-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IHy3jqaCvHeQ94iVfS7j+JKvI3hZDl2NDHViyzAN67PkBEIhHDVBfU4QOlrl2nwi Qpqz8pWNcNBT+rtt07IDyg== 0000931763-99-002425.txt : 19990817 0000931763-99-002425.hdr.sgml : 19990817 ACCESSION NUMBER: 0000931763-99-002425 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRANSCEND SERVICES INC CENTRAL INDEX KEY: 0000858452 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISC HEALTH & ALLIED SERVICES, NEC [8090] IRS NUMBER: 330378756 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-18217 FILM NUMBER: 99692770 BUSINESS ADDRESS: STREET 1: 3353 PEACHTREE RD NE STE 1000 CITY: ATLANTA STATE: GA ZIP: 30326 BUSINESS PHONE: 4043648000 MAIL ADDRESS: STREET 1: 3353 PEACHTREE RD NE CITY: ATLANTIC STATE: GA ZIP: 30326 FORMER COMPANY: FORMER CONFORMED NAME: TRICARE INC DATE OF NAME CHANGE: 19920703 10-Q 1 FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 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 (I.R.S Employer incorporation or organization) Identification No.) 3353 Peachtree Road, N.E., Suite 1000, Atlanta, Georgia 30326 (Address of principal executive offices and zip code) Registrant's telephone number, including area code: (404) 364-8000 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of the Registrant's common stock as of the latest practicable date. Class Outstanding at August 9, 1999 ----- ----------------------------- Common Stock, $.01 par value 22,093,479 ================================================================================
INDEX PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998.......................... 3 Consolidated Statements of Operations for the Three Months Ended and the Six Months Ended June 30, 1999 and 1998....................................... 4 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1999 and 1998...................... 5 Notes to Consolidated Financial Statements................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 7 Item 3. Quantitative and Qualitative Disclosures about Market Risk..... 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings.............................................. 13 Item 4. Submission of Matters to a Vote of Security Holders............ 14 Item 5. Other Information.............................................. 14 Item 6. Exhibits and Reports on Form 8-K............................... 14 SIGNATURES............................................................... 15
PART I. FINANCIAL INFORMATION Item 1. Financial Statements TRANSCEND SERVICES, INC. CONSOLIDATED BALANCE SHEETS (Unaudited) June 30, 1999 December 31, 1998 ----------------- ----------------- ASSETS ------ Current assets: Cash and cash equivalents $ 1,230,000 $ 450,000 Accounts receivable, net of allowance for doubtful accounts of $878,000 in 1999 and $389,000 in 1998 6,231,000 8,231,000 Prepaid expenses and other current assets 788,000 915,000 ------------ ------------- Total current assets 8,249,000 9,596,000 ------------ ------------- Property and equipment: Computer equipment 10,263,000 9,527,000 Software development 2,242,000 1,862,000 Furniture and fixtures 216,000 217,000 ------------ ------------- Property and equipment 12,721,000 11,606,000 Accumulated depreciation (5,319,000) (4,304,000) ------------ ------------- Property and equipment, net 7,402,000 7,302,000 Deposits and other assets 625,000 482,000 Goodwill and other intangible assets: Goodwill and other intangible assets 4,596,000 4,596,000 Accumulated amortization (1,964,000) (1,731,000) ------------ ------------- Goodwill and other intangible assets, net 2,632,000 2,865,000 Net assets from discontinued operations 2,718,000 2,726,000 ------------ ------------- Total assets $ 21,626,000 $ 22,971,000 ============ ============= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Current maturities of long-term debt $ 450,000 $ 458,000 Accounts payable 2,124,000 2,657,000 Accrued compensation and benefits 2,702,000 1,933,000 Other accrued liabilities 1,988,000 2,211,000 Deferred income taxes 113,000 113,000 ------------ ------------- Total current liabilities 7,377,000 7,372,000 Long term debt, net of current maturities 6,395,000 5,547,000 Deferred income taxes 539,000 540,000 Convertible debentures 2,000,000 2,000,000 Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value; 21,000,000 shares authorized Series A convertible preferred stock, 212,800 shares issued at September 30, 1998 and December 31, 1997 2,000 2,000 Common Stock, $.01 par value; 30,000,000 shares authorized 22,000,000 issued at June 30, 1999 and 21,500,000 at December 31, 1998 220,000 215,000 Additional paid-in capital 26,906,000 26,286,000 Subscription receivable, stockholder (620,000) - Retained deficit (21,193,000) (18,991,000) ------------ ------------- Total stockholders' equity 5,315,000 7,512,000 ------------ ------------- Total liabilities and stockholders' equity $ 21,626,000 $ 22,971,000 ============ =============
_______________________________________________________________________________ The accompanying notes are an integral part of these consolidated statements. 3 TRANSCEND SERVICES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended June 30 Six Months Ended June 30 -------------------------- -------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Net revenues $13,297,000 $12,831,000 $26,866,000 $25,205,000 Direct costs 11,796,000 10,636,000 23,431,000 20,941,000 ----------- ----------- ----------- ----------- Gross profit 1,501,000 2,195,000 3,435,000 4,264,000 Marketing and sales expenses 619,000 502,000 1,170,000 981,000 General and administrative expenses 1,930,000 1,058,000 3,260,000 2,165,000 Research and development expenses 192,000 29,000 386,000 29,000 Amortization expenses 64,000 50,000 127,000 122,000 ----------- ----------- ----------- ----------- Income (loss) from operations (1,304,000) 556,000 (1,508,000) 967,000 ----------- ----------- ----------- ----------- Other expense: Interest expense, net 217,000 101,000 408,000 205,000 Other - 60,000 - 60,000 ----------- ----------- ----------- ----------- Income (loss) before taxes and discontinued operations (1,521,000) 395,000 (1,916,000) 702,000 Income taxes - - - - ----------- ----------- ----------- ----------- Income (loss) before discontinued operations (1,521,000) 395,000 (1,916,000) 702,000 ----------- ----------- ----------- ----------- Loss from discontinued operations (23,000) (17,000) (46,000) (32,000) ----------- ----------- ----------- ----------- Net income (loss) $(1,544,000) $ 378,000 $(1,962,000) $ 670,000 =========== =========== =========== =========== Dividends on preferred stock 120,000 120,000 240,000 239,000 =========== =========== =========== =========== Net income (loss) to common stockholders $(1,664,000) $ 258,000 $(2,202,000) $ 431,000 =========== =========== =========== =========== Basic income (loss) per share: From continuing operations $ (0.08) $ 0.01 $ (0.10) $ 0.02 From discontinued operations (0.00) (0.00) (0.00) (0.00) =========== =========== =========== =========== Net income (loss) $ (0.08) $ 0.01 $ (0.10) $ 0.02 =========== =========== =========== =========== Weighted average shares outstanding 22,056,000 20,871,000 21,832,000 20,721,000 =========== =========== =========== =========== Diluted income (loss) per share From continuing operations $ (0.08) $ 0.01 $ (0.10) $ 0.02 From discontinued operations (0.00) (0.00) (0.00) (0.00) =========== =========== =========== =========== Net income (loss) $ (0.08) $ 0.01 $ (0.10) $ 0.02 =========== =========== =========== =========== Weighted average shares outstanding 22,056,000 21,125,000 21,832,000 20,975,000 =========== =========== =========== ===========
________________________________________________________________________________ The accompanying notes are an integral part of these consolidated statements. 4
TRANSCEND SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30 --------------------------------- 1999 1998 -------------- -------------- Cash flows from operating activities: Net Income (Loss) $ (2,202,000) $ 431,000 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 1,248,000 805,000 Loss related to discontinued operations 46,000 32,000 Preferred stock dividends 240,000 239,000 Changes in assets and liabilities: Accounts receivable, net 2,000,000 (1,127,000) Prepaid expenses 127,000 (476,000) Deposits and other assets (143,000) (284,000) Accounts payable (533,000) 312,000 Accrued liabilities 546,000 (395,000) ------------ ------------ Total adjustments 3,531,000 (894,000) ------------ ------------ Net cash provided by (used in) continuing operations 1,329,000 (463,000) Net cash used in discontinued operations (38,000) (83,000) ------------ ------------ Net cash provided by (used in) operating activities 1,291,000 (546,000) ------------ ------------ Cash flows from investing activities: Capital expenditures (1,115,000) (2,210,000) Cash acquired from acquisitions - 31,000 ------------ ------------ Net cash used in investing activities (1,115,000) (2,179,000) ------------ ------------ Cash flows from financing activities: Borrowings under line of credit agreement 1,018,000 29,000 Borrowings from long-term debt - 517,000 Principle payments on long-term debt (179,000) (55,000) Preferred stock dividends (240,000) (239,000) Net Proceeds-stock options and other issuances 5,000 - ------------ ------------ Net cash provided by (used in) financing activities 604,000 252,000 ------------ ------------ Net increase (decrease) in cash and cash equivalents 780,000 (2,473,000) Cash and cash equivalents, at beginning of period 450,000 5,541,000 ------------ ------------ Cash and cash equivalents at end of period $ 1,230,000 $ 3,068,000 ============ ============ Supplemental cash flow information: Cash paid for interest expense $ 453,000 $ 231,000 - -------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements. 5 TRANSCEND SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1999 and 1998 (Unaudited) (1) The accompanying consolidated financial statements are unaudited and have been prepared by management of Transcend Services, Inc. (the "Company") in accordance with the rules and regulations of the Securities and Exchange Commission. The unaudited financial information furnished herein in the opinion of management reflects all adjustments, which were of a normal recurring nature, which are necessary to fairly state the Company's financial position, the results of its operations and its cash flows. For further information refer to the consolidated financial statements and footnotes thereto included in the Company's Form 10-K for the year ended December 31, 1998. Footnote disclosure, which would substantially duplicate the disclosure contained in those documents, has been omitted. (2) The Company has no components of comprehensive income (loss) other than net income (loss) for the six-month periods ended June 30, 1999 and 1998. (3) Segment Reporting The company's identifiable business segments are patient information services, patient information software (Cascade), and case management services (TCM). Below sets forth the results (in thousands) of the identifiable business segments of the Company, such results do not reflect allocations for income taxes, interest expense, amortization expense, and corporate expense to the business segments. For Three Months Ended June 30 ------------------------------
PATIENT PATIENT CASE INFORMATION INFORMATION MANAGEMENT SALES AND (in thousands) SERVICES SOFTWARE SERVICES CORPORATE CONSOLIDATED - ---------------------------------------------------------------------------------------------------------- REVENUES: 1999 $12,356 $759 $182 $ 0 $13,297 1998 $12,747 $ 84 $ 0 $ 0 $12,831 - ---------------------------------------------------------------------------------------------------------- NET INCOME (LOSS): 1999 $ 48 $124 $(26) $(1,690) $(1,544) 1998 $ 1,905 $(24) $ 0 $(1,503) $ 378 - ---------------------------------------------------------------------------------------------------------- DEPRECIATION AND AMORTIZATION: 1999 $ 317 $ 17 $ 5 $ 302 $ 641 1998 $ 255 $ 0 $ 0 $ 152 $ 407 - ---------------------------------------------------------------------------------------------------------- CAPITAL EXPENDITURES: 1999 $ 285 $ 43 $ 0 $ 78 $ 406 1998 $ 1,200 $ 32 $ 0 $ 133 $ 1,365
6 For Six Months Ended June 30 ----------------------------
PATIENT PATIENT CASE INFORMATION INFORMATION MANAGEMENT SALES AND (in thousands) SERVICES SOFTWARE SERVICES CORPORATE CONSOLIDATED - -------------------------------------------------------------------------------------------------------- REVENUES: 1999 $25,107 $1,308 $451 $ 0 $28,866 1998 $24,775 $ 84 $346 $ 0 $25,205 - -------------------------------------------------------------------------------------------------------- NET INCOME (LOSS): 1999 $ 1,216 $ 131 $ 9 $(3,318) $(1,962) 1998 $ 3,675 $ (24) $ 22 $(3,003) $ 670 - -------------------------------------------------------------------------------------------------------- DEPRECIATION AND AMORTIZATION: 1999 $ 734 $ 20 $ 8 $ 486 $ 1,248 1998 $ 480 $ 0 $ 4 $ 321 $ 805 - -------------------------------------------------------------------------------------------------------- CAPITAL EXPENDITURES: 1999 $ 847 $ 95 $ 0 $ 173 $ 1,115 1998 $ 1,981 $ 32 $ 0 $ 197 $ 2,210
(4) On March 23, 1999 the Company sold 500,000 unregistered shares of Transcend Common Stock to certain executive officers at the then current market value. In connection with the sales, the executive officers issued promissory notes to the Company totaling $620,000. The issuances of the promissory notes were noncash transactions. (5) Net income (loss) per share is computed in accordance with SFAS No. 128 "Earnings per Share." Basic and diluted net loss per share are the same in the three and six month periods ended June 30, 1999 because the Company's potentially dilutive securities are antidilutive in such periods. A reconciliation of basic net income per share and diluted net income per share for the three and six months ended June 30, 1998 is as follows:
Three Months Ended Six Months Ended June 30, 1998 June 30, 1998 ------------------ ---------------- INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS $ 395,000 $ 702,000 LOSS FROM DISCONTINUED OPERATIONS (17,000) (32,000) ----------- ----------- NET INCOME (LOSS) $ 378,000 $ 670,000 =========== =========== DIVIDENDS ON PREFERRED STOCK 120,000 239,000 NET INCOME (LOSS) TO COMMON STOCKHOLDERS $ 258,000 $ 431,000 =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 20,871,000 20,721,000 =========== =========== BASIC INCOME (LOSS) PER SHARE: FROM CONTINUING OPERATIONS $ 0.01 $ 0.02 FROM DISCONTINUED OPERATIONS $ (0.00) $ 0.00 ----------- ----------- NET INCOME (LOSS) PER SHARE $ 0.01 $ 0.02 =========== =========== WEIGHTED AVERAGE SHARES: BASIC 20,871,000 20,721,000 STOCK OPTIONS 254,000 254,000 ----------- ----------- TOTAL DILUTED SHARES 21,125,000 20,975,000 =========== =========== DILUTED INCOME (LOSS) PER SHARE: FROM CONTINUING OPERATIONS $ 0.01 $ 0.02 FROM DISCONTINUED OPERATIONS $ (0.00) $ 0.00 ----------- ----------- NET INCOME (LOSS) $ 0.01 $ 0.02 =========== ===========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain information included in this Quarterly Report on Form 10-Q contains, and other reports or materials filed or to be filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Company or its management) contain or will contain, "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, Section 27A of the Securities Act of 1933, as amended and pursuant to the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may relate to financial results and plans for future business activities, and are thus prospective. Such forward-looking statements are subject to risks, uncertainties and other factors which 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, general economic conditions, competition and other uncertainties detailed in this report and detailed from time to time in other filings by the Company with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Company or its management). Any forward-looking statements are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such speak only as of the date made. Overview - -------- Transcend Services, Inc. (the "Company"), and its wholly-owned subsidiary, Cascade Health Information Software, Inc. ("Cascade"), provide patient information management solutions to hospitals and other associated health care providers. These solutions include medical records department management, transcription of physicians' dictated medical notes, coding and compliance services, and state-of-the-art software for the management of patient information. The Company's wholly-owned subsidiary, Transcend Case Management, Inc. ("TCM"), also provides case management services to insurance carriers, third party benefit administrators, and self-insured employers. 7 Results of Operations Results of operations include the consolidated results of Transcend Services, Inc. and its subsidiaries. Consolidated results do not include Cascade prior to its June 1, 1998 acquisition, as the amounts were immaterial, and TCM, after March 16, 1998, the date on which it was sold. Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998 Net revenues for the Company increased from $12,831,000 for the three months ended June 30, 1998, to $13,297,000 for the three months ended June 30, 1999, an increase of 3.6 percent. Patient information management services ("Services") including medical record department management ("Co-Soucing"), transcription, and coding and compliance, accounted for 93 percent of the Company's net revenues for the three months ended June 30, 1999, and 99 percent of net revenues for the three months ended June 30, 1998. Co-Sourcing revenues decreased 12 percent year over year and represented 56 percent of Services revenues for the three months ended June 30, 1999, and 61 percent for the three months ended June 30, 1998. The decrease is primarily attributable to three contracts that converted to transcription services only contracts. Medical transcription revenues increased 11.1 percent year over year and represented 44 percent of Services revenues for the three months ended June 30, 1999, and 39 percent for the same period the prior year. The increase in transcription revenues resulted from new contracts, net of terminations. Coding and compliance revenues decreased 49.3 percent year over year and represented less than 1 percent of Services revenues in the three months ended June 30, 1999, and 1 percent in 1998. Patient information software revenues represented 6 percent of revenues for the three months ended June 30, 1999 and 1 percent of revenues for the three months ended June 30, 1998. Case management services accounted for 1 percent of total revenues for the three months ended June 30, 1999. Gross profit decreased 31.6 percent to $1,501,000 for the three months ended June 30, 1999, from $2,195,000 for the same three months in the prior year. Gross profit margins decreased to 11.3 percent for the three months ended June 30, 1999, from 17.1 percent for the same three months in the prior year. Services produced margins of 6.9 percent for the three months ended June 30, 1999, compared to 15.8 percent for the three months ended June 30, 1998. The year over year decline was attributable to start up losses in the Company's national transcription hub, unexpected telecommunication issues that impaired transcription services performance, and several Co-Sourcing sites that were failing to meet their contract performance deliverables and required additional resources resulting in lower gross profit margins. In addition, there were non- recurring charges of $50,000 from exit costs related to the termination of a Co- Sourcing contract. Software gross profit margins were 74.2 percent for the three months ended June 30, 1999, compared to 76.2 percent for the three months ended June 30, 1998. Case management gross profit margins were -5.5 percent for the three months ended June 30,1999. Marketing and sales expenses increased 23.3 percent to $619,000 for the three months ended June 30, 1999, from $502,000 for the same three months in the prior year and as a percentage of revenues was 4.8 percent for the three months ended June 30, 1999 and 3.9 percent for the three months ended June 30, 1998. The year over year increase in marketing and sales expenses is the result of the addition of Cascade. General and administrative expenses of $1,930,000 for the three months ended June 30, 1999, increased 82.4 percent over the $1,058,000 expended in the same prior year period. The increase in general and administrative expenses year over year is attributable to the acquisition of Cascade, an increase of approximately $200,000 in health benefit claims reserves, and a non-recurring adjustment of $500,000 made to the receivables reserve due to the recent bankruptcy filing of a former Co-Sourcing client. Amortization expenses increased to $64,000, for the three months ended June 30, 1999, from $50,000 for the three months ended June 30, 1998. Net interest expense increased to $217,000 for the three months ended June 30, 1999, as compared to $101,000 for the three months ended June 30, 1998, primarily due to increased borrowings. 8 The Company reported losses before discontinued operations of $1,521,000 for the three months ended June 30, 1999, compared to income of $395,000 for the same three months in 1998. The year over year decline was attributable to start up losses in the Company's national transcription hub, unexpected telecommunication issues that impaired transcription services performance, and several Co-Sourcing sites that were failing to meet their contract performance deliverables and required additional resources resulting in lower profit margins. In addition, there were non-recurring charges of $750,000, including $500,000 in accounts receivable reserves due to the recent bankruptcy filing of a former client, $200,000 in health benefit claims reserves, and $50,000 in exit costs related to the termination of a Co-Sourcing contract. The loss from discontinued operations increased slightly to $23,000 for the three months ended June 30, 1999, from $17,000 for the three months ended June 30, 1998, representing charges for legal fees incurred in connection with the Company's civil lawsuit against certain insurance companies in the state of California discussed in item 1 of part II of this report.
- --------------------------------------------------------------------------------------------------- Three Months Ended June 30 - --------------------------------------------------------------------------------------------------- 1999 1998 Change % Change - --------------------------------------------------------------------------------------------------- Net revenues $13,297 $12,831 $ (466) 3.6% - --------------------------------------------------------------------------------------------------- Gross profit 1,501 2,195 (694) (31.6%) - --------------------------------------------------------------------------------------------------- Gross margin 11.3% 17.1% - --------------------------------------------------------------------------------------------------- Marketing and sales expenses 619 502 117 23.3% - --------------------------------------------------------------------------------------------------- General and administrative expenses 1,930 1,058 872 82.4% - --------------------------------------------------------------------------------------------------- Amortization expenses 64 50 14 28.0% - --------------------------------------------------------------------------------------------------- Research and development expenses 192 29 163 562.1% - --------------------------------------------------------------------------------------------------- Net Income (loss) $(1,544) $ 378 $(1,922) (508.5%) - ---------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------- Three Months Ended June 30 - --------------------------------------------------------------------------------------------------- 1999 1998 Change - --------------------------------------------------------------------------------------------------- Net revenues 100.0% 100.0% -- - --------------------------------------------------------------------------------------------------- Direct costs 88.7% 82.9% 5.8% - --------------------------------------------------------------------------------------------------- Gross profit 11.3% 17.1% (5.8%) - --------------------------------------------------------------------------------------------------- Marketing and sales expenses 4.7% 3.9% 0.8% - --------------------------------------------------------------------------------------------------- General and administrative expenses 14.5% 8.2% 6.3% - --------------------------------------------------------------------------------------------------- Amortization expenses 0.5% 0.4% 0.1% - --------------------------------------------------------------------------------------------------- Research and development expenses 1.4% 0.2% 1.2% - --------------------------------------------------------------------------------------------------- Net Income (loss) (11.6%) 2.9% (14.5%) - ---------------------------------------------------------------------------------------------------
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998 Net revenues for the Company increased from $25,205,000 for the six months ended June 30, 1998, to $26,866,000 for the six months ended June 30, 1999, an increase of 6.6 percent. Patient information management services ("Services") including medical record department management, transcription, coding and compliance, and systems implementation, accounted for 93 percent of the Company's net revenues for the six months ended June 30, 1999, and 98 percent of net revenues for the six months ended June 30, 1998. Co-Sourcing revenues decreased 5.4 percent year over year and represented 56 percent of Services revenues for the six months ended June 30, 1999, and 60 percent for the six months ended June 30, 1998. The reduced revenues are a result of three full Co- Sourcing contracts that converted to transcription services only contracts. Medical transcription revenues increased 12.3 percent year over year and represented 44 percent of Services revenues for the six months ended June 30, 1999, and 40 percent for the same period the prior year. The increase in transcription revenues resulted primarily from new contracts, net of terminations. Coding and compliance revenues decreased 62.8 percent year over year and represented less than 1 percent of Services revenues in the six months ended June 30, 1999, and 1 percent in 1998. 9 Patient information software revenues represented 5 percent of revenues for the six months ended June 30, 1999 and less than 1 percent of revenues for the six months ended June 30, 1998. Case management services accounted for 2 percent of total revenues for the six months ended June 30, 1999 and 1 percent for the six months ended June 30, 1998. Gross profit decreased 19.4 percent to $3,435,000 for the six months ended June 30, 1999, from $4,264,000 for the same six months in the prior year. Gross profit margins decreased to 12.8 percent for the six months ended June 30, 1999, from 16.9 percent for the same six months in the prior year. Services produced margins of 9.3 percent for the six months ended June 30, 1999, compared to 15.8 percent for the six months ended June 30, 1998. The year over year decline was attributable to start up losses in the Company's national transcription hub, unexpected telecommunication issues that impaired transcription services performance, and several Co-Sourcing sites that were failing to meet their contract performance deliverables and required additional resources resulting in lower gross profit margins. In addition, there were non-recurring charges of $50,000 from exit costs related to the termination of a Co-Sourcing contract. Software gross profit margins were 73.5 percent for the six months ended June 30, 1999, compared to 76.2 percent for the six months ended June 30, 1998. Case management gross profit margins were 6.0 percent for the six months ended June 30,1999 and 24.0 percent for the six months ended June 30,1998. Marketing and sales expenses increased 19.3 percent to $1,170,000 for the six months ended June 30, 1999, from $981,000 for the same six months in the prior year and as a percentage of revenues was 4.4 percent for the six months ended June 30, 1999 and 3.9 percent for the six months ended June 30, 1998. The year over year increase in marketing and sales expenses is the result of the addition of Cascade, net of the reduction from the sale of TCM. General and administrative expenses of $3,260,000 for the six months ended June 30, 1999, increased 50.6 percent over the $2,165,000 expended in the same prior year period. The increase in general and administrative expenses year over year is attributable to the acquisition of Cascade, an increase of approximately $200,000 in health benefit claims reserves, and a non-recurring adjustment of $500,000 made to the receivables reserve due to the recent bankruptcy filing of a former Co-Sourcing client. Amortization expenses increased to $127,000, for the six months ended June 30, 1999, from $122,000 for the six months ended June 30, 1998. Net interest expense increased to $408,000 for the six months ended June 30, 1999, as compared to $205,000 for the six months ended June 30, 1998, primarily due to increased borrowings. The Company reported losses before discontinued operations of $1,916,000 for the six months ended June 30, 1999, compared to income of $702,000 for the same six months in 1998. The year over year decline was attributable to start up losses in the Company's national transcription hub, unexpected telecommunication issues that impaired transcription services performance, and several Co-Sourcing sites that were failing to meet their contract performance deliverables and required additional resources resulting in lower profit margins. In addition, there were non-recurring charges of $750,000, including $500,000 in accounts receivable reserves due to the recent bankruptcy filing of a former client, $200,000 in health benefit claims reserves, and $50,000 in exit costs related to the termination of a Co-Sourcing contract. The loss from discontinued operations increased slightly to $46,000 for the six months ended June 30, 1999, from $32,000 for the six months ended June 30, 1998, representing charges for legal fees incurred in connection with the Company's civil lawsuit against certain insurance companies in the state of California discussed in item 1 of part II of this report.
Six Months Ended June 30 - ------------------------------------------------------------------------------------ 1999 1998 Change % Change - ------------------------------------------------------------------------------------ Net revenues $26,866 $25,205 $ 1,661 6.6% - ------------------------------------------------------------------------------------ Gross profit 3,435 4,264 (829) (19.4%) - ------------------------------------------------------------------------------------ Gross margin 12.8% 16.9% - ------------------------------------------------------------------------------------ Marketing and sales expenses 1,170 981 189 19.3% - ------------------------------------------------------------------------------------ General and administrative expenses 3,260 2,165 1,095 50.6% - ------------------------------------------------------------------------------------ Amortization expenses 127 122 5 4.1% - ------------------------------------------------------------------------------------ Research and development expenses 386 29 357 (1,231.0%) - ------------------------------------------------------------------------------------ Net income (loss) $(1,962) $ 670 $(2,632) (392.8%) - ------------------------------------------------------------------------------------
10
Six Months Ended June 30 - ------------------------------------------------------------------------------------------------ 1999 1998 Change - ------------------------------------------------------------------------------------------------ Net revenues 100.0% 100.0% -- - ------------------------------------------------------------------------------------------------ Direct costs 87.2% 83.1% 4.1% - ------------------------------------------------------------------------------------------------- Gross profit 12.8% 16.9% (4.1%) - ------------------------------------------------------------------------------------------------ Marketing and sales expenses 4.4% 3.9% 0.5% - ------------------------------------------------------------------------------------------------ General and administrative expenses 12.1% 8.6% 3.5% - ------------------------------------------------------------------------------------------------ Amortization expenses 0.5% 0.5% 0.0% - ------------------------------------------------------------------------------------------------ Research and development expenses 1.4% 0.1% 1.3% - ------------------------------------------------------------------------------------------------ Net Income (loss) (7.3%) 2.7% (10.0%) - ------------------------------------------------------------------------------------------------
Liquidity and Capital Resources The Company's cash flows from continuing operations provided cash of $1,329,000 for the six months ended June 30, 1999. Discontinued operations used cash of $38,000 for the six months ended June 30, 1999. The Company's net working capital decreased to $872,000 during the six months ended June 30, 1999, from $2,224,000 at December 31, 1998. The Company's cash flows from investing activities used cash of $1,115,000 for the six months ended June 30, 1999 for capital expenditures, primarily for electronic patient record systems in connection with new contracts, digital dictation equipment and continued investment in software development of the Company's national transcription platform. Cash flows from financing activities provided $604,000 for the six months ended June 30, 1999, primarily from borrowings under the Company's working capital credit facility. The Company also used $179,000 for principal payments on long-term debt associated with prior acquisitions and $240,000 to pay preferred stock dividends. On April 3, 1997, the Company entered into a $5.0 million credit agreement with Coast Business Credit ("Coast"), an asset based lender (and a division of Southern Pacific Thrift and Loan Association). The agreement provides the Company with a $4.7 million working capital facility and a $300,000 capital expenditure facility secured by substantially all of the Company's assets. The working capital facility has been used to pay off the previous credit relationship with Silicon Valley Bank in full. These Coast facilities do not contain any financial covenants but contain restrictions from paying dividends and entering into financing arrangements without consent. Coast has consented to the payment of dividends related to the preferred stock and the master lease agreement and equipment loan facility discussed below. Funding limits under the agreement are determined by a funding formula. Under the original terms of the agreement, the funding formula is based on 1.5 times monthly contractual contract management revenues, plus 80 percent of all medical transcription receivables under 90 days (aging) under the working capital facility and up to $300,000 on new capital expenditures under the capital expenditure facility. On August 8, 1997, the Company agreed to amend its credit facility with Coast. Under the terms of the amendment, the term of the agreement was extended to May 31, 2000, and the funding formula modified to provide additional liquidity to the Company by providing funding of 1.5 times average monthly receipts under long term transcription contracts. The amendment also provides for an increase in the funding formula from 1.5 times to 2.0 times monthly contract revenues if the Company's tangible net worth exceeds $5.0 million for five consecutive business days. In February 1999, the Company again amended its working capital credit facility agreement with Coast to increase the facility to $10 million and extend the maturity date to May 31, 2001. These facilities are priced at prime plus 2.25 percent declining to prime plus 1.75 percent upon two consecutive quarters of achievement and ongoing maintenance of a debt service coverage ratio of not less than 1.5 measured on an earnings before interest, taxes, and amortization ("ebita") basis. EBITA is used by Coast as an indicator of a company's ability to incur and service debt. EBITA should not be considered an alternative to operating income, net income, cash flows, or any other measure of performance as determined in accordance with generally accepted accounting principles, as an indicator of operating performance, or as a measure of liquidity. These facilities are secured by a first security interest on all Company assets. As of June 30, 1999, the capacity of the credit line based on the funding formula was $6,090,000 with $87,000 unused. On February 19, 1998, the Company signed a master lease agreement providing up to $5.0 million in lease financing with Information Leasing Corporation, a subsidiary of Provident Bank, Cincinnati, Ohio, at interest rates equal to Provident Bank prime rate plus 2 percent. Subject to a review of the underlying customer contract, the master lease agreement calls for equal monthly payments over the term of the lease, typically the life of the underlying contract, not to exceed five years. The facility is intended to provide financing for new electronic document management systems and transcription systems required for new contracts. There were no borrowings outstanding under this master lease agreement at June 30, 1999. 11 On April 13, 1998, the Company signed a $10 million equipment loan facility with DVI Financial Services, Inc. This facility provides additional financing for electronic patient record systems and transcription systems required for new contracts. The facility calls for monthly payments which amortize the cost of the equipment over the life of the customer contract, not to exceed 60 months, at interest rates fixed at the time over the loan advance based on then current treasury bill rates. The total borrowings outstanding at June 30, 1999, were $540,000. The Company does not believe that its cash resources will be adequate to finance continuing operations, make capital investments in the normal and ordinary course of its business, fund the expenses of its civil litigation action against certain insurance carriers and fund its Year 2000 related capital investment requirements during 1999. The Company estimates its capital requirements for the remainder of 1999 to be between $1,500,000 and $3,000,000. Accordingly, on August 16, 1999, the Company received bridge financing of $1,500,000 predominantly from certain Directors of the Company in exchange for unsecured promissory notes, with interest at 10% per annum, which mature January 15, 2001. The Company has also engaged an investment banking firm to assist it in securing additional financing. Although there can be no assurances given that the Company will secure the additional financing needed for the remainder of 1999 and to repay the bridge financing, the Company plans to secure additional capital through a possible private placement of securities to accredited investors, some or all of whom may be related parties to the Company, or through the possible sale of certain of its operations. If the Company is unable to raise the additional capital required for the remainder of 1999, the Company would be required to adjust its business plans and operations accordingly. Year 2000 Compliance The Company has performed an assessment of the year 2000 readiness of its operations and its corporate financial systems and is nearing the completion of its implementation plan to become year 2000 compliant. In 1998, the Company launched its national transcription platform, which is year 2000 compliant. The Company has installed the national transcription platform in substantially all of the Company's new contracts and is implementing its plan to convert its existing operations that are not already year 2000 compliant. The Company has invested approximately $400,000 in year 2000 compliant dictation and transcription systems to date. The Company expects additional investments of up to $1 million for the remainder of 1999 and to have its systems year 2000 compliant by November 30, 1999. The Company's Co-Sourcing operations and software systems are dependent upon the hospital's systems. The Company is continuing its process of accumulating written inquiries to its existing Co-Sourcing customers to determine their readiness and their plans to become year 2000 compliant and expects to complete its assessment by August 31, 1999. The majority of the Company's Co-Sourcing contracts require that the hospital provide certain services, including access to electronic information, in order for Transcend to provide the services that the Company is contractually obligated to supply. If such services are not provided by the hospital, the Company has the contractual ability to receive reimbursement from the hospital for any additional expenses incurred due to the inability of the hospital to provide a functional software system. Cascade's new software product is year 2000 compliant. The software for existing customers has been modified to be year 2000 compliant. Cascade plans to upgrade or convert all of its customers to be year 2000 compliant by October 31, 1999. The cost to be incurred for the upgrades is immaterial. The Company has upgraded its corporate financial systems and believes them to be year 2000 compliant. The Company is in the process of refining its contingency plans and expects to have alternative solutions available by November 30, 1999, if needed. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has no material exposure to market risk from derivatives or other financial instruments. 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is subject to certain claims in the ordinary course of business which are not material. On September 17, 1993, the Company and its former subsidiaries, First Western Health Corporation and Veritas Healthcare Management, and the physician- owned medical groups, FWHC Medical Group, Inc. and Veritas Medical Group, Inc., which had contracts with the 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' compensation insurance carriers (the "Lawsuit".) 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 seeks $115 million in compensatory damages plus punitive damages. The plaintiffs claim abuse of process, intentional interference with contractual and prospective business relations, negligent interference and unlawful or unfair business practices which led to the discontinuation in April 1993 of the former business of the Company's subsidiaries and their contracting associated medical groups. Nine defendants in the Lawsuit have filed cross complaints against the plaintiffs seeking restitution, accounting from the plaintiffs for moneys previously paid by the defendants, disgorgement of profits, injunctive relief, attorneys' fees and punitive damages, based upon allegations of illegal corporate practice of medicine, illegal referral arrangements, specific statutory violations and related improper conduct. The Company and its counsel do not believe that it is likely that the Company will be held liable on any of the cross complaints; however, there can be no assurance that the Company will be successful in the defense of the cross complaints. In addition, there can be no assurance as to the recovery by the Company of the damages sought in its complaint against the defendants. The costs associated with the conduct of the Lawsuit cannot be ascertained with certainty but are expected to be substantial. On March 21, 1997, the Los Angeles County Superior Court sustained the defendant insurance companies' demurrer to the Third Amended and Supplemental Complaint of the Company and certain of its subsidiaries, without leave to further amend the complaint. The Court determined in such ruling that exclusive jurisdiction with respect to the claims contained in the Lawsuit resides with the California Workers' Compensation Appeals Board and that the Superior Court of the State of California is an improper forum. The Company has been advised by counsel that there is no remedy for the damages claimed in the Lawsuit from the California Workers' Compensation Appeals Board. A final order dismissing the Lawsuit was issued by the Court on June 18, 1997. On June 25, 1998, the California Court of Appeals affirmed the Superior Court of the State of California's decision dismissing the case. Transcend then filed a Petition for Review with the California Supreme Court in July 1998. On September 25, 1998, the Supreme Court of the State of California agreed to review the decision of the California Court of Appeals. There can be no assurance that the Supreme Court of the State of California will overturn the decision of the California Court of Appeals. By stipulation, the carriers' cross-complaints against the plaintiffs were stayed pending resolution of the plaintiffs' appeal. The Company believes that the trial court's ruling, if not overturned by the California Supreme Court, also would result in dismissal of the cross-complaints. There can be no assurance, however, that such cross complaints would be dismissed. The cross complaints expose the Company to risk of liability which, if the Company is unsuccessful in the defense of such cross complaints, could have a materially adverse impact on the Company's results of operations for a particular period. The Company believes it has adequate defenses to the cross complaints. For the six months ended June 30, 1999, the Company expensed approximately $46,000 of legal expenses connected with the lawsuit. Under the original agreement with the Company's counsel of record in the Lawsuit, there was a cap on legal expenses and after December 1996, with respect to expenses incurred at the trial court level, the Company would only be responsible for out-of-pocket expenses and the payment to counsel of a percentage of any recovery of damages by the Company. However, in May 1997, the Company was notified that the partner principally responsible for the case was leaving the firm with which the Company contracted to handle the case. The Company has moved the representation to new counsel, which resulted in negotiation of a new fee arrangement requiring the Company to pay additional legal expenses incurred in connection with the appeal. 13 Item 4. Submission of Matters to a Vote of Security Holders. (a) The Company held its Annual Meeting of Stockholders on May 11, 1999. The following Directors were elected to serve until the next Annual Meeting of Stockholders or until their Successors are elected and qualified:
VOTES VOTES FOR WITHHELD ---------- -------- Donald L. Lucas 20,224,551 290,073 Larry G. Gerdes 20,212,615 302,009 George B. Caldwell 20,224,551 290,073 Walter S. Huff, Jr. 20,215,311 299,313 Charles E. Thoele 20,224,551 290,073 B. Frederick Becker 20,224,651 289,973
The stockholders also ratified the appointment of Arthur Andersen, LLP as independent accountants for the Company for the year ending December 31, 1999 with 20,274,570 votes FOR, 195,883 votes AGAINST and 44,171 ABSTAINING. Item 5. Other Information. As stated in the Company's 1999 Proxy Statement, proposals by stockholders intended to be presented at the 2000 Transcend annual meeting (to be held in the Spring of 2000) must be forwarded in writing and received at the principal executive office of Transcend no later than December 11, 1999 directed to the attention of the Secretary, for consideration for inclusion in the Transcend's proxy statement for the annual meeting of stockholders to be held in 2000. Any such proposals must comply in all respects with the rules and regulations of the Securities and Exchange Commission. In connection with the Company's Annual Meeting of Shareholders to be held in 2000, if the Company does not receive notice of a matter or proposal to be considered by February 24, 2000, then the persons appointed by the Board of Directors to act as the proxies for such Annual Meeting (named in the form of proxy) will be allowed to use their discretionary voting authority with respect to any such matter or proposal at the Annual Meeting, if such matter or proposal is properly raised at the Annual Meeting and put to a vote. Item 6. Exhibits and Reports on Form 8-K. The following exhibits are filed herewith: 27 Financial Data Schedule 1999 (for SEC use only) Reports on Form 8-K: There were no filings on Form 8-K during the ------------------- quarter ended June 30, 1999. 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. TRANSCEND SERVICES, INC. August 13, 1999 By: /s/ Larry G. Gerdes -------------------------------------- Larry G. Gerdes, President and Chief Executive Officer (Principal Executive Officer) August 13, 1999 By: /s/ Doug Shamon -------------------------------------- Doug Shamon Executive Vice President, Chief Financial Officer (Principal Financial and Accounting Officer) 15 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF TRANSCEND SERVICES, INC. FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS 6-MOS DEC-31-1999 DEC-31-1998 JAN-01-1999 JAN-01-1998 JUN-30-1999 JUN-30-1998 1,230 3,068 0 0 7,109 6,326 (878) (169) 0 0 8,249 10,672 12,721 8,394 (5,319) (3,425) 21,626 21,982 7,377 6,137 0 0 0 0 2 2 220 216 5,093 7,817 21,626 21,982 26,866 25,205 26,866 25,205 23,431 20,941 0 0 4,943 3,357 0 0 408 205 (1,916) 702 0 0 (1,916) 702 (46) (32) 0 0 0 0 (2,202) 431 (0.10) 0.02 (0.10) 0.02
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