<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
X Quarterly Report Pursuant to Section 13 or 15(d)
---- of the Securities Exchange Act of 1934
For the Quarterly Period Ended December 31, 1996 or
---- Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Transition Period from_____ to_____
COMMISSION FILE NUMBER 0-28182
-------
TRANSITION SYSTEMS, INC.
------------------------
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2887598
------------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification Number)
ONE BOSTON PLACE, BOSTON, MASSACHUSETTS 02108
---------------------------------------------
(Address of principal executive offices)
(Zip Code)
(617) 723-4222
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------ ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
OUTSTANDING AT
CLASS FEBRUARY 3, 1997
----- ----------------
COMMON STOCK, 16,937,057
$.01 PAR VALUE SHARES
NON-VOTING COMMON STOCK, 356,262
$.01 PAR VALUE SHARES
<PAGE> 2
TRANSITION SYSTEMS, INC.
FORM 10-Q FOR THE THREE MONTHS ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
Page No.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of
December 31, 1996 (unaudited) and September 30, 1996. . . . . . 3
Consolidated Statements of Operations for the Three Months
Ended December 31, 1996 and December 30, 1995 (unaudited) . . . 4
Consolidated Statements of Cash Flows for the Three Months
Ended December 31, 1996 and December 30, 1995 (unaudited) . . . 5
Notes to Interim Consolidated Financial Statements . . . . . . 6
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . 7
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . 10
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2
<PAGE> 3
<TABLE> TRANSITION SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1996
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $53,836,000 $51,505,000
Accounts receivable, net 12,859,000 13,419,000
Other current assets 2,004,000 1,831,000
Deferred income taxes 2,062,000 2,062,000
----------- -----------
Total current assets 70,761,000 68,817,000
----------- -----------
Property and equipment, net 1,170,000 1,108,000
Capitalized software costs, net 1,399,000 1,399,000
Purchased technology, net 1,553,000 1,611,000
Intangible assets, net 235,000 120,000
Long-term deferred income taxes 1,228,000 1,228,000
----------- -----------
Total assets $76,346,000 $74,283,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 340,000 $ 595,000
Accrued expenses 4,116,000 4,280,000
Income taxes payable 1,175,000 2,015,000
Deferred revenue 6,215,000 6,255,000
----------- -----------
Total current liabilities 11,846,000 13,145,000
----------- -----------
Notes payable 19,000 21,000
Deferred income taxes 485,000 485,000
----------- -----------
Total liabilities $12,350,000 $13,651,000
----------- -----------
Commitments
Stockholders' equity:
Common stock 169,000 166,000
Non-voting common stock 3,000 3,000
Non-voting common stock warrant 395,000 395,000
Additional paid-in capital 40,743,000 39,161,000
Retained earnings 22,686,000 20,907,000
----------- -----------
Total stockholders' equity 63,996,000 60,632,000
----------- -----------
Total liabilities
and stockholders' equity $76,346,000 $74,283,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE> 4
<TABLE>
TRANSITION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<CAPTION>
Three Months Ended
----------------------------
December 31, December 30,
1996 1995
------------ ------------
<S> <C> <C>
Revenues:
Software and implementation $5,860,000 $4,407,000
Maintenance 2,626,000 2,151,000
---------- ----------
Total revenues 8,486,000 6,558,000
--------- ----------
Cost of Revenues:
Software and implementation 2,205,000 1,656,000
Maintenance 659,000 808,000
Research and development 878,000 808,000
Sales and marketing 1,364,000 888,000
General and administrative 981,000 547,000
---------- ----------
Total operating expenses 6,087,000 4,707,000
---------- ----------
Income from operations 2,399,000 1,851,000
Interest income 566,000 148,000
---------- ----------
Income before income taxes 2,965,000 1,999,000
Provision for income taxes 1,186,000 820,000
---------- ----------
Net income $1,779,000 $1,179,000
========== ==========
Net income per share $0.09 $0.06
Weighted average common shares
outstanding 20,526,000 20,619,000(1)
(1) See note (2) of notes to interim consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
4
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<TABLE>
TRANSITION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<CAPTION>
Three Months Ended
---------------------------
December 31, December 30,
1996 1995
------------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $1,779,000 $1,179,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Deferred income taxes - 107,000
Depreciation and amortization 384,000 319,000
Compensation charge related to options 39,000 -
Tax benefit from stock option excercise 1,201,000 -
Changes in operating assets and liabilities:
Decrease in accounts receivable 560,000 309,000
(Increase) in other current assets (173,000) (96,000)
(Decrease) in accounts payable (255,000) (104,000)
(Decrease) in accrued expenses (164,000) (695,000)
(Decrease) in taxes payable (840,000) (363,000)
Increase in due to affiliates - 70,000
Increase (decrease) in deferred revenue (40,000) 345,000
-------------- -----------
Net cash provided by operating activities 2,491,000 1,071,000
Cash flows provided by (used by) investing activities:
Purchases of investments - (1,595,000)
Maturities of investments - 3,164,000
Sales of investments - 5,755,000
Purchases of property and equipment (204,000) (121,000)
Additions to capitalized software costs (175,000) (175,000)
Additions to intangible assets (123,000) (1,000)
-------------- -----------
Net cash provided by (used by) investing activities (502,000) 7,027,000
Cash flows provided by (used by) financing activities:
Exercise of options 350,000 -
Paydown of note payable (2,000) -
Equity issuance costs (6,000) -
-------------- -----------
Net cash provided by financing activities 342,000 -
Net increase in cash and cash equivalents 2,331,000 8,098,000
Cash and cash equivalents - beginning of period 51,505,000 3,844,000
============== ===========
Cash and cash equivalents - end of period $53,836,000 $11,942,000
============== ===========
Supplemental information:
Income taxes paid $ 831,000 $ 1,059,000
Interest paid - -
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
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TRANSITION SYSTEMS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, and have been prepared by the Company
without audit. In the opinion of management, the accompanying consolidated
financial statements contain all adjustments, consisting only of those of a
normal recurring nature, except for the effects of the Recapitalization effected
by the Company in January 1996 and the Company's initial public offering in
April 1996, necessary for a fair presentation of the Company's financial
position, results of operations and cash flows at the dates and for the periods
indicated. While the Company believes that the disclosures presented are
adequate to make the information not misleading, these financial statements
should be read in conjunction with the audited consolidated financial statements
for the year ended September 30, 1996 which are contained in the Company's
Annual Report on Form 10-K, File No. 0-28182. The results of operations for the
three months ended December 31, 1996 are not necessarily indicative of the
results to be expected for the entire year ending September 30, 1997.
2. COMPUTATION OF PRO FORMA EARNINGS PER SHARE
Net income per common share is computed based upon the weighted average number
of common shares and common equivalent shares outstanding during each period.
Common equivalent shares are included in the per share calculations where the
effect of their inclusion would be dilutive. Net income per share for the three
month period ended December 30, 1995, on a pro forma basis, gives effect to the
Company's Recapitalization, and the issuance of common stock in the initial
public offering. In accordance with the Securities and Exchange Commission's
Staff Accounting Bulletin No. 83 ("SAB 83") all common and common equivalent
shares and other potentially dilutive instruments, including stock options,
warrants and preferred stock issued during the twelve-month period prior to the
filing date (April 18, 1996) of the Company's Registration Statement for its
initial public offering have been included in the calculation as if they were
outstanding for all periods presented.
3. SUBSEQUENT EVENT
On January 31, 1997, the Company acquired a 19.5% ownership interest in
HealthVISION, Inc. for $6 million in cash. HealthVISION is a provider of
electronic medical record software based in Santa Rosa, California. This
investment is being accounted for on the cost basis.
6
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
This document contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that may contribute
to such differences include those listed under "Risk Factors" in the Company's
Annual Report on Form 10-K for the fiscal year ended September 30, 1996, File
No. 0-28182.
The following information should be read in conjunction with the consolidated
financial statements included herein and the notes thereto as well as the
consolidated financial statements and notes included in the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1996.
OVERVIEW
- --------
The Company provides integrated clinical and financial decision support systems
to hospitals, integrated delivery systems and other health care institutions.
The Company was founded in 1985 to apply management control techniques to the
health care delivery process, with the objective of improving quality and
lowering costs.
The Company has experienced a seasonal pattern in its operating results, in
which the first quarter of each fiscal year typically has the lowest revenue and
net income, frequently lower than the last quarter of the previous fiscal year,
and the fourth quarter typically has the highest revenue and net income. While
the Company has taken steps to moderate this seasonal pattern, there can be no
assurance that it will be able to eliminate the seasonality of its operating
results.
The Company's revenues are derived from sales of software licenses and related
implementation services and of software maintenance. Software and implementation
revenues are generally accounted for using the percentage of completion method
based principally upon progress and performance as measured by achievement of
contract milestones. Software maintenance fees, which are generally received
annually in advance, are recorded as deferred revenue on the Company's balance
sheet and are recognized as revenue ratably over the life of the contract.
RESULTS OF OPERATIONS
- ---------------------
REVENUES
The Company's total revenues increased 29% to $8.5 million for the three months
ended December 31, 1996 from $6.6 million for the same period in the prior year.
Software and implementation revenue increased 33% to $5.9 million for the three
months ended December 31, 1996 from $4.4 million for the same period in the
prior year. The increase in software and implementation revenue was due
primarily to growth in sales to integrated delivery systems and increased
penetration of the small hospital market through sales of the Company's AS/400
and UNIX products. Maintenance revenue increased 22% to $2.6 million for the
three months ended December 31, 1996 from $2.2 million for the same period in
the prior year. The growth in maintenance revenue is attributable to the growth
in the Company's installed base.
7
<PAGE> 8
COST OF REVENUE
Cost of software and implementation revenue consists primarily of the cost of
third-party software that is resold by the Company or included in the Company's
products, personnel costs, the cost of related benefits, travel and living
expenses, costs of materials and other costs related to the installation and
implementation of the Company's products, and amortization of capitalized
software development costs. Cost of maintenance revenue consists primarily of
maintenance costs associated with the third-party software included in the
Company's products and personnel costs incurred in providing maintenance and
technical support services to the Company's customers.
Cost of software and implementation revenue increased 33% to $2.2 million for
the three months ended December 31, 1996 from $1.7 million for the same period
in the prior year. The increase was primarily due to a net increase of
twenty-one persons in the Company's implementation staff. In addition, a greater
proportion of the Company's revenue was generated by products which contain a
higher third party royalty cost. Cost of maintenance revenue decreased 19% to
$0.7 million for the three months ended December 31, 1996 from $0.8 million for
the same period in the prior year. The decrease was primarily due to the
reorganization of the Company's technical support department. Several employees
in the technical support department were reassigned to research and development
due to the maturation of the Company's midrange product, reducing support needs.
RESEARCH AND DEVELOPMENT
Research and development expense increased 9% to $0.9 million for the three
months ended December 31, 1996 from $0.8 million for the same period in the
prior year. The increase was mainly due to the reorganization of the Company's
technical support department. This increase was partly offset by the transfer of
personnel in the product planning group from a research and development role in
fiscal 1996, to marketing in 1997.
SALES AND MARKETING
Sales and marketing expense increased 54% to $1.4 million for the three months
ended December 31, 1996 from $0.9 million for the same period in the prior year.
The increase was primarily due to a net increase of five new persons and the
transfer of personnel from research and development to marketing as market
segment managers. Commission expense was also higher in the three months ended
December 30, 1996 as compared to the same period in the prior year due to an
increase in contract signings.
8
<PAGE> 9
GENERAL AND ADMINISTRATIVE
General and administrative expense increased 80% to $1.0 million for the three
months ended December 31, 1996 from $0.5 million for the same period in the
prior year. The increase was primarily due to increased costs related to
becoming a public company, a net increase of two new persons, and general and
administrative expenses related to Enterprising HealthCare, Inc., which the
Company acquired in July 1996.
NET INTEREST INCOME (EXPENSE)
Net interest income increased 283% to $0.6 million for the three months ended
December 31, 1996 from $0.1 million for the same period in the prior year. The
increase was due to the significantly higher cash balance generated by the April
1996 initial public offering.
PROVISION FOR INCOME TAXES
The Company's effective income tax rate decreased to 40% for the three months
ended December 31, 1996 from 41% for the same period in the prior year. The
decrease was primarily attributed to the tax benefit obtained by the Company
investing a portion of its cash in tax exempt securities during the current
year.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash and cash equivalents increased to $53.8 million at December 31, 1996 from
$51.5 million at September 30, 1996. The increase is attributable primarily to
the cash flow provided by operating activities during the current quarter.
The Company believes that the net proceeds from the sale of common stock by the
Company in its initial public offering in April 1996, together with available
funds, cash generated from operations and its unused line of credit of $15
million, will be sufficient to finance the Company's operations and planned
capital expenditures for at least the next twelve months. There can be no
assurance, however, that the Company will not require additional financing
during that time or thereafter.
9
<PAGE> 10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
*3.2 Amended and Restated Articles of Organization
*3.4 Amended and Restated By-Laws
*3.5 Articles of Amendment to the Articles of Organization, as
filed with the Secretary of State of the Commonwealth of
Massachusetts on April 3, 1996.
*4.1 Specimen Certificate for Common Stock
11.1 Computation of Per Share Earnings
* Incorporated herein by reference to the similarly-numbered exhibit included
in the company registration statement on Form S-1, File No. 333-01758.
(b) REPORTS ON FORM 8-K
none
10
<PAGE> 11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Transition Systems, Inc.
(Registrant)
Dated: February 14, 1997 /s/ Robert F. Raco
---------------------------------------------
Robert F. Raco
President, Chief Executive Officer and Director
(principal executive officer)
Dated: February 14, 1997 /s/ Paula J. Malzone
-----------------------------------------------
Paula J. Malzone
Treasurer and Controller
(principal financial and accounting officer)
11
<PAGE> 1
Exhibit 11.1
<TABLE>
TRANSITION SYSTEMS, INC.
COMPUTATION OF PRO FORMA EARNINGS PER SHARE
<CAPTION>
For the three month period ended: December 31, 1996 December 30, 1995
------------------ ------------------
<S> <C> <C>
Net income ............................................. $ 1,779,000 $ 1,179,000
Common stock outstanding .......................... 17,135,539 16,987,776
Common stock equivalents .......................... 3,390,401 3,630,730
Weighted average number of common shares...........
and common equivalent shares outstanding ......... 20,525,940 20,618,506
Net income per share .............................. $ 0.09 $ 0.06
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 53,836
<SECURITIES> 0
<RECEIVABLES> 14,161
<ALLOWANCES> 1,302
<INVENTORY> 0
<CURRENT-ASSETS> 70,761
<PP&E> 4,143
<DEPRECIATION> 3,090
<TOTAL-ASSETS> 76,346
<CURRENT-LIABILITIES> 11,846
<BONDS> 0
0
0
<COMMON> 169
<OTHER-SE> 63,827
<TOTAL-LIABILITY-AND-EQUITY> 76,346
<SALES> 0
<TOTAL-REVENUES> 8,486
<CGS> 0
<TOTAL-COSTS> 2,864
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 38
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,965
<INCOME-TAX> 1,186
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,779
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
