<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, 1997 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 [ ]
The number of shares outstanding of each of the issuer's classes of common
stock, as of February 6, 1998.
CLASS
-----
COMMON STOCK, $.01 PAR VALUE 17,795,456 SHARES
NON-VOTING COMMON STOCK, $.01 PAR VALUE 356,262 SHARES
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TRANSITION SYSTEMS, INC.
FORM 10-Q FOR THE THREE MONTHS ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 1997
(unaudited) and September 30, 1997................................. 3
Consolidated Statements of Operations for the Three
Months Ended December 31, 1997 and 1996 (unaudited)................ 4
Consolidated Statements of Cash Flows for the Three Months
Ended December 31, 1997 and 1996 (unaudited)....................... 5
Notes to Interim Consolidated Financial Statements................. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.......................................... 8
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................................10
SIGNATURES...................................................................11
2
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TRANSITION SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $58,509,000 $58,485,000
Accounts receivable, net 19,884,000 19,339,000
Other current assets 1,136,000 696,000
Deferred income taxes 853,000 853,000
----------- -----------
Total current assets 80,382,000 79,373,000
----------- -----------
Property and equipment, net 1,556,000 1,357,000
Capitalized software costs, net 1,411,000 1,411,000
Purchased technology, net 1,336,000 1,376,000
Intangible assets, net 291,000 302,000
Equity investment 6,000,000 6,000,000
----------- -----------
Total assets $90,976,000 $89,819,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 622,000 $ 279,000
Accrued expenses 4,487,000 6,680,000
Income taxes payable 1,715,000 1,476,000
Deferred revenue 7,320,000 7,369,000
----------- -----------
Total current liabilities 14,144,000 15,804,000
----------- -----------
Deferred income taxes 496,000 496,000
----------- -----------
Total liabilities 14,640,000 16,300,000
----------- -----------
Commitments
Stockholders' equity:
Common stock 177,000 177,000
Non-voting common stock 4,000 4,000
Non-voting common stock warrant 395,000 395,000
Additional paid-in capital 47,054,000 46,717,000
Retained earnings 28,706,000 26,226,000
----------- -----------
Total stockholders' equity 76,336,000 73,519,000
----------- -----------
Total liabilities and stockholders' equity $90,976,000 $89,819,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
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TRANSITION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------
DECEMBER 31, DECEMBER 31,
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
Software and implementation $ 7,700,000 $ 5,860,000
Maintenance 3,215,000 2,626,000
----------- -----------
Total revenues 10,915,000 8,486,000
----------- -----------
Cost of revenues:
Software and implementation 2,788,000 2,205,000
Maintenance 701,000 659,000
Research and development 1,337,000 878,000
Sales and marketing 1,829,000 1,364,000
General and administrative 881,000 981,000
--------- ---------
Total operating expenses 7,536,000 6,087,000
----------- -----------
Income from operations 3,379,000 2,399,000
Interest income 754,000 566,000
----------- -----------
Income before income taxes 4,133,000 2,965,000
Provision for income taxes 1,653,000 1,186,000
----------- -----------
Net income $ 2,480,000 $ 1,779,000
=========== ===========
Net income per share data:
Basic earnings per share $ 0.14 $ 0.10
Diluted earnings per share $ 0.12 $ 0.09
Weighted average common shares outstanding:
Basic 18,091,000 17,163,000
Diluted
20,498,000 19,923,000
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
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TRANSITION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------
DECEMBER 31, DECEMBER 31,
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,480,000 $ 1,779,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 406,000 384,000
Compensation charge related to options -- 39,000
Tax benefit from stock option exercises 57,000 1,201,000
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (545,000) 560,000
Increase in other current assets (440,000) (173,000)
Increase (decrease) in accounts payable 343,000 (255,000)
Decrease in accrued expenses (2,193,000) (164,000)
Increase (decrease) in taxes payable 239,000 (840,000)
Decrease in deferred revenue (49,000) (40,000)
----------- -----------
Net cash provided by operating activities 298,000 2,491,000
Cash flows used by investing activities:
Purchases of property and equipment (379,000) (204,000)
Additions to capitalized software costs (175,000) (175,000)
Additions to intangible assets -- (123,000)
--------- ------------
Net cash used by investing activities (554,000) (502,000)
Cash flows provided by (used by) financing activities:
Exercise of options 238,000 350,000
Proceeds from employee stock purchase plan 42,000 --
Other -- (8,000)
----------- -----------
Net cash provided by financing activities 280,000 342,000
Net increase in cash and cash equivalents 24,000 2,331,000
Cash and cash equivalents - beginning of period 58,485,000 51,505,000
----------- -----------
Cash and cash equivalents - end of period $58,509,000 $53,836,000
=========== ===========
Supplemental information:
Income taxes paid $ 1,267,000 $ 831,000
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 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, which adjustments, except those related to
the Company's initial public offering in April 1996, consist only of adjustments
of a normal, recurring nature. 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 fiscal year ended September 30, 1997 which are contained in
the Company's Annual Report on Form 10-K for such fiscal year. The results of
operations for the three months ended December 31, 1997 are not necessarily
indicative of the results to be expected for the entire fiscal year ending
September 30, 1998.
2. EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards No. 128
("SFAS 128"), "Earnings per Share." SFAS 128 requires a dual presentation of
Basic earnings per share, which is computed using the weighted average number of
shares outstanding, and Diluted earnings per share, which reflects the potential
dilution from assumed conversions of common shares. SFAS 128 also requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. These financial
statements have been prepared and presented based on the new standard. Prior
period amounts have been restated to conform to current year presentation.
<TABLE>
<CAPTION>
For the three months ended December 31, 1997 For the three months ended December 31, 1996
Per Share Per Share
Income Shares Amount Income Shares Amount
-------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Net income $2,480,000 18,091,000 $ 0.14 $1,779,000 17,163,000 $ 0.10
------ ------
EFFECT OF DILUTIVE SECURITIES
Warrants 246,000 216,000
Common stock equivalents 2,161,000 2,544,000
---------- ----------
DILUTED EPS
Income to common stockholders
and assumed conversions $2,480,000 20,498,000 $ 0.12 $1,779,000 19,923,000 $ 0.09
---------- ---------- ------ ---------- ---------- ------
</TABLE>
3. RECENT PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting
Comprehensive Income". SFAS 130 establishes standards for reporting and display
of comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general-purpose financial statements. SFAS 130 requires
that an enterprise classify items of other comprehensive income by their nature
in a financial statement and display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of the
6
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balance sheet. The Company will be required to adopt SFAS 130 in the first
quarter of its 1999 fiscal year, and does not believe this statement will have a
material effect on the Company's financial position or results of operations.
In June of 1997, the FASB issued Statement of Financial Accounting Standards No.
131 ("SFAS 131"), "Disclosures About Segments of an Enterprise and Related
Information". SFAS 131 specifies revised guidelines for determining an entity's
operating segments and the type and level of financial information to be
disclosed. The Company will be required to adopt SFAS 131 during fiscal 1999,
and does not believe this statement will have a material effect on the Company's
financial position or results of operations.
On October 27, 1997, the AICPA Accounting Standards Executive Committee issued
Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition". SOP
97-2 supersedes Statement of Position 91-1, Software Revenue Recognition, and
provides guidance on when and in what amounts revenue should be recognized for
the licensing, selling, leasing, or marketing of computer software. SOP 97-2 is
effective for transactions entered into in fiscal years beginning after December
15, 1997. The Company believes that its revenue recognition policies are already
in compliance with SOP 97-2 and does not believe this statement will have a
material effect on the Company's financial position or results of operations.
7
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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, 1997, 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, 1997.
OVERVIEW
The Company provides management information technology to hospitals, integrated
delivery networks, physician groups and other health care organizations. The
Company's product lines span the health care organization's information
technology needs, providing enterprise-wide financial and clinical decision
support, data integration services, disease management products and master
person identifier solutions as well as a clinical data repository. The Company
was founded in 1985 and has been profitable in each fiscal year since 1987.
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 accounted for using the percentage of completion method, and
revenue is recognized as contract milestones are reached. Software maintenance
contracts are sold separately at the time of the initial software license sale
and are generally renewable annually.
RESULTS OF OPERATIONS
REVENUES
The Company's total revenues increased 28.6% to $10.9 million for the three
months ended December 31, 1997 from $8.5 million for the same period in the
prior year. Software and implementation revenue increased 31.4% to $7.7 million
for the three months ended December 31, 1997 from $5.9 million for the same
period in the prior year. The increase in software and implementation revenue
was due primarily to increased penetration of the Company's expanded product
lines to the existing customer base as well as sales made to new customers.
Maintenance revenue increased 22.4% to $3.2 million for the three months ended
December 31, 1997 from $2.6 million for the same period in the prior year
reflecting the growth in the Company's installed base.
COST OF REVENUES
Cost of software and implementation revenues 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 revenues consists primarily of
maintenance fees payable by the Company 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.
8
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Cost of software and implementation revenues increased 26.4% to $2.8 million for
the three months ended December 31, 1997 from $2.2 million for the same period
in the prior year. The increase in spending was primarily due to a net increase
of twenty-two people in the Company's implementation staff. As a percentage of
software and implementation revenues, cost of software and implementation
revenues decreased to 36.2% for the three months ended December 31, 1997 from
37.6% for the same period in the prior year. The decrease as a percentage of
revenue is a result of increased productivity of the Company's implementation
staff.
Cost of maintenance revenue increased 6.4% to $0.7 million for the three months
ended December 31, 1997 from $0.6 million for the same period in the prior year.
The increase in spending was primarily due to increased maintenance fees payable
to third party software suppliers. As a percentage of maintenance revenue, cost
of maintenance revenue decreased to 21.8% for the three months ended December
31, 1997 from 25.1% for the same period in the prior year. As a percent of
revenue, cost of maintenance revenue decreased due to the maturation of the
Company's products, reducing support needs.
RESEARCH AND DEVELOPMENT
Research and development expense increased 52.3% to $1.3 million for the three
months ended December 31, 1997 from $0.9 million for the same period in the
prior year. As a percentage of total revenues, research and development
increased to 12.2% for the three months ended December 31, 1997 from 10.3% for
the same period in the prior year. The increase was primarily due to a net
increase of twelve people in the Company's research and development staff and
increased professional consulting service fees to support new product
development.
SALES AND MARKETING
Sales and marketing expense increased 34.1% to $1.8 million for the three months
ended December 31, 1997 from $1.4 million for the same period in the prior year.
As a percentage of total revenues, sales and marketing expense increased to
16.7% for the three months ended December 31, 1997 from 16.1% for the same
period in the prior year. The increase was primarily associated with the growth
of the sales and marketing organization to support the Company's expanding
product line.
GENERAL AND ADMINISTRATIVE
General and administrative expense decreased 10.2% to $.9 million for the three
months ended December 31, 1997 from $1.0 million for the same period in the
prior year. As a percentage of total revenues, general and administrative
expense decreased to 8.1% for the three months ended December 31, 1997 from
11.6% for the same period in the prior year. The decrease in spending is
primarily due to a decrease in professional service expenses during the quarter.
INTEREST INCOME (EXPENSE)
Interest income increased 33.2% to $0.8 million for the three months ended
December 31, 1997 from $0.6 million for the same period in the prior year. The
increase in interest income is primarily due to a higher average cash balance
for the period.
PROVISION FOR INCOME TAXES
The Company's effective income tax rate remained constant at 40% for the three
months ended December 31, 1997 and 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents balance remained constant at $58.5 million at December
31, 1997 and September 30, 1997.
The Company believes that 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
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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
27.1 Financial Data Schedule
* Incorporated herein by reference to the similarly-numbered exhibit included
in the Company's registration statement on Form S-1, File No. 333-01758.
(b) REPORTS ON FORM 8-K
None.
10
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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 13, 1998 /s/ Robert F. Raco
------------------------------------------
Robert F. Raco President, Chief Executive
Officer and (principal executive officer)
Dated: February 13, 1998 /s/ Paula J. Malzone
------------------------------------------
Paula J. Malzone Chief Financial Officer
and Treasurer (principal financial and
accounting officer)
11
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<ARTICLE> 5
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 58,509
<SECURITIES> 0
<RECEIVABLES> 20,059
<ALLOWANCES> 175
<INVENTORY> 0
<CURRENT-ASSETS> 80,382
<PP&E> 5,347
<DEPRECIATION> 3,791
<TOTAL-ASSETS> 90,976
<CURRENT-LIABILITIES> 14,144
<BONDS> 0
0
0
<COMMON> 177
<OTHER-SE> 76,159
<TOTAL-LIABILITY-AND-EQUITY> 90,976
<SALES> 0
<TOTAL-REVENUES> 10,915
<CGS> 0
<TOTAL-COSTS> 3,489
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 37
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,133
<INCOME-TAX> 1,653
<INCOME-CONTINUING> 2,480
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
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<EPS-PRIMARY> .14
<EPS-DILUTED> .12
</TABLE>
