruments", the fair value of short-term debt is estimated to approximate 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, 2000 was equal to the carrying amount included in the accompanying consolidated balance sheet. 20 STOCK BASED COMPENSATION In accordance with the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, the Company measures stock-based compensation expense as the excess of the market price on date of grant over the amount of the grant. Since the Company grants all stock-based compensation at the market price on the date of grant, no compensation expense is recognized. As permitted, the Company has elected to adopt only the disclosure provisions of SFAS No. 123, Accounting for Stock-based Compensation (see Note 9). INCOME TAXES The Company accounts for its income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts and for operating loss and tax credit carry-forwards. NET INCOME (LOSS) PER SHARE The Company follows SFAS No. 128, "Earnings per Share." That statement requires the disclosure of basic net income (loss) per share and diluted net income (loss) per share. Basic net income (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted-average number of common shares outstanding during the period and does not include any other potentially dilutive securities. Diluted net income (loss) per share gives effect to all potentially dilutive securities. The Company's convertible debentures, convertible preferred stock, stock options and stock purchase warrants are potentially dilutive securities. All potentially dilutive securities were antidilutive and therefore are not included in diluted net loss per share calculations in 2001, 2000 and 1999. COMPREHENSIVE LOSS The Company accounts for comprehensive loss under the provisions of SFAS No. 130, Reporting Comprehensive Income. This statement establishes standards for reporting and display of comprehensive loss and its components in a full set of general purpose financial statements. The Company has chosen to disclose comprehensive loss, which consists of an unrealized loss and a reversal of a valuation reserve on a short-term investment, in the consolidated statements of stockholders' equity. CREDIT RISK The Company's accounts receivable potentially subject the Company to credit risk, as collateral is generally not required. The Company's risk of loss is limited due to the ability to terminate access on delinquent accounts. The carrying amount of the Company's receivables approximates their fair values. RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard No. 141 ("SFAS 141"), regarding "Business Combinations" in June 2001, SFAS 142 regarding "Goodwill and Other Intangible Assets" in June 2001, SFAS 143 regarding "Accounting for Asset Retirement Obligations" in June 2001 and SFAS 144 regarding "Accounting for the Impairment or Disposal of Long-Lived Assets" in August 2001 (collectively, the "Statements"). The provisions of the Statements became, or will become, effective at various times in 2001 through 2003 and were, or will be, considered and adopted, where and when applicable, by the Company at the appropriate time. None of the applicable Statements had an effect on the results of operations or financial position of the Company reported in the accompanying consolidated financial statements as a result of said adoption. 2. DISCONTINUED OPERATIONS The net loss from discontinued operations of $1,452,000 in 1999 relates to the operations of TCM and the Company's former subsidiaries, First Western Health Corporation and Veritas Health Management ("Tricare Ops"), which ceased operations as of April 30, 1993. The Company sold and reacquired TCM in 1998 and reported revenue of $783,000 and a net loss of $32,000 for TCM in 1999 before ceasing TCM's operations effective December 31, 1999. The net loss from Tricare Ops of $1,420,000 in 1999 represents the net costs for legal proceedings associated with the civil lawsuit filed by the Company against certain workers' compensation insurance carriers. This lawsuit was settled for approximately $1.2 million on December 30, 1999. 21 3. NON-RECURRING ITEMS In December 1999, the Company recorded gains on the sale of certain transcription operations and contracts of approximately $5.8 million (see Note 11), and charges from the restructuring of its operations, the write-off of obsolete fixed assets, and other unusual charges totaling approximately $5.5 million, which are included in the appropriate operating expense accounts in the consolidated statements of operations. 4. BORROWING ARRANGEMENTS Long-term debt of $614,000 as of December 31, 2000 represents borrowings under the Company's current line of credit described below. There were no borrowings under this line of credit as of December 31, 2001. In February 1999, the Company amended its credit facility agreement with Coast Business Credit ("Coast"), a division of Southern Pacific Thrift and Loan Association, to $10.0 million and extended the maturity date to May 31, 2001. The agreement provided the Company with a $9.7 million working capital facility and a $300,000 capital expenditure facility secured by substantially all of the Company's assets. On November 21, 2000, this credit facility was terminated and the then-current outstanding balance of approximately $1.8 million was paid in full with a portion of the proceeds from the sale of the Co-Sourcing and CodeRemote business units (see Note 11). On August 14, 2000, the Company entered into a bridge loan agreement with each of the Company's Chief Executive Officer and one of the Company's Directors to provide short-term capital to retire its convertible debentures, which matured on August 15, 2000. The unsecured loans totaled $1,600,000, bore interest at 10.75%, which approximated the Coast interest rate, and matured upon the earlier of November 15, 2000 or upon closing of the proposed sale of the Co-Sourcing and CodeRemote business units (see Note 11). The Company also obtained agreements with certain debenture holders to extend the maturity date of their debentures, which totaled $350,000, until the earlier of November 15, 2000 or upon the closing of the proposed sale of the Co-Sourcing and CodeRemote business units. These bridge loans and extended-maturity debentures were repaid and retired, respectively, on October 13, 2000 with a portion of the proceeds received from the sale of the Co-Sourcing and CodeRemote business units. On November 17, 2000, the Company signed a one-year promissory note due November 20, 2001 that established a $750,000 line of credit (the "LOC") with Bank of America, N.A. ("B of A"). Borrowings under this LOC bear interest at B of A's prime rate less one-half percent (4.25% at December 31, 2001). Repayment of such borrowings is personally guaranteed by the Company's Chief Executive Officer and one of its Directors (the "Guarantors"). The balance outstanding under this LOC was $614,000 at December 31, 2000. On January 31, 2001, the Company and the Guarantors increased the LOC to $1.5 million under the same terms and conditions as the original promissory note. On March 30, 2001, the Company and the Guarantors extended the due date of the LOC to March 31, 2002. There was no balance outstanding under this LOC at December 31, 2001 and the entire $1.5 million was available for borrowing at that date. 5. COMMITMENTS AND CONTINGENCIES Lease Commitments Future minimum annual rental obligations under operating leases as of December 31, 2001 are as follows: 2002 ........................ $ 274,000 2003 ........................ 251,000 2004 ........................ 256,000 2005 ........................ 269,000 2006 ........................ 275,000 Thereafter .................. 210,000 --------------- $1,535,000 =============== Rental expense was $301,000, $398,000 and $665,000 for the years ended December 31, 2001, 2000 and 1999, respectively. Litigation On September 17, 1993, the Company and its former subsidiaries, Tricare Ops, and the physician-owned medical groups, FWHC Medical Group, Inc. and Veritas Medical Group, Inc., which had contracts with the healthcare subsidiaries, initiated a lawsuit in the Superior Court of the State of California, County of Los Angeles, against 22 of the largest California workers' 22 compensation insurance carriers. The lawsuit was subsequently amended to name 13 defendant insurance groups including State Compensation Insurance Fund, Continental Casualty Company, California Compensation Insurance Company, Zenith National Insurance Corporation, and Pacific Rim Assurance Company. The action sought compensatory damages plus punitive damages. The plaintiffs claimed abuse of process, intentional interference with contractual and prospective business relations, negligent interference and unlawful or unfair business practices which led to the discontinuation in April 1993 of the former business of the Company's subsidiaries and their contracting associated medical groups. Nine defendants in the lawsuit filed cross complaints against the plaintiffs seeking restitution, accounting from the plaintiffs for monies previously paid by the defendants, disgorgement of profits, injunctive relief, attorneys' fees and punitive damages, based upon allegations of illegal corporate practice of medicine, illegal referral arrangements, specific statutory violations and related improper conduct. All parties released all claims upon settlement of the lawsuit for approximately $1.2 million on December 30, 1999. The Company expensed approximately $91,000 of legal expenses connected with the Lawsuit in 1999. On June 18, 1999, Paul and Linda Greiner (the "Greiners") filed a demand for Arbitration with the American Arbitration Association, seeking unspecified amounts of compensatory damages, punitive damages, interest, arbitration costs, and attorney's fees, based on unspecified theories of fraud, fraudulent inducement to contract, and breach of contract. The demand alleged misrepresentation by the Company in connection with an agreement between the parties to register the Greiners' shares for resale under federal securities laws. The Company settled this claim at a cost of $50,000 cash plus the forgiveness of indebtedness in the amount of $150,000 during June 2000. On April 5, 2001, Our Lady of the Lakes Hospital, Inc. ("OLOL") filed a lawsuit against the Company. The lawsuit, styled "Our Lady of the Lakes Hospital, Inc. v. Transcend Services, Inc." was filed in the 19th Judicial District Court, Parish of East, State of Louisiana, Civil Case Number 482775, Div. A. The lawsuit alleges, among other things, that the Company breached certain contracts entered into between OLOL and the Company, including a staffing and management servicing contract, a transcription platform agreement and a marketing agreement. OLOL is seeking an unspecified amount of monetary damages. On May 30, 2001, the Company filed a timely Answer that generally denied all liability, and the Company filed a counterclaim against OLOL primarily seeking fees owed by OLOL for services performed by the Company and interest on unpaid invoices. OLOL has subsequently added Transcend's insurance carrier as defendants to the lawsuit. The Company intends to vigorously defend all claims made by OLOL. The lawsuit is in a very early procedural stage, however, and therefore it is not possible at this time to determine the outcome of the actions or the effect, if any, that their outcome may have on the Company's results of operations and financial condition. There can be no assurances that this litigation will not have a material adverse effect on the Company's results of operations and financial condition. On July 9, 2001, Provider HealthNet Services, Inc. ("PHNS") made a written demand for payment from Transcend in the amount of approximately $750,000. The demand was based on allegations that Transcend had breached certain representations and warranties contained in an Asset Purchase Agreement between PHNS and Transcend entered into on October 13, 2000. Thereafter, Transcend made a counter-demand against PHNS for payment of approximately $93,000 owed under that same Asset Purchase Agreement. The parties have subsequently submitted all disputes in this matter to binding arbitration, which was held on January 23 and 24, 2002. The results of this arbitration have not been finalized and it is not possible at this time to determine the outcome of this arbitration or the effect, if any, that the outcome may have on the Company's results of operations and financial condition. There can be no assurances that this litigation will not have a material adverse effect on the Company's results of operations and financial condition. On September 14, 2001, the Company filed a lawsuit against Palmer & Cay Consulting Group, Inc. ("P&C"), the Company's former insurance broker. The lawsuit, styled "Transcend Services, Inc. v. Palmer & Cay Consulting Group, Inc." was filed in the Superior Court of Fulton County, State of Georgia, Civil Action File No.: 2001-CV-42725. The lawsuit alleges that P&C negligently failed to advise Transcend of, or otherwise failed to make arrangements to cover, Transcend's potential liability for certain health care claims submitted by Transcend's employees. Transcend is seeking damages of $450,000, attorneys' fees and interest. The case is in the preliminary stages of discovery and it is not possible at this time to determine an outcome of the lawsuit or the effect, if any, that the outcome may have on the Company's results of operations and financial condition. The Company is party to various lawsuits encountered in the normal course of business and is involved in a dispute with the Internal Revenue Service regarding the timely payment of payroll taxes in prior years. The Company believes that it has meritorious defenses to the related claims and assertions, however, there can be no assurance that the Company will be successful in defending such claims and assertions. 23 6. RETIREMENT PLAN The Company maintains a 401(k) retirement plan that covers substantially all eligible employees. 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. There have been no Company matching contributions for 2001, 2000 and 1999. 7. TRANSACTIONS WITH RELATED PARTIES On March 23, 1999, the Company sold unregistered shares of its common stock to certain executive officers at market value of $620,000. In connection with the sale, the executive officers issued promissory notes payable to the Company. In December 1999, the Company exchanged the promissory notes for the unregistered shares, which are held in Treasury at December 31, 2000 and 1999. These shares held in Treasury were retired in 2001. In August 1999, certain directors and accredited investors of the Company loaned an aggregate $1.5 million to the Company for the purpose of interim financing. The related unsecured promissory notes provided for interest at the rate of 10% annually and a maturity date of January 15, 2000. On November 10, 1999, the Company executed an agreement with these directors and investors providing that, at the option of the Company, the promissory notes may be converted to a new class of convertible preferred stock at any time prior to the maturity date. The Shareholders approved the conversion on December 30, 1999, which was effected on January 14, 2000. The new class of preferred stock, the Series B Convertible Preferred Stock, does not pay dividends, and will have voting rights with the common stockholders equal to the number of shares of common stock into which the preferred stock may be converted from time to time. The preferred stock is convertible to common stock at a price of $3.625 per share of common stock. On December 28, 2001, the Company sold 100,000 shares of its unregistered common stock to certain Company officers at market value of $126,000 as determined by the closing sales price reported on the Nasdaq SmallCap Market System on that date. As consideration for the sale, the officers issued interest-bearing, secured promissory notes payable to the Company with a maturity date of January 15, 2003. 8. STOCKHOLDERS' EQUITY The Company has authorized 6,000,000 shares of common stock at $.05 par value, and 21,000,000 shares of preferred stock, at $.01 par value. On November 14, 1997, the Company raised approximately $5.3 million in cash through a private placement of 212,800 shares of newly issued Series A Convertible Preferred Stock (the "Series A Preferred Stock"). The Series A Preferred Stock has a $.01 par value, $25.00 stated value, and a dividend of 9% payable quarterly. The shares of Series A Preferred Stock are convertible into shares of common stock at any time at the option of the holder at a conversion price of $16.875 per share. Under certain circumstances the Company may, at its option, redeem the Series A Preferred Stock, in whole or in part, at 100% of its stated value together with all accrued and unpaid dividends to the redemption date. The holders of the Series A Preferred Stock may convert the Series A Preferred Stock into shares of Common Stock within 60 days following the Company's notice of redemption. Effective January 14, 2000, the Company issued 60,000 shares Series B Convertible Preferred Stock with a stated value of $25.00 per share pursuant to the conversion of $1.5 million of unsecured promissory notes held by certain related parties (see Note 7). On January 14, 2000, the Company effected a 1-for-5 reverse stock split of its common stock. All Common shares and per share amounts have been restated to reflect the effects of the transaction. 9. STOCK OPTIONS AND WARRANTS The Company has established two stock option plans for its employees and Directors. The plans provide for the issuance of incentive stock options and non-statutory options. Under this plan, options are granted for the Company's common stock at the approximate fair value, as defined in the option agreement. 24 The following is a summary of stock option transactions:
WEIGHTED AVERAGE AVERAGE PRICE PRICE OPTIONS PER SHARE PER SHARE ------- --------- --------- Options outstanding at December 31, 1998 302,000 $0.25 to $56.25 $14.80 Granted 278,000 $1.72 to $11.88 $3.14 Forfeited (239,000) $0.25 to $27.50 $12.71 Exercised -- -- $-- ----------------- Options outstanding at December 31, 1999 341,000 $0.25 to $56.25 $7.95 Granted 180,000 $1.34 to $3.50 $2.32 Forfeited (138,000) $0.25 to $56.25 $10.78 Exercised (28,000) $2.63 to $3.00 $3.00 ----------------- Options outstanding at December 31, 2000 355,000 $1.34 to $27.50 $3.55 Granted 162,000 $1.10 to $2.50 $1.63 Forfeited (99,000) $1.34 to $27.50 $4.65 Exercised (10,000) $1.72 $1.72 ----------------- Options outstanding at December 31, 2001 408,000 $1.10 to $18.13 $2.56 ================= Options eligible for exercise at December 31, 2001 176,000 =================
At December 31, 2001 there were a total of 350,000 common stock options available to be granted under the plans. The Company has elected to account for its stock-based compensation plans under Accounting Principles Board Opinion No. 25, under which no compensation cost has been recognized by the Company. However, the Company has computed, for pro forma disclosure purposes, the value of all options for shares of the Company's common stock granted during 2001, 2000 and 1999 to employees and Directors of the Company using the Black-Scholes option-pricing model and the following weighted average assumptions:
2001 2000 1999 --------------------------------------------------------------------------------------------------------------------------- Risk-free interest rate 4.25% 5.65% - 6.65% 4.84% - 6.07% Expected dividend yield -- -- -- Expected life Four years Four years Four years Expected volatility 63% 88% 93%
The total fair value of the options granted during the years ended December 31, 2001, 2000 and 1999 was computed to be approximately $128,000, $124,000 and $295,000, respectively, which would be amortized over the vesting period of the options. If the Company had accounted for these plans in accordance with SFAS No. 123, the Company's reported pro forma net loss for the years ended December 31, 2001, 2000 and 1999 would have been as follows:
2001 2000 1999 ---- ---- ---- Net loss attributable to common stockholders: As reported ($1,067,000) ($1,188,000) ($4,988,000) Pro forma ($1,184,000) ($1,662,000) (5,528,000) Basic and diluted net loss per share attributable to common stockholders: As reported ($0.24) ($0.27) ($1.14) Pro forma ($0.27) ($0.38) ($1.26)
25 The following table sets forth the exercise price range, number of shares, weighted average exercise price, and remaining contractual lives by groups of similar price and grant date:
Options Outstanding Options Exercisable ------------------- ------------------- Outstanding Average Weighted Exercisable Weighted Actual at Remaining Average at Average Range of December 31, Contractual Exercise December 31, Exercise Exercise Price 2001 Life Price 2001 Price --------------------------------------------------------------------------------------------------------------------------------- $1.10 - $1.50 147,000 9.4 years $1.28 17,000 $1.34 $1.51 - $2.00 127,000 8.8 years $1.74 87,000 $1.72 $2.01 - $5.00 110,000 8.5 years $2.77 53,000 $2.77 $5.01 - $18.13 25,000 6.8 years $13.34 19,000 $14.13 -------------------- ------------------- $1.10 - $18.13 408,000 8.6 years $2.56 176,000 $3.35 ==================== ===================
10. INCOME TAXES For the years ended December 31, 2001, 2000 and 1999, the Company generated a net loss for income tax purposes; therefore, no income tax provision has been recorded. The Company reported an income tax benefit of $116,000 in 2001 due to the elimination of deferred income tax liabilities of $121,000 established in prior years that are no longer required, offset slightly by state income taxes of $5,000. The tax effects of temporary differences between the carrying amounts of assets and liabilities in the financial statements and their respective tax bases, which give rise to deferred tax assets and liabilities as of December 31, 2001 and 2000, were as follows:
2001 2000 ---- ---- Deferred tax liabilities: Equipment and leasehold .............................................. $-- $(30,000) Intangibles assets ................................................... -- (10,000) Exercise of stock options ............................................ (358,000) (358,000) --------------------------------- (358,000) (398,000) Deferred tax assets: Net operating loss carry-forwards .................................... 8,366,000 7,962,000 Cash-basis deferral .................................................. 24,000 24,000 Accrued liabilities .................................................. 15,000 139,000 Valuation allowance .................................................. (8,047,000) (7,848,000) --------------------------------- Net deferred tax (liabilities) ....................................... $-- $(121,000) =================================
At December 31, 2001, the Company had net operating loss carry-forwards of approximately $21,450,000 that may be used to reduce future income taxes. If not utilized these carry-forwards will begin to expire in 2009. The Company has established a valuation allowance of $8,047,000 and $7,848,000 at December 31, 2001 and 2000, respectively, due to the uncertainty regarding the realizability of certain deferred tax assets, including its net operating loss carry-forwards.
Reconciliation of Tax Rates: 2001 2000 1999 ---- ---- ---- Federal .............................................................. 34% 34% 34% State ................................................................ 5% 5% 5% Net operating loss carry-forwards .................................... 0% 0% 0% Valuation allowance .................................................. (55%) (39%) (39%) ----------------------------------- Effective tax rate. (16%) 0% 0% ===================================
11. ACQUISITIONS AND DIVESTITURES On March 16, 1998 Transcend sold the net assets of Transcend Case Management, Inc., its wholly owned subsidiary, to TCM Services, Inc., a wholly owned subsidiary of CORE, Inc. ("CORE"). On December 23, 1998 the Company reacquired TCM from CORE and filed an arbitration claim against CORE after learning of CORE's intent to discontinue the business. The reacquisition of TCM was accounted for under the purchase method of accounting. On February 8, 2000, an arbitrator ruled that CORE had breached its purchase contract with Transcend and awarded approximately $1.7 million, plus attorney's fees and arbitration costs, to Transcend. On March 31, 2000, CORE issued 248,703 shares of its unregistered common stock to Transcend in full and complete settlement of the arbitrator's award to Transcend. The Company reported a $461,000 gain on this legal settlement in 2000 and a $576,000 loss on the sale of the CORE stock in 2001. The Company ceased TCM's operations effective December 31, 1999 (see 26 Note 2). In December 1999, the Company sold the net assets of its Utah and Northeast-based medical transcription services operations and certain contracts for an aggregate purchase price of approximately $7.7 million, consisting of $7.3 million in cash, and the remainder in promissory notes paid in December 2001. In addition, the Company received a one-time earn-out payment of $553,000 in December 2001 related to these sold operations and contracts, which is presented as a gain on sale of assets in the accompanying consolidated statements of operations. On October 13, 2000, the Company completed the sale of its Co-Sourcing and CodeRemote business units (the "Businesses") to Provider HealthNet Services, Inc. ("PHNS") pursuant to an Asset Purchase Agreement (the "Agreement") with PHNS. Transcend received approximately $4.7 million in cash with the potential to receive additional consideration payable over the subsequent five years. The amount of future consideration, if any, will be based on a fixed percentage of certain defined future revenue recognized by PHNS from the Businesses. The Company reported an $89,000 gain on the disposition in 2000. The Company did not recognize additional consideration of approximately $93,000 due from PHNS in 2001 pending a favorable resolution of an unrelated dispute with PHNS. See Note 5. The following unaudited pro forma financial information presents consolidated revenue and gross profit for the continuing operations in 2000 and 1999 as if the dispositions had taken place on January 1, 1999. Management evaluated the performance of its transcription operations and certain business segments, including Co-Sourcing and CodeRemote, on the basis of revenue and gross profit. Since many of the assets and operating expenses of these sold operations and segments are not separately identifiable, these divestitures are not reported as discontinued operations. Such pro forma amounts are not necessarily indicative of what actual results of operations might have been if the disposition had been effective on January 1, 1999. (in 000's, except for per share data) 2000 1999 ---- ---- Revenue $15,921 $17,642 Gross Profit $ 3,544 $ 2,158 12. Segment Information The Company's reportable segments are strategic business units that offer different services and products. The Company operated in four segments (hospital medical records management, remote coding of medical records, medical transcription and coding software) during 1999 and for the ten-month and thirteen-day period ended October 13, 2000 and in two segments for the remainder of 2000 and 2001 (medical transcription and coding software). These four segments are referred to by the Company as Co-Sourcing, CodeRemote, Transcription Services and Cascade, respectively. In 1999 and 2000 the Company evaluated the performance of Co-Sourcing, CodeRemote and Transcription Services based on revenue and gross profit and Cascade based on revenue, gross profit and operating income. In 2001 Transcription Services and Cascade are each evaluated based on revenue, gross profit and operating income. In 1999 the revenue and gross profit derived from transcription services performed for Co-Sourcing customers was reclassified from Co-Sourcing to Transcription Services for the purpose of evaluating the performance of the transcription business. Since many of the assets and operating expenses of these segments are not separately identifiable, management believes that allocating such shared assets and expenses in not only impractical, but also meaningless. 27
(in 000's) 2001 2000 1999 Revenue: Transcription Services $11,817 $13,666 $24,085 Cascade 1,968 2,255 2,234 Co-Sourcing N/A 9,678 22,868 CodeRemote N/A 663 328 ------------------------------------------ Total revenue $13,785 $26,262 $49,515 ========================================== Gross profit: Transcription Services $ 2,939 $ 2,128 $ 599 Cascade 1,001 1,416 1,431 Co-Sourcing N/A 1,179 1,377 CodeRemote N/A 54 0 ------------------------------------------ Total gross profit $ 3,940 $ 4,777 $ 3,407 ========================================== Operating loss: Transcription Services ($214) N/A N/A Cascade (449) ($477) ($600) --------------============================ Total operating loss ($663) =============
13. Selected Quarterly Financial Data (unaudited)
First Quarter Second Quarter Third Quarter Fourth Quarter 2001 Revenue $3,559,000 $ 3,263,000 $3,425,000 $ 3,538,000 Gross profit $1,186,000 $ 810,000 $ 899,000 $ 1,044,000 Net income (loss) attributable to common shareholders (2) $ 69,000 $(1,016,000) $ (122,000) $ 2,000 Basic and diluted net income (loss) per share attributable to common $ 0.02 $ (0.23) $ (0.03) $ 0.00 stockholders 2000 Revenue (1) $8,127,000 $ 8,127,000 $6,235,000 $ 3,773,000 Gross profit $1,457,000 $ 1,726,000 $1,211,000 $ 383,000 Net income (loss) attributable to common shareholders (2) $ 79,000 $ 4,000 $ (40,000) $(1,231,000) Basic and diluted net income (loss) per share attributable to common $ 0.02 $ 0.00 $ (0.01) $ (0.29) stockholders
(1) The decrease in revenue in the third quarter of 2000 is primarily attributable to the Company terminating certain unprofitable and marginally profitable Co-Sourcing contracts. The decrease in revenue in the fourth quarter of 2000 is primarily attributable to the loss of revenue from the sale of the Co-Sourcing and CodeRemote business units during October 2000 (see Note 11). (2) The following unusual items are included in the determination of net income (loss) attributable to common stockholders: (a) (loss) gain on legal settlement of $272,000 in the first quarter of 2000, $231,000 in the third quarter of 2000, $(42,000) in the fourth quarter of 2000 and $(576,000) in the second quarter of 2001, all primarily related to TCM (see Note 11); (b) gain on sale of assets of $89,000 in the fourth quarter of 2000 related to the sale of the Co-Sourcing and CodeRemote business units in October 2000 (see Note 11); (c) income tax benefit of $121,000 in the first quarter of 2001 due to the elimination of deferred tax liabilities established in prior years that are no longer required (see Note 10); and (d) gain on sale of assets of $200,000 and $353,000 in the third and fourth quarters of 2001, respectively, related to an earn-out payment from the sale of certain medical transcription services operations and certain contracts in 1999 (see Note 11). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On September 6, 2001, the Audit Committee of the Company's Board of Directors dismissed Arthur Andersen LLP ("AA") and appointed Miller Ray & Houser LLP ("MR&H") as the Company's independent auditors for the year ended December 31, 2001. AA's report on the Company's consolidated financial statements for the years ended December 31, 2000 and 1999 contained no adverse opinion or disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles. There were no disagreements between the Company and AA on matters of accounting principles or practices, financial statement disclosure or auditing scope or procedure at any time. AA confirmed the Company's representations in a letter to the Securities and Exchange Commission filed with the Company's Current Report on Form 8-K dated September 6, 2001 regarding the change in the Company's certifying accountant. 28 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The disclosures required herein are incorporated by reference from the Company's proxy statement to be filed in connection with the 2002 Annual Meeting of Stockholders to be held May 7, 2002. ITEM 11. EXECUTIVE COMPENSATION The disclosures required herein are incorporated by reference from the Company's proxy statement to be filed in connection with the 2002 Annual Meeting of Stockholders to be held May 7, 2002. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The disclosures required herein are incorporated by reference from the Company's proxy statement to be filed in connection with the 2002 Annual Meeting of Stockholders to be held May 7, 2002. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The disclosures required herein are incorporated by reference from the Company's proxy statement to be filed in connection with the 2002 Annual Meeting of Stockholders to be held May 7, 2002. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this Annual Report for Transcend Services, Inc.: 1. Financial Statements The Consolidated Financial Statements, the Notes to Consolidated Financial Statements and the Reports of Independent Public Accountants listed below are included in Item 8. Reports of Independent Public Accountants. Consolidated Balance Sheets as of December 31, 2001 and 2000 Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001, 2000 and 1999 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 Notes to Consolidated Financial Statements Financial Statement Schedules are not required (b) Reports on Form 8-K. The Company did not file any reports of Form 8-K during the quarter ended December 31, 2001. (c). Exhibits. -------- The following exhibits are filed with or incorporated by reference into this report. The exhibits which are denoted by an asterisk (*) were previously filed as a part of, and are hereby incorporated by reference from, either (i) a Registration Statement on Form S-3 under the Securities Act of 1933 for the Company, Registration No. 333-19177, filed on January 2, 1997 (referred to as "S-3"); (ii) a Registration Statement on Form S-8 under the Securities Act of 1933 for the Company, Registration No. 33-37685, filed on November 8, 1990 (referred to as "1990 S-8"); (iii) a Registration Statement on Form S-8 under the Securities Act of 1933 for the Company, Registration No. 33-57072, filed on January 15, 1993 (referred to as "1993 S-8"); (iv) a Registration Statement on Form S-8 under the Securities Act of 1933 for the Company, Registration No. 333-16213, filed on November 15, 1996 (referred to as "1996 S-8"); (v) the Company's Annual Report on form 10-K for the year ended May 31, 1993 (referred to as "1993 10-K"); (vi) the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 (referred to as "6/30/95 10-Q"); (vii) Amendment No. 1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 (referred to as "9/30/96 29 10-Q/A No. 1"); (viii) the Company's Annual Report on Form 10-K for the year ended December 31, 1998 (referred to as 12/31/98 10-K); (ix) the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 (referred to as 3/31/98 10-Q); (x) the Company's Current Report on Form 8-K relating to an event which occurred April 28, 1998 (referred to as 4/28/98 8-K); (xi) the Company's Current Report on Form 8-K/A relating to an event which occurred December 23, 1998 (referred to as 12/23/98 8-K/A); (xii) the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 (referred to as "3/31/97" 10-Q"); (xiii) the Company's Current Report on Form 8-K filed December 27, 1999 (referred to as "12/27/99 8-K"); (xiv) the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 (referred to as "6/30/00 10-Q); (xv) the Company's Current Report on Form 8-K filed October 30, 2000 (referred to as "10/30/00 8-K"); (xvi) the Company's Annual Report on Form 10-K for the year ended December 31, 2000 (referred to as "2000 10-K"); or (xvii) the Company's Current Report on Form 8-K filed on September 6, 2001 (referred to as "9/6/01 8-K"). EXHIBIT NO. DESCRIPTION --- ------------ *2.1 - Merger Agreement dated April 16, 1997 for acquisition of DocuMedX (3-31-97 10-Q, Exhibit 2.6) *2.2 - Purchase and Sale agreement dated March 16, 1998 with CORE, INC. for the sale of the net assets of Transcend Case Management, Inc. (12/31/98 10-K) *2.3 - Merger and Reorganization Agreement dated April 28, 1998 for acquisition of Health Care Information Systems, Inc. (4/28/98 8-K, Exhibit 2(a)) *2.4 - Assignment and Assumption agreement dated December 23, 1998 with TCM Services, Inc. (12/23/98 8-K/A, Exhibit 2(a)) *2.5 - Asset Purchase Agreement dated December 9, 1999 with Medquist Transcriptions, Ltd. for the sale of net assets and contracts of Transcend Services, Inc. (12/27/99 8-K, Exhibit 2(a)) *2.6 - Asset Purchase Agreement dated December 16, 1999 with Medquist Transcriptions, Ltd. for the sale of net assets and contracts of Transcend Services, Inc. (12/27/99 8-K, Exhibit 2(d)) *2.7 - Asset Purchase Agreement dated October 13, 2000 with Provider HealthNet Services, Inc. (10/30/00 8-K, Exhibit 2.7) *3.1.1 - Certificate of Incorporation (6/30/95 10-Q, Exhibit 3) *3.1.2 - Certificate of Designation of Series A Convertible Preferred Stock (12/31/98 10-K) *3.1.3 - Certificate of Designation of Series B Convertible Preferred Stock (2000 10-K) *3.1.4 - Certificate of Amendment of the Certificate of Incorporation (2000 10-K) *3.2 - Bylaws (as restated) (1993 10-K, Exhibit 3(a)) *4.1 - 1990 Employee Stock Purchase Plan (1990 S-8, Exhibit 4) *4.2 - 1992 Stock Option Plan, as amended (1993 S-8, Exhibit 4(a)) *4.3 - 1992 Stock Option Plan, as Amended and Restated (1996 S-8, Exhibit 4.1) *4.9 - Warrant to Purchase Common Stock Granted to Silicon Valley Bank (9/30/96 10-Q/A No. 1, Exhibit 4.4) 4.10 - Silicon Valley Bank Antidilution Agreement (9/30/96 10-Q/A No. 1, Exhibit 4.5) *4.11 - Silicon Valley Registration Rights Agreement (9/30/96 10-Q/ No. 1, Exhibit 4.6) *4.12 - DVI Financial Services Inc. Loan and Security Agreement (3/31/98 10- Q, Exhibit 10.14.1)) *4.13 - Promissory Note between the Company and Walter S. Huff, Jr. (6/30/00 10-Q, Exhibit 4.13) 30 EXHIBIT NO. DESCRIPTION --- ------------ *4.14 - Promissory Note between the Company and Larry G. Gerdes (6/30/00 10-Q, Exhibit 4.14) 4.15 - 2001 Stock Option Plan *10.3 - Form of Incentive Stock Option Agreement under 1992 Stock Option Plan, as Amended and Restated (1996 S-8, Exhibit 4.2) *10.9 - Form of indemnification agreement (1993 10-K, Exhibit 10(a)) *10.10 - Letter Agreement dated December 5, 1996 by and between the Company and VHA, Inc. (S-3, Exhibit 10.1) *10.11 - Services Agreement dated December 5, 1996 by and between the Company and VHA, Inc. (S-3, Exhibit 10.2) *16.1 - Letter from Arthur Andersen re: Change in Certifying Accountant (9/6/01 8-K) *21.1 - Subsidiaries of the Registrant 23.1 - Consent of Miller Ray & Houser LLP 23.2 - Consent of Arthur Andersen LLP 31 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 Service, Inc. By: /s/ Larry G. Gerdes --------------------------- Larry G. Gerdes President, Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer (Principal Executive, Financial and Accounting Officer) Dated: February 28, 2002 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.
Signature Title Date --------- ----- ---- /s/ Larry G. Gerdes Director, President, Chief Executive Officer, February 28, 2002 -------------------- Larry G. Gerdes Chief Financial Officer and Chief Accounting Officer (Principal Executive, Financial and Accounting Officer) /s/ Joseph P. Clayton Director February 28, 2002 --------------------- Joseph P. Clayton /s/ Walter S. Huff, Jr. Director February 28, 2002 ----------------------- Walter S. Huff, Jr. /s/ Charles E. Thoele Director February 28, 2002 --------------------- Charles E. Thoele
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