<PAGE>
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. 1)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
[_] Definitive Proxy Statement RULE 14A-6(E)(2))
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
TRANSCEND SERVICES, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------------
(3) Filing Party:
-------------------------------------------------------------------------
(4) Date Filed:
-------------------------------------------------------------------------
Notes:
Reg. (S) 240.14a-101.
SEC 1913 (3-99)
<PAGE>
TRANSCEND SERVICES, INC.
3353 Peachtree Road, N.E., Suite 1000
Atlanta, Georgia 30326
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held on December 30, 1999
To the Stockholders:
A special meeting of stockholders (the "Special Meeting") of Transcend
Services, Inc. (the "Company") will be held on December 30, 1999 at the offices
of Smith, Gambrell & Russell, LLP, 1230 Peachtree Street, Promenade II, Suite
1230, Atlanta, Georgia 30309 at 10 a.m. local time for the following purposes:
1. To approve an amendment to the Company's Certificate of Incorporation to
effect, if and when the Board of Directors deems appropriate (for the period of
time beginning on the date the amendment is approved by the stockholders and
expiring at the Company's 2000 Annual Meeting of Stockholders), a 1-for-5
reverse split of the Company's Common Stock; and
2. To approve the terms of that certain conversion agreement by and among the
Company and certain of the Company's directors and affiliates (the "Conversion
Agreement") which would permit the Company, at its option, to convert
outstanding promissory notes of the Company in the aggregate principal amount of
$1,500,000 into a new class of convertible preferred stock to be designated as
the "Series B Convertible Preferred Stock."
3. To transact such other business as may properly come before the Special
Meeting or any postponement or adjournment thereof.
Only stockholders of record at the close of business on December 1, 1999
shall be entitled to notice of, and to vote at, the Special Meeting or any
adjournment thereof.
A Proxy Statement and a proxy solicited by the Board of Directors are
enclosed herewith. You are cordially invited to attend the Special Meeting.
Whether or not you plan to attend the Special Meeting, please complete, sign,
date and mail the enclosed proxy card promptly in the enclosed postage-paid
envelope. If you attend the meeting, you may, if you wish, withdraw your proxy
and vote in person.
By order of the Board of Directors,
DOUG SHAMON
Secretary
Atlanta, Georgia
December 3, 1999
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON,
YOU ARE URGED TO COMPLETE, SIGN, DATE AND PROMPTLY MAIL THE ENCLOSED PROXY IN
THE ACCOMPANYING POSTAGE PAID ENVELOPE. IF YOU ATTEND THE MEETING, YOU MAY
REVOKE THE PROXY AND VOTE YOUR SHARES IN PERSON.
<PAGE>
TRANSCEND SERVICES, INC.
3353 Peachtree Road, N.E., Suite 1000
Atlanta, Georgia 30326
PROXY STATEMENT
Special Meeting Of Stockholders To Be Held December 30, 1999
This Proxy Statement and the accompanying form of Proxy are being furnished
to the stockholders of Transcend Services, Inc. (the "Company" or "Transcend")
on or about December 3, 1999 in connection with the solicitation of proxies by
the Board of Directors of the Company for use at a Special Meeting of
Stockholders to be held on December 30, 1999 at the offices of Smith, Gambrell &
Russell, LLP, 1230 Peachtree Street, Promenade II, Suite 3100, Atlanta, Georgia
30309, at 10 a.m. local time and any adjournment thereof. Any stockholder who
executes and delivers a proxy may revoke it at any time prior to its use by (i)
giving written notice of revocation to the Secretary of the Company; (ii)
executing a proxy bearing a later date; or (iii) appearing at the meeting and
voting in person. The address of the principal executive offices of the Company
is 3353 Peachtree Road, N.E., Suite 1000, Atlanta, Georgia 30326 and the
Company's telephone number is (404) 836-8000.
Unless otherwise specified, all shares represented by effective proxies
will be voted in favor of (i) the approval of the amendment to the Certificate
of Incorporation to effect the 1-for-5 reverse stock split; (ii) the approval of
the Conversion Agreement; and (iii) the transaction of such other business as
may properly come before the Special Meeting or any postponement or adjournment
thereof. The Board of Directors does not know of any other business to be
brought before the meeting, but as to any such other business, proxies will be
voted upon any such matters in accordance with the best judgment of the person
or persons acting thereunder as to what is in the best interests of the
Company.
The cost of soliciting proxies will be borne by the Company. In addition to
use of the mail, proxies may be solicited in person or by telephone or telegram
by directors and officers of the Company who will not receive additional
compensation for such services. Brokerage houses, nominees, custodians and
fiduciaries will be requested to forward soliciting material to beneficial
owners of stock held of record by them, and the Company will reimburse such
persons for their reasonable expenses in doing so.
Holders of record of outstanding shares of both the Company's Common Stock,
$.01 par value per share (the "Common Stock") and the Company's Series A
Preferred Stock, $.01 par value per share (the "Series A Preferred Stock") at
the close of business on December 1 , 1999 are entitled to notice of and to vote
at the meeting. As of December 1, 1999, there were approximately 567 holders of
record of the Company's Common Stock and 15 holders of record of the Company's
Series A Preferred Stock. Each holder of common stock is entitled to one vote
for each share held on the record date. Each holder of Series A Preferred Stock
shall be entitled to 7.4 votes per share on each preferred share held. There
were 22,093,153 shares of Common Stock outstanding and entitled to vote on
December 1, 1999 and 212,800 shares of Series A Preferred Stock outstanding and
entitled to vote on December 1, 1999. The Reverse Split which requires an
amendment to the Company's Certificate of Incorporation must be approved by a
majority of the outstanding stock entitled to vote on the matter.
Abstentions and broker "non-votes" will be counted as present in
determining whether the quorum requirement is satisfied. A "non-vote" occurs
when a nominee holding shares for a beneficial owner votes on one proposal
pursuant to discretionary authority or instructions from the beneficial owner,
but does not vote on another proposal because the nominee has not received
instruction from the beneficial owner, and does not have discretionary power. An
abstention from voting by a stockholder on a proposal has the same effect as a
vote against such proposal. Broker "non-votes" are not counted for purposes of
determining whether a proposal has been approved, which also has the same effect
as a vote against such proposal.
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following tables set forth, as of December 1 , 1999, certain
information with respect to all stockholders known to Transcend to beneficially
own more than five percent of the Company's Common Stock or Preferred Stock, and
information with respect to Transcend Common Stock or Preferred Stock
beneficially owned by each director of Transcend, each executive officer, and
all directors and executive officers of Transcend as a group. Except as
otherwise indicated, the stockholders listed in the table have sole voting and
investment power with respect to the Common Stock or Preferred Stock owned by
them.
<TABLE>
<CAPTION>
PREFERRED STOCK
- ---------------------------------------------------------------------------------------------------------
AMOUNT AND NATURE OF
NAME AND ADDRESS BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS
- ---------------- ----------------------- ----------------
<S> <C> <C>
Richard L. Gunderson
101 East 5th Street, Suite 201
St. Paul, Minnesota 55101 20,000 9.40%
- ---------------------------------------------------------------------------------------------------------
Laumar Investors Limited Partnership
3353 Peachtree Road, Suite 1000
Atlanta, Georgia 30326 40,000 18.80%
- ---------------------------------------------------------------------------------------------------------
MMI Companies, Inc.
540 Lake Cook Road
Deerfield, Illinois 60015-5290 60,000 28.20%
- ---------------------------------------------------------------------------------------------------------
Monmouth College
700 East Broadway
Monmouth, Illinois 61462 20,000 9.40%
- ---------------------------------------------------------------------------------------------------------
Transylvania University
300 N. Broadway
Lexington, Kentucky 40508 20,000 9.40%
</TABLE>
(1) The shares of Preferred Stock are convertible into shares of Common
Stock at any time at the option of the holder. The percentages are
based upon 212,800 shares of Preferred Stock outstanding as of December
1, 1999.
<PAGE>
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
- -------------------------------------------------------------------------------------------------------------------
AMOUNT AND NATURE PERCENT AMOUNT AND NATURE OF PERCENT
OF BENEFICIAL OF BENEFICIAL OF
NAME AND ADDRESS OWNERSHIP(1) CLASS OWNERSHIP(13) CLASS
- ---------------- ----------------- --------- --------------------- ---------
<S> <C> <C> <C> <C>
Gerdes Huff Investments
3353 Peachtree Road, N.E., Suite 1030
Atlanta, Georgia 30326 3,500,001 (2) 15.84% 0 *
- -------------------------------------------------------------------------------------------------------------------
Donald L. Lucas 671,744 (3) 3.03% 10,000 (14) 4.70%
- -------------------------------------------------------------------------------------------------------------------
Larry G. Gerdes
3353 Peachtree Road, N.E., Suite 1000
Atlanta, Georgia 30326 4,806,889 (4) 21.54% 12,000 5.64%
- -------------------------------------------------------------------------------------------------------------------
B. Frederick Becker 25,457 (5) * 0 (15) *
- -------------------------------------------------------------------------------------------------------------------
George B. Caldwell 139,581 (6) * 2,000 (16) *
- -------------------------------------------------------------------------------------------------------------------
Walter S. Huff, Jr.
3353 Peachtree Road, N.E., Suite 1000
Atlanta, Georgia 30326 5,118,061 (7) 22.89% 40,000 (17) 9.40%
- -------------------------------------------------------------------------------------------------------------------
Charles E. Thoele 115,994 (8) * 2,000 *
- -------------------------------------------------------------------------------------------------------------------
E. Leo Cooper 154,500 (9) * 0 *
- -------------------------------------------------------------------------------------------------------------------
David W. Murphy 297,122 (10) 1.34% 0 *
- -------------------------------------------------------------------------------------------------------------------
Douglas A. Shamon 271,606 (11) 1.23% 0 *
- -------------------------------------------------------------------------------------------------------------------
All Directors and Officers as a group 8,100,953 (12) 35.24% 66,000 31.02%
</TABLE>
* Represents less than 1%
(1) "Beneficial Ownership" includes shares for which an individual, directly
or indirectly, has or shares voting or investment power or both and also
includes shares of Common Stock underlying options and warrants to
purchase Common Stock which are exercisable within sixty days of the date
hereof. Beneficial ownership as reported in the above table has been
determined in accordance with Rule 13d-3 of the Securities Exchange Act of
1934. The percentages are based upon 22,093,153 shares outstanding as of
December 1, 1999, except for certain parties who hold presently
exercisable options, convertible preferred stock or warrants to purchase
Common Stock. The percentages for those parties who hold presently
exercisable options, convertible preferred stock or warrants are based
upon the sum of 22,093,153 shares plus the number of shares subject to
presently exercisable options or warrants held by them, as indicated in
the following notes. Unless otherwise indicated, each person has sole
voting and dispositive power with respect to all shares listed opposite
his name.
(2) Such shares are owned of record by Gerdes Huff Investments, a general
partnership the sole general partners of which are Messrs. Gerdes and
Huff. As a result, each of Messrs. Gerdes and Huff are deemed the
beneficial owner of all of such shares.
(3) Includes 442,514 shares held by the Donald L. Lucas and Lygia S. Lucas
Trust dated December 3, 1984, of which Mr. Donald L. Lucas is trustee;
50,675 shares held by the Donald L. Lucas Profit Sharing Trust of which
Mr. Lucas is Successor Trustee; 21,481 shares held by the Donald L. Lucas
Remuneration Account dated July 7, 1993; 74,074 shares held by the Donald
L. Lucas, SUCC TTEE Donald L. Lucas Profit Sharing Trust which may be by
acquired in connection with the Company's November 1997 offering of Series
A Convertible Preferred Stock; and 74,000 shares which Mr. Lucas has the
right to acquire pursuant to presently exercisable stock options. Excludes
certain shares and shares underlying warrants with respect to which Mr.
Lucas disclaims beneficial ownership which were purchased by the Richard
M. Lucas Cancer Foundation, of which Mr. Lucas is the Chairman, in the
Company's private placement dated September 5, 1996; 71,500 shares which
may be acquired upon the conversion of an 8% Convertible Debenture also
held by the Richard M. Lucas Cancer Foundation and 74,074 shares, also
held by the Richard M. Lucas Cancer Foundation, which may be acquired in
connection with the Company's November 1997 offering of Series A
Convertible Preferred Stock.
<PAGE>
(4) Includes 3,500,001 shares held by Gerdes Huff Investments, a general
partnership of which Mr. Gerdes is a general partner; 93,600 shares held
by Mr. Gerdes' spouse; 94,155 shares held by Mr. Gerdes as custodian for
his minor children; 50,000 shares held by the Gerdes Family Partnership LP
of which Mr. Gerdes is the General Partner; and 88,888 shares which may be
acquired in connection with the Company's November 1997 offering of Series
A Convertible Preferred Stock; and 222,396 shares purchasable pursuant to
presently exercisable stock options.
(5) Includes 8,857 shares held by The Becker Family Foundation; 200 shares
held by Mr. Becker's spouse; 300 shares held by Mr. Becker's minor
children and 16,000 shares purchasable pursuant to presently exercisable
stock options. Excludes 444,444 shares which may be acquired by MMI
Companies, Inc., of which Mr. Becker is Chairman and Chief Executive
Officer and to which Mr. Becker disclaims beneficial ownership, in
connection with the Company's November 1997 offering of Series A
Convertible Preferred Stock. Voting and investment power related to such
shares rests with the investment committee of the board of directors of
MMI Companies, Inc., of which Mr. Becker is not a member.
(6) Includes 22,522 shares subject to presently exercisable warrants to
purchase Common Stock; 14,814 shares which may be acquired in connection
with the Company's November 1997 offering of Series A Convertible
Preferred Stock; and 28,000 shares which Mr. Caldwell has the right to
acquire pursuant to presently exercisable stock options. Excludes 444,444
shares which may be acquired by MMI Companies, Inc., of which Mr. Caldwell
is a member of the board of directors and to which Mr. Caldwell disclaims
beneficial ownership, in connection with the Company's November 1997
offering of Series A Convertible Preferred Stock. Voting and investment
power related to such shares rests with the investment committee of the
board of directors of MMI Companies, Inc., of which Mr. Caldwell is not a
member.
(7) Includes 3,500,001 shares held by Gerdes Huff Investments, a general
partnership of which Mr. Huff is a general partner; 162,650 shares held by
Laumar Investors Limited Partnership, a limited partnership of which Mr.
Huff is the General Partner; 40,000 shares subject to presently
exercisable options; 225,225 shares subject to presently exercisable
warrants to purchase Common Stock; 56,300 shares held by the Larry G.
Gerdes Trust of which Mr. Huff is the trustee; and 296,296 shares held by
Laumar Investors Limited Partnership of which Mr. Huff is the General
Partner. Excludes 57,200 shares with respect to which Mr. Huff disclaims
beneficial ownership and which may be acquired upon the conversion of an
8% Convertible Debenture held by the Walter S. Huff, Jr. Charitable
Foundation, of which Mr. Huff's adult children are trustees.
(8) Includes 11,261 shares subject to presently exercisable warrants to
purchase Common Stock; 14,814 shares which may be acquired in connection
with the Company's November 1997 offering of Series A Convertible
Preferred Stock; and 40,000 shares subject to presently exercisable stock
options.
(9) Includes 52,500 shares subject to presently exercisable options.
(10) Includes 90,000 shares subject to presently exercisable options.
(11) Includes 3,000 shares held by Mr. Shamon's minor children, 2,900 shares
held by Mr. Shamon's spouse and 45,000 shares subject to presently
exercisable stock options.
(12) Includes 634,846 shares subject to presently exercisable stock options and
259,008 shares subject to presently exercisable warrants and 488,886
shares subject to presently exercisable Series A Convertible Preferred
Stock.
(13) The shares of Preferred Stock are convertible into shares of Common Stock
at any time at the option of the holder. The total shares of Common Stock
convertible from Preferred Stock are accounted for in the Common Stock
Beneficial Ownership column of the above table. The percentages are based
upon 212,800 shares of Preferred Stock outstanding as of April 5, 1999.
(14) Includes 10,000 shares held by Donald L. Lucas, SUCC TTE Donald L. Lucas
Profit Sharing Trust. Excludes 10,000 shares, with respect to which Mr.
Lucas disclaims beneficial ownership, which are held by the Richard M.
Lucas Cancer Foundation, of which Mr. Lucas is the Chairman.
(15) Excludes 60,000 shares held by MMI Companies, Inc., of which Mr. Becker is
Chairman and Chief Executive Officer and to which Mr. Becker disclaims
beneficial ownership.
(16) Includes 2,000 shares held by George B. Caldwell, TTEE of The George B.
Caldwell Trust. Excludes 60,000 shares held by MMI Companies, Inc., of
which Mr. Caldwell is a member of the board of directors and to which Mr.
Caldwell disclaims beneficial ownership.
(17) Includes 40,000 shares held by Laumar Investors Limited Partnership, of
which Mr. Huff is the General Partner.
<PAGE>
EXECUTIVE COMPENSATION
The table below provides certain summary information for the fiscal years
ended December 31, 1998, 1997 and 1996 concerning compensation paid or accrued
by the Company to or on behalf of the Company's Chief Executive Officer and the
other executive officers of the Company whose total annual salary and bonus
exceeded $100,000 during the year ended December 31, 1998 (the "Named Executive
Officers.")
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION SECURITIES
-------------------------- UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS/SAR'S (#)
- --------------------------- ---- --------- --------- -----------------
<S> <C> <C> <C> <C>
Larry G. Gerdes............................... 1998 $220,000 $ -- 22,000
President and Chief Executive 1997 $220,089 $ -- --
Officer 1996 $210,115 $ -- --
E. Leo Cooper (1)............................. 1998 $180,000 $ -- 17,000
Executive Vice President, Sales & 1997 $176,678 $ -- 80,000
Marketing...................................
David W. Murphy............................... 1998 $170,000 $ -- 17,000
Executive Vice President, Operations........ 1997 $141,333 $ -- 20,000
1996 $120,000 $ -- 10,000
Douglas A. Shamon (2)......................... 1998 $150,000 $ -- 17,000
Executive Vice President, Chief Financial... 1997 $ 60,229 $ -- 75,000
Officer, Secretary
</TABLE>
(1) Mr. Cooper resigned from the Company effective November 19, 1999.
(2) Mr. Shamon joined the Company in July 1997.
Option/SAR Grants in Last Fiscal Year
The following table sets forth information regarding individual grants of
options for Transcend Common Stock during the twelve months ended December 31,
1998 to each of the executive officers named in the Summary Compensation Table
above. All such grants were made pursuant to the Transcend Services, Inc. 1992
Stock Option Plan, as amended (the "1992 Stock Option Plan"). In accordance
with the rules of the Commission, the table sets forth the hypothetical gains or
"option spreads" that would exist for the options at the end of their respective
ten-year terms based on assumed annualized rates of compound stock price
appreciation of 5% and 10% from the dates the options were granted to the end of
the respective option terms. Actual gains, if any, on option exercises are
dependent on the future performance of Transcend Common Stock and overall market
condition. There can be no assurance that the potential realizable values shown
in this table will be achieved.
<PAGE>
Option/SAR Grants in Last Fiscal Year
-------------------------------------
<TABLE>
<CAPTION>
Potential Realizable
Value At
% of Total Assumed Annual Rates
Number of Options/SAR's of Stock Price
Securities Granted to Exercise Appreciation
Underlying Employees or Base for Option Term (3)
Options/SAR's in Fiscal Price Expiration --------------------
Name Granted (#)(1) Year (2) ($/Share) Date 5% 10%
- ----------------------------- ------------- ------- -------- -------- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Larry G. Gerdes (4) 22,000 4.0% $2.875 01/22/08 $39,778 $100,804
E. Leo Cooper (5) 12,000 3.1% $2.875 01/22/08 $21,697 $54,984
5,000 $3.125 03/25/08 $9,826 $24,902
David W. Murphy (6) 17,000 3.1% $2.875 01/22/08 $30,737 $77,894
Douglas A. Shamon (7) 15,000 3.1% $2.875 01/22/08 $27,121 $68,730
2,000 $3.125 3/25/08 $3,931 $9,961
</TABLE>
_______________
(1) Stock options are granted with an exercise price equal to the fair market
value of the Transcend Common Stock on date of grant.
(2) Transcend granted options to purchase 544,000 shares to all directors,
officers, and employees in the 12 months ended December 31, 1998.
(3) The 5% and 10% assumed rates of annual compound stock appreciation are
mandated by rules of the Commission and do not represent Transcend's
estimate or projection of future prices for Transcend Common Stock.
(4) Mr. Gerdes was granted 22,000 options on January 22, 1998. These options
are vested after 7 years. The vesting period is accelerated if the market
price of Transcend's stock equals or exceeds $15.00 per share for 20
consecutive trading days before April 1, 2000.
(5) Mr. Cooper was granted 12,000 options on January 22, 1998 and 5,000 options
on March 25, 1998. These options are vested after 7 years. The vesting
period is accelerated if the market price of Transcend's stock equals or
exceeds $15.00 per share for 20 consecutive trading days before April 1,
2000.
(6) Mr. Murphy was granted 17,000 options on January 22, 1998. These options
are vested after 7 years. The vesting period is accelerated if the market
price of Transcend's stock equals or exceeds $15.00 per share for 20
consecutive trading days before April 1, 2000.
(7) Mr. Shamon was granted 15,000 options on January 22, 1998 and 2,000 options
on March 25,1998. These options are vested after 7 years. The vesting
period is accelerated if the market price of Transcend's stock equals or
exceeds $15.00 per share for 20 consecutive trading days before April 1,
2000.
The following table presents information regarding options exercised by the
Named Executive Officers during fiscal 1998 and the value of options outstanding
at December 31, 1998.
AGGREGATED OPTION EXERCISES IN FISCAL 1998 AND FISCAL YEAR END OPTION VALUES
There were no options exercised by the Named Executive Officers during fiscal
1998.
FY-End Option/SAR Values
------------------------
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SAR's Options/SAR's
Name at FY-End at FY-End
---- --------- ---------
<S> <C> <C> <C>
Larry G. Gerdes Exercisable 222,396 $0
Unexercisable 22,000 $0
E. Leo Cooper Exercisable 27,500 $0
Unexercisable 119,500 $0
David W. Murphy Exercisable 68,000 $0
Unexercisable 89,000 $0
Douglas A. Shamon Exercisable 18,750 $0
Unexercisable 103,250 $0
</TABLE>
<PAGE>
Compensation of Directors
The Company paid cash fees to each director who is not an executive officer
of Transcend in fiscal 1998 in the amount of $8,000. In addition, each person
who first becomes a non-employee director is granted, as of the date such person
becomes a director of Transcend, options to purchase 10,000 shares of
Transcend's Common Stock at the current market price.
Each non-employee director also will be granted options to purchase 6,000
shares of the Transcend's Common Stock, except the Chairman, who will be granted
options to purchase 9,000 shares, upon election or re-election at the annual
stockholders' meeting, provided they have served on the board a minimum of six
months. The options have an exercise price equal to the fair market value on
the date of grant and a term of 10 years.
Compensation Committee Interlocks and Insider Participation
The Stock Option and Compensation Committee of the Board of Directors for
1998 was comprised of Walter S. Huff, Jr., Charles E. Thoele, and B. Frederick
Becker. None of the members of the Stock Option and Compensation Committee
served as an officer or employee of the Company or any of its subsidiaries
during fiscal 1998.
AGENDA ITEM ONE
PROPOSAL TO AMEND CERTIFICATE OF INCORPORATION
TO EFFECT 1-FOR-5 REVERSE STOCK SPLIT
General
On November 7, 1999, the Company's Board of Directors unanimously approved,
and recommends that shareholders approve, an amendment to Article IV of the
Company's Certificate of Incorporation to implement, if and when the Board deems
appropriate, a reverse split of the Common Stock of the Company at the ratio of
1-for-5, to be effective at the time a Certificate of Amendment is filed with
the Secretary of State of the State of Delaware (the "Reverse Split"). The
Reverse Split may be effected by the Board of Directors, at its discretion, for
the period of time beginning on the date the Reverse Split is approved by the
stockholders and expiring on the date of the Company's 2000 Annual Meeting of
Stockholders. The proposal may be abandoned by the Board of Directors, without
further action by the Stockholders, at any time before or after the Special
Meeting and prior to the date and time at which the Reverse Split becomes
effective (the "Effective Date") if for any reason the Board of Directors deems
it advisable to abandon the proposal.
The Reverse Split will be effected by an amendment to the Certificate of
Incorporation in the form as set forth in full as Appendix A to this Proxy
Statement. The number of shares of capital stock authorized by the amendment to
the Certificate of Incorporation will be 6,000,000 as a result of the proposed
Reverse Split. The effect of the proposed Reverse Split on the holders of Common
Stock will be as follows: holders of record of five or more shares of Common
Stock on the Effective Date will receive a number of whole new shares equal to
1/5 of the number of shares held on the Effective Date. No fractional shares
will be issued. In the event a shareholder holds a number of shares which is not
evenly divisible by five, such shareholder will receive cash in the amount to
which he is entitled in lieu of any fractional shares. Holders of record of
fewer than five shares of Common Stock on the Effective Date will have their
shares automatically converted into the right to receive cash in lieu of
fractional shares in the amount set forth below.
Cash Payment in Lieu of Fractional Shares
In lieu of issuing fractional shares resulting from the Reverse Split, the
Company will redeem all fractional shares for cash. The Company will value each
outstanding share of Common Stock held on the Effective Date of the Reverse
Split at a price per share ("Market Price") equal to the closing bid price of
the Common Stock on the trading day immediately preceding the Effective Date, as
reported on the Nasdaq National Market. No brokerage commission will be payable
by holders who receive cash in lieu of fractional shares. The Company will not
issue certificates representing fractional shares and will pay the Market Price
to redeem fractional shares resulting from the Reverse Split upon presentation
to the Company's transfer agent of the certificates representing such shares.
The holders of Common Stock prior to the Reverse Split will not have the right
to offer to the Company for cash redemption any shares other than fractional
shares resulting from the Reverse Split.
Effect of Reverse Split
The Company has authorized capital stock of 51,000,000 shares, consisting
of 30,000,000 shares of Common Stock and 21,000,000 shares of Preferred Stock,
of which 212,800 shares have been designated as Series A Preferred Stock. The
authorized capital stock will be reduced to 27,000,000 shares by reason of the
proposed Reverse Split consisting of 6,000,000 shares of Common Stock and
21,000,000 shares of Preferred Stock. As of December 1, 1999, the number of
issued and outstanding shares of Common Stock was 22,093,153 and the number of
issued and outstanding shares of Series A Preferred Stock was 212,800. Based on
the Company's best estimates, the number of issued and outstanding shares of
Common Stock will be reduced as a result of the proposed Reverse Split from
22,093,153 shares to approximately 4,418,631 shares.
<PAGE>
By implementing the Reverse Split, management does not intend to take the
Company "private" by decreasing the number of stockholders of the Company below
300. Management currently believes that there are over 5,000 shareholders who
beneficially own shares of Common Stock of the Company. Management does not
believe that a 1-for-5 Reverse Split will result in a significant number of
shareholders being cashed out by virtue of holding less than one share after the
Reverse Split.
The Reverse Split, if adopted, will also increase the par value per share
of the Company's Common Stock from $.01 to $.05. The increase in par value is
intended to maintain the Company's capital stock accounts at current levels.
If the Reverse Split is approved, the rights of the holders of the Common
Stock as stockholders will not be affected adversely. Except for the receipt of
cash in lieu of fractional interests, the Reverse Split will not affect any
shareholder's proportionate equity interest in the Company. The Certificate of
Incorporation does not provide for a preference to be given to the holders of
Common Stock in the event of liquidation, and as a result, there are no
liquidation rights or preferences to lose.
Purpose of the Proposed Reverse Split
The Board of Directors believes that the Reverse Split should enhance the
acceptability of the Company's Common Stock by the financial community and the
investment public. Many leading brokerage firms are reluctant to recommend
low-price stocks to their clients. Additionally, since brokers' commissions on
low-price stocks generally represent a higher percentage of the stock price than
commissions on higher priced stocks, the current share price of the Common Stock
can result in individual stockholder's paying transaction costs that are a
higher percentage of their total share value than would be the case if the
Company's share price were substantially higher. This factor may also limit
willingness of institutions to purchase the Company's stock. In addition, a
variety of brokerage house policies and practices tend to discourage individual
brokers within those firms from dealing in low priced stocks. Some of those
policies and practices pertain to the payment of brokers' commissions and to
time-consuming procedures that function to make the handling of low priced
stocks unattractive to brokers from an economic standpoint.
The Common Stock has been trading at a low price for several years, and
recently in the $1.00 per share range. With the shares trading in such a range,
small moves in absolute terms in the price-per-share of Common Stock translate
into disproportionately large swings in the price on a percentage basis, and
these swings tend to bear little relationship to the financial condition and
results of the Company. In the Board's view, these factors have resulted in an
unjustified, relatively low level of interest in the Company on the part of
investment analysts, brokers and professionals, and individual investors, which
tends to depress the market for the Common Stock. The Board has thus proposed
the Reverse Split as a means of increasing the per-share market price of the
Common Stock in the hope that these problems will thereby be addressed.
The decrease in the number of shares of Common Stock outstanding as a
consequence of the proposed Reverse Split should increase the per share price of
the Common Stock, which may encourage greater interest in the Common Stock and
possibly promote greater liquidity for the Company's shareholders. However, the
increase in the per share price of the Common Stock as a consequence of the
proposed Reverse Split may be proportionately less than the decrease in the
number of shares outstanding. In addition, any increased liquidity due to any
increased per share price could be partially or entirely offset by the reduced
number of shares outstanding after the proposed Reverse Split. Moreover, the
Reverse Split is expected to increase the number of "odd-lot" Common Stock
holdings (i.e., holdings of a number of shares that are not divisible by 100),
which may be more difficult to sell and may also result in increased selling
costs with full-service brokers. Nevertheless, the proposed Reverse Split could
result in a per share price that adequately compensates for the adverse impact
of the market factors noted above. There can, however, be no assurance that the
favorable effects described above will occur, or that any increase in per share
price of the Common Stock resulting from the proposed reverse stock split will
be maintained for any period of time. Moreover, there can be no assurance that
the market price of the Common Stock after the proposed Reverse Split will be
five times the market price before the proposed Reverse Split, or that such
price will either exceed or remain in excess of the current market price.
<PAGE>
Finally, in order for the Company's Common Stock to continue to be eligible
for quotation on the Nasdaq National Market (or the Nasdaq SmallCap Market), the
Common Stock must have a minimum bid price per share of $1.00 as well as meeting
certain other requirements. The Company's Common Stock currently is trading in
the $1.00 per share range. Management believes that, if required to maintain the
Company's Nasdaq National Market listing, the implementation of the Reverse
Split is in the best interests of the Company and its stockholders. A failure to
meet the continued inclusion requirements of Nasdaq will result in the removal
of the Company's Common Stock from Nasdaq National Market listing. If the
Company's shares are removed from the Nasdaq National Market and are not
eligible for listing on the Nasdaq SmallCap Market, the Company's shares may be
eligible for quotation on the Nasdaq Bulletin Board.
If necessary to maintain listing of the Common Stock on the Nasdaq National
Market or if the Board of Directors otherwise deems the Reverse Split to be in
the best interests of the Company, management presently intends to effect the
Reverse Split as soon as practicable subsequent to receiving the requisite
stockholder approval. The Company expects to notify stockholders of the
effectiveness of the Reverse Split by a press release.
Warrants, Options, Series A Preferred Stock and Convertible Debentures
The Company also has outstanding or is authorized to issue various warrants
and options exercisable to acquire up to an aggregate of approximately 1,933,621
shares of Common Stock at various exercise prices. The amount of Common Stock
issuable pursuant to these options and warrants will be reduced to one-fifth the
previous amounts and the per share exercise prices will be increased by a factor
of five.
The Company also has outstanding 212,800 shares of Series A Preferred Stock
and $2,000,000 of convertible debentures (the "Debentures") which are
convertible into shares of Common Stock at the option of the preferred stock and
debenture holders. In addition, the Company has $1,500,000 of promissory notes
(the "Promissory Notes") which may be converted to equity at the option of the
Company at any time on or before January 15, 2000. See "Agenda Item Two--
Proposal to Approve the Terms of the Conversion Agreement." As the amount of
Common Stock issuable pursuant to conversions of the Series A Preferred Stock,
the Debentures and the Promissory Notes depends on the market price of the
Common Stock at the time of conversion, any increase in market price resulting
from the Reverse Split will have the effect of reducing the number of shares
issuable upon conversions of the Series A Preferred Stock, the Debentures or the
Promissory Notes.
Procedure for Implementing the Reverse Split
As soon as practicable after the Effective Date, the Company will send
letters of transmittal to all shareholders of record on the Effective Date for
use in transmitting stock certificates ("Old Certificates") to the transfer
agent, who will act as the exchange agent. Upon proper completion and execution
of the letter of transmittal and return thereof to the transfer agent, together
with the Old Certificates, each shareholder who holds of record fewer than five
shares on the Effective Date will receive cash in the amount to which he is
entitled. Until surrendered, each outstanding Old Certificate held by a
shareholder who holds of record fewer than five shares shall be deemed for all
purposes to represent only the right to receive the amount of cash to which the
holder is entitled.
Upon proper completion and execution of the letter of transmittal and
return thereof to the transfer agent, together with the Old Certificates,
holders of record of five or more shares on the Effective Date will receive new
certificates ("New Certificates") representing the number of whole shares of
Common Stock into which their shares of Common Stock have been converted as a
result of the Reverse Split. Holders of record of five or more shares on the
Effective Date whose shares are not evenly divisible by five will receive cash
in the amount to which they are entitled in lieu of any fractional shares. Until
surrendered, each outstanding Old Certificate held by a shareholder who holds of
record five or more shares shall be deemed for all purposes to represent the
number of whole shares and the right to receive the amount of cash, if any, to
which the holder is entitled.
<PAGE>
Federal Income Tax Consequences
The following discussion generally describes certain federal income tax
consequences of the proposed Reverse Split to stockholders of the Company. The
federal income tax consequences of the Reverse Split will vary among
stockholders depending upon whether they receive (1) solely cash for their
shares, (2) solely New Certificates, or (3) New Certificates plus cash for
fractional shares, in exchange for Old Certificates. In addition, the actual
consequences for each stockholder will be governed by the specific facts and
circumstances pertaining to his acquisition and ownership of the Common Stock.
Thus, the Company makes no representations concerning the tax consequences for
any of its stockholders and recommends that each stockholder consult with his
own tax advisor concerning the tax consequences of the Reverse Split, including
federal, state and local or other income tax. The Company has not sought and
will not seek an opinion of counsel or a ruling from the Internal Revenue
Service regarding the federal income tax consequences of the proposed Reverse
Split. However, the Company believes that because the Reverse Split is not part
of a plan to periodically increase a stockholder's proportionate interest in the
assets or earnings and profits of the Company, and because the cash payment to
be made in lieu of the issuance of fractional shares represents a mechanical
rounding off of the fractions in the exchange rather than separately bargained
for consideration, the proposed Reverse Split will have the following federal
income tax effects:
1. A stockholder will not recognize taxable gain or loss on the receipt of
New Certificates in exchange for Old Certificates in the Reverse Split. In the
aggregate, the stockholder's basis in the Common Stock represented by New
Certificates will equal his basis in the shares of Common Stock represented by
Old Certificates exchanged therefor (but not including the basis of any shares
of Common Stock represented by Old Certificates to which a fractional share
interest in Common Stock represented by a New Certificate is attributable), and
such stockholder's holding period for the New Certificates will include the
holding period for the Old Certificates exchanged therefor if the shares of
Common Stock represented by such certificates are capital assets in the hands of
such stockholder.
2. To the extent that a stockholder receives cash in the Reverse Split in
lieu of the issuance of a fractional share by the Company (whether or not in
addition to receiving New Certificates in exchange for Old Certificates), such
stockholder will generally be treated as having received a fractional interest
in a share of Common Stock represented by a New Certificate which is then
redeemed by the Company. Such stockholder generally will recognize taxable gain
or loss, as the case may be, equal to the difference, if any, between the amount
of cash received and such stockholder's aggregate basis in the pre-Reverse Split
shares of Common Stock to which such fractional share interest is attributable.
If such shares are a capital asset in the hands of such stockholder, the gain or
loss will be long-term gain or loss if the shares were held for more than one
year.
3. The proposed Reverse Split will constitute a reorganization within the
meaning of Section 368(a)(1)(E) of the Internal Revenue Code of 1986, as amended
(the "Code"), and the Company will not recognize any gain or loss as a result of
the proposed Reverse Split.
Vote Required
The Reverse Split which requires an amendment to the Certificate of
Incorporation must be approved by a majority of the outstanding stock entitled
to vote on the matter. For this purpose, the holders of the Common Stock and the
holders of the Series A Preferred Stock will vote on the matter together as one
class. However, each share of Series A Preferred Stock entitles the holder to
cast the number of votes equal to the number of shares of Common Stock into
which each share of Series A Preferred Stock is convertible, rounded down to the
nearest whole share. As of the record date, each share of Series A Preferred
Stock is entitled to 7.4 votes per share. THE BOARD OF DIRECTORS RECOMMENDS THAT
THE COMPANY'S STOCKHOLDERS VOTE "FOR" THE REVERSE SPLIT.
<PAGE>
AGENDA ITEM TWO
PROPOSAL TO APPROVE THE TERMS OF THE CONVERSION AGREEMENTS
On November 10, 1999, the Company entered into an agreement with certain
directors and affiliated entities of such directors (the "Affiliates") which
would permit the Company, at its option to convert up to $1.5 million principal
amount of unsecured promissory notes held by such Affiliates into a new class of
convertible preferred stock at any time prior to January 15, 2000, as explained
more fully below. Pursuant to rules and regulations of the NASDAQ Stock Market,
the Company is required to seek shareholder approval for the possible conversion
of the promissory notes into preferred stock of the Company. The terms of the
conversion agreement and the proposed new class of convertible preferred stock
are described more fully below.
General
In August 1999, the Company issued $1.5 million in unsecured promissory
notes (the "Notes") to the Affiliates for the purpose of interim financing. The
Notes mature on January 15, 2000 and bear interest at the rate of 10% per annum.
On November 10, 1999, the Company entered into an agreement with these directors
and investors, the form of which is attached to this Proxy Statement as Appendix
B (the "Conversion Agreement") pursuant to which Notes may be converted, at the
option of the Company, at any time prior to the maturity date of January 15,
2000 into a new class of convertible preferred stock to be designated as the
"Series B Convertible Preferred Stock" (the "Series B Preferred Stock"), in
exchange for the cancellation of the Notes. The Conversion Agreement was
approved by the disinterested directors of the Company on November 7, 1999.
The Series B Preferred Stock, if issued, will not pay any dividends but
will have voting rights with the common stockholders equal to the number of
shares of common stock into which the shares of Series B Preferred Stock may be
converted from time to time. The Series B Preferred Stock, if issued, will be
convertible into shares of the Company's Common Stock at a price equal to the
greater of (i) the average closing bid price for the five trading days preceding
the date of issuance of the Series B Preferred Stock or (ii) the closing bid
price on the day preceding the date of issuance of the Series B Preferred Stock.
The conversion of the Notes will require the Company to issue up to 62,500
shares of Series B Preferred Stock and to reserve additional shares of the
Company's Common Stock for subsequent issuance upon the conversion of the Series
B Preferred Stock. The terms of the Series B Preferred Stock are set forth in
Appendix B to the Conversion Agreement.
<PAGE>
The Board of Directors recommends that stockholders approve the Conversion
Agreement because it considers the proposal to be in the best long-term and
short-term interests of the Company, its stockholders and its other
constituencies.
Completion of the transactions contemplated by the Conversion Agreement is
subject to, among other things,
. approval by the stockholders of the Company of the terms of the Conversion
Agreement,
. approval by the Board of Directors to effect the conversion of the Notes,
and
. an amendment to the Company's Certificate of Incorporation to create the
Series B Convertible Preferred Stock.
Terms of the Series B Preferred Stock
The Company has authorized under its Certificate of Incorporation
21,000,000 shares of Preferred Stock, $.01 par value per share (the "Preferred
Stock"). The Board of Directors has the authority to issue Preferred Stock in
one or more series and to fix the dividend rights, dividend rates, liquidation
preference, conversion rights, voting rights, rights and terms of redemption
(including sinking fund provisions), and the number of shares constituting any
such series, without any further action by the stockholders unless such action
is required by applicable rules or regulations or by the terms of other
outstanding shares of Preferred Stock. Any shares of Preferred Stock which may
be issued may rank senior to shares of the Company's Common Stock as to payment
of dividends and upon liquidation. As of September 30, 1999, the Company had
212,800 shares of Series A Preferred Stock issued and outstanding.
The Series B Preferred Stock will rank junior to the Series A Preferred
Stock upon liquidation but will rank senior to the Company's Common Stock. The
Series B Preferred Stock will not pay any dividends and is non-redeemable but
will have voting rights with the common stockholders equal to the number of
shares of common stock into which the shares of Series B Preferred Stock may be
converted from time to time. Each share of the Series B Preferred Stock will be
convertible into the number of shares of the Company's Common Stock equal to
$25.00, the stated value of each share of Series B Preferred Stock, divided by
the conversion price of the Series B Preferred Stock, as adjusted. The
conversion price to be used in calculating the number of shares of Common Stock
to be issued to the holders of the Series B Preferred Stock will be the greater
of (i) the average closing bid price of one share of Common Stock for the five
business days immediately preceding the date of issuance of the Series B
Preferred Stock, or (ii) the closing bid price on the day preceding the issuance
of the Series B Preferred Stock.
The foregoing summary of the terms of the Series B Preferred Stock is
qualified in its entirety by reference to the description thereof contained in
the form of Certificate of
<PAGE>
Designations which is included as Appendix B to the Conversion Agreement,
which is attached to this Proxy Statement as Appendix B.
Reasons for and Effect of the Debt Restructuring
The failure of the Company to restructure its indebtedness under the Notes
could result in the Company being unable to repay this debt when it comes due on
January 15, 2000 and may result in a delisting of the Common Stock from the
NASDAQ National Market. The conversion of the Notes into shares of Series B
Preferred Stock is part of a plan, along with the Reverse Split and the proposed
sale of a portion of the Company's transcription operations, to bring the
Company into compliance with the maintenance standards for continued listing on
the NASDAQ National Market. A failure to meet the continued inclusion
requirements of NASDAQ will result in the removal of the Company's Common Stock
from the NASDAQ National Market. As the conversion of the Notes would result in
the issuance to certain of the Company's directors of greater than (i) one
percent (1%) of the Company's total shares of Common Stock outstanding or (ii)
25,000 shares, the Company is seeking the approval of its stockholders in
accordance with the rules and regulations of the NASDAQ Stock Market. In the
event that the Company's Common Stock is removed from the NASDAQ National Market
and is not eligible for listing on the NASDAQ SmallCap Market, the Common Stock
may be eligible for quotation on the Nasdaq Bulletin Board.
In order to avoid a default under the Notes and to attempt to bring the
Company into compliance with the NASDAQ listing requirements, the Board of
Directors has determined that the Conversion Agreement is in the best interests
of the Company and its stockholders. If consummated, the transactions
contemplated by the Conversion Agreement will result in a reduction of not less
than $1.5 million in the Company's current indebtedness, resulting in increased
working capital, increased stockholders' equity and increased "tangible net
worth" (as defined by the NASDAQ Stock Market) while also reducing the Company's
interest expense. The conversion of the Notes, however, will result in the
issuance of up to 62,500 shares of the Series B Preferred Stock and up to
approximately 3,000,000 shares of common stock of the Company, based on recent
trading prices of the Common Stock of approximately $.50 per share. This amount
would represent approximately 12% of the Company's outstanding shares of Common
Stock, assuming the conversion of the Series B Preferred Stock. The issuance of
these additional shares of Common Stock would substantially dilute the ownership
interest of the Company's existing stockholders.
Interests of Certain Persons in the Conversion Agreement
In the event that the Company chooses to cause the Notes to be converted
into shares of Series B Preferred Stock, certain directors of the Company will
have the ability to vote their shares of Series B Preferred Stock on all matters
presented to the holders of the Common Stock. The Series B Preferred Stock will
have voting rights with the common stockholders equal to the number of shares of
common stock into which the shares of Series B Preferred Stock may be
<PAGE>
converted from time to time. Based on the recent trading price of the Common
Stock ($0.50 per share), the conversion of the Notes will result in an increase
in voting power (either individually or through affiliated entities) for the
following directors as follows:
Name Before Conversion After Conversion
Larry G. Gerdes 21.5% 23.6%
Walter S. Huff, Jr. 22.6% 26.3%
Donald L. Lucas 3.0% 3.1%
Total 32.1% 39.6%*
* The percentages of ownership for Messrs. Gerdes and Huff include 3,500,001
shares owned by Gerdes Huff Investments, which are deemed to be beneficially
owned in their entirety by each of Messrs. Gerdes and Huff. However, when
computing the percentages of ownership for the group as a whole, these shares
are only included once. See "Security Ownership of Certain Beneficial Owners
and Management."
Vote Required
The affirmative vote of the holders of a majority of the shares having
voting power present in person or by proxy is required for the approval of the
Conversion Agreement. THE BOARD OF DIRECTORS RECOMMENDS THAT THE COMPANY'S
STOCKHOLDERS APPROVE THE CONVERSION AGREEMENT.
<PAGE>
CERTAIN FINANCIAL INFORMATION
Shareholders are encouraged to review and consider carefully the financial
information attached to this Proxy Statement in evaluating whether to approve
the Conversion Agreement. The following portions of the Company's Annual Report
on Form 10-K for the year ended December 31, 1998, and the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999 are attached to the
Proxy Statement as Appendix C: (i) audited consolidated financial statements of
the Company as of December 31, 1998 and 1997 and for the years ended December
31, 1998, 1997 and 1996; (ii) unaudited consolidated financial statements of the
Company as of September 30, 1999 and for the three and nine months ended
September 30, 1999; and (iii) Management's Discussion and Analysis of Financial
Condition and Results of Operations.
INDEPENDENT PUBLIC ACCOUNTANTS
Representatives of Arthur Andersen LLP are expected to be present at the
meeting and shall have the opportunity to make a statement, if they desire to do
so, and respond to appropriate questions.
PROPOSALS BY STOCKHOLDERS
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 Stockholders 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.
ANNUAL REPORT ON FORM 10-K
Additional information concerning the Company, including financial
statements of the Company, is provided in the Company's Form 10-K for the fiscal
year ended December 31, 1998, that accompanies this Proxy Statement. Copies of
exhibits and basic documents filed with the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998, as filed with the Securities and
Exchange Commission, are available to stockholders who make written request
therefor to the Company's Secretary, 3353 Peachtree Road, N.E., Suite 1000,
Atlanta, Georgia 30326.
OTHER MATTERS
The Board of Directors is not aware of any other matters to be presented
for action at the Special Meeting. If any other matter should come before the
Special Meeting, it is the intention of the persons named in the accompanying
proxy to vote on such matter in accordance with their best judgment of what is
in the best interests of the Company.
By Order of the Board of Directors
-------------------------------------
Donald L. Lucas, Chairman of the Board
Atlanta, Georgia
December 3, 1999
<PAGE>
APPENDIX A
CERTIFICATE OF AMENDMENT OF THE
CERTIFICATE OF INCORPORATION
OF
TRANSCEND SERVICES, INC.
TRANSCEND SERVICES, INC. (the "Corporation"), a corporation organized and
existing under and by virtue of the Delaware General Corporation Law ("DGCL")
does hereby certify:
FIRST: That the Board of Directors of this Corporation, by the
unanimous written consent of its members in accordance with the provisions of
Section 141(f) of the DGCL, filed with the minutes of the Board, duly adopted
resolutions setting forth a proposed Certificate of Amendment of the Certificate
of Incorporation of this Corporation, declaring said amendment to be advisable
and submitting said amendment to the shareholders of this Corporation for
consideration thereof. The resolution setting forth the amendment is as follows:
RESOLVED, that the Certificate of Incorporation of the
Corporation, as amended, be further by deleting Article IV thereof
in its entirety and substituting the following in lieu thereof:
"IV.
The total number of shares of common stock which the
Corporation shall have authority to issue is Six Million
(6,000,000), and the par value of such shares is Five Cents ($.05).
Effective with the filing of this Certificate of Amendment,
each one share of the Corporation's Common Stock issued and
outstanding on the Effective Date of this Certificate of Amendment
shall be automatically changed without further action into one-fifth
(1/5) of a fully paid and nonassessable share of the Corporation's
Common Stock, provided that no fractional shares shall be issued
pursuant to such change. The Company shall pay to each stockholder
who would otherwise be entitled to a fractional share as a result of
such change the cash value of such fractional share based upon the
closing bid price per share of the Common Stock on the trading day
preceding the Effective Date of this Certificate of Amendment as
quoted by the Nasdaq National Market.
The total number of shares of preferred stock which the
Corporation shall have the authority to issue is Twenty-One Million
(21,000,000), and the par value of such shares is One Cent ($.01)
per share. Such shares of such preferred stock may be issued by from
time to time in one or more series, with the Board of Directors
being hereby authorized to fix by resolution or resolutions the
designation of the preferred stock and the rights, powers,
preferences, and the relative participating, optional or other
special rights, and the qualifications, limitations or restrictions
thereof, including, without limiting the generality of the
foregoing, such provisions as may be desired concerning voting or
consent, redemption, dividends, dissolution or the distribution of
assets, conversion or exchange, and such other subjects or matters
as may be fixed by resolution or resolutions of the Board of
Directors under the General Corporation Law of the State of
Delaware."
SECOND: That thereafter, pursuant to resolution of the Board of
Directors of the Corporation, a special meeting of the stockholders of the
Corporation was duly called and held, upon notice in accordance with Section 222
of the DGCL, at which meeting the necessary number of shares as required by the
DGCL was voted in favor of such amendment.
A-1
<PAGE>
THIRD: That said Certificate of Amendment was duly adopted in
accordance with the provisions of Section 242 of the DGCL.
FOURTH: This Certificate of Amendment shall become effective upon
the time of its filing with the Secretary of State of the State of Delaware in
accordance with Section 103 of the DGCL.
IN WITNESS WHEREOF, the undersigned has signed this Certificate of
Amendment on this ____ day of December, 1999.
TRANSCEND SERVICES, INC.
By:______________________________________
Larry G. Gerdes,
President and Chief Executive Officer
A-2
<PAGE>
APPENDIX B
CONVERSION AGREEMENT
THIS AGREEMENT made and entered into as of this 10th day of November, 1999
by and among TRANSCEND SERVICES, INC., a Delaware corporation (the "Company"),
and Larry G. Gerdes, Walter S. Huff, Jr., Donald L. Lucas Profit Sharing Trust
DTD 1-1-84, Donald L. Lucas Trustee, and the Richard M. Lucas Foundation, the
undersigned holders of term notes of the Company (individually, a "Holder" and
collectively, the "Holders").
WHEREAS, the Holders are the holders of those certain Promissory Notes
(individually, a "Note," and collectively, the "Notes") issued by the Company
and more fully described in Appendix A attached hereto; and
WHEREAS, in connection with the restructuring of certain indebtedness of
the Company, each of the Holders has agreed to exchange his or its Note for
shares of the Company's Series B Convertible Preferred Stock, par value $0.01
per share, the terms of which shall be set forth in a Certificate of
Designations to be filed with the Secretary of State of the State of Delaware
substantially in the form of Appendix B attached hereto (the "Series B Preferred
Stock"), all on the terms set forth in this Agreement;
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants of the parties hereto, and for other good and valuable consideration,
the receipt and sufficiency of which is acknowledged by them, the parties hereto
do hereby agree as follows:
(1) Conversion of the Notes. At any time on or before January 15, 2000, at
-----------------------
the option of the Company, in its sole discretion and upon delivery by the
Company of a notice to each of the Holders, each of the Notes shall be converted
into the number of shares (the "Preferred Shares") of Series B Preferred Stock
equal to the sum of the principal amount thereof plus the accrued but unpaid
interest on such Note through the Conversion Date (as defined below) divided by
$25.00 (the "Stated Value"). The date upon which the Company mails the above
notice shall be referred to as the Conversion Date. From and after the
Conversion Date, the Company shall have no liability to any person or entity
with respect to any indebtedness (whether for principal, interest, premium or
penalty) or any other obligations under the Notes, all such indebtedness being
deemed discharged on the Conversion Date pursuant hereto. From and after the
Conversion Date, and until the surrender of the Notes and cancellation thereof
pursuant to the terms of the Notes, the Notes shall be deemed to represent the
Preferred Shares as held in the name of the respective Holders on the stock
transfer records of the Company.
Pursuant to the notice referred to in the preceding paragraph, the Company
shall notify the Holders that the conversion has occurred, and shall direct the
Holders to deliver to the Company for cancellation the Notes. Upon receipt of
the Notes, the Company shall promptly deliver to the Holders one or more
certificates representing the Preferred Shares.
<PAGE>
(2) No Fractional Share Adjustments. No fractional shares shall be issued
-------------------------------
upon conversion of the Notes. Instead of any fractional shares of Series B
Preferred Stock which would otherwise be issuable upon conversion of the Notes,
the Company will pay a cash adjustment in respect of such fractional interest in
an amount equal to the same fraction of the Stated Value.
(3) Waiver of Notices. Each of the parties hereto, by executing this
-----------------
Agreement, does hereby waive any and all notices which are, or may be, required
pursuant to the terms of the Notes, in connection with the conversion of the
Notes provided for in this Agreement.
(4) Representations and Warranties of the Company. As an inducement to the
---------------------------------------------
Holders to enter into and perform this Agreement, the Company hereby represents
and warrants as follows:
(a) Outstanding Capital Stock. As of the date of this Agreement, the
-------------------------
authorized capital stock of the Company consists of (i) 30,000,000 shares
of the Company's Common Stock, $.01 par value per share (the "Common
Stock"), and (ii) 21,000,000 shares of Preferred Stock, $.01 par value,
212,800 of which have been designated as the Series A Convertible Preferred
Stock and are issued and outstanding. No other shares of any class or
series of Preferred Stock, other than the Series A Convertible Preferred
Stock, are issued and outstanding as of the date hereof. No other class of
capital stock of the Company is authorized or outstanding. As of the date
of this Agreement, all of the issued and outstanding shares of capital
stock of the Company are duly authorized and are validly issued, fully paid
and nonassessable.
(b) Reservation of Preferred Shares and Underlying Common Shares.
------------------------------------------------------------
The Company shall (i) reserve and keep available for issuance such number
of its authorized but unissued shares of Series B Preferred Stock as will
be sufficient to permit the conversion in full of the Notes into Preferred
Shares, and (ii) reserve and keep available for issuance such number of its
authorized but unissued shares of Common Stock as will be sufficient to
permit the conversion in full of the Preferred Shares into shares of Common
Stock (the "Underlying Common Shares"). The Preferred Shares and the
Underlying Common Shares that shall be so issuable shall, when issued upon
conversion, be duly and validly issued and fully paid and non-assessable.
(c) Binding Effect of Agreement. This Agreement has been duly
---------------------------
executed and delivered by the Company and is a valid and binding agreement
of the Company, enforceable in accordance with its terms. No consent,
authorization or approval of, or declaration, filing or registration with,
any governmental or regulatory authority or any consent, authorization or
approval of any third party is necessary in order to enable the Company to
enter into and perform its obligations hereunder.
(d) SEC Documents. The Company has furnished to each of the Holders,
-------------
true and complete copies of its filings with the Securities and Exchange
Commission ("SEC") of (i) its report on Form 10-K for the year ended
December 31, 1998, (ii) its Annual Report to
-2-
<PAGE>
its shareholders for the year ended December 31, 1998, (iii) its Proxy
Statement dated April 9, 1999, and (iv) its reports on Form 10-Q for the
fiscal quarters ended March 31, 1999 and June 30, 1999 (collectively, the
"SEC Documents").
(5) Representations and Warranties of the Holders. As an inducement to the
---------------------------------------------
Company to enter into and perform this Agreement, each of the Holders hereby
represents and warrants to the Company as follows:
(a) Each of the Holders has carefully read this Agreement and, to the
extent believed necessary, has discussed the representations, warranties
and agreements which such Holder makes by signing it and the applicable
limitations upon such Holder's resale of the Preferred Shares and the
Underlying Common Shares (the Preferred Shares and the Underlying Common
Shares are collectively referred to herein as the "Securities") with his or
its counsel.
(b) Each of the Holders is acquiring the Securities for such Holder's
own account, with the intention of holding the Securities for investment,
with no present intention of dividing or allowing others to participate in
this investment or of reselling or otherwise participating, directly or
indirectly, in a distribution of the Securities; and shall not make any
sale, transfer or other disposition of the Securities without registration
under the 1933 Act, and any applicable securities laws of any state or
unless an exemption from registration is available under those laws.
(c) Each of the Holders represents that such Holder, if an individual,
has adequate means of providing for his current needs and personal and
family contingencies, has no need for liquidity in his investment in the
Securities, and at the present time, could afford a complete loss of such
investment.
(d) Each of the Holders is an accredited investor as that term is
defined in Section 501(a) under Regulation D promulgated by the Securities
and Exchange Commission under the 1933 Act. Each of the Holders is
financially able to bear the economic risk of this investment, including
the ability to afford holding the Securities for an indefinite period.
(e) The address shown under each of the Holders' signature at the end
of this Agreement is the respective Holder's principal residence if he is
an individual or its principal business address if a corporation or other
entity.
(f) Each of the Holders and/or his purchaser representative has such
knowledge and experience in financial and business matters as to be capable
of evaluating the merits and risks of an investment in the Securities.
(g) Each of the Holders has received and read the SEC Documents, and
understands the information contained therein including the risks of, and
other considerations relating to the Securities.
-3-
<PAGE>
(h) Each of the Holders has made an independent evaluation of the
merits of the investment and acknowledges the high risk nature of the
investment.
(i) Each of the Holders understands that the provisions of Rule 144
promulgated under the 1933 Act are not available to permit resales of the
Securities, and that registration or compliance with some other
registration exemption will be required.
(j) Each of the Holders understands and agrees that stop transfer
instructions will be given to the Company's transfer agent or the officer
in charge of its stock records and noted on the appropriate records of the
Company to the effect that the Securities may not be transferred out of
such Holder's name unless it is established to the satisfaction of counsel
for the Company that such transfer is in compliance with applicable
securities laws. Each of the Holders further agrees that there will be
placed on the certificates for the Securities, or any substitutions
therefor, a legend stating in substance as follows, and such Holder
understands and agrees that the Company may refuse to permit the transfer
of the Securities out of its name and that the Securities must be held
indefinitely in the absence of compliance with the terms of such legend:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR THE
SECURITIES LAWS OF ANY STATE, IN RELIANCE UPON EXEMPTIONS FROM THE
REGISTRATION REQUIREMENTS OF THE 1933 ACT AND SUCH LAWS. THESE SECURITIES
MAY NOT BE TRANSFERRED, NOR WILL ANY ASSIGNEE OR ENDORSEE HEREOF BE
RECOGNIZED AS AN OWNER HEREOF BY THE ISSUER FOR ANY PURPOSES, EXCEPT IN
TRANSACTIONS REGISTERED UNDER THE 1933 ACT AND ANY APPLICABLE STATE
SECURITIES LAWS, UNLESS THE AVAILABILITY OF AN EXEMPTION FROM REGISTRATION
UNDER THE 1933 ACT AND ANY APPLICABLE STATE SECURITIES LAWS WITH RESPECT TO
ANY PROPOSED TRANSFER OR DISPOSITION OF SUCH SECURITIES SHALL BE
ESTABLISHED TO THE SATISFACTION OF COUNSEL FOR THE ISSUER."
"THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE
TERMS AND CONDITIONS SET FORTH IN THE CERTIFICATE OF DESIGNATIONS,
PREFERENCES AND RIGHTS FILED WITH THE SECRETARY OF STATE OF THE STATE OF
DELAWARE. COPIES OF SUCH CERTIFICATE, SETTING FORTH THE POWERS, PREFERENCES
AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF THE
SECURITIES AND THE QUALIFICATIONS, LIMITATIONS, OR RESTRICTIONS OF SUCH
PREFERENCES AND RIGHTS FOR THESE SECURITIES ARE AVAILABLE FOR INSPECTION AT
THE OFFICES OF THE ISSUER WHICH WILL ALSO FURNISH THAT
-4-
<PAGE>
INFORMATION TO ANY HOLDER OF THE SECURITIES ON REQUEST IN WRITING AND
WITHOUT CHARGE."
Each of the Holders understands and agrees that the Company may refuse to
permit the transfer of the Securities, and that such Holder may be required
to hold the Securities indefinitely, in the absence of compliance with the
terms of such legend.
(k) Each of the Holders is not subscribing for the Securities as a
result of or subsequent to any advertisement, article, notice or other
communication published in any newspaper, magazine or similar media or
broadcast over television or radio, or presented at any seminar or meeting,
or any solicitation of a subscription by a person not previously known to
such Holder in connection with investments in Securities generally.
(6) Releases and Indemnities. By its execution hereof, each of the Holders
------------------------
does hereby, on behalf of itself and its officers, directors, employees and
agents, in their respective capacities as such (the "Holder Parties"), release
and hold harmless the Company and its officers, directors, employees and agents,
in their respective capacities as such (the "Company Parties"), from any and all
liabilities, claims or obligations which the Company Parties, or any of them,
may have to the Holder Parties, or any of them, arising from or in connection
with the conversion of the Notes.
(7) Governing Law. This Agreement, and the rights and obligations of the
-------------
parties hereunder, shall be construed and governed under the laws of the State
of Georgia.
(8) Counterparts. This Agreement may be executed in counterparts, all of
------------
which together shall constitute one and the same instrument.
(9) Effect of Headings. The Section headings herein are for convenience
------------------
only, and shall not affect the construction hereof.
-5-
<PAGE>
IN WITNESS WHEREOF the parties hereto have executed this Agreement under
seal, effective as of the date first above written.
"COMPANY"
TRANSCEND SERVICES, INC.
By: /s/ Larry G. Gerdes
----------------------------------------
Title: President and Chief Executive Officer
"HOLDERS"
By: /s/ Larry G. Gerdes
--------------------------------------
Name: Larry G. Gerdes
Address: 330 Argonne Drive
Atlanta, GA 30305
By: /s/ Walter S. Huff, Jr.
--------------------------------------
Name: Walter S. Huff, Jr.
Address: 3353 Peachtree Road, N.E., Suite 1050
Atlanta, GA 30326
DONALD L. LUCAS PROFIT SHARING TRUST DTD 1-1-84,
DONALD L. LUCAS TRUSTEE
By: /s/ Donald L. Lucas
--------------------------------------
Name: Donald L. Lucas
Title: Successor Trustee
Address: 3000 Sand Hill Road, #3210
Menlo Park, CA 94025
RICHARD M. LUCAS FOUNDATION
By: /s/ Donald L. Lucas
--------------------------------------
Name: Donald L. Lucas
Title: Chairman of the Board
Address: 3000 Sand Hill Road #3210
Menlo Park, CA 94025
<PAGE>
APPENDIX A
-----------
<TABLE> <CAPTION>
<S> <C>
Description of Promissory Notes to be Surrendered by Holders
A) Issued to: Larry G. Gerdes
------------------------------------------------
Issue date: August 13, 1999
-------------------------------------------------------
Principal amount: $555,000
-------------------------------------------------
B) Issued to: Walter S. Huff, Jr.
------------------------------------------------
Issue date: August 13, 1999
-------------------------------------------------------
Principal amount: $750,000
-------------------------------------------------
C) Issued to: Donald L. Lucas Profit Sharing Trust DTD 1-1-84, Donald L.Lucas Trustee
-------------------------------------------------------------------------
Issue date: August 13, 1999
-------------------------------------------------------
Principal amount: $117,000
-------------------------------------------------
D) Issued to: Richard M. Lucas Foundation
------------------------------------------------
Issue date: August 13, 1999
-------------------------------------------------------
Principal amount: $78,000
-------------------------------------------------
</TABLE>
<PAGE>
APPENDIX B
SERIES B CONVERTIBLE PREFERRED STOCK
1. Designation; Rank. 62,500 shares of the preferred stock, $.01 par
-----------------
value, stated value $25.00 per share (the "Stated Value"), of the Corporation
are hereby constituted as a series of the preferred stock designated as "Series
B Convertible Preferred Stock" (the "Series B Preferred Stock") and having
relative rights and preferences to all other classes and series of the capital
stock of the Corporation as set forth herein. The Series B Preferred Stock
shall rank junior to the Corporation's Series A Preferred Stock and senior to
all other classes or series of capital stock of the Corporation except as
permitted by Section 4(b) hereof.
2. Dividends. The holders of the Series B Preferred Stock shall not
---------
be entitled to receive dividends.
3. Preference on Liquidation.
-------------------------
(a) Liquidation Preference for Series B Preferred Stock. In the event
---------------------------------------------------
that the Corporation shall commence a voluntary case under the federal
bankruptcy laws or any other applicable federal or state bankruptcy, insolvency
or similar law, or consent to the entry of an order for relief in an involuntary
case under such law or to the appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or other similar official) of the Corporation
or of any substantial part of its property, or make an assignment for the
benefit of its creditors, or admit in writing its inability to pay its debts
generally as they become due, or if a decree or order for relief in respect of
the Corporation shall be entered by a court having jurisdiction in the premises
in an involuntary case under the federal bankruptcy laws or any other applicable
federal or state bankruptcy, insolvency or similar law, or appointing a
receiver, liquidator, assignee, custodian, trustee, sequestrator (or other
similar official) of the Corporation or of any substantial part of its property,
or ordering the winding up or liquidation of its affairs, and on account of any
such event the Corporation shall liquidate, dissolve or wind up, or if the
Corporation shall otherwise liquidate, dissolve or wind up, no distribution of
the assets of the Corporation shall be made to the holders of shares of Common
Stock or other Junior Securities (and no monies shall be set apart for such
purpose) unless prior thereto, the holders of shares of Series B Preferred Stock
shall have received from the assets of the Corporation an amount per share equal
to the sum of $25.00 (the "Series B Liquidation Preference").
(b) Pro Rata Payments. If, upon any such liquidation, dissolution or
-----------------
other winding up of the affairs of the Corporation, the assets of the
Corporation shall be insufficient to permit the payment in full of the Series B
Liquidation Preference for each share of Series B Preferred Stock then
outstanding and the full liquidating payments on all Parity Securities, then the
assets of the Corporation remaining after the distribution to holders of any
Senior Securities of the full amounts to which they may be entitled shall be
ratably distributed among the holders of Series B Preferred Stock and of any
Parity Securities in proportion to the full amounts to which they would
otherwise be respectively entitled if all amounts thereon were paid in full.
<PAGE>
(c) Sale not a Liquidation. Neither the voluntary sale, conveyance,
----------------------
exchange or transfer (for cash, shares of stock, securities or other
consideration) of all or substantially all the property or assets of the
Corporation nor the consolidation, merger or other business combination of the
Corporation with or into one or more corporations shall be deemed to be a
liquidation, dissolution or winding up, voluntary or involuntary, of the
Corporation.
(d) Notice of Liquidation. Written notice of any liquidation,
---------------------
dissolution or winding up of the Corporation, stating the payment date or dates
when and the place or places where amounts distributable in such circumstances
shall be payable, shall be given by first class mail, postage prepaid, not less
than thirty (30) days prior to any payment date specified therein, to the
holders of record of the Series B Preferred Stock at their respective addresses
as shall appear on the records of the Corporation.
4. Voting.
------
(a) General Rights. In addition to any voting rights provided in the
--------------
Certificate of Incorporation or By-laws, the Series B Preferred Stock shall vote
together with the Common Stock as a single class on all actions to be voted on
by the stockholders of the Corporation. Each share of Series B Preferred Stock
shall entitle the holder thereof to such number of votes per share on each such
action as shall equal the number of shares of Common Stock (rounded down to the
nearest whole share of Common Stock) into which each share of Series B Preferred
Stock is then convertible. The holders of Series B Preferred Stock shall be
entitled to notice of any stockholders' meeting in accordance with the By-Laws
of the Corporation.
(b) Special Voting Rights on Certain Corporate Actions. The
--------------------------------------------------
Corporation shall not, without the prior consent (in addition to any other vote
or consent required by law, contract or otherwise) of the holders of seventy-
five percent (75%) of the outstanding shares of Series B Preferred Stock, voting
as a class in person or by proxy in writing or at a special meeting called for
the purpose: (i) create or authorize any additional stock or any class or series
unless the same ranks junior to the Series B Preferred Stock as to dividends, as
to redemptions and as to the distribution of assets on dissolution, liquidation
or winding up, whether voluntary or involuntary, or create or authorize any
obligation or security convertible into shares of stock of any class or series
unless the same ranks junior to the Series B Preferred Stock as to dividends, as
to redemptions and as to the distribution of assets on dissolution, liquidation
or winding up, whether voluntary or involuntary, whether any such creation or
authorization shall be by means of amendment of the Certificate of
Incorporation, this Certificate of Designations, merger, consolidation or
otherwise; or (ii) amend, alter or repeal the Certificate of Incorporation, this
Certificate of Designations or Bylaws, or file any directors' resolutions
pursuant to the General Corporation Law of the State of Delaware, containing, in
any such case, any provision which in any manner adversely affects the
respective powers, designations, preferences or rights, or the qualifications,
limitations or restrictions thereof, of the Series B Preferred Stock, (iii)
agree to, or permit any subsidiary to agree to, any provision in any agreement
that would impose any restrictions on the Corporation's right to make any
redemption of or convert any of the Series B
-2-
<PAGE>
Preferred Shares or otherwise prohibit the Corporation from honoring the
exercise of any rights the holders of the Series B Preferred Shares now have or
may hereafter have, or (iv) engage in any merger, share exchange, consolidation
or reorganization which would result in the holders of Common Stock of the
Corporation immediately prior to such transaction owning less than fifty percent
(50%) of the Common Stock of the Corporation, or such surviving entity,
immediately after such transaction.
5. Conversion. The holders of Series B Preferred Stock shall have the
----------
right to convert all or a portion of such shares into fully paid and
nonassessable shares of Common Stock or any capital stock or other securities
into which such Common Stock shall have been changed or any capital stock or
other securities resulting from a reclassification thereof as follows:
(a) Optional Conversion. Subject to and upon compliance with the
-------------------
provisions of this Section 5, a holder of shares of Series B Preferred Stock
shall have the right without payment of any additional consideration, at the
option of such holder, at any time or from time to time, to convert each of such
shares into the number of fully paid and nonassessable shares of Common Stock
(calculated as to each conversion to the nearest 1/100th of a share of Common
Stock) obtained by dividing $25.00 by the Conversion Price then in effect and by
surrender of such shares, such surrender to be made in the manner provided in
paragraph (b) of this Section 5. The Common Stock issuable upon conversion of
the shares of Series B Preferred Stock, when such Common Stock shall be issued
in accordance with the terms hereof, are hereby declared to be and shall be duly
authorized, validly issued, fully paid and nonassessable Common Stock held by
the holders thereof.
(b) Mechanics of Conversion. Each holder of Series B Preferred Stock
-----------------------
that desires to convert the same into shares of Common Stock shall surrender the
certificate or certificates therefor, duly endorsed, at the principal office of
the Corporation or of any transfer agent for the Series B Preferred Stock or
Common Stock, accompanied by written notice to the Corporation setting forth the
name or names in which such holder wishes the certificate or certificates for
shares of Common Stock to be issued if such name or names shall be different
than that of such holder. In case such notice shall specify a name or names
other than that of such holder, such notice shall be accompanied by payment of
all transfer taxes payable upon the issuance and delivery of shares of Common
Stock in such name or names. Thereupon, the Corporation shall issue and deliver
at such office on the fifth (5th) succeeding Business Day (unless such
conversion is in connection with an underwritten public offering of Common
Stock, in which event concurrently with such conversion) to such holder or on
such holder's written order, (i) a certificate or certificates for the number of
validly issued, fully paid and nonassessable full shares of Common Stock to
which such holder is entitled and (ii) if less than the full number of shares of
Series B Preferred Stock evidenced by the surrendered certificate or
certificates are being converted, a new certificate or certificates, of like
tenor, for the number of shares evidenced by such surrendered certificate or
certificates less the number of shares converted.
-3-
<PAGE>
Each conversion shall be deemed to have been effected immediately
prior to the close of business on the date of such surrender of the shares to be
converted (except that if such conversion is in connection with an underwritten
public offering of Common Stock, then such conversion shall be deemed to have
been effected upon such surrender) so that the rights of the holder thereof as
to the shares being converted shall cease at such time except for the right to
receive shares of Common Stock, and the person entitled to receive the shares of
Common Stock issuable upon such conversion shall be treated for all purposes as
the record holder of such shares of Common Stock at such time.
(c) Adjustment of the Conversion Price. The Conversion Price shall be
----------------------------------
adjusted from time to time as follows:
(i) Adjustment for Stock Splits and Combinations. If the
--------------------------------------------
Corporation at any time or from time to time after the Issue Date effects a
subdivision of the outstanding Common Stock or combines the outstanding
shares of Common Stock, then, in each such case, the Conversion Price in
effect immediately prior to such event shall be adjusted so that each
holder of shares of Series B Preferred Stock shall have the right to
convert its shares of Series B Preferred Stock into the number of shares of
Common Stock which it would have owned after the event had such shares of
Series B Preferred Stock been converted immediately before the happening
of such event. Any adjustment under this Section 5(c)(i) shall become
effective as of the date and time the subdivision or combination becomes
effective.
(ii) Reorganization, Reclassification, Merger or Consolidation.
---------------------------------------------------------
If the Corporation shall at any time reorganize or reclassify the
outstanding shares of Common Stock (other than a change in par value, or
from no par value to par value, or from par value to no par value, or as a
result of a subdivision or combination) or consolidate with or merge into
another corporation (where the Corporation is not the continuing
corporation after such merger or consolidation), the holders of Series B
Preferred Stock shall thereafter be entitled to receive upon conversion of
the Series B Preferred Stock in whole or in part, the same kind and number
of shares of stock and other securities, cash or other property (and upon
the same terms and with the same rights) as would have been distributed to
a holder upon such reorganization, reclassification, consolidation or
merger had such holder converted its Series B Preferred Stock immediately
prior to such reorganization, reclassification, consolidation or merger
(subject to subsequent adjustments under Section 5(c) hereof). The
Conversion Price upon such conversion shall be the Conversion Price that
would otherwise be in effect pursuant to the terms hereof. Notwithstanding
anything herein to the contrary, the Corporation will not effect any such
reorganization, reclassification, merger or consolidation unless prior to
the consummation thereof, the corporation who may be required to deliver
any stock, securities or other assets upon the conversion of the Series B
Preferred Stock shall agree by an instrument in writing to deliver such
-4-
<PAGE>
stock, cash, securities or other assets to the holders of the Series B
Preferred Stock. A sale, transfer or lease of all or substantially all of
the assets of the Corporation to another person shall be deemed a
reorganization, reclassification, consolidation or merger for the foregoing
purposes.
(iii) Issuance of Common Stock at a Price Below Conversion
----------------------------------------------------
Price. In case the Corporation at any time or from time to time shall
------
issue after the Issue Date shares of its Common Stock (or securities
convertible into its Common Stock) at a price per share (or having a
conversion price per share) less than the Conversion Price (as defined in
Section 8 below) per share of Common Stock, and in such case, the number of
shares of Common Stock into which each share of the Series B Preferred
Stock is convertible shall be adjusted so that the holder of each share
thereof shall be entitled to receive, upon the conversion thereof, the
number of shares of Common Stock determined by multiplying (a) the number
of shares of Common Stock into which such share was convertible immediately
prior to such event by (b) a fraction, the numerator of which shall be the
sum of (I) the number of shares of Common Stock outstanding immediately
prior to such event plus (II) the number of additional shares of Common
Stock issued, and the denominator of which shall be the sum of (III) the
number of shares of Common Stock outstanding immediately prior to such
event plus (IV) the number of shares of Common Stock which the aggregate
consideration receivable by the Corporation for the total number of shares
of Common Stock so issued would purchase at such Conversion Price on the
date of such issuance. The adjustment contemplated by this section shall
not be made for the first 250,000 shares of Common Stock issued upon
exercise of stock options granted to employees or non-employee directors
pursuant to plans in existence on the Issue Date provided, however, that
the consideration received by the Corporation upon issuance is at least
$2.00 per share.
(iv) Other Provisions Applicable to Adjustments under this
-----------------------------------------------------
Section. The following provisions shall be applicable to the making
-------
of adjustments of the shares of Common Stock into which the Series B
Preferred Stock is convertible and the Conversion Price at which the Series
B Preferred Stock is convertible provided for in this Section 5(c):
(A) When Adjustments to Be Made. The adjustments
---------------------------
required by this Section 5(c) shall be made whenever and as
often as any event requiring an adjustment shall occur,
except that any adjustment of the Conversion Price that
would otherwise be required may be postponed (except in the
case of a subdivision or combination of shares of the Common
Stock, as provided for in Section 5(c)(i)) up to, but not
beyond the date of conversion if such adjustment either by
itself or with other adjustments not previously made amount
to a
-5-
<PAGE>
change in the Conversion Price is less than $.05. Any
adjustment representing a change of less than such minimum
amount (except as aforesaid) which is postponed shall be
carried forward and made as soon as such adjustment,
together with other adjustments required by this Section
5(c) and not previously made, would result in a minimum
adjustment or on the date of conversion. For the purpose of
any adjustment, any event shall be deemed to have occurred
at the close of business on the date of its occurrence.
(B) Fractional Interests. In computing adjustments
--------------------
under this Section 5(c), fractional interests in the Common
Stock shall be taken into account to the nearest 1/10th of a
share.
(C) Challenge to Good Faith Determination. Whenever
-------------------------------------
the Board shall be required to make a determination in good
faith of the fair value of any item under this Section 5(c),
such determination may be challenged in good faith by a
holder of Series B Preferred Stock and any dispute shall be
resolved by an investment banking firm of recognized
national standing selected by the Corporation and acceptable
to such holder. The fees of such investment banker shall be
borne by such holder if the Corporation's calculation is
determined to be correct and otherwise by the Corporation.
(d) No Fractional Share Adjustments. No fractional shares shall be
-------------------------------
issued upon conversion of the Series B Preferred Stock. If more than one share
of the Series B Preferred Stock is to be converted at one time by the same
stockholder, the number of full shares issuable upon such conversion shall be
computed on the basis of the aggregate amount of the shares to be converted.
Instead of any fractional shares of Common Stock which would otherwise be
issuable upon conversion of any shares of Series B Preferred Stock, the
Corporation will pay a cash adjustment in respect of such fractional interest in
an amount equal to the same fraction of the Market Price per share of Common
Stock at the close of business on the day of conversion which such fractional
share of Series B Preferred Stock would be convertible into on such date.
(e) Shares to be Reserved. The Corporation shall at all times reserve
---------------------
and keep available, out of its authorized and unissued stock, solely for the
purpose of effecting the conversion of the Series B Preferred Stock, such number
of shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all of the Series B Preferred Stock from time to time outstanding.
The Corporation shall from time to time, in accordance with the laws of the
State of Delaware, increase the authorized number of shares of Common Stock if
at any time the number of shares of authorized but unissued Common Stock shall
be insufficient to permit the conversion in full of the Series B Preferred
Stock.
-6-
<PAGE>
(f) Taxes and Charges. The Corporation will pay any and all issue or
-----------------
other taxes that may be payable in respect of any issuance or delivery of shares
of Common Stock on conversion of the Series B Preferred Stock. The Corporation
shall not, however, be required to pay any tax which may be payable in respect
of any transfer involved in the issuance or delivery of Common Stock in a name
other than that of the Series B Preferred Stock, and no such issuance or
delivery shall be made unless and until the Person requesting such issuance has
paid to the Corporation the amount of such tax or has established, to the
satisfaction of the Corporation, that such tax has been paid.
(g) Closing of Books. The Corporation will at no time close its
----------------
transfer books against the transfer of any shares of Series B Preferred Stock or
of any shares of Common Stock issued or issuable upon the conversion of any
shares of Series B Preferred Stock in any manner which interferes with the
timely conversion of such shares of Series B Preferred Stock.
6. Shares to be Retired. Any share of Series B Preferred Stock
--------------------
converted, redeemed or otherwise acquired by the Corporation shall be retired
and canceled and shall upon cancellation be restored to the status of authorized
but unissued shares of preferred stock, subject to reissuance by the Board as
shares of preferred stock of one or more other series but not as shares of
Series B Preferred Stock.
7. Restrictions on Transfer. Prior to conversion as set forth in
------------------------
Section 5, the Series B Preferred Stock shall not be transferrable without the
prior written consent of the Company, which consent shall not be unreasonably
withheld.
8. Definitions. As used herein, the following terms shall have the
-----------
respective meanings set forth below:
"Business Day" means any day that is not a Saturday, a Sunday or a day
------------
on which banks are required or permitted to be closed in the State of
Georgia.
"Common Stock" means the Corporation's Common Stock, $.01 par value
------------
per share, and any stock into which such Common Stock may hereafter be
changed or for which such Common Stock may be exchanged after giving effect
to the terms of such change or exchange (by way of reorganization,
recapitalization, merger, consolidation or otherwise).
"Conversion Price" means the Conversion Price per share of Common
----------------
Stock into which the Series B Preferred Stock is convertible, as such
Conversion Price may be adjusted pursuant to Section 5 hereof. The initial
Conversion Price shall be the greater of (i) the average closing bid price
of one share of Common Stock for the five (5) Business Days preceding the
Issue Date or (ii) the closing bid price of one share of Common Stock on
the day preceding the Issue Date.
-7-
<PAGE>
"Issue Date" means, as to any share of Series B Preferred Stock, the
----------
date of original issuance thereof by the Corporation.
"Junior Securities" means the Common Stock and any other class of
-----------------
capital stock or series of preferred stock hereafter created by the
Corporation which does not expressly provide that it ranks senior to or
pari passu with the Series B Preferred Stock as to dividends, other
---- -----
distributions, liquidation preference or otherwise.
"Parity Securities" mean any class of capital stock or series of
-----------------
preferred stock hereafter created by the Corporation which expressly
provides that it ranks pari passu with the Series B Preferred Stock as to
---- -----
dividends, other distributions, liquidation preference or otherwise.
"Person" or "person" shall mean an individual, partnership,
------ ------
corporation, trust, unincorporated organization, joint venture, government
or agency, political subdivision thereof, or any other entity of any kind.
"Public Equity Offering" means an underwritten offering with gross
----------------------
proceeds to the Corporation of at least $15 million pursuant to a
registration statement that has been declared effective by the Commission
(other than a registration statement on Form S-8 or otherwise relating to
equity securities issuable under any employee benefit plan of the
Corporation).
"Senior Securities" means the Corporation's Series A Convertible
-----------------
Preferred Stock and any class or series of capital stock, debt instrument
or security convertible into capital stock or debt securities of the
Corporation other than Parity Securities or Junior Securities.
"Series B Liquidation Preference" shall have the meaning set forth in
-------------------------------
Section 3(a).
"Series B Preferred Stock" shall have the meaning set forth in
------------------------
Section 1.
9. Notices. Except as may otherwise be provided for herein, all notices
-------
referred to herein shall be in writing, and all notices hereunder shall be
deemed to have been given (i) upon receipt, in the case of a notice of
conversion given to the Corporation as contemplated in Section 5(b) hereof, or
(ii) in all other cases, upon the earlier of (x) receipt of such notice, (y)
three Business Days after the mailing of such notice if sent by registered mail
(unless first-class mail shall be specifically permitted for such notice under
the terms hereof) or (z) the Business Day following sending such notice by
overnight courier, in any case with postage or delivery charges prepaid,
addressed: if to the Corporation, to its offices at 3353 Peachtree Road, N.E.,
Suite 1000, Atlanta, Georgia 30342, Attention: Douglas A. Shamon, or to an agent
of the Corporation designated as permitted by the Articles of Incorporation, or,
if to any holder of the Series B Preferred Stock, to such holder at the address
of such holder of the Series B Preferred Stock as listed in the stock record
books of the Corporation.
-8-
<PAGE>
APPENDIX C
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following audited financial statements are filed with this proxy
statement:
Report of Arthur Andersen LLP, Independent Public Accountants
Consolidated Balance Sheets at December 31, 1998 and 1997
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
The following unaudited interim financial statements are filed with this
proxy statement:
Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998
Consolidated Statements of Operations for the Three Months Ended and the
Nine Months Ended September 30, 1999 and 1998
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and 1998
Notes to Consolidated Financial Statements
1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Transcend Services, Inc.:
We have audited the accompanying consolidated balance sheets of Transcend
Services, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1998
and 1997 and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Transcend Services, Inc. and
subsidiaries as of December 31, 1998 and 1997 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Atlanta, Georgia
February 15, 1999
2
<PAGE>
TRANSCEND SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------
1998 1997
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 450,000 $ 5,541,000
Accounts receivable, net of allowance for
doubtful accounts of $389,000 in 1998
and $163,000 in 1997 8,231,000 4,965,000
Prepaid expenses and other current assets 915,000 979,000
------------ ------------
Total current assets 9,596,000 11,485,000
------------ ------------
Property and equipment:
Computer equipment 9,527,000 5,780,000
Software development 1,862,000 736,000
Furniture and fixtures 217,000 183,000
------------ ------------
Property and equipment 11,606,000 6,699,000
Accumulated depreciation (4,304,000) (3,277,000)
------------ ------------
Property and equipment, net 7,302,000 3,422,000
Deposits and other assets 482,000 510,000
Goodwill and other intangible assets:
Goodwill and other intangible assets 4,596,000 6,664,000
Accumulated amortization (1,731,000) (4,077,000)
------------ ------------
Goodwill and other intangible assets, net 2,865,000 2,587,000
Net assets from discontinued operations 2,726,000 2,646,000
------------ ------------
Total assets $ 22,971,000 $ 20,650,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long term debt $ 458,000 $ 108,000
Accounts payable 2,657,000 843,000
Accrued compensation and benefits 1,933,000 2,399,000
Other accrued liabilities 2,211,000 1,751,000
Deferred income taxes 113,000 113,000
------------ ------------
Total current liabilities 7,372,000 5,214,000
------------ ------------
Long term debt, net of current maturities 5,547,000 4,983,000
Deferred income taxes 540,000 540,000
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
December 31, 1998 and 1997 2,000 2,000
Common stock, $.01 par value, 30,000,000 shares
authorized 21,500,000 and 20,500,000 shares
issued at December 31, 1998 and 1997 215,000 205,000
Additional paid-in capital 26,286,000 26,208,000
Retained deficit (18,991,000) (18,502,000)
------------ ------------
Total stockholders' equity 7,512,000 7,913,000
------------ ------------
Total liabilities and stockholders' equity $ 22,971,000 $ 20,650,000
============ ============
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements.
3
<PAGE>
TRANSCEND SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------
------------ ------------ ------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net revenues $ 53,314,000 $ 43,413,000 $ 39,633,000
Direct costs 44,748,000 37,137,000 34,346,000
------------ ------------ ------------
Gross profit 8,566,000 6,276,000 5,287,000
------------ ------------ ------------
Marketing and sales expenses 2,238,000 2,065,000 2,480,000
General and administrative expenses 4,891,000 4,787,000 5,771,000
Research and development expenses 260,000 -- --
Amortization expenses 213,000 445,000 535,000
Non-recurring charges -- 2,338,000 1,700,000
------------ ------------ ------------
Income (loss) from operations 964,000 (3,359,000) (5,199,000)
------------ ------------ ------------
Other expense:
Interest expense, net 521,000 433,000 262,000
Other 61,000 -- 200,000
------------ ------------ ------------
582,000 433,000 462,000
------------ ------------ ------------
Income (loss) before taxes and
discontinued operations 382,000 (3,792,000) (5,661,000)
Income taxes -- -- --
------------ ------------ ------------
Income (loss) before discontinued
operations 382,000 (3,792,000) (5,661,000)
Loss from discontinued operations (100,000) (147,000) (1,582,000)
------------ ------------ ------------
Net income (loss) 282,000 (3,939,000) (7,243,000)
------------ ------------ ------------
Dividends on preferred stock 479,000 59,000 --
------------ ------------ ------------
Net loss to common stockholders ($ 197,000) ($ 3,998,000) ($ 7,243,000)
============ ============ ============
Basic and diluted amounts per share:
From continuing operations $ 0.00 ($ 0.19) ($ 0.29)
From discontinued operations (0.01) (0.01) (0.08)
------------ ------------ ------------
Net loss ($ 0.01) ($ 0.20) ($ 0.37)
============ ============ ============
Weighted average common shares
outstanding 21,121,000 20,279,000 19,517,000
- --------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE>
TRANSCEND SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK STOCK CAPITAL DEFICIT EQUITY
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ -- $ 189,000 $ 16,676,000 $ (7,167,000) $ 9,698,000
Issuance of 521,725 shares of
Common Stock in private placement -- 5,000 2,441,000 -- 2,446,000
Issuance of 87,805 shares of
Common Stock in acquisitions -- 1,000 -- 312,000 313,000
Issuance of 476,054 shares of
Common Stock from exercise of
options and other issuances -- 5,000 863,000 -- 868,000
Net loss -- -- -- (7,243,000) (7,243,000)
Distribution to former
Stockholder/Owner -- -- -- (121,000) (121,000)
----------------------------------------------------------------------------
Balance, December 31, 1996 -- 200,000 19,980,000 (14,219,000) 5,961,000
Issuance of 212,800 shares of
Preferred Stock in private
placement 2,000 -- 5,318,000 -- 5,320,000
Issuance of 461,848 shares of
Common Stock from exercise
of options and other issuances -- 5,000 910,000 -- 915,000
Net loss -- -- -- (3,998,000) (3,998,000)
Distribution to former
Stockholder/Owner -- -- -- (285,000) (285,000)
----------------------------------------------------------------------------
Balance, December 31, 1997 2,000 205,000 26,208,000 (18,502,000) 7,913,000
Issuance of 56,148 shares of
Common Stock from exercise
of options and other issuances -- 1,000 100,000 -- 101,000
Net loss -- -- -- (197,000) (197,000)
Issuance of 920,000 shares of
Common Stock in acquisitions -- 9,000 (9,000) (292,000) (292,000)
Adjustment for issuance costs
for preferred stock in 1997 (13,000) (13,000)
----------------------------------------------------------------------------
Balance, December 31, 1998 $ 2,000 $ 215,000 $ 26,286,000 $(18,991,000) $ 7,512,000
============================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE>
TRANSCEND SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
1998 1997 1996
------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($ 197,000) ($3,998,000) ($7,243,000)
------------------------------------------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,790,000 1,667,000 1,460,000
Non-recurring charges -- 2,338,000 1,700,000
Loss related to discontinued operations 100,000 147,000 1,582,000
Preferred stock dividends 479,000 59,000 --
Changes in assets and liabilities:
Accounts receivable, net (2,962,000) (1,164,000) (333,000)
Prepaid expenses (137,000) (432,000) (235,000)
Deposits and other assets (61,000) (339,000) 243,000
Accounts payable 1,651,000 (1,211,000) 734,000
Accrued liabilities (674,000) 892,000 704,000
Other -- -- (20,000)
------------------------------------------
Total adjustments 186,000 (1,957,000) 5,835,000
Net cash used in continuing operations (11,000) (2,041,000) (1,408,000)
Net cash (used in) discontinued operations (180,000) (215,000) (1,745,000)
------------------------------------------
Net cash used in operating activities (191,000) (2,256,000) (3,153,000)
------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (5,362,000) (2,108,000) (1,428,000)
Disposal and transfer of property -- -- 11,000
Cash acquired from acquisitions 31,000 -- 37,000
Distribution to former shareholder/owner -- (285,000) (121,000)
------------------------------------------
Net cash (used in) provided by investing activities (5,331,000) (2,393,000) (1,501,000)
------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on short-term debt -- -- (100,000)
Borrowings under line of credit agreement 343,000 4,701,000 2,118,000
Repayments on line of credit agreement -- (2,118,000) (19,000)
Borrowings from long-term debt 702,000 104,000 98,000
Principal payments long-term debt (236,000) (336,000) (218,000)
Proceeds from private placement of preferred
stock -- 5,320,000 --
Preferred stock dividends (479,000) (59,000) --
Proceeds from private placement of common stock -- -- 2,446,000
Proceeds - stock options and other issuances 101,000 915,000 868,000
------------------------------------------
Net cash provided by financing activities 431,000 8,527,000 5,193,000
------------------------------------------
Net increase in cash and cash equivalents (5,091,000) 3,878,000 539,000
Cash and cash equivalents, at beginning of year 5,541,000 1,663,000 1,124,000
=========================================
Cash and cash equivalents, at end of year $ 450,000 $ 5,541,000 $ 1,663,000
=========================================
Supplemental cash flow information:
Cash paid for interest expense $ 505,000 $ 483,000 $ 311,000
- ------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
6
<PAGE>
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Transcend Services, Inc. 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"),
provides case management services to insurance carriers, third party benefit
administrators, and self-insured employers.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the Company's
financial statements and accompanying notes. Actual results could differ from
those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE
Accounts receivable are recorded net of an allowance for doubtful accounts
established to provide for losses on uncollectible accounts based on
management's estimates and historical collection. Charges for bad debts were
$160,000, $100,000, and $101,000 in 1998, 1997, and 1996, respectively.
REVENUE AND COST RECOGNITION
Service revenue is recognized monthly as the services are performed.
Implementation fee revenue is recognized as services are performed, generally
over the first four months of a Co-Sourcing contract. Software support and
maintenance revenue is recognized monthly over the service period. Software
sales revenue is recognized under the percentage of completion method of
accounting. Service and implementation costs are expensed as incurred.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, less accumulated depreciation.
Charges for depreciation of capital assets are computed using the straight-line
method over their estimated useful lives, which range from three to five years.
All costs in the software development process that are classified as
research and development are expensed as incurred until technological
feasibility has been established. Once technological feasibility has been
established, such costs are considered for capitalization. The Company's policy
is to amortize these costs using the straight-line method over the remaining
estimated economic life of the product, not to exceed five years. As of December
31, 1998, the software under development had not yet been put in use,
accordingly, no charges for software amortization were recorded.
7
<PAGE>
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
NOTES RECEIVABLE
Notes receivable related to loans to certain employees and are secured by
pledges of the Company's stock and stock options to acquire the Company's stock.
Notes receivable were $405,000 at December 31, 1998 and $200,000 at December 31,
1997. The notes have a weighted average interest of 5.4 PERCENT PER ANNUM and
have various maturity dates ranging through September 2002.
INCOME TAXES
The Company accounts for its income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") NO. 109. Deferred tax assets and
liabilities are recognized for the expected tax consequences of temporary
differences between tax basis of assets and liabilities and their reported
amounts and for operating loss and tax credit carry-forwards.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets are amortized over periods ranging
from three to thirty years. In accordance with SFAS NO.121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
the Company periodically evaluates whether events and circumstances have
occurred that indicate that the remaining estimated useful life of goodwill may
warrant revision or that the remaining balance of goodwill may not be
recoverable. When factors (such as a change in law or regulatory environment or
forecasts showing changing long-term profitability) indicate that goodwill
should be evaluated for possible impairment, the Company uses an estimate of the
related business unit's undiscounted net income over the remaining life of the
goodwill to measure whether the goodwill is recoverable. In December 1997, the
Company recorded a charge of $1.8 MILLION for the impairment of its goodwill
associated with its subsidiary (see NOTE 3 of "Notes to Consolidated Financial
Statements").
FAIR VALUE OF DEBT
In accordance with SFAS NO.107, "Disclosures About Fair Value of Financial
Investments," the fair value of short-term debt is estimated to approximate its
carrying value. The fair value of long-term debt is estimated based on
approximate market interest rates for similar issues. The estimated fair value
of long-term debt at December 31, 1998 and 1997 was equal to the carrying amount
included in the accompanying balance sheets.
EARNINGS PER COMMON SHARE AND COMMON SHARE EQUIVALENT
In accordance with SFAS NO.128, "Earnings per Share," basic EPS is
computed based on the weighted average number of shares of the Company's common
stock outstanding. When the impact of common equivalent shares from stock
options, warrants and convertible securities are anti-dilutive, they are not
included in the computation of diluted EPS.
COMPREHENSIVE INCOME
SFAS NO.130, "Reporting Comprehensive Income," establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of financial statements. There were
no components of comprehensive income which required reporting or display in the
financial statements.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS NO.133,
"Accounting For Derivative Instruments and Hedging Activities," which
establishes standards for accounting for derivatives and hedging activities.
SFAS NO.133 requires fair value reporting for derivatives and formalizes hedge
criteria. SFAS NO.133 is effective for fiscal years beginning after January 1,
2000.
8
<PAGE>
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
2. 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.
PATIENT PATIENT CASE
INFORMATION INFORMATION MANAGEMENT
(in thousands) SERVICES SOFTWARE SERVICES CORPORATE CONSOLIDATED
- --------------------------------------------------------------------------------
REVENUES:
1998 $ 51,608 $ 1,360 $ 346 $ 0 $ 53,314
1997 $ 41,552 $ 0 $ 1,861 $ 0 $ 43,413
1996 $ 36,171 $ 0 $ 3,462 $ 0 $ 39,633
- --------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
1998 $ 5,838 $ 293 $ 29 $ (5,196) $ 964
1997 $ 4,856 $ 0 $ (832) $ (5,045) $ (1,021)
1996 $ 3,564 $ 0 $ (728) $ (6,335) $ (3,499)
- --------------------------------------------------------------------------------
IDENTIFIABLE ASSETS:
1998 $ 16,380 $ 1,254 $ 281 $ 5,056 $ 22,971
1997 $ 15,355 $ 0 $ 356 $ 4,939 $ 20,650
1996 $ 11,177 $ 0 $ 730 $ 4,650 $ 16,557
- --------------------------------------------------------------------------------
DEPRECIATION AND AMORTIZATION:
1998 $ 1,127 $ 14 $ 4 $ 645 $ 1,790
1997 $ 736 $ 0 $ 102 $ 829 $ 1,667
1996 $ 464 $ 0 $ 132 $ 864 $ 1,460
- --------------------------------------------------------------------------------
CAPITAL EXPENDITURES:
1998 $ 4,651 $ 331 $ 0 $ 380 $ 5,362
1997 $ 1,052 $ 0 $ 6 $ 1,050 $ 2,108
1996 $ 568 $ 0 $ 23 $ 837 $ 1,428
3. NON-RECURRING CHARGES
In December 1997, the Company recorded charges of $2.3 MILLION related to
the carrying value of long-lived assets and assets to be disposed of and for
restructuring of the Company's wholly-owned subsidiary, Transcend Case
Management, Inc. The charges were comprised of (i) $1.8 MILLION related to the
adjustment of goodwill associated with the Company's wholly-owned subsidiary,
Transcend Case Management, Inc. ("TCM") (see NOTE 11 of "Notes to Consolidated
Financial Statements"); (ii) $116,000 related to the Company's restructuring of
TCM in December 1997; (iii) $350,000 for the write-off of the remaining
receivable balance from AmHealth, Inc., see below, after learning that there was
no possibility of collection on the receivable; and (iv) $75,000 related to the
write-off of certain obsolete assets.
In August 1996, the Company took a $1.7 MILLION charge for the write-down
of a receivable related to the sale of a former subsidiary in September 1994 to
AmHealth, Inc. In November 1996, AmHealth had its four Northern California
operating entities (three clinics and its Employee Services Division) foreclosed
on by the senior creditors. The operations were turned over to the senior
creditors.
9
<PAGE>
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
4. LONG-TERM DEBT
Long-term debt is summarized as follows at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Notes payable, interest at 8.5 PERCENT monthly
payments of principal and interest of
$11,284 through May 19, 2000 $ 170,000 $ 286,000
Notes payable, 10 PERCENT interest payable quarterly
annual principal payments of $35,000, matures April 15, 2000 69,000 104,000
$180,000 revolving line of credit, interest computed
at prime plus 1.75 PERCENT (9.5 PERCENT at December 31, 1998) 163,000 --
$10,000,000 credit facility, interest at 30 month treasury notes
plus 5.5 PERCENT (10.2 PERCENT at December 31, 1998)
monthly payments of principal and interest of $17,898
through November 2003 617,000 --
$5,000,000 revolving line of credit, interest at prime
plus 2.25 PERCENT (10.0 PERCENT at December 31, 1998)
matures May 31, 2000 4,986,000 4,701,000
8 PERCENT convertible debentures, due August 15, 2000 2,000,000 2,000,000
Total debt 8,005,000 7,091,000
Less: current maturities (458,000) (108,000)
- -----------------------------------------------------------------------------------------------------
Long-term debt $ 7,547,000 $ 6,983,000
Future principal payments on long-term debt as of December 31,
1998 are follows:
- -----------------------------------------------------------------------------------------------------
1999 $ 468,000
2000 7,240,000
2001 193,000
2002 104,000
thereafter - 0 -
- -----------------------------------------------------------------------------------------------------
$ 8,005,000
- -----------------------------------------------------------------------------------------------------
</TABLE>
Convertible debentures bear interest at 8 PERCENT, paid semi-annually, and
are convertible into common stock at $3.50 per share. The debentures mature on
August 15, 2000 and are convertible by the Company if the market value of
Transcend's common stock equals or exceeds $10.50 per share for 30 consecutive
trading days.
The Company has a $5.0 MILLION credit agreement with Coast Business Credit
("Coast"), 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 discussed below and in NOTE 8 of "Notes to Consolidated
Financial Statements".
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
to 2.0 times monthly contractual Co-Sourcing revenues and the average monthly
receipts under long term transcription contracts, plus 80 PERCENT of other
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.
10
<PAGE>
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
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.
In February 1999, the Company amended its credit facility with Coast.
Under the terms of the amendment, the facility was increased to $10.0 MILLION
and the maturity date extended to May 31, 2001.
5. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
Future minimum annual rental obligations under operating leases as of
December 31, 1998 are follows:
- --------------------------------------------------------------------------------
1999 $ 599,000
2000 467,000
2001 247,000
2002 135,000
2003 29,000
thereafter - 0 -
- --------------------------------------------------------------------------------
$ 1,477,000
- --------------------------------------------------------------------------------
Rent expense was $582,000, $573,000, and $665,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
LITIGATION
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 health care 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 monies
previously paid by the defendants, disgorgement of profits, injunctive relief,
attorneys' fees and punitive damages, based upon allegations of illegal
corporate practice of medicine, illegal referral arrangements, specific
statutory violations and related improper conduct. 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
11
<PAGE>
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
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 year ended December 31,1998, the Company expensed approximately
$100,000 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.
6. RETIREMENT PLAN
The Company maintains a 401(k) retirement plan that covers substantially
all eligible employees. Employees are eligible to contribute amounts to the plan
subject to certain minimum and maximum limitations. The Company matches employee
contributions on a discretionary basis as determined by the Company's Board of
Directors. There have been no Company matches for 1998, 1997 and 1996.
7. TRANSACTIONS WITH RELATED PARTIES
Certain members of the Company's Board of Directors and parties related to
the Company's Board of Directors have participated in the following private
offerings:
- --------------------------------------------------------------------------------
OFFERING OFFERING DATE PERCENT OF OFFERING
Common stock September 5, 1996 69 PERCENT
Convertible preferred stock November 15,1997 64 PERCENT
- --------------------------------------------------------------------------------
8. STOCKHOLDERS' EQUITY
The Company has authorized 30,000,000 shares of common stock and
21,000,000 shares of preferred stock, $.01 par value.
On November 14, 1997, the Company raised approximately $5.3 MILLION in
cash through a private placement of 212,800 shares of newly issued Series A
Convertible preferred stock (the "preferred stock"). The preferred stock has a
$.01 par value, $25.00 stated value, and a dividend of 9 PERCENT payable
quarterly. The shares of preferred stock are convertible into shares of common
stock at any time at the option of the holder at a conversion price of $3.375
per share. Under certain circumstances the Company may, at its option, redeem
the preferred stock on or after November 15, 1998, in whole or in part, at the
redemption prices set forth below together with all accrued and unpaid dividends
to the redemption date.
12
<PAGE>
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
REDEMPTION DATES REDEMPTION PRICES
- --------------------------------------------------------------------------------
November 15, 1998 through November 14, 1999 109 PERCENT
November 15, 1999 through November 14, 2000 106 PERCENT
November 15, 2000 through November 14, 2001 103 PERCENT
November 15, 2001 and after 100 PERCENT
The holders of the Preferred Stock may convert the preferred stock into
shares of common stock within 60 days following the Company's notice of
redemption.
On September 5, 1996, the Company raised approximately $2.4 MILLION in a
private placement of common stock and warrants to purchase common stock. A total
of 522,000 shares of common stock were sold at a price of $4.44 per share and a
total of 522,000 warrants were sold at a price of $0.25 per warrant to 20
investors. The $4.44 price represents the ten-day average of the closing price
of the Company's common stock prior to the board meeting approving the private
placement. The securities issued in the private placement were issued in
reliance on certain exemptions from registration under federal and state
securities laws. The shares of common stock underlying the warrants and the
common stock issued in the private placement carry piggyback registration
rights, subject to certain limitations, in the event the Company proposes to
register the sale of any of its securities for its own account or for the
account of its stockholders.
9. STOCK OPTION AND WARRANTS
The Company has established a stock option plan for the employees of the
Company. The plan provides for the issuance of incentive stock options and
non-statutory options. Under this plan, options are granted for the Company's
common stock at the approximate fair value, as defined in the option agreement.
The following is a summary of stock option transactions:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE AVERAGE
PRICE PRICE
OPTIONS PER SHARE PER SHARE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding December 31, 1995 1,505,000 $2.43
Granted 241,000 $4.00 to $11.38 6.79
Forfeited (222,000) .30 to 7.13 5.01
Exercised (398,000) .07 to 3.50 1.75
- ------------------------------------------------------------------------------------------------------------------------
Options outstanding December 31, 1996 1,126,000 2.83
Granted 679,000 .01 to 4.88 2.91
Forfeited (134,000) 1.87 to 5.75 3.80
Exercised (428,000) .01 to 4.25 2.24
- ------------------------------------------------------------------------------------------------------------------------
Options outstanding December 31, 1997 1,243,000 3.11
Granted 544,000 2.00 to 3.88 2.88
Forfeited (253,000) .05 to 11.38 3.99
Exercised (11,000) $.05 to $2.75 2.45
- ------------------------------------------------------------------------------------------------------------------------
Options outstanding December 31, 1998 1,523,000 $2.96
Options eligible for exercise December 31, 1998 739,000
</TABLE>
At December 31, 1998, there were a total of 461,000 shares of common stock
available for grant.
On April 30, 1996, the Company granted a warrant to purchase shares of its
common stock to Silicon Valley Bank, a California-chartered bank, in connection
with two credit facilities the Company established with Silicon Valley East, a
Division of Silicon Valley Bank. The warrant entitles the holder to purchase an
aggregate of 25,000 shares of the Company's common stock, subject to certain
adjustments, at an exercise price of $11.25 per share and expires April 30,
2001.
On April 3, 1997, the Company granted a warrant to purchase shares of its
common stock to Coast Business Credit.
13
<PAGE>
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
The warrant entitles the holder to purchase an aggregate of 15,000 shares
of the Company's common stock, subject to certain adjustments, at an exercise
price of $4.625 per share and expires April 30, 2001.
In connection with the private placement of common stock on September 5,
1996, the Company sold 522,000 warrants to purchase common stock (see NOTE 8 of
"Notes to Consolidated Financial Statements"). The warrants have a five year
term and are exercisable at a price of $4.44 per share, are redeemable by the
Company at any time with thirty days notice (during which time the holder may
exercise the warrants) at an exercise price of $4.44 and are not transferable.
The shares of common stock underlying the warrants and the common stock issued
in the private placement carry piggyback registration rights, subject to certain
limitations, in the event the Company proposes to register the sale of any of
its securities for its own account or for the account of its shareholders.
The Company has elected to account for its stock-based compensation plans
under APB Opinion NO. 25, under which no compensation cost has been recognized
by the Company. However, the Company has computed, for pro forma disclosure
purposes, the value of all options for shares of the Company's common stock
granted during 1998 and 1997 to employees and non-employee directors of the
Company using the Black-Scholes option-pricing model and the following weighted
average assumptions:
- --------------------------------------------------------------------------------
1998 1997 1996
Risk-free interest rate 4.60% - 5.91% 5.33% - 6.72% 5.08% - 7.89%
Expected dividend yield 0 0 0
Expected lives four years four years four years
Expected volatility 0.70 0.70 0.70
- --------------------------------------------------------------------------------
The total fair value of the options granted during the years ended
December 31, 1998, 1997 and 1996 was computed as approximately $701,000,
$920,000, and $517,000 respectively, which would be amortized over the vesting
period of the options. If the Company had accounted for these plans in
accordance with SFAS NO. 123, the Company's reported pro forma net loss for the
years ended December 31,1998, 1997 and 1996 would have been as follows:
- --------------------------------------------------------------------------------
1998 1997 1996
NET LOSS:
As reported $(197,000) $(3,998,000) $(7,243,000)
Pro forma $(714,000) $(4,348,000) $(7,372,000)
BASIC AND DILUTED NET LOSS PER
COMMON SHARE:
As reported $ (0.01) $ (0.20) $ (0.37)
Pro forma $ (0.03) $ (0.21) $ (0.38)
- --------------------------------------------------------------------------------
The following table sets forth the exercise price range, number of shares,
weighted average exercise price, and remaining contractual lives by groups of
similar price and grant date:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED
ACTUAL NUMBERS AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE PRICE DECEMBER 31, 1998 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 1998 EXERCISE PRICE
- ----------------------------------------------------------------------------------------------------------
$ 0.00 - $ 0.05 8,000 7.8 years $ 0.02 5,000 $ 0.03
$ 1.88 - $ 2.94 959,000 7.6 years $ 2.34 457,000 $ 2.22
$ 3.00 - $ 5.63 529,000 8.3 years $ 3.72 250,000 $ 3.84
$ 11.25 - $ 11.38 27,000 7.3 years $ 11.25 27,000 $ 11.25
- ----------------------------------------------------------------------------------------------------------
$ 0.00 - $ 11.38 1,523,000 7.8 years $ 2.96 739,000 $ 3.08
</TABLE>
14
<PAGE>
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
10. INCOME TAXES
The tax effects of temporary differences between the carrying amounts of
assets and liabilities in the financial statements and their respective tax
bases, which give rise to deferred tax assets and liabilities as of December 31,
1998 and 1997, were as follows:
DEFERRED TAX LIABILITIES: 1998 1997
- --------------------------------------------------------------------------------
Equipment and leasehold $ (334,000) $ (110,000)
Intangible assets (48,000) (136,000)
Discontinued operations (1,064,000) (1,032,000)
Exercise of stock options (325,000) (320,000)
- --------------------------------------------------------------------------------
$(1,771,000) $(1,598,000)
DEFERRED TAX ASSETS:
- --------------------------------------------------------------------------------
Net operating loss carry-forwards 7,228,000 7,222,000
Cash-basis deferral 110,000 110,000
Accrued liabilities 264,000 191,000
Valuation allowance (6,484,000) (6,578,000)
- --------------------------------------------------------------------------------
Net deferred tax (liabilities) $ (653,000) $ (653,000)
At December 31, 1998, the Company had net operating loss carry-forwards of
approximately $18,533,000 which may be used to reduce future income taxes. If
not utilized these carry-forwards will begin to expire in 2008. The Company has
established a valuation allowance of $6,484,000 and $6,578,000 at December 31,
1998 and 1997, respectively due to the uncertainty regarding the realizability
of certain deferred tax assets, including its net operating loss carry-forward.
RECONCILIATION OF TAX RATES: 1998 1997 1996
- --------------------------------------------------------------------------------
Federal 34% 34% 34%
State 5% 5% 5%
Net operating loss carry-forwards 0% 0% 0%
Valuation allowance (39%) (39%) (39%)
- --------------------------------------------------------------------------------
Effective tax rate 0% 0% 0%
11. ACQUISITIONS AND DIVISITURES
On June 19, 1996, the Company acquired 100 PERCENT of the capital stock of
Greiner's Medical Transcription, Inc. for 87,805 shares of Transcend common
stock. On June 28, 1996, the Company acquired 100 PERCENT of the capital stock
of Express Medical Transcription, Inc. for 230,000 shares of Transcend common
stock. On April 16, 1997, the Company acquired 100 PERCENT of the capital stock
of DocuMedX, Inc., a Washington corporation for 608,800 shares of the Company's
common stock. The consolidated financial statements have been restated to
reflect the acquisition of Express Medical Transcription, Inc. and DocuMedX,
Inc. under the pooling of interests method of accounting.
On March 16, 1998, Transcend sold the net assets of Transcend Case
Management, Inc., its wholly-owned subsidiary, to TCM Services, Inc., a
wholly-owned subsidiary of CORE. Under the terms of the sale, the purchase price
was to be paid based upon an earn-out formula with payment due to Transcend no
earlier than March 1999. Other provisions of the sale allowed CORE to
discontinue the operations of TCM Services, Inc., under certain circumstances,
in advance of the earn-out payment to Transcend. However, the agreement also
provided Transcend with the option to protect its interest in the earn-out
payment by re-acquiring the business in the event of CORE's discontinuing the
operations of TCM Services, Inc.
Upon receipt of CORE's notice that it would discontinue the operations of
TCM Services, Inc., Transcend gave notice to CORE of its intent to exercise its
option to re-acquire the business with a full reservation of rights. On December
23, 1998, Transcend acquired the net assets of TCM Services, Inc. The Company
accounted for the transaction under the purchase method of accounting and
recorded approximately $281,000 in tangible assets and $1,091,000 in goodwill.
15
<PAGE>
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
On June 1, 1998, Transcend completed the acquisition of Health Care
Information Systems, Inc. ("HCIS"). The acquisition was accounted for under the
pooling of interests method of accounting, however, the Company did not restate
prior periods as amounts are immaterial. Transcend has merged HCIS into a newly
formed wholly-owned subsidiary, Cascade Health Information Software, Inc.
("Cascade"), the product name formerly used by HCIS and widely recognized in the
industry.
12. DISCONTINUED OPERATIONS
The net loss and net assets from discontinued operations relate to the
operations of the Company's former subsidiaries, First Western Health
Corporation and Veritas Health Management, which ceased operations as of April
30, 1993. Net loss from discontinued operations represents costs for legal
proceedings associated with the $115 MILLION civil lawsuit (the "Lawsuit") filed
by the Company (see note 5 of "Notes to Consolidated Financial Statements"). The
net assets related to discontinued operations relate to receivables from certain
workers compensation insurance carriers from the Company's former subsidiaries,
net of reserves for collection liabilities. Charges for legal expenses connected
with the Lawsuit were $100,000 in 1998, $147,000 in 1997, and $1,582,000 in
1996. All future out-of-pocket legal expenses will continue to be expensed on a
current basis going forward.
The net accounts receivable from the discontinued operations represent
reimbursements that are owed the Company by certain insurance companies from
applicant/legal evaluation services. The Company has filed liens for all of the
gross accounts receivable outstanding as of December 31, 1998 with the
California Workers' Compensation Appeals Board ("WCAB") due to lack of timely
payment by the insurance companies. While lien claimants are supposed to be paid
immediately, they are not entitled to a determination on the lien by an
administrative court until there has been a hearing on the employee's underlying
case. Accordingly, if an insurer fails to pay a medical/legal provider's bill as
required and continues to dispute payment after the filing of a lien, the
provider may have to wait years until the injured worker's health status reaches
the point that entitlement to benefits may be determined. In addition, after the
WCAB has made a determination as to payment, backlogs in the system often create
delays of several years before an order for payment can be obtained. The
situation is analogous to the several years or longer that it often takes in the
civil court system to obtain judgement after filing an action.
At December 31, 1998, the net assets related to the discontinued
operations were $2,726,000, consisting of $5,807,000 of gross accounts
receivable offset by reserves for collection liabilities of $3,090,000.
Substantially all of the gross accounts receivable are subject to stays, as
discussed below, pending the resolution of the Lawsuit. Although it may take a
number of years, the Company does not believe that there is any dispute as to
the Company's ability to attempt collection on the liens. The Company expects to
collect the receivables not subject to stays over the next several years. During
1998, the Company collected approximately $33,000 on the receivables not subject
to stays and wrote off approximately $1,000.
Four insurers that are defendants in the Lawsuit have obtained stays of
the proceedings before the WCAB, pending resolution of the Lawsuit. The Company
believes that it will be able to collect such accounts as the stays of
proceedings only impact the timing of the Company's collection, not the
insurance companies' legal obligation to pay for the services rendered.
In estimating net assets related to discontinued operations, the Company
believes that it has made adequate provisions as to the estimated amount of
gross receivables that the Company can expect to collect upon resolution of the
disputed receivables by the WCAB. The Company will continue to reevaluate the
valuation of the net assets related to discontinued operations on an ongoing
basis. Any such reevaluation could result in an adjustment that may potentially
be material to the carrying value of the asset.
16
<PAGE>
TRANSCEND SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 67,000 $ 450,000
Accounts receivable, net of allowance for doubtful accounts
of $872,000 in 1999 and $389,000 in 1998 7,220,000 8,231,000
Prepaid expenses and other current assets 781,000 915,000
------------- ------------
Total current assets 8,068,000 9,596,000
------------- ------------
Property and equipment:
Computer equipment 9,964,000 9,527,000
Software development 2,517,000 1,862,000
Furniture and fixtures 265,000 217,000
------------- ------------
Property and equipment 12,746,000 11,606,000
Accumulated depreciation (5,740,000) (4,304,000)
------------- ------------
Property and equipment, net 7,006,000 7,302,000
Deposits and other assets 519,000 482,000
Goodwill and other intangible assets:
Goodwill and other intangible assets 4,596,000 4,596,000
Accumulated amortization (2,050,000) (1,731,000)
------------- ------------
Goodwill and other intangible assets, net 2,546,000 2,865,000
Net assets from discontinued operations 2,692,000 2,726,000
------------- ------------
Total assets $ 20,831,000 $ 22,971,000
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 423,000 $ 458,000
Short-term Notes to Directors 1,500,000 -
Accounts payable 2,328,000 2,657,000
Accrued compensation and benefits 2,800,000 1,933,000
Other accrued liabilities 1,824,000 2,211,000
Deferred income taxes 113,000 113,000
------------- ------------
Total current liabilities 8,988,000 7,372,000
Long term debt, net of current maturities 5,185,000 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,
1999 and December 31, 1998 2,000 2,000
Common Stock, $.01 par value; 30,000,000 shares authorized 22,093,000
issued at September 30, 1999 and 21,500,000 at December 31, 1998 221,000 215,000
Additional paid-in capital 26,943,000 26,286,000
Subscription receivable, stockholder (620,000) -
Retained deficit (22,427,000) (18,991,000)
------------ ------------
Total stockholders' equity 4,119,000 7,512,000
------------ ------------
Total liabilities and stockholders' equity $ 20,831,000 $ 22,971,000
============ ============
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
17
<PAGE>
TRANSCEND SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues $12,904,000 $14,030,000 $39,770,000 $39,235,000
Direct costs 11,539,000 11,685,000 34,970,000 32,627,000
----------- ----------- ----------- -----------
Gross profit 1,365,000 2,345,000 4,800,000 6,608,000
Marketing and sales expenses 593,000 585,000 1,763,000 1,566,000
General and administrative expenses 1,418,000 1,187,000 4,678,000 3,352,000
Research and development expenses 160,000 105,000 546,000 134,000
Amortization expenses 63,000 45,000 190,000 167,000
----------- ----------- ----------- -----------
Income (loss) from operations (869,000) 423,000 (2,377,000) 1,389,000
----------- ----------- ----------- -----------
Other expense:
Interest expense, net 217,000 170,000 625,000 375,000
Other - - - 60,000
----------- ----------- ----------- -----------
Income (loss) before taxes and discontinued operations (1,086,000) 253,000 (3,002,000) 954,000
Income taxes - - - -
----------- ----------- ----------- -----------
Income (loss) before discontinued operations (1,086,000) 253,000 (3,002,000) 954,000
Loss from discontinued operations (27,000) (22,000) (73,000) (54,000)
----------- ----------- ----------- -----------
Net income (loss) $(1,113,000) $ 231,000 $(3,075,000) $ 900,000
=========== =========== =========== ===========
Dividends on preferred stock 120,000 120,000 360,000 359,000
=========== =========== =========== ===========
Net income (loss) to common stockholders $(1,233,000) $ 111,000 $(3,435,000) $ 541,000
=========== =========== =========== ===========
Basic income (loss) per share:
From continuing operations $ (0.05) $ 0.01 $ (0.15) $ 0.03
From discontinued operations (0.01) (0.00) (0.01) (0.00)
=========== =========== =========== ===========
Net income (loss) $ (0.06) $ 0.01 $ (0.16) $ 0.03
=========== =========== =========== ===========
Weighted average shares outstanding 22,093,000 21,514,000 21,917,000 20,882,000
=========== =========== =========== ===========
Diluted income (loss) per share
From continuing operations $ (0.05) $ 0.01 $ (0.15) $ 0.03
From discontinued operations (0.01) (0.00) (0.01) (0.00)
=========== =========== =========== ===========
Net income (loss) $ (0.06) $ 0.01 $ (0.16) $ 0.03
=========== =========== =========== ===========
Weighted average shares outstanding 22,093,000 21,643,000 21,917,000 20,978,000
=========== =========== =========== ===========
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
18
<PAGE>
TRANSCEND SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net Income (Loss) $(3,435,000) $ 541,000
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,799,000 1,254,000
Loss related to discontinued operations 73,000 54,000
Preferred stock dividends 360,000 359,000
Changes in assets and liabilities:
Accounts receivable, net 1,011,000 (3,375,000)
Prepaid expenses 134,000 (402,000)
Deposits and other assets (37,000) (286,000)
Accounts payable (329,000) 1,839,000
Accrued liabilities 601,000 384,000
----------- -----------
Total adjustments 3,612,000 (173,000)
----------- -----------
Net cash provided by (used in) continuing operations 177,000 368,000
Net cash used in discontinued operations (37,000) (111,000)
----------- -----------
Net cash provided by (used in) operating activities 140,000 257,000
----------- -----------
Cash flows from investing activities:
Capital expenditures (1,706,000) (4,327,000)
Disposal of property 400,000 -
Cash acquired from acquisitions - 31,000
----------- -----------
Net cash used in investing activities (1,306,000) (4,296,000)
----------- -----------
Cash flows from financing activities:
Repayments under line of credit agreement (145,000) (60,000)
Borrowings from short-term debt 1,500,000 -
Borrowings from long-term debt - 917,000
Principle payments on long-term debt (255,000) (188,000)
Preferred stock dividends (360,000) (359,000)
Net Proceeds-stock options and other issuances 43,000 26,000
----------- -----------
Net cash provided by (used in) financing activities 783,000 336,000
----------- -----------
Net increase (decrease) in cash and cash equivalents (383,000) (3,703,000)
Cash and cash equivalents, at beginning of period 450,000 5,541,000
----------- -----------
Cash and cash equivalents at end of period $ 67,000 $ 1,838,000
=========== ===========
Supplemental cash flow information:
Cash paid for interest expense $ 662,000 $ 439,000
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
19
<PAGE>
TRANSCEND SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 nine-month periods ended September 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). The table 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 September 30,
<TABLE>
<CAPTION>
PATIENT PATIENT CASE
INFORMATION INFORMATION MANAGEMENT SALES AND
(in thousands) SERVICES SOFTWARE SERVICES CORPORATE CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES:
1999 $ 12,307 $ 454 $ 143 $ 0 $ 12,904
1998 $ 13,362 $ 668 $ 0 $ 0 $ 14,030
- ------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS):
1999 $ 201 $ (137) $ (45) $ (1,132) $ (1,113)
1998 $ 969 $ 241 $ 0 $ (979) $ 231
- ------------------------------------------------------------------------------------------------------------
DEPRECIATION AND AMORTIZATION:
1999 $ 389 $ 25 $ 5 $ 132 $ 551
1998 $ 287 $ 7 $ 0 $ 155 $ 449
- ------------------------------------------------------------------------------------------------------------
CAPITAL EXPENDITURES:
1999 $ 527 $ 39 $ 0 $ 25 $ 591
1998 $ 1,815 $ 126 $ 0 $ 176 $ 2,117
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
For Nine Months Ended September 30,
PATIENT PATIENT CASE
INFORMATION INFORMATION MANAGEMENT SALES AND
(in thousands) SERVICES SOFTWARE SERVICES CORPORATE CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES:
1999 $ 37,414 $ 1,762 $ 594 $ 0 $ 39,770
1998 $ 38,137 $ 752 $ 346 $ 0 $ 39,235
- ------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS):
1999 $ 1,417 $ (6) $ (36) $ (4,450) $ (3,075)
1998 $ 4,644 $ 216 $ 22 $ (3,982) $ 900
- ------------------------------------------------------------------------------------------------------------
DEPRECIATION AND AMORTIZATION:
1999 $ 1,123 $ 45 $ 13 $ 618 $ 1,799
1998 $ 767 $ 7 $ 4 $ 476 $ 1,254
- ------------------------------------------------------------------------------------------------------------
CAPITAL EXPENDITURES:
1999 $ 1,374 $ 134 $ 0 $ 198 $ 1,706
1998 $ 3,796 $ 158 $ 0 $ 373 $ 4,327
</TABLE>
(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 non-cash
transactions.
(5) 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, 2000.
(See "Liquidity and Capital Resources" of Item 2.)
(6) 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 nine month periods ended September 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 nine months ended September 30, 1998 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30,1998 September 30,1998
------------------ -----------------
<S> <C> <C>
INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS $ 253,000 $ 954,000
LOSS FROM DISCONTINUED OPERATIONS (22,000) (54,000)
----------- -----------
NET INCOME (LOSS) $ 231,000 $ 900,000
=========== ===========
DIVIDENDS ON PREFERRED STOCK 120,000 359,000
NET INCOME (LOSS) TO COMMON STOCKHOLDERS $ 111,000 $ 541,000
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 21,514,000 20,882,000
=========== ===========
BASIC INCOME (LOSS) PER SHARE:
FROM CONTINUING OPERATIONS $ 0.01 $ 0.03
FROM DISCONTINUED OPERATIONS $ (0.00) $ 0.00
----------- -----------
NET INCOME (LOSS) PER SHARE $ 0.01 $ 0.03
=========== ===========
WEIGHTED AVERAGE SHARES:
BASIC 21,514,000 20,882,000
STOCK OPTIONS 129,000 96,000
----------- -----------
TOTAL DILUTED SHARES 21,643,000 20,978,000
=========== ===========
DILUTED INCOME (LOSS) PER SHARE:
FROM CONTINUING OPERATIONS $ 0.01 $ 0.03
FROM DISCONTINUED OPERATIONS $ (0.00) $ 0.00
----------- -----------
NET INCOME (LOSS) $ 0.01 $ 0.03
=========== ===========
</TABLE>
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Certain information included in this Proxy Statement 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 the mix of service revenue, changes in
pricing policies, delays in sales revenue recognition, lower-than-expected
demand for Transcend's solutions, business conditions in the integrated health
care delivery network market, 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.
The following discussion should be read in conjunction with the
consolidated financial statements of the Company (including the notes thereto)
contained elsewhere in this Proxy Statement.
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
("Co-Sourcing"), transcription of physicians' dictated medical notes, remote
coding ("CodeRemote") 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.
On November 10, 1999, the Company announced plans to restructure its
business, sell certain operations and focus on medical transcription and coding
services. The Company also announced a letter of intent to sell approximately
25% of its medical transcription business. (See "Liquidity and Capital
Resources")
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.
Three Months Ended September 30, 1999 Compared to
Three Months Ended September 30, 1998
Net revenues for the Company decreased from $14,030,000 for the three months
ended September 30, 1998, to $12,904,000 for the three months ended September
30, 1999, a decrease of 8 PERCENT. Patient information management services
("Services") including medical record department management, transcription, and
remote coding and compliance, accounted for 95 PERCENT of the Company's net
revenues for the three months ended September 30, 1999 and 1998. Co-Sourcing
revenues decreased 13 PERCENT year over year and represented 54 PERCENT of
Services revenues for the three months ended September 30, 1999, and 60 PERCENT
for the three months ended September 30, 1998. The decrease is primarily
attributable to three contracts that converted to transcription services only
contracts and one terminated contract. Medical transcription revenues increased
1.7 PERCENT year over year and represented 45 PERCENT of Services revenues for
the three months ended September 30, 1999, and 39 PERCENT for the same period
the prior year. The increase in transcription revenues resulted primarily from
new contracts, net of terminations. Remote Coding and compliance revenues
increased 67.1 PERCENT year over year and represented 1 PERCENT of Services
revenues in the three months ended September 30, 1999, and 1 PERCENT in 1998.
The increase in coding and compliance revenues resulted from new sales in
CodeRemote, which began operations in April 1999.
Patient information software accounted for 4 PERCENT of revenues for the
three months ended September 30, 1999 and 5 PERCENT of revenues for the three
months ended September 30, 1998. Case management services accounted for 1
PERCENT of total revenues for the three months ended September 30, 1999.
22
<PAGE>
Gross profit decreased 41.8 PERCENT to $1,365,000 for the three months ended
September 30, 1999, from $2,345,000 for the same three months in the prior year.
Gross profit margins decreased to 10.6 PERCENT for the three months ended
September 30, 1999, from 16.7 PERCENT for the same three months in the prior
year. Services produced gross profit margins of 9 PERCENT for the three months
ended September 30, 1999, compared to 13.3 PERCENT for the three months ended
September 30, 1998. The year over year decline in gross profit margins was
attributable to start up losses in the Company's national transcription hub and
increased costs in several Co-Sourcing sites that were failing to meet their
contract performance deliverables and required additional resources. Software
gross profit margins were 60.1 PERCENT for the three months ended September 30,
1999, compared to 84.7 PERCENT for the three months ended September 30, 1998.
The year over year decline is due to a higher percentage of Cascade's total
revenue coming from software support rather than software sales. Software
support contributes lower gross profit margins. Case management gross profit
margins were -11.2 PERCENT for the three months ended September 30,1999.
Marketing and sales expenses increased slightly to $593,000 for the three
months ended September 30, 1999, from $585,000 for the same three months in the
prior year and as a percentage of revenues was 4.6 PERCENT for the three months
ended September 30, 1999 compared to 4.2 PERCENT for the three months ended
September 30, 1998. The three months ended September 30, 1999, included write-
offs of unearned draws, higher trade show expenses, and additional personnel for
Cascade.
General and administrative expenses of $1,418,000 for the three months ended
September 30, 1999, increased 19.5 PERCENT over the $1,187,000 expended in the
same prior year period. The increase in general and administrative expenses year
over year is attributable to additional personnel.
Amortization expenses increased to $63,000, for the three months ended
September 30, 1999, from $45,000 for the three months ended September 30, 1998.
Net interest expense increased to $217,000 for the three months ended
September 30, 1999, as compared to $170,000 for the three months ended September
30, 1998, primarily due to increased borrowings.
The Company reported losses before discontinued operations of $1,086,000 for
the three months ended September 30, 1999, compared to income of $253,000 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, several Co-Sourcing
sites that were failing to meet their contract performance deliverables and
required additional resources resulting in lower profit margins, and the ramp-up
of sales, general, and administrative expenses in Cascade.
The loss from discontinued operations increased slightly to $27,000 for the
three months ended September 30, 1999, from $22,000 for the three months ended
September 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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Three Months Ended September 30,
- -----------------------------------------------------------------------------------------------
1999 1998 Change % Change
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $12,904 $14,030 $(1,126) (8.0%)
- -----------------------------------------------------------------------------------------------
Gross profit 1,365 2,345 (980) (41.8%)
- -----------------------------------------------------------------------------------------------
Gross margin 10.6% 16.7%
- -----------------------------------------------------------------------------------------------
Marketing and sales expenses 593 585 8 1.4%
- -----------------------------------------------------------------------------------------------
General and administrative expenses 1,418 1,187 231 19.5%
- -----------------------------------------------------------------------------------------------
Amortization expenses 63 45 18 40.0%
- -----------------------------------------------------------------------------------------------
Research and development expenses 160 105 55 52.4%
- -----------------------------------------------------------------------------------------------
Net Income (loss) $(1,113) $231 $(1,344) (581.8%)
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Three Months Ended September 30,
- -----------------------------------------------------------------------------------------------
1999 1998 Change
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues 100.0% 100.0% --
- -----------------------------------------------------------------------------------------------
Direct costs 89.4% 83.3% 6.1%
- -----------------------------------------------------------------------------------------------
Gross profit 10.6% 16.7% (6.1%)
- -----------------------------------------------------------------------------------------------
Marketing and sales expenses 4.6% 4.2% 0.4%
- -----------------------------------------------------------------------------------------------
General and administrative expenses 11.0% 8.5% 2.5%
- -----------------------------------------------------------------------------------------------
Amortization expenses 0.5% 0.3% 0.2%
- -----------------------------------------------------------------------------------------------
Research and development expenses 1.2% 0.7% 0.5%
- -----------------------------------------------------------------------------------------------
Net Income (loss) (8.6%) 1.6% (10.3%)
- -----------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Net revenues for the Company increased from $39,235,000 for the nine months
ended September 30, 1998, to $39,770,000 for the nine months ended September 30,
1999, an increase of 1.4 PERCENT. Patient information management services
("Services") including medical record department management, transcription,
coding and compliance, and systems implementation, accounted for 94 PERCENT of
the Company's net revenues for the nine months ended September 30, 1999, and 97
PERCENT of net revenues for the nine months ended September 30, 1998.
Co-Sourcing revenues decreased 5.2 PERCENT year over year and represented 55
PERCENT of Services revenues for the nine months ended September 30, 1999, and
59 PERCENT for the nine months ended September 30, 1998. The reduced revenues
are a result of a reduction in the number of Co-Sourcing contracts. Medical
transcription revenues increased 7.6 PERCENT year over year and represented 44
PERCENT of Services revenues for the nine months ended September 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. Remote
coding and compliance revenues increased 14.6 PERCENT year over year and
represented 1 PERCENT of Services revenues in the nine months ended September
30, 1999, and 1 PERCENT in 1998. The increase in coding and compliance revenues
resulted from new sales in CodeRemote, which began operations in April 1999.
Patient information software accounted for 4 PERCENT of revenues for the nine
months ended September 30, 1999 and 2 PERCENT of revenues for the nine months
ended September 30, 1998 after being acquired in June 1998. Case management
services accounted for 2 PERCENT of total revenues for the nine months ended
September 30, 1999 and 1 PERCENT for the nine months ended September 30, 1998.
Gross profit decreased 27.4 PERCENT to $4,800,000 for the nine months ended
September 30, 1999, from $6,608,000 for the same nine months in the prior year.
Gross profit margins decreased to 12.1 PERCENT for the nine months ended
September 30, 1999, from 16.8 PERCENT for the same nine months in the prior
year. Services produced margins of 9.5 PERCENT for the nine months ended
September 30, 1999, compared to 15.4 PERCENT for the nine months ended September
30, 1998. The year over year decline in gross profit margin was attributable to
start up losses in the Company's national transcription hub, unexpected
telecommunication issues that impaired transcription services performance, and
increased costs in several Co-Sourcing sites that were failing to meet their
contract performance deliverables and required additional resources. Patient
information software gross profit margins were 70.3 PERCENT for the nine months
ended September 30, 1999, compared to 83.6 PERCENT for the nine months ended
September 30, 1998. Case management gross profit margins were 1.9 PERCENT for
the nine months ended September 30,1999 and 25.4 PERCENT for the nine months
ended September 30,1998.
Marketing and sales expenses increased 12.6 PERCENT to $1,763,000 for the
nine months ended September 30, 1999, from $1,566,000 for the same nine months
in the prior year and as a percentage of revenues was 4.4 PERCENT for the nine
months ended September 30, 1999 and 4.0 PERCENT for the nine months ended
September 30, 1998. The year over year increase in marketing and sales expenses
is the result of the acquisition of Cascade.
General and administrative expenses of $4,678,000 for the nine months ended
September 30, 1999, increased 39.6 PERCENT over the $3,352,000 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 bankruptcy
filing of a former Co-Sourcing client.
Amortization expenses increased to $190,000, for the nine months ended
September 30, 1999, from $167,000 for the nine months ended September 30, 1998.
Net interest expense increased to $625,000 for the nine months ended
September 30, 1999, as compared to $375,000 for the nine months ended September
30, 1998, primarily due to increased borrowings.
The Company reported losses before discontinued operations of $3,002,000 for
the nine months ended September 30, 1999, compared to income of $954,000 for the
same nine 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
increased costs in several Co-Sourcing sites that were failing to meet their
contract performance deliverables and required additional resources. 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.
24
<PAGE>
The loss from discontinued operations increased to $73,000 for the nine
months ended September 30, 1999, from $54,000 for the nine months ended
September 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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Nine Months Ended September 30,
- -----------------------------------------------------------------------------------------------
1999 1998 Change % Change
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $39,770 $39,235 $535 1.4%
- -----------------------------------------------------------------------------------------------
Gross profit 4,800 6,608 (1,808) (27.4%)
- -----------------------------------------------------------------------------------------------
Gross margin 12.1% 16.8%
- -----------------------------------------------------------------------------------------------
Marketing and sales expenses 1,763 1,566 197 12.6%
- -----------------------------------------------------------------------------------------------
General and administrative expenses 4,678 3,352 1,326 39.6%
- -----------------------------------------------------------------------------------------------
Amortization expenses 190 167 23 13.8%
- -----------------------------------------------------------------------------------------------
Research and development expenses 546 134 412 307.5%
- -----------------------------------------------------------------------------------------------
Net Income (loss) $(3,075) $900 $(3,975) (441.7%)
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Nine Months Ended September 30,
- -----------------------------------------------------------------------------------------------
1999 1998 Change
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues 100.0% 100.0% --
- -----------------------------------------------------------------------------------------------
Direct costs 87.9% 83.2% 4.7%
- -----------------------------------------------------------------------------------------------
Gross profit 12.1% 16.8% (4.7%)
- -----------------------------------------------------------------------------------------------
Marketing and sales expenses 4.4% 4.0% 0.4%
- -----------------------------------------------------------------------------------------------
General and administrative expenses 11.8% 8.5% 3.3%
- -----------------------------------------------------------------------------------------------
Amortization expenses 0.5% 0.4% 0.1%
- -----------------------------------------------------------------------------------------------
Research and development expenses 1.4% 0.3% 1.1%
- -----------------------------------------------------------------------------------------------
Net Income (loss) (7.7%) 2.3% (10.0%)
- -----------------------------------------------------------------------------------------------
</TABLE>
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net revenues for the Company increased from $43,413,000 in 1997 to
$53,314,000 in 1998, an increase of 22.8 PERCENT. Patient information management
services including medical record department management, transcription, coding
and compliance, and systems implementation, accounted for 97 PERCENT of the
Company's 1998 net revenues and 96 PERCENT of 1997 net revenues, growing 24.8
PERCENT year over year. The increase in service revenues resulted primarily from
new contracts, net of terminations. Patient information software revenues
represented 3 PERCENT of revenues in 1998 as a result of the acquisition of
Cascade in June 1998. Case management services accounted for less than 1 PERCENT
of total revenues in 1998, down from 4 PERCENT of revenues in 1997 due to the
sale of the net assets of TCM in March 1998.
Co-Sourcing revenues increased 25 PERCENT year over year and represented
56 PERCENT of service revenues in 1998 and in 1997. Medical transcription
revenues increased 20 PERCENT year over year and represented 41 PERCENT of
service revenues in 1998 and 43 PERCENT in 1997. Coding and compliance revenues
decreased 37 PERCENT year over year and represented less than 1 PERCENT of
service revenues in 1998 and 1 PERCENT in 1997. Systems implementation services
revenue represented 3 PERCENT of service revenues in 1998, up from less than 1
PERCENT in 1997.
Gross profit increased 36.5 PERCENT to $8,566,000 for 1998 from $6,276,000
in the prior year. Gross profit margins increased to 16.1 PERCENT for 1998 from
14.5 PERCENT in the prior year, an increase of 1.6 margin points. Services
produced blended margins of 14.3 PERCENT in 1998, a slight decrease of 0.3
percentage points from 1997. Software gross profit margins were 82.8 PERCENT in
1998. Case management gross profit margins were 24.0 PERCENT in 1998 and 10.4
PERCENT in 1997.
Marketing and sales expenses increased 8.4 PERCENT to $2,238,000 in 1998
from $2,065,000 in the prior year and decreased as a percentage of revenues to
4.2 PERCENT for 1998 from 4.8 PERCENT for 1997. The decrease in marketing and
sales expenses as a percentage of revenues is attributable to the Company's
improved leverage of the fixed cost structure as revenues grow. 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 $4,891,000 for the 1998 fiscal year
increased 2.2 PERCENT over the $4,787,000 expended in the same prior year period
but declined as a percentage of revenues from 11.0 PERCENT in 1997 to 9.2
PERCENT in 1998. The increase in general and administrative expenses year over
year is attributable to Cascade less the reduction from the sale of TCM.
25
<PAGE>
Non-recurring charges of $2,338,000 in 1997 were recorded related
primarily to asset write-downs associated with the default on a note receivable
and reductions in the carrying value of goodwill related to TCM.
Amortization expenses decreased to $213,000 in 1998 from $445,000 in 1997
reflecting the impact of the sale of TCM.
Net interest expense increased to $521,000 for 1998 as compared to
$433,000 for 1997, primarily due to increased borrowings (see Note 4 of "Notes
to Consolidated Financial Statements").
Other expense of $61,000 in 1998 represented acquisition costs incurred in
connection with the June 1, 1998 acquisition of Cascade.
The Company reported income before discontinued operations of $382,000 in
1998 compared to the loss of $3,792,000 in the prior year. Excluding
non-recurring charges of $2,338,000 in 1997, the Company's loss before
discontinued operations was $1,454,000 in 1997. The year over year improvement
from continuing operations was attributable to higher revenues, improved gross
profit margins, and operating leverage where selling, general, and
administrative expenses grew at a slower rate than gross profits.
The loss from discontinued operations decreased to $100,000 for 1998 from
$147,000 in 1997, representing charges for legal fees incurred in connection
with the Company's civil lawsuit against certain insurance companies in the
state of California (see NOTE 5 of "Notes to Consolidated Financial
Statements").
In November 1997, the Company issued 212,800 shares of series A
convertible preferred stock with dividend of 9 PER ANNUM. Net loss to common
stockholders includes preferred stock dividends of $479,000 in 1998 compared to
$59,000 in 1997.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net revenues for the Company increased from $39,633,000 in 1996 to
$43,413,000 in 1997, an increase of 9.5 PERCENT. Co-Sourcing revenues
represented 55.5 percent of net revenues in 1996 and 53.8 PERCENT in 1997,
increasing 6.3 PERCENT year over year. Medical transcription revenues
represented 32.4 PERCENT of net revenues in 1996 and 40.9 PERCENT in 1997,
increasing 38.5 PERCENT year over year. Co-Sourcing and medical transcription
revenue growth resulted from new contracts in late 1996 and 1997, offset by
client attrition. Coding and compliance revenues represented 1.7 PERCENT of the
Company's net revenues for 1996 and 1.0 PERCENT for 1997, decreasing to $422,000
in 1997. TCM revenues represented 4.3 PERCENT of net revenues in 1997 and 8.7
PERCENT in 1996, decreasing 46.2 PERCENT year over year due to the loss of
several large accounts. Also included in 1996 net revenues was $678,000 related
to the sale of a computer system to a customer, which was sold at cost.
Gross profit increased 18.7 PERCENT to $6,276,000 for 1997 from $5,287,000
in the prior year. Gross profit margins increased to 14.5 PERCENT for 1997 from
13.3 PERCENT in the prior year, an increase of 1.2 margin points. This increase
was primarily attributable to margin expansion in Co-Sourcing and medical
transcription which produced blended margins of 15.0 PERCENT in 1997, an
increase of 1.5 percentage points from 1996. TCM margins declined year over year
to 10.7 PERCENT from 16.1 PERCENT in 1996 due to significant revenue declines
and an increase in the use of contract nurses. Write-offs of accounts receivable
resulted in a loss in coding and compliance in 1997 compared to a gross profit
margin of 10.9 PERCENT in 1996.
Marketing and sales expenses decreased 16.7 PERCENT to $2,065,000 in 1997
from $2,480,000 in the prior year and decreased as a percentage of revenues to
4.8 PERCENT for 1997 from 6.3 PERCENT for 1996. The decrease in sales and
marketing expenditures as a percentage of revenues is attributable to the
Company's improved leverage of the fixed cost structure as revenues grew. The
year over year decrease in marketing and sales expenses resulted from the 1997
realignment of sales and marketing resources to operations management. Reduction
in sales promotion expenditures also contributed to the decrease.
General and administrative expenses of $4,787,000 for the 1997 fiscal year
decreased 17.1 PERCENT over the $5,771,000 expended in the prior year. The
decline in general and administrative expenses year over year is attributable to
charges incurred in 1996 in connection with the Company's internal
reorganization and restructuring efforts. General and administrative expenses as
a percentage of revenues declined from 14.6 PERCENT in 1996 to 11.0 PERCENT in
1997.
Non-recurring charges of $2,338,000 in 1997 and $1,700,000 in 1996 were
recorded related primarily to asset write-downs associated with the default on a
note receivable and reduc-tions in the carrying value of goodwill related to
TCM.
26
<PAGE>
Amortization expenses decreased to $445,000 in 1997 from $535,000 in 1996
reflecting the impact of acquisition related intangible assets being fully
amortized.
Net interest expense increased to $433,000 for 1997 as compared to
$262,000 for 1996, primarily due to the impact of interest expense incurred in
connection with the Company's increased borrowings, loan fees, and higher
interest rates associated with the credit facility with Coast Business Credit
("Coast"), (see NOTE 4 of "Notes to Consolidated Financial Statements").
Other expense included $200,000 in 1996 to cover all of its legal,
accounting and printing costs incurred in connection with its filing of a
registration statement in May 1996 to raise additional capital through a public
offering of its common stock. Due to adverse market conditions, the Company
withdrew its offering in July 1996.
The Company's loss before discontinued operations decreased to $3,792,000
for 1997 from $5,661,000 in the prior year. Excluding non-recurring charges of
$2,338,000 in 1997 and $1,700,000 in 1996, the Company's loss before
discontinued operations was $1,454,000 in 1997, an improvement of $2,507,000
year over year.
The loss from discontinued operations decreased to $147,000 for 1997 from
$1,582,000 in 1996 as a result of decreased legal fees incurred in connection
with the Company's civil lawsuit against certain insurance companies in the
state of California (see NOTE 5 of "Notes to Consolidated Financial
Statements").
In November 1997, the Company issued 212,800 shares of series A
convertible preferred stock with dividend of 9 PER ANNUM. Net loss to common
stockholders in 1997 included $59,000 of preferred stock dividends.
Liquidity and Capital Resources
The Company's cash flows from continuing operations required the use of
cash of $11,000 in 1998. Discontinued operations used cash of $180,000 in 1998.
The Company's net working capital decreased to $2,224,000 during the twelve
months ended December 31, 1998, from $6,271,000 at December 31, 1997, primarily
due to capital investments in electronic patient record systems and the national
transcription platform.
The Company's cash flows from continuing operations provided cash of
$177,000 for the nine months ended September 30, 1999. Discontinued
operations used cash of $37,000 for the nine months ended September 30,
1999. The Company's net working capital was ($920,000) during the nine
months ended September 30, 1999 compared to $2,224,000 at December 31, 1998.
The Company's cash flows from investing activities used cash of $5,331,000
in 1998 primarily for capital expenditures. In 1998, the Company incurred
$5,362,000 in 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. The Company also acquired cash of $31,000 from its
acquisition of Cascade.
The Company's cash flows from investing activities used cash of $1,306,000
for the nine months ended September 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 $431,000 in 1998 primarily
from borrowings to finance electronic patient record systems in the amount of
$702,000, increased borrowings under the Company's revolving credit facility of
$343,000, and the proceeds received on the exercise of incentive stock options
in the amount of $101,000. The Company also used $236,000 for principal payments
on long-term debt associated with prior acquisitions and $479,000 to pay
preferred stock dividends.
Cash flows from financing activities provided $783,000 for the nine months
ended September 30, 1999, primarily from the $1,500,000 in short-term notes to
Directors. The Company also used $255,000 for principal payments on long-term
debt associated with prior acquisitions and $240,000 to pay preferred stock
dividends. The Company is one quarter in arrears on 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.
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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 September 30, 1999, the
capacity of the credit line based on the funding formula was $5,596,000 with
$535,000 unused. There has been a reduction in borrowing capacity due to
contract terminations.
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 September 30, 1999.
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 September 30, 1999,
were $487,000.
In August 1999, certain directors and accredited investors of the Company
loaned an aggregate of $1.5 million to the Company for the purpose of interim
financing. The unsecured promissory notes mature January 15, 2000 and bear
interest at the rate of 10% per annum. On November 10, 1999, the Company
executed an agreement with these directors and investors providing that at the
option of the Company, the promissory notes may be converted at any time prior
to the maturity date of January 15, 2000 to a new class of redeemable
convertible preferred stock. The preferred stock, if issued, will not pay any
dividends, but will be redeemable by the Company at face value plus a redemption
premium and will have voting rights with the common stockholders equal to the
number of shares of common stock into which the preferred stock may be converted
from time to time. The preferred stock, if issued, will be convertible to common
stock at a price equal to the greater of (i) the average closing bid price for
the five trading days preceding the date of issuance of preferred stock or (ii)
the closing bid price on the day preceding the issuance of the preferred stock.
On October 29, 1999, the Company secured a loan of $600,000 from Bank of
America to provide capital for continuing operations. The loan bears an interest
rate of prime minus .5%, matures on April 30, 2000, and is guaranteed by certain
Directors who received no compensation for their guarantee.
On November 10, 1999, the Company executed a letter of intent for the sale of
certain medical records management contracts of the Company to a qualified buyer
("Buyer"). In consideration of the proposed sale, the Company will receive an
initial price of $675,000 in cash to the Company, which approximates 50% of the
current annualized revenues for the contracts. In addition, the Company will
receive an amount equal to 50% of the revenues generated under the contracts
during the period from November 1, 1999 to October 31, 2001, less the initial
payment price of $675,000 (the "Earn Out"). The initial payment to the Company
for the Earn Out will occur on December 31, 2001 for revenues actually collected
as of that date and additional payments will be made for revenues collected
thereafter at the end of each month in which the revenues are collected. In no
event shall the Earn Out exceed an additional $675,000 over the initial sale
price. The Company will be required to enter into a five-year non-competition
and non-solicitation agreement with Buyer respecting the contracts sold.
Also on November 10, 1999, the Company executed a letter of intent with Buyer
for the sale of the assets of its transcription operations located in Salt Lake
City, Pittsburgh and Boston ("Target Offices"). The purchase price of the assets
will be an amount equal to 5.5 times EBITDA (earnings before interest, taxes,
depreciation and amortization) applicable to the Target Offices. The purchase
price is expected to range between $6.5 million and $7.0 million. A cash payment
equal to 95% of the purchase price will be payable at closing with 5% of the
purchase price to be held in escrow. Buyer will place $750,000 in escrow as
earnest money pending the execution of a definitive agreement for the purchase
and sale of the assets. As a condition to the transaction, the Company will be
required to execute a three-year non-competition and non-solicitation agreement
with Buyer generally restricting it from competing with Buyer in the territories
covered by the Target Offices.
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The agreements in principle are subject to the negotiation and execution of
definitive agreements. Buyer will not assume any liabilities in connection with
the above-referenced proposed purchases other than certain specific operating
liabilities and liabilities arising after closing. The Company expects to
proceed promptly to the negotiation and execution of definitive agreements, but
in any event prior to December 31, 1999.
The Company believes that upon the completion of the financing activities
discussed above combined with cash flows from operations there will be adequate
cash resources 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, fund the remainder of its
year 2000 related capital investments, and substantially reduce its outstanding
debt.
Impact of Inflation and Market Risk
Inflation has not had a material effect on the Company to date. However,
the effects of inflation on future operating results will depend, in part, on
the Company's ability to increase prices and/or lower expenses in amounts
offsetting inflationary cost increases. The Company has no material exposure to
market risk from derivatives or other financial instruments.
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 $700,000 in year 2000
compliant dictation and transcription systems to date. The Company expects
additional investments of up to $200,000 for the remainder of 1999 and to have
its systems year 2000 compliant before December 31, 1999.
The Company's Co-Sourcing operations and software systems are dependent upon
the hospital's systems. The Company has completed accumulating inquiries to its
existing Co-Sourcing customers to determine their readiness and their plans to
become year 2000 compliant. Based on the inquiries the Company believes the
majority of is existing Co-Sourcing customers to be year 2000 compliant. For
those customers where issues were identified, actions are being taken to make
these customers year 2000 compliant. The Company expects to complete this
process by December 15, 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 has
upgraded or converted all of its customers to be year 2000 compliant as of
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 to "work around" year 2000 systems
issues, if needed.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has no material exposure to market risk from derivatives or other
financial instruments.
29
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TRANSCEND SERVICES, INC.
3353 Peachtree Road, NE
Suite 1000
Atlanta, Georgia 30326
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR A SPECIAL
MEETING OF STOCKHOLDERS.
The undersigned hereby appoints Larry G. Gerdes and Douglas A. Shamon, or
either of them, with power of substitution to each, the proxies of the
undersigned to vote the securities of the undersigned at a Special Meeting of
Stockholders of TRANSCEND SERVICES, INC. to be held on Thursday, December 30,
1999, at _____ __.m. at the offices of Smith, Gambrell & Russell, LLP, 1230
Peachtree Street, N.E., Promenade II, Suite 3100, Atlanta, Georgia 30309, and
any postponement, rescheduling or adjournment thereof:
1. To approve an amendment to the Company's Certificate of Incorporation, as
amended, to effect a 1-for-5 reverse split of the Company's Common Stock.
[_] FOR [_] AGAINST [_] ABSTAIN
2. To vote in accordance with their best judgment with respect to any other
matters that may properly come before the meeting.
(continued and to be signed on reverse)
THE BOARD OF DIRECTORS FAVORS A VOTE "FOR" EACH OF THE ABOVE PROPOSALS AND
UNLESS INSTRUCTIONS TO THE CONTRARY ARE INDICATED IN THE SPACE PROVIDED, THIS
PROXY WILL BE SO VOTED.
Please date and sign this Proxy exactly
as name(s) appears on the mailing label.
-----------------------------------------
-----------------------------------------
Print Name(s):
--------------------------
NOTE: When signing as an attorney,
trustee, executor, administrator or
guardian, please give your title as such.
If a corporation or partnership, give
full name by authorized officer. In the
case of joint tenants, each joint owner
must sign.
Dated:
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