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 September 30, 2004
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 or organization) |
(I.R.S Employer Identification No.) |
945 East Paces Ferry Rd, Suite 1475, Atlanta, Georgia 30326
(Address of principal executive offices and zip code)
Registrant’s telephone number, including area code: (404) 364-8000
N/A
(Former name, former address, and former fiscal year, if changed since last report)
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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ¨ No x
Indicate the number of shares outstanding of the Registrant’s common stock as of the latest practicable date.
| Class |
Outstanding at October 26, 2004 | |
| Common Stock, $.05 par value | 7,330,565 Shares |
| Page Number | ||||
| PART I. |
3 | |||
| Item 1. |
3 | |||
| Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003 |
3 | |||
| 4 | ||||
| Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004 and 2003 |
5 | |||
| 6 | ||||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
7 | ||
| Item 3. |
10 | |||
| Item 4. |
10 | |||
| PART II. |
11 | |||
| Item 1. |
11 | |||
| Item 6. |
12 | |||
| 13 | ||||
2
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| September 30, 2004 |
December 31, 2003 |
|||||||
| ASSETS | ||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 563,000 | $ | 558,000 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $12,000 at September 30, 2004 and $39,000 at December 31, 2003, respectively |
1,292,000 | 1,306,000 | ||||||
| Prepaid expenses and other current assets |
202,000 | 216,000 | ||||||
| Total current assets |
2,057,000 | 2,080,000 | ||||||
| Property and equipment: |
||||||||
| Computer equipment |
2,301,000 | 1,971,000 | ||||||
| Software development |
2,158,000 | 1,826,000 | ||||||
| Furniture and fixtures |
211,000 | 170,000 | ||||||
| Property and equipment |
4,670,000 | 3,967,000 | ||||||
| Accumulated depreciation |
(3,266,000 | ) | (2,749,000 | ) | ||||
| Property and equipment, net |
1,404,000 | 1,218,000 | ||||||
| Other assets |
48,000 | 48,000 | ||||||
| Total assets |
$ | 3,509,000 | $ | 3,346,000 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: |
||||||||
| Promissory notes payable |
$ | — | $ | 200,000 | ||||
| Accounts payable |
138,000 | 109,000 | ||||||
| Accrued compensation and benefits |
438,000 | 486,000 | ||||||
| Other accrued liabilities |
284,000 | 111,000 | ||||||
| Total current liabilities |
860,000 | 906,000 | ||||||
| Commitments and contingencies |
||||||||
| Stockholders’ equity: |
||||||||
| Preferred stock, $.01 par value; 2,000,000 shares authorized; none outstanding |
— | — | ||||||
| Common stock, $.05 par value; 15,000,000 shares authorized; 7,331,000 and 7,317,000 shares issued and outstanding at September 30, 2004 and December 31, 2003, respectively |
367,000 | 364,000 | ||||||
| Additional paid-in capital |
27,069,000 | 27,058,000 | ||||||
| Accumulated deficit |
(24,787,000 | ) | (24,982,000 | ) | ||||
| Total stockholders’ equity |
2,649,000 | 2,440,000 | ||||||
| Total liabilities and stockholders’ equity |
$ | 3,509,000 | $ | 3,346,000 | ||||
The accompanying notes are an integral part of these consolidated balance sheets.
3
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| 9/30/04 |
9/30/03 |
9/30/04 |
9/30/03 |
|||||||||||||
| Revenue |
$ | 3,668,000 | $ | 3,754,000 | $ | 11,296,000 | $ | 10,628,000 | ||||||||
| Direct costs |
2,638,000 | 2,557,000 | 8,131,000 | 7,249,000 | ||||||||||||
| Gross profit |
1,030,000 | 1,197,000 | 3,165,000 | 3,379,000 | ||||||||||||
| Operating expenses: |
||||||||||||||||
| Sales and marketing |
275,000 | 212,000 | 802,000 | 620,000 | ||||||||||||
| Research and development |
71,000 | 122,000 | 254,000 | 345,000 | ||||||||||||
| General and administrative |
641,000 | 579,000 | 1,893,000 | 1,740,000 | ||||||||||||
| Total operating expenses |
987,000 | 913,000 | 2,949,000 | 2,705,000 | ||||||||||||
| Operating income |
43,000 | 284,000 | 216,000 | 674,000 | ||||||||||||
| Interest expense, net |
(3,000 | ) | (4,000 | ) | (18,000 | ) | (4,000 | ) | ||||||||
| Income before income tax provision |
40,000 | 280,000 | 198,000 | 670,000 | ||||||||||||
| Income tax provision |
(1,000 | ) | 0 | (3,000 | ) | 0 | ||||||||||
| Net income |
39,000 | 280,000 | 195,000 | 670,000 | ||||||||||||
| Dividends on preferred stock |
— | — | — | (180,000 | ) | |||||||||||
| Net income attributable to common stockholders |
$ | 39,000 | $ | 280,000 | $ | 195,000 | $ | 490,000 | ||||||||
| Basic earnings per share: |
||||||||||||||||
| Net earnings per share attributable to common stockholders |
$ | 0.01 | $ | 0.04 | $ | 0.03 | $ | 0.09 | ||||||||
| Weighted average shares outstanding |
7,331,000 | 7,317,000 | 7,327,000 | 5,463,000 | ||||||||||||
| Diluted earnings per share: |
||||||||||||||||
| Net earnings per share attributable to common stockholders |
$ | 0.01 | $ | 0.04 | $ | 0.03 | $ | 0.09 | ||||||||
| Weighted average shares outstanding |
7,551,000 | 7,523,000 | 7,614,000 | 5,618,000 | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months Ended September 30, |
||||||||
| 2004 |
2003 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net income attributable to common stockholders |
$ | 195,000 | $ | 490,000 | ||||
| Adjustments to reconcile net income attributable to common stockholders to net cash provided by operating activities: |
||||||||
| Depreciation and amortization |
570,000 | 489,000 | ||||||
| Preferred stock dividends |
— | 180,000 | ||||||
| Changes in assets and liabilities: |
||||||||
| Accounts receivable, net |
14,000 | (137,000 | ) | |||||
| Prepaid expenses and other current assets |
14,000 | (212,000 | ) | |||||
| Note receivable and other assets |
— | 22,000 | ||||||
| Accounts payable |
29,000 | 16,000 | ||||||
| Accrued liabilities |
125,000 | (5,000 | ) | |||||
| Total adjustments |
752,000 | 353,000 | ||||||
| Net cash provided by operating activities |
947,000 | 843,000 | ||||||
| Cash flows from investing activities: |
||||||||
| Capital expenditures |
(594,000 | ) | (413,000 | ) | ||||
| Capitalized software development costs |
(162,000 | ) | — | |||||
| Net cash used in investing activities |
(756,000 | ) | (413,000 | ) | ||||
| Cash flows from financing activities: |
||||||||
| Payment of promissory notes payable |
(200,000 | ) | — | |||||
| Redemption of preferred stock |
— | (600,000 | ) | |||||
| Preferred stock dividends |
— | (110,000 | ) | |||||
| Preferred stock redemption/conversion expenses |
(72,000 | ) | ||||||
| Proceeds from issuances of common stock |
14,000 | — | ||||||
| Net cash used in financing activities |
(186,000 | ) | (782,000 | ) | ||||
| Net increase (decrease) in cash and cash equivalents |
5,000 | (352,000 | ) | |||||
| Cash and cash equivalents, at beginning of period |
558,000 | 782,000 | ||||||
| Cash and cash equivalents, at end of period |
$ | 563,000 | $ | 430,000 | ||||
| Supplemental cash flow information: |
||||||||
| Cash paid for interest expense |
$ | 19,000 | $ | 15,000 | ||||
| Noncash financing activities: |
||||||||
| Issuance of promissory notes payable in conjunction with the redemption of preferred stock |
$ | — | $ | 200,000 | ||||
| Issuances of common stock in lieu of preferred stock cash dividends |
$ | — | $ | 70,000 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004 and 2003
(Unaudited)
(1) The accompanying consolidated financial statements are unaudited and have been prepared by management of Transcend Services, Inc. (the “Company” or “Transcend”) in accordance with the rules and regulations of the Securities and Exchange Commission. In the opinion of management, all adjustments, consisting of normal recurring accruals, necessary for the fair presentation of the consolidated financial position, results of operations and cash flows, have been included. 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, 2003. Footnote disclosure that substantially duplicates the disclosure contained in that document has been omitted.
(2) Revenue attributable to one customer totaled $472,000, or 13% and $1,393,000, or 12% of total revenue for the three and nine months ended September 30, 2004, respectively, and $380,000, or 10% and $1,150,000, or 11% of total revenue for the three and nine months ended September 30, 2003, respectively. Additionally, one other customer contributed revenue totaling $371,000, or 10% and $1,129,000, or 11% of total revenue for the three and nine months ended September 30, 2003, respectively.
(3) 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 carryforwards. Certain state income tax credit carryforwards had been exhausted by 2004. The Company’s taxable income for the three and nine months ended September 30, 2003 was offset by available net operating loss carryforwards; therefore no income tax provisions were recorded for those periods. The income tax provisions recorded for the three and nine months ended September 30, 2004 are attributable to the expiration of certain state income tax credit carryforwards.
(4) The Company accounts for comprehensive income (loss) under the provisions of SFAS No. 130, Reporting Comprehensive Income. The Company’s comprehensive income was equivalent to its net income attributable to common stockholders for the three and nine months ended September 30, 2004 and 2003.
(5) On March 8, 2004, the Company replaced its existing $1.5 million line of credit (“LOC”) with a $1 million LOC that has a maturity date of April 30, 2005. Borrowings, if any, under the new LOC shall bear interest at the lender’s prime rate and shall be secured by the Company’s accounts receivable.
(6) 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 carriers as defendants to the lawsuit.
The Company intends to vigorously defend all claims made by OLOL. The lawsuit is in an 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.
The Company is subject to other legal proceedings and claims that arise in the ordinary course of business. In the opinion of management, the amount of potential liability, if any, with respect to these actions will not materially affect the Company’s results of operations and financial condition.
(7) The Company issued 31,050 and 12,372 shares of its unregistered common stock at $1.50 and $2.00 per share, respectively, to certain holders of its Series A Convertible Preferred Stock who elected to receive their quarterly preferred stock dividends in shares of the Company’s common stock in lieu of cash at the preferred stock dividend payment dates of February 15 and May 15, 2003. All outstanding shares of the Company’s preferred stock were either converted into 2,860,000 shares of common stock or redeemed on June 25, 2003 and July 1, 2003, respectively, in transactions that were approved by the Company’s stockholders.
6
(8) On March 31, 2004, the Financial Accounting Standards Board (“FASB”) published an exposure draft regarding “Share-Based Payment, an Amendment of FASB Statements No. 123 and 95” (the “Exposure Draft”). If the provisions of the Exposure Draft become generally accepted accounting principles as presently proposed, such provisions would affect the way that the Company presently accounts for stock-based compensation plans and would result in increased compensation expense of a presently indeterminable amount being included in the Company’s results of operations after the effective date of such provisions.
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 that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Among the important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are competitive pressures, loss of significant customers, the mix of revenue, changes in pricing policies, delays in 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. 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.
Results of Operations
Transcend Services, Inc. (the “Company”) utilizes its web-based voice and data distribution technology and home-based medical language specialists to convert physicians’ voice recordings into electronic medical record documents.
Three Months Ended September 30, 2004 Compared to Three Months Ended September 30, 2003
Revenue decreased $86,000, or 2%, to $3.7 million for the three months ended September 30, 2004, compared to revenue of $3.8 million for the three months ended September 30, 2003. The net decrease in revenue is primarily attributable to: (1) transcription revenue of $693,000 from new transcription customers; (2) a decrease of $607,000 in transcription revenue from customers that terminated contracts since September 30, 2003; (3) a decrease in transcription revenue of $182,000 from existing customers; and (4) an increase of $10,000 in other revenue.
Direct costs increased $81,000, or 3%, to $2,638,000 for the three months ended September 30, 2004, compared to direct costs of $2,557,000 for the three months ended September 30, 2003. Direct costs include costs attributable to compensation for transcriptionists, recruiting of transcriptionists, production management, customer service, technical support for production operations, implementation of transcription services and depreciation and amortization related to production operations. Transcription compensation is a variable cost based on lines transcribed or edited multiplied by specified per-line pay rates that vary by individual as well as type of work. The per-line pay rates are higher for transcription work on the Company’s transcription platform than for transcription and editing work on a third-party’s voice recognition platform, used for approximately 10% and 5% of the Company’s revenue for the three months ended September 30, 2004 and 2003, respectively. All direct costs referred to above other than compensation for transcriptionists are semi-variable production infrastructure costs that periodically change in anticipation of or in response to the overall level of production activity. Compensation for transcriptionists decreased $21,000 due to the overall decrease in revenue of $86,000 referred to above. The remaining net increase in direct costs of $102,000 was attributable to a net increase in production infrastructure costs to support a higher level of revenue that was not achieved. Production management, the largest component of production infrastructure costs, increased $76,000 due primarily to the addition of quality control and documentation personnel to support a higher level of production activity and revenue that was not achieved. The remaining production infrastructure costs increased $26,000 between the third quarters of 2004 and 2003.
Gross profit decreased $167,000, or 14%, to $1 million for the three months ended September 30, 2004, compared to gross profit of $1.2 million for the three months ended September 30, 2003. Gross profit as a percentage of revenue decreased to 28.1% in the third
7
quarter of 2004 compared to 31.9% in the third quarter of 2003. This decrease of 3.8 percentage points is primarily due to: (i) an increase in production infrastructure costs, in particular in the production management area as discussed above, in anticipation of a projected revenue level that was not achieved in the third quarter of 2004, which accounted for 3.5 percentage points of the 3.8 percentage point unfavorable variance, and (ii) the incremental training costs associated with the anticipated use of the speech recognition platform. In addition, a higher mix of transcription work being performed on a third party’s voice recognition platform resulted in lower margins in the third quarter of 2004 compared to the third quarter of 2003.
Sales and marketing expenses increased $63,000, or 30%, to $275,000 in the third quarter of 2004, compared to sales and marketing expenses of $212,000 in the third quarter of 2003. Sales and marketing expenses as a percentage of revenue for the third quarter of 2004 were 7% compared to 6% in the third quarter of 2003. The increase in sales and marketing expense is primarily due to the increase in the size of the sales force that resulted in higher salaries, commissions on new sales and travel expenses. Partially offsetting these increases in direct sales expenses were lower marketing expenses in the third quarter of 2004.
Research and development expenses decreased $51,000, or 42%, to $71,000 in the third quarter of 2004, compared to research and development expenses of $122,000 in the third quarter of 2003. Research and development expenses as a percentage of revenue for the third quarter of 2004 were 2% compared to 3% for the third quarter of 2003. During the third quarter of 2004, the Company capitalized internal software development costs of $57,000 related to its speech recognition technology platform. Partially offsetting this reduction of costs was the reassignment of technology resources from other areas to work on technology development projects.
During the third quarter of 2004, the Company capitalized $67,000 of salary expense (including the $57,000 referred to above) related to the development of a speech recognition technology platform and the development of interfaces for the Company’s enterprise transcription platform to various medical records systems.
General and administrative expenses increased $62,000, or 11%, to $641,000 in the third quarter of 2004, compared to general and administrative expenses of $579,000 in the third quarter of 2003. General and administrative expenses as a percentage of revenue for the third quarter of 2004 were 17% compared to 15% for the third quarter of 2003. This net increase was primarily due to an unexpected state business and occupation tax assessment of $50,000 and regulatory reporting expenses.
The Company reported net interest expense of $3,000 in the third quarter of 2004, comprised primarily of the amortization expense related to the line of credit facility fees. For the third quarter of 2003, the Company reported net interest expense of $4,000.
The Company reported an income tax provision of $1,000 in the third quarter of 2004 due to the expiration of certain state income tax credit carryforwards in 2004 and no income tax provision in the third quarter of 2003, since the Company has net operating loss carryforwards of approximately $19 million.
Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30, 2003
Revenue increased $668,000, or 6%, to $11.3 million for the nine months ended September 30, 2004, compared to revenue of $10.6 million for the nine months ended September 30, 2003. The net increase in revenue is primarily attributable to: (1) transcription revenue of $1,738,000 from new transcription customers; (2) a decrease of $1,777,000 in transcription revenue from customers that terminated contracts since September 30, 2003; (3) an increase in transcription revenue of $701,000 from existing customers; and (4) an increase of $6,000 in other revenue.
Direct costs increased $882,000, or 12%, to $8.1 million for the nine months ended September 30, 2004, compared to direct costs of $7.3 million for the nine months ended September 30, 2003. Direct costs include costs attributable to compensation for transcriptionists, recruiting of transcriptionists, production management, customer service, technical support for production operations, implementation of transcription services and depreciation and amortization related to production operations. Transcription compensation is a variable cost based on lines transcribed or edited multiplied by specified per-line pay rates that vary by individual as well as type of work. The per-line pay rates are higher for transcription work on the Company’s transcription platform than for transcription and editing work on a third-party’s voice recognition platform, used for approximately 10% and 3% of the Company’s revenue for the nine months ended September 30, 2004 and 2003, respectively. All direct costs referred to above other than compensation for transcriptionists are semi-variable production infrastructure costs that periodically change in anticipation of or in response to the overall level of production activity. Compensation for transcriptionists increased $573,000 due to the overall increase in revenue of $668,000 referred to above. The remaining net increase in direct costs of $309,000 was attributable to a net increase in production infrastructure costs to support a higher level of revenue, some of which was not achieved. Production management, the largest component of production infrastructure costs, increased $294,000 due primarily to the addition of quality control and documentation personnel to support a higher level of production activity and revenue, some of which was not achieved. The remaining production infrastructure costs increased $15,000 between the second quarters of 2004 and 2003.
8
Gross profit decreased $214,000, or 6%, to $3.2 million for the nine months ended September 30, 2004, compared to gross profit of $3.4 million for the nine months ended September 30, 2003. Gross profit as a percentage of revenue decreased to 28.0% in the first nine months of 2004 compared to 31.8% in the first nine months of 2003. This decrease of 3.8 percentage points is primarily due to: (i) an increase in production infrastructure costs, in particular in the production management area as discussed above, in anticipation of a projected revenue level that was not achieved in the first nine months of 2004, which accounted for 2.3 percentage points of the 3.8 percentage point unfavorable variance, and (ii) the incremental training costs associated with the anticipated use of the speech recognition platform. In addition, a higher mix of transcription work being performed on a third party’s voice recognition platform resulted in lower margins in the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003.
Sales and marketing expenses increased $182,000, or 29%, to $802,000 for the nine months ended September 30, 2004, compared to sales and marketing expenses of $620,000 for the nine months ended September 30, 2003. Sales and marketing expenses as a percentage of revenue for the first nine months of 2004 were 7% compared to 6% for the first nine months of 2003. The increase in sales and marketing expense is primarily due to an increase in the size of the sales force that resulted in higher levels of salaries, commissions on new sales and travel expenses. Partially offsetting these increases in direct sales expenses were lower marketing expenses in the first nine months of 2004.
Research and development expenses decreased $91,000, or 26%, to $254,000 for the nine months ended September 30, 2004, compared to research and development expenses of $345,000 for the nine months ended September 30, 2003. Research and development expenses as a percentage of revenue for the first nine months of 2004 were 2% compared to 3% for the first nine months of 2003. During the first nine months of 2004, the Company capitalized internal software development costs of $120,000 related to the development of a speech recognition technology platform and enhancements to the Company’s billing system. In addition, the Company reduced its consulting fees related to the development and enhancements of the speech recognition and web-based platforms in the nine months ended September 30, 2004. Partially offsetting these reductions of costs were the reassignment of technology resources from other areas to work on technology development projects.
During the first nine months of 2004, the Company capitalized $162,000 of salary expense (including the $120,000 referred to above) related to the development of a speech recognition technology platform, enhancements to the Company’s billing system and data distribution technology platform and development of interfaces for the Company’s enterprise transcription platform to various medical records systems.
General and administrative expenses increased $153,000, or 9%, to $1.9 million for the nine months ended September 30, 2004, compared to general and administrative expenses of $1.7 million for the nine months ended September 30, 2003. General and administrative expenses as a percentage of revenue were 17% for the first nine months of 2004 compared to 16% for the first nine months of 2003. This net increase was primarily due to a state business and occupation tax assessment of $83,000 and increases in state franchise business taxes, as the Company’s operations have expanded to 48 states. In addition, regulatory reporting expenses and rent expenses increased in the nine months ended September 30, 2004.
The Company reported net interest expense of $18,000 for the nine months ended September 30, 2004, primarily due to $5,000 of interest on sales tax returns, amortization expense of $8,000 for line of credit facility fees and interest of $1,000 on the short-term note payable related to the 2003 preferred stock redemption that was paid in full on April 1, 2004. The Company reported net interest expense of $4,000 that related to the amortization expense for the line of credit facility fees for the nine months ended September 30, 2003.
The Company reported an income tax provision of $3,000 in the nine months ended September 30, 2004 due to the expiration of certain state income tax credit carryforwards in 2004 and no income tax provision in the six months ended September 30, 2003, since the Company has net operating loss carryforwards of approximately $19 million.
Liquidity and Capital Resources
The Company’s current financial condition has been significantly influenced by four factors: (1) profitable and positive cash flow operations for 2003 and the first nine months of 2004; (2) the redemption of a portion of its preferred stock for $600,000 cash on
9
July 1, 2003; (3) the conversion of the remaining shares of preferred stock into common stock on June 25, 2003, thereby eliminating quarterly cash dividend payments of approximately $120,000 after May 15, 2003; and (4) the payment of two promissory notes payable of $100,000 each on January 1 and April 1, 2004 related to the 2003 preferred stock redemption. As of September 30, 2004, the Company had cash and cash equivalents of $563,000, working capital of $1.2 million, no debt and full availability of its $1 million line of credit, which expires on April 30, 2005.
Net cash provided by operating activities totaled $947,000 for the nine months ended September 30, 2004, due primarily to profitable operations and noncash depreciation and amortization expenses.
Net cash used in investing activities totaled $756,000 for the nine months ended September 30, 2004, and was comprised primarily of the acquisition of computer hardware and software upgrades and the development of a speech recognition platform. Subsequent to quarter-end, the Company made a partial payment of $225,000 to the developer of its speech recognition tool.
Net cash used in financing activities during the first nine months of 2004 consisted of $200,000 to pay off promissory notes payable on January 1 and April 1, 2004, partially offset by the issuances of common stock as a result of stock option exercises.
Aside from cash available under its $1 million line of credit referred to above, during the fourth quarter of 2004 and 2005 inclusive, the Company has potential cash resources of an undetermined amount of earn-out payments, if any, payable by Provider HealthNet Services, Inc. (“PHNS”) based on a fixed percentage of certain defined future revenue recognized by PHNS from the Co-Sourcing and CodeRemote businesses sold to PHNS by Transcend in October 2000.
The Company is a defendant in one lawsuit and subject to other legal proceedings and claims that arise in the ordinary course of business. See Note 6 to the Consolidated Financial Statements included with this report and “Legal Proceedings”.
Absent a material adverse outcome from the lawsuit, the Company anticipates that cash on hand, together with internally generated funds, cash available under its line of credit and potential cash from the PHNS earn-out agreement, if any, should be sufficient to finance operations and make capital investments in the normal and ordinary course of its business during 2004 and for the foreseeable future.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company had no material exposure to market risk from derivatives or other financial instruments as of September 30, 2004.
Item 4. Controls and Procedures
The SEC defines the term “disclosure controls and procedures” to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. The Company’s principal executive officer and principal financial officer, based on their evaluation of the Company’s disclosure controls and procedures as of the end of the quarterly period covered by this report, have concluded that the Company’s disclosure controls and procedures were effective for this purpose.
Internal control over financial reporting consists of control processes designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with GAAP. To the extent that components of the Company’s internal control over financial reporting are included in the Company’s disclosure controls, they are included in the scope of the evaluation by the Company’s principal executive officer and principal financial officer referenced above. There were no changes in the Company’s internal control over financial reporting during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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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 carriers as defendants to the lawsuit.
The Company intends to vigorously defend all claims made by OLOL. The lawsuit is in an 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.
The Company is subject to other legal proceedings and claims that arise in the ordinary course of business. In the opinion of management, the amount of potential liability, if any, with respect to these actions will not materially affect the Company’s results of operations and financial condition.
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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-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”); (ii) the Company’s Annual Report on form 10-K for the year ended May 31, 1993 (referred to as “1993 10-K”); (iii) the Company’s Current Report on Form 8-K filed October 30, 2000 (referred to as “10/30/00 8-K”); (iv) the Company’s Annual Report on Form 10-K for the year ended December 31, 2001 (referred to as “2001 10-K”); (v) a Registration Statement on Form S-3 under the Securities Act of 1933 for the Company, Registration No. 333-106446, filed on June 25, 2003 (referred to as “2003 S-3”); (vi) the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 (referred to as “3/31/04 10-Q”); or (vii) the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 (referred to as “6/30/04 10-Q”).
| EXHIBIT NO. |
DESCRIPTION | |||
| *2.1 | – | Asset Purchase Agreement dated October 13, 2000 with Provider HealthNet Services, Inc. (10/30/00 8-K, Exhibit 2.7) | ||
| *3.1 | – | Certificate of Incorporation (2003 S-3, Exhibit 4.1) | ||
| *3.2 | – | Restated Bylaws (1993 10-K, Exhibit 3(a)) | ||
| 31.1 | – | Certification of Chief Executive Officer of the Registrant Pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended | ||
| 31.2 | – | Certification of Chief Financial Officer of the Registrant Pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended | ||
| **32.1 | – | Certification of Chief Executive Officer of the Registrant Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
| **32.2 | – | Certification of Chief Financial Officer of the Registrant Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
| ** | This certification is furnished to, but not filed with, the Commission. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Registrant specifically incorporates it by reference. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| TRANSCEND SERVICES, INC. | ||||
| October 28, 2004 |
By: |
/s/ Larry G. Gerdes | ||
| Larry G. Gerdes, | ||||
| Chief Executive Officer | ||||
| (Principal Executive Officer) | ||||
| By: |
/s/ Joseph G. Bleser | |||
| Joseph G. Bleser, | ||||
| Chief Financial Officer | ||||
| (Principal Financial Officer) | ||||
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