<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 June 30, 1998 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 AUGUST 5, 1998
----- --------------
COMMON STOCK, 18,029,095
$.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 JUNE 30, 1998
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of
June 30, 1998 (unaudited) and September 30, 1997.................. 3
Consolidated Statements of Operations for the Three Months and
Nine Months Ended June 30, 1998 (unaudited)
and June 30, 1997 (unaudited)..................................... 4
Consolidated Statements of Cash Flows for the Nine Months
Ended June 30, 1998 (unaudited) and June 30, 1997 (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................................................................ 11
2
<PAGE> 3
TRANSITION SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1998 1997
----------- -------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $65,179,000 $58,485,000
Accounts receivable, net 19,662,000 19,339,000
Other current assets 1,179,000 696,000
Deferred income taxes 853,000 853,000
----------- -----------
Total current assets 86,873,000 79,373,000
----------- -----------
Property and equipment, net 1,638,000 1,357,000
Capitalized software costs, net 1,410,000 1,411,000
Purchased technology, net 1,219,000 1,376,000
Intangible assets, net 674,000 302,000
Equity investment 6,000,000 6,000,000
----------- -----------
Total assets $97,814,000 $89,819,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,334,000 $ 279,000
Accrued expenses 3,717,000 6,680,000
Income taxes payable 2,871,000 1,476,000
Deferred revenue 7,676,000 7,369,000
----------- -----------
Total current liabilities 15,598,000 15,804,000
----------- -----------
Deferred income taxes 496,000 496,000
----------- -----------
Total liabilities $16,094,000 $16,300,000
----------- -----------
Commitments
Stockholders' equity:
Common stock 179,000 177,000
Non-voting common stock 4,000 4,000
Non-voting common stock warrant 395,000 395,000
Additional paid-in capital 47,778,000 46,717,000
Retained earnings 33,364,000 26,226,000
----------- -----------
Total stockholders' equity 81,720,000 73,519,000
----------- -----------
Total liabilities and stockholders' equity $97,814,000 $89,819,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
3
<PAGE> 4
TRANSITION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Software and implementation $ 6,946,000 $ 9,651,000 $23,881,000 $22,537,000
Maintenance 3,509,000 2,919,000 10,065,000 8,338,000
----------- ----------- ----------- -----------
Total revenues 10,455,000 12,570,000 33,946,000 30,875,000
----------- ----------- ----------- -----------
Cost of revenues:
Software and implementation 3,230,000 2,623,000 9,190,000 7,293,000
Maintenance 708,000 726,000 2,125,000 2,062,000
Research and development 1,556,000 948,000 4,435,000 2,709,000
Sales and marketing 2,077,000 2,023,000 6,023,000 5,067,000
General and administrative 712,000 965,000 2,561,000 2,996,000
----------- ----------- ----------- -----------
Total operating expenses 8,283,000 7,285,000 24,334,000 20,127,000
----------- ----------- ----------- -----------
Income from operations 2,172,000 5,285,000 9,612,000 10,748,000
Interest income 790,000 651,000 2,285,000 1,798,000
----------- ----------- ----------- -----------
Income before income taxes 2,962,000 5,936,000 11,897,000 12,546,000
Provision for income taxes 1,185,000 2,374,000 4,759,000 5,018,000
----------- ----------- ----------- -----------
Net income $ 1,777,000 $ 3,562,000 $ 7,138,000 $ 7,528,000
=========== =========== =========== ===========
Net income per share data:
Basic earnings per share $ 0.10 $ 0.20 $ 0.39 $ 0.43
Diluted earnings per share 0.09 0.18 0.35 0.38
Weighted average common shares outstanding
(in thousands):
Basic 18,232 17,511 18,153 17,333
Diluted 20,454 19,880 20,459 19,900
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
4
<PAGE> 5
TRANSITION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------
JUNE 30, JUNE 30,
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,138,000 $ 7,528,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,329,000 1,195,000
Other (92,000)
Tax benefit from stock option exercises 467,000 2,162,000
Changes in operating assets and liabilities:
Increase in accounts receivable (323,000) (4,140,000)
Increase in other current assets (483,000) (161,000)
Decrease in deferred tax asset -- 1,409,000
Increase (decrease) in accounts payable 1,055,000 (289,000)
(Decrease) increase in accrued expenses (2,963,000) 1,428,000
Increase in taxes payable 1,395,000 468,000
Increase in deferred revenue 307,000 323,000
----------- -----------
Net cash provided by operating activities 7,922,000 9,831,000
Cash flows used by investing activities:
Purchases of investments -- (250,000)
Purchases of property and equipment (904,000) (699,000)
Additions to capitalized software costs (524,000) (537,000)
Additions to intangible assets (396,000) (212,000)
Equity investment -- (6,000,000)
----------- -----------
Net cash used by investing activities (1,824,000) (7,698,000)
Cash flows provided by (used by) financing activities:
Exercise of options 495,000 760,000
Proceeds from employee stock purchase plan 101,000 --
Other -- (12,000)
----------- -----------
Net cash provided by financing activities 596,000 748,000
Net increase in cash and cash equivalents 6,694,000 2,881,000
Cash and cash equivalents - beginning of period 58,485,000 51,505,000
=========== ===========
Cash and cash equivalents - end of period $65,179,000 $54,386,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
5
<PAGE> 6
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, 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 and nine months ended June 30, 1998 are not
necessarily indicative of the results to be expected for the entire fiscal year
ending September 30, 1998.
2. EARNINGS PER SHARE
Basic earnings per share is computed using the weighted average number of shares
outstanding, and diluted earnings per share reflects the potential dilution from
assumed conversions of all dilutive securities such as stock options. A
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation is shown below.
<TABLE>
<CAPTION>
For the three months ended June 30, 1998 For the three months ended June 30, 1997
Per Share Per Share
Income Shares Amount Income Shares Amount
-------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Net income $1,777,000 18,232,000 $0.10 $3,562,000 17,511,000 $0.20
----- -----
EFFECT OF DILUTIVE SECURITIES
Warrants 238,000 210,000
Dilutive securities 1,984,000 2,159,000
---------- ----------
DILUTED EPS
Income to common stockholders
and assumed conversions $1,777,000 20,454,000 $0.09 $3,562,000 19,880,000 $0.18
---------- ---------- ----- ---------- ---------- -----
<CAPTION>
For the nine months ended June 30, 1998 For the nine months ended June 30, 1997
Per Share Per Share
Income Shares Amount Income Shares Amount
-------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Net income $7,138,000 18,153,000 $0.39 $7,528,000 17,333,000 $0.43
----- -----
EFFECT OF DILUTIVE SECURITIES
Warrants 240,000 212,000
Dilutive securities 2,066,000 2,355,000
---------- ----------
DILUTED EPS
Income to common stockholders
and assumed conversions $7,138,000 20,459,000 $0.35 $7,528,000 19,900,000 $0.38
---------- ---------- ----- ---------- ---------- -----
</TABLE>
For the three and nine months ended June 30, 1998, 350,000 and 300,000 options
were excluded from the computation of diluted EPS. In addition, for the three
and nine months ended June 30, 1997, 179,400 and 30,000 options were excluded
from the computation of diluted EPS. These options were excluded because the
effect would have been antidilutive for the period and could potentially dilute
basic EPS in the future.
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, 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 decreased 17% to $10.5 million for the three months
ended June 30, 1998 from $12.6 million for the same period in the prior year.
For the nine months ended June 30, 1998, total revenues increased 10% to $33.9
million from $30.9 million for the same nine month period in the prior year.
Software and implementation revenue decreased 28% to $6.9 million for the three
months ended June 30, 1998 from $9.7 million for the same period in the prior
year and increased 6% to $23.9 million for the nine months ended June 30, 1998
from $22.5 million for the same period in the prior year. The decrease in
software and implementation revenue for the quarter was due primarily to a
decrease in contract signings. This decrease was due to delays in closing
several large transactions due to various market conditions. Maintenance revenue
increased 20% to $3.5 million for the three months ended June 30, 1998 from $2.9
million for the same period in the prior year, and increased 21% to $10.1
million for the nine months ended June 30, 1998 from $8.3 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 and the number of supported products.
COST OF REVENUE
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.
7
<PAGE> 8
Cost of software and implementation revenues increased 23% to $3.2 million for
the three months ended June 30, 1998 from $2.6 million for the same period in
the prior year. For the nine months ended June 30, 1998, cost of software and
implementation revenues increased 26% to $9.2 million from $7.3 million for the
same period last year. The increase in spending was primarily due to a net
increase of 22 people in the Company's implementation and client service staff
offset by a decrease in third-party software costs related to the decrease in
associated revenue. As a percentage of software and implementation revenue, cost
of software and implementation revenues increased to 46% from 27% for the three
months ended June 30, 1998 and June 30, 1997, respectively and increased to 38%
from 32% for the nine months ended June 30, 1998 and June 30, 1997. The increase
as a percentage of revenue is a result of increased costs of implementation
staff without a corresponding increase in related revenues.
Cost of maintenance revenues was essentially unchanged at $0.7 million and $2.1
million for the three and nine months ended June 30, 1998 and 1997,
respectively. As a percentage of maintenance revenue, cost of maintenance
revenues decreased to 20% from 25% for the three months ended June 30, 1998 and
June 30, 1997, respectively, and decreased to 21% from 25% for the nine months
ended June 30, 1998 and June 30, 1997, respectively. 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 64% to $1.6 million for the three
months ended June 30, 1998 from $0.9 million for the same period in the prior
year. For the nine months ended June 30, 1998, research and development expenses
increased 64% to $4.4 million from $2.7 million for the same period in the prior
year. As a percentage of revenues, research and development expense increased to
15% from 8% for the three months ended June 30, 1998 and June 30, 1997,
respectively, and increased to 13% from 9% for the nine months ended June 30,
1998 and June 30, 1997, respectively. The increase was primarily due to a net
increase of 18 people in the Company's research and development staff and
increased professional consulting expense to support new product development.
The increase as a percentage of revenue is a result of increased costs of
research and development staff without a corresponding increase in related
revenues.
SALES AND MARKETING
Sales and marketing expense increased 3% to $2.1 million for the three months
ended June 30, 1998 from $2.0 million for the same period in the prior year, and
increased 19% to $6.0 million for the nine months ended June 30, 1998 from $5.1
million for the same period in the prior year. The increase was primarily
associated with the growth of the sales organization and marketing programs to
support the Company's expanding product lines. As a percentage of revenues,
sales and marketing expense increased to 20% for the three months ended June 30,
1998 from 16% for the three months ended June 30, 1997 and increased to 18% from
16% for the nine months ended June 30, 1998 and June 30, 1997 respectively. The
increase as a percentage of revenue is a result of increased costs of sales
staff without a corresponding increase in related revenues.
GENERAL AND ADMINISTRATIVE
General and administrative expense decreased 26% to $0.7 million for the three
months ended June 30, 1998 from $1.0 million for the same period in the prior
year, and decreased 15% to $2.6 million for the nine months ended June 30, 1998
from $3.0 million for the same period in the prior year. The decrease in
spending was primarily due to a reduction in performance related compensation
expenses during the period as a result of the decrease in revenue. As a
percentage of revenues, general and administrative expense decreased to 7% from
8% for the three months ended June 30, 1998 and June 30, 1997, respectively, and
decreased to 8% from 10% for the nine months ended June 30, 1998 and June 30,
1997, respectively. The decrease as a percent of revenue on a year to date basis
is attributable to increased efficiencies of the Company's administrative
functions.
INTEREST INCOME
Interest income for the three months ended June 30, 1998 was $0.8 million,
compared to $0.6 million for the same period in the prior year. During the nine
months ended June 30, 1998, the Company had $2.3 million in interest income
compared to $1.8 million in interest income for the same period in the prior
year. The increase is attributable to the interest generated on higher cash
balances during fiscal 1998.
8
<PAGE> 9
PROVISION FOR INCOME TAXES
The Company's effective income tax rate remained constant at 40.0% for the three
and nine months ended June 30, 1998 and June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased to $65.2 million at June 30, 1998 from $58.5
million at September 30, 1997. The increase is attributable primarily to cash
generated from operating activities of $7.9 million offset by investments in
capital equipment of $900 thousand.
The Company believes 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
27 Financial Data Schedule
* 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: August 14, 1998 /s/ Robert F. Raco
--------------------------------------------
Robert F. Raco
President, Chief Executive Officer
(principal executive officer)
Dated: August 14, 1998 /s/ Paula J. Malzone
--------------------------------------------
Paula J. Malzone
Chief Financial Officer and Treasurer
(principal financial and accounting officer)
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 65,179
<SECURITIES> 0
<RECEIVABLES> 19,837
<ALLOWANCES> 175
<INVENTORY> 0
<CURRENT-ASSETS> 86,873
<PP&E> 5,872
<DEPRECIATION> 4,234
<TOTAL-ASSETS> 97,814
<CURRENT-LIABILITIES> 15,598
<BONDS> 0
0
0
<COMMON> 179
<OTHER-SE> 81,541
<TOTAL-LIABILITY-AND-EQUITY> 97,814
<SALES> 0
<TOTAL-REVENUES> 10,455
<CGS> 0
<TOTAL-COSTS> 3,938
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 40
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,962
<INCOME-TAX> 1,185
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,777
<EPS-PRIMARY> .10
<EPS-DILUTED> .09
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 54,386
<SECURITIES> 0
<RECEIVABLES> 17,684
<ALLOWANCES> 125
<INVENTORY> 0
<CURRENT-ASSETS> 74,841
<PP&E> 4,782
<DEPRECIATION> 3,442
<TOTAL-ASSETS> 86,562
<CURRENT-LIABILITIES> 15,075
<BONDS> 0
0
0
<COMMON> 173
<OTHER-SE> 70,814
<TOTAL-LIABILITY-AND-EQUITY> 86,562
<SALES> 0
<TOTAL-REVENUES> 12,570
<CGS> 0
<TOTAL-COSTS> 3,349
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,936
<INCOME-TAX> 2,374
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,562
<EPS-PRIMARY> .20
<EPS-DILUTED> .18
</TABLE>
