<PAGE>
Rules 424(b)(4) and 430A
Registration Statement No. 333-2790
3,000,000 SHARES
LOGO
LOGO OF SUNQUEST INFORMATION SYSTEMS, INC.
COMMON STOCK
----------------
All of the 3,000,000 shares of Common Stock offered hereby are being sold by
Sunquest Information Systems, Inc. ("Sunquest" or the "Company"). Prior to
this offering, there has been no public market for the Common Stock of the
Company. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price. The Common Stock has been
approved for quotation on the Nasdaq National Market under the symbol "SUNQ."
----------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGES 5 THROUGH 12.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
===============================================================================
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share........................ $16.00 $1.12 $14.88
- ------------------------------------------------------------------------------
Total(3)......................... $48,000,000 $3,360,000 $44,640,000
==============================================================================
</TABLE>
(1) The Company and one of its shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses, payable by the Company, estimated at
$1,000,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
450,000 additional shares of Common Stock on the same terms and conditions
as set forth above solely to cover over-allotments, if any. If the
Underwriters exercise this option in full, the total Price to Public,
Underwriting Discounts and Commissions, and Proceeds to Company will be
$55,200,000, $3,864,000 and $51,336,000, respectively. See "Underwriting."
----------------
The shares of Common Stock are offered by the several Underwriters named
herein, subject to prior sale, when, as and if accepted by them and subject to
certain conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected
that the certificates for the shares of Common Stock will be available for
delivery at the offices of Volpe, Welty & Company, One Maritime Plaza, San
Francisco, California, on or about June 5, 1996.
VOLPE, WELTY & COMPANY PUNK, ZIEGEL & KNOELL
The date of this Prospectus is May 31, 1996
<PAGE>
The inside front cover of this Prospectus contains a color graphic chart of
a collection of health care information systems that an Integrated Delivery
Network ("IDN") could have. The focus of the chart is Sunquest's IntelliCare
Clinical Repository System and its Scalable Clinical Patient Repository
("SCPR"). The chart depicts how various entities within the IDN (such as
hospitals, clinics and managed care organizations) are integrated so as to share
information among the various entities' departments and functions.
The chart appears in the inside front cover as follows:
Integrated Delivery Network
Clinic Hospital
CAREGIVER WORKSTATION ** LABORATORY FLEXILAB
CAREGIVER VIEW RADIOLOGY FLEXIRAD
CAREGIVER VIEW
CAREGIVER WORKSTATION **
CAREGIVER DOCUMENTATION **
CAREGIVER COMMUNICATION
LEGACY SYSTEM
LEGACY SYSTEM
INTELLICARE:
Scalable Clinical
Patient Repository*
(SCPR)
Hospital Managed Care Organization (MCO)
LABORATORY FLEXILAB MCM - MANAGED CARE MANAGER
RADIOLOGY FLEXIRAD
LEGACY SYSTEM
CONTRACTS MANAGEMENT
ADMITTING/REGISTRATION
PATIENT ACCOUNTING
LEGACY SYSTEM
PHARMACY
[SUN AND MOUNTAIN LOGO OF SUNQUEST INFORMATION SYSTEMS, INC.]
*Currently being implemented on an enterprise-wide basis at the Company's
primary beta site.
**Currently under development.
-----------------
Sunquest Information Systems, Sunquest, FlexiLab, FlexiRad, Flexi-$,
IntelliCare, SCPR and the sun and mountain logo, among other marks, are
registered trademarks of the Company. CareGiver, CMDR, FlexiLabxl and Flexi-3R,
among other marks, are trademarks of the Company.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED
AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Combined Financial Statements and Notes thereto appearing
elsewhere in this Prospectus. Prospective investors should consider carefully
the information discussed under "Risk Factors." Certain terms used in this
Prospectus are defined under "Glossary of Selected Terms."
THE COMPANY
Sunquest provides health care information systems to large and mid-sized
hospitals, clinics and other facilities, including integrated delivery networks
("IDNs") comprised of multi-entity, multi-site health care organizations.
Sunquest was established in 1979 and has become a market leader in the sale of
laboratory information systems ("LISs") that integrate disparate equipment and
data sources in order to automate a laboratory department's specialized
processes and manage its large volumes of clinical data. As of December 31,
1995, the Company had an installed LIS base of more than 600 sites in the
United States, Canada and the United Kingdom. Sunquest is applying its open
systems, integration and clinical experience to develop and service enterprise-
wide clinical repository and managed care systems targeted at the information
needs of the emerging IDN market. The Company's clinical repository systems are
currently being implemented on an enterprise-wide basis at the Company's
primary beta site, a multi-entity, 812-bed IDN.
In order to lower health care delivery costs while improving the quality of
patient care, IDNs need detailed clinical and management information that
enables providers within the IDN to manage: (i) the patient care process across
multiple delivery sites; (ii) the appropriateness of diagnoses, treatments and
resource utilizations; (iii) provider performance and clinical outcomes; and
(iv) performance under managed care contracts. A comprehensive clinical
repository addresses these information needs by integrating clinical and
financial data from various information systems of the IDN's clinical
departments and administrative areas. A clinical repository forms the
foundation for a computerized patient record ("CPR"), which offers providers
throughout an IDN immediate on-line access to more complete patient data across
multiple delivery sites. Significant market opportunities exist for health care
information systems vendors offering open architecture clinical repository
systems. These systems permit IDNs to select and integrate best-of-fit
information systems by either retaining existing legacy systems or selecting
from an array of new and existing systems from different vendors.
Sunquest offers three suites of information systems: departmental clinical
systems, clinical repository systems and managed care systems. The Company's
departmental clinical systems consist of laboratory and radiology information
systems. These systems capture departmental information, communicate with
patient care areas and other information systems, provide comprehensive
management reports and incorporate rules-based decision tools for ordering
tests and analyzing results. Sunquest estimates that it has installed in its
LIS client base over 6,500 interfaces that were developed for approximately 350
separate instruments and 550 health care information systems of other vendors.
The Company's clinical repository systems are comprised of a clinical database,
an interface engine, and integration and access tools. These systems collect
clinical data from legacy departmental systems and then organize, index and
store these data in a relational database. With these clinical repository
systems, a clinician can access, from a single source, a comprehensive record
of prior illnesses, treatments, orders, results and diagnoses for which data
have been stored in the clinical repository. The Company's managed care systems
support the administrative functions of managed care organizations, such as
health maintenance organizations and managed care entities within IDNs, and are
designed to meet the demands of the evolving capitation and fixed fee
reimbursement structures.
Sunquest's business strategy is to leverage its position as a leading LIS
vendor in order to become a strategic supplier of clinical repository systems
to the emerging enterprise-wide CPR market. The key elements of this strategy
are to build upon Sunquest's experience implementing and interfacing complex
LISs to develop best-of-fit clinical repository systems, and to cross-sell its
clinical repository systems to its installed LIS client base. The Company also
intends to diversify and expand its systems and service offerings to meet the
rapidly changing needs of IDNs and managed care organizations, while increasing
and refocusing its sales and marketing efforts to target the enterprise-wide
information needs of these emerging markets.
Sunquest's clients include The Cleveland Clinic Foundation, Intermountain
Health Care, Kaiser Foundation Health Plan of Colorado, Moses Cone Health
System, St. Lukes-Roosevelt Hospital Center and The University of Illinois at
Chicago Medical Center. Upon completion of this offering, Dr. Sidney A.
Goldblatt, the President and Chief Executive Officer of the Company, and three
trusts for the benefit of his children will own approximately 79.9% of the
outstanding Common Stock of the Company.
3
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered hereby..................... 3,000,000 shares
Common Stock to be outstanding after this
offering........................................ 14,904,000 shares(1)
Use of proceeds................................. Shareholder distributions and
general corporate purposes,
including working capital and
potential acquisitions
Nasdaq National Market symbol................... SUNQ
</TABLE>
SUMMARY COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Total revenues......... $56,144 $57,970 $63,459 $62,618 $61,532 $13,564 $16,717
Operating income
(loss).................. 5,951 6,411 4,869 7,253 4,841 (645) 1,677
Income (loss) before
income taxes............ 6,094 4,677 4,918 6,305 3,862 (875) 1,566
Net income (loss)(2)... 6,094 4,677 4,842 6,214 3,789 (858) 1,535
Pro forma net income
(loss)(3)............... 2,015 850
Pro forma net income
per common share(3)..... $ 0.16 $ 0.07
Pro forma weighted
average number of
common shares
outstanding(3)....... 12,762 12,842
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA(4) AS ADJUSTED(5)
------- ------------ --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................ $ 966 $ 966 $33,772
Working capital (deficiency)............. 5,738 (7,759) 38,858
Total assets............................. 45,441 46,444 75,584
Obligations under capital leases from
related party, net of current portion.. 6,254 6,254 6,254
Total shareholders' equity............... 22,150 4,218 47,858
</TABLE>
- --------
(1) Excludes 790,000 shares of Common Stock issuable upon exercise of stock
options granted on the date of this Prospectus at an exercise price equal
to the initial public offering price.
(2) From January 1, 1990 to May 29, 1996, the Company operated as an S
corporation and, accordingly, was not subject to federal or certain state
income taxes. The Company's S corporation status terminated on May 30,
1996. See "S Corporation Distributions and Termination of S Corporation
Status."
(3) Pro forma net income has been computed assuming the elimination of related
party interest income and using an estimated income tax rate of 43%. Pro
forma net income per common share has been computed giving effect to the
assumed issuance, as of the beginning of the pro forma periods presented,
of the number of shares of Common Stock necessary to replace the equity
distributed as a result of the First S Corporation Distribution (as defined
below). See "Use of Proceeds" and Note 2 of Notes to Combined Financial
Statements.
(4) Reflects: (i) the non-cash expense for deferred income taxes (estimated at
$1,132,000) that will be recognized in the second quarter of 1996 as a
result of the termination of the Company's S corporation status; (ii) the
declaration of the S Corporation Distributions (as defined below); and
(iii) the capital contribution to Sunquest of all of the outstanding stock
of Sunquest Europa Limited and Sunquest Germany GmbH. See "Capitalization"
and Note 2 of Notes to Combined Financial Statements.
(5) Adjusted to give effect to the sale of the shares of Common Stock offered
hereby, the application of the estimated net proceeds thereof and the
receipt of payment of certain notes from a related party. See "Use of
Proceeds."
Except as otherwise indicated, all information in this Prospectus assumes no
exercise of the Underwriters' over-allotment option and reflects: (i) a
1780.3836-for-one split of the Company's Common Stock on March 25, 1996; (ii)
an amendment of the Company's Articles of Incorporation on March 25, 1996, as
described elsewhere herein; and (iii) the capital contribution to Sunquest of
all of the outstanding stock of Sunquest Europa Limited and Sunquest Germany
GmbH on May 30, 1996. See "The Company," "S Corporation Distributions and
Termination of S Corporation Status," "Description of Capital Stock,"
"Underwriting" and Note 12 of Notes to Combined Financial Statements.
4
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing the shares of Common Stock offered hereby.
Dependence on Single Product. To date, the Company has derived substantially
all of its revenues from sales of LISs and related implementation and support
services. In 1993, 1994, 1995 and the first three months of 1996, those
revenues totalled approximately $63.2 million, $61.6 million, $60.5 million
and $16.6 million, respectively, representing approximately 99.5%, 98.4%,
98.4% and 99.3%, respectively, of the Company's total revenues in those
periods. The Company expects that it will continue to derive a significant
portion of its total revenues for the foreseeable future from sales of LISs
and related implementation and support services. Accordingly, any factor
adversely affecting sales of LISs could have a material adverse effect on the
Company's business and results of operations. The Company's target market for
its LISs, consisting primarily of large and mid-sized hospitals, is
characterized by a high degree of market penetration. Competitive pressures or
other factors, including the Company's efforts to expand its LIS offerings to
new markets, may result in significant price decreases that could have a
material adverse effect on the Company's business and results of operations.
There can be no assurance that the Company will be able to sustain or increase
the level of revenues from sales of its LISs on an annual or quarterly basis.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Business--Products--Departmental Clinical Systems--
Laboratory Information Systems."
Dependence on Successful Introduction of Clinical Repository Systems. The
Company's future success will depend to a significant degree upon its ability
to complete the development of, and successfully market, its clinical
repository systems. In 1995, the Company installed a beta version of its
clinical repository systems at two client locations. At one of these
locations, the clinical repository systems continue to be modified through
quarterly releases, although the systems have completed the beta process, as
defined for purposes of the client contract, and are in the process of being
implemented on an enterprise-wide basis. The installation of the clinical
repository systems at the other beta site has not proceeded beyond a
preliminary stage, pending further discussions between the Company and the
client as to whether to continue the beta test process. The Company is
currently developing additional modules for its clinical repository systems.
There can be no assurance that the Company will be successful in completing
the development of its clinical repository systems or that the Company will
successfully hire and train additional sales and marketing personnel to
promote its clinical repository systems. A significant number of vendors are
currently offering or developing versions of clinical repository systems and
any significant delay in the scheduled development of the Company's clinical
repository systems could have a material adverse effect on the Company's
ability to compete successfully in the emerging clinical repository
marketplace. Moreover, there is wide variation in the approach and
functionality of clinical repository systems currently being offered or
developed by vendors, such as using internet technology to create a CPR; no
assurance can be given that the Company's clinical repository systems, if
successfully developed, will achieve and maintain marketplace acceptance. If
the Company's clinical repository systems are not developed substantially on
schedule, do not perform substantially as expected or are not accepted in the
marketplace, the Company's business and results of operations will be
materially adversely affected. See "Business--Business Strategy" and
"--Products--Clinical Repository Systems."
Historical Decline in Revenues. The Company has experienced declining
revenues in each of the last two years. The Company's total revenues declined
by 1.3% from 1993 to 1994 and by 1.7% from 1994 to 1995 and system sales
revenues decreased by 11.0% from 1993 to 1994 and by 16.0% from 1994 to 1995.
The Company believes that the decline in such revenues from 1993 to 1995 was
primarily attributable to a number of factors, including: (i) reductions in
hardware manufacturers' list pricing; (ii) uncertainty in the health care
community relative to the extent of possible government intervention in the
existing health care financing system; (iii) a reallocation of Company
resources from site installations to research and development activities
focused on enhancing existing products and developing new systems; and (iv)
restructuring within the Company related to its management and to its sales
and marketing department. There can be no assurance that factors such as these
5
<PAGE>
will not occur in the future and will not have a material adverse effect on
the Company's business and results of operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Significant Fluctuations in Quarterly Operating Results; Revenue Recognition
Policy. The Company's quarterly revenues and results of operations have varied
significantly as a result of a number of factors, including: the volume and
timing of systems sales and installations; the timing of client acceptances;
the length and complexity of the systems sales and installation cycles;
seasonal buying trends as a result of clients' annual purchasing and budgeting
practices; and the Company's sales commission practices. The Company expects
that these variations will continue for the foreseeable future. The timing of
revenue recognition is difficult to forecast because the Company's systems
sales and installation cycles are relatively long and frequently depend on
factors such as the size and scope of installations and general economic
conditions. The sales cycle for the Company's systems is typically nine to 15
months from initial contact to contract execution; and depending upon the
combination of products purchased and the client's installation schedule, an
installation typically takes from eight to 12 months. During the sales cycle,
the Company commits substantial time, effort and funds to prepare a contract
proposal and negotiate the contract. In addition, the Company recognizes
revenues from the software portion of system sales on a percentage-of-
completion method based upon completion of specified milestones. As a result,
the timing of revenue recognition varies considerably and could be impeded by
a number of factors, including availability of Company personnel, the
Company's need to allocate system installation resources to other
installations or to research and development activities, availability of
client personnel and other resources, complexity of clients' needs and delays
imposed by clients. Any delays in progress toward completing a system
installation could reduce the revenues recognized in any given period and
could have a material adverse effect on the Company's business and results of
operations. Because a significant percentage of the Company's total expenses,
particularly employee compensation, is relatively fixed, variations in the
timing of systems sales and installations can cause significant variations in
operating results from quarter to quarter. If total revenues are below
expectations in any period, the Company's inability to adjust spending to
compensate fully for the lower revenues may magnify the adverse effect of such
a shortfall on the Company's results of operations. Accordingly, the Company
believes that period-to-period comparisons of revenues and results of
operations are not necessarily meaningful and should not be relied upon as
indicators of future performance. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Quarterly Results of
Operations."
Competition. The markets for health care information systems ("HCISs"),
including the markets for the Company's information systems, are highly
competitive. Most of the Company's revenues are derived from lengthy,
competitive procurement processes managed by sophisticated purchasers that
extensively investigate and compare the HCISs offered by the Company and its
competitors. The Company believes that the principal competitive factors
influencing the market for its HCISs include vendor and product reputation,
product architecture, functionality and features, ease of use, rapidity of
implementation, quality of client support, product performance and price.
There can be no assurance that the Company will be able to compete
successfully with respect to any of such factors. In the LIS market, the
Company's principal competitors are Cerner Corporation, HBO & Company, Medical
Information Technology, Inc., Shared Medical Systems Corporation and Soft
Computer Consultants, Inc. In addition, the Company competes with a large
number of other LIS vendors. The market for clinical repository systems is in
an early stage, and a significant number of vendors are currently offering or
developing competitive versions of clinical repository systems. These vendors
include not only existing clinical information system suppliers, but other
vendors throughout the HCIS industry, such as suppliers of practice management
systems. Many of the Company's current and potential competitors have
significantly greater financial, managerial, development, technical, marketing
and sales resources than the Company and may be able to devote those resources
to develop and introduce clinical repository systems more rapidly than the
Company or clinical repository systems with significantly greater
functionality than, and superior overall performance to, those offered by the
Company. These competitors may also be able to initiate and withstand
significant price decreases more effectively than the Company. Moreover, the
continuing consolidation of hospitals and other health care providers has
resulted in fewer individual purchasing decisions, a trend that may favor
larger vendors with greater numbers of hospitals currently under contract. To
be competitive, the Company must be able to respond effectively to the
introduction of new and improved HCISs by its competitors. There
6
<PAGE>
can be no assurance that the Company will be able to develop new or improved
HCISs and services in a timely and cost effective manner or that the Company's
current and future HCISs and services will achieve and maintain market
acceptance. See "Business--Competition."
Rapid Technological Change and Dependence on New Product Development,
Enhancement and Acceptance. The HCIS market is characterized by rapid
technological advances, frequent new product introductions and evolving
industry standards that are outside the control of the Company. The
development and sale of additional applications is a principal means of
competition in the HCIS market. Advances in both hardware and software
technology, including the introduction of new hardware platforms, new
programming languages and new software applications, will require the Company
to make significant ongoing expenditures for research and development in order
to adapt the Company's existing and subsequently introduced HCISs to such new
technologies and to take advantage of the benefits they offer. For the
foreseeable future, the Company intends to continue to devote substantial
financial, managerial and personnel resources to its product development
efforts. The development of new and enhanced HCISs is a complex and uncertain
process requiring high levels of innovation and the accurate anticipation of
technological and market trends, and from time to time the Company has
experienced delays in introducing new HCISs and HCIS enhancements. There can
be no assurance that the Company will not experience difficulties that could
delay or prevent the successful and timely development, introduction and
marketing of new and enhanced HCISs or the migration of its clients and
products to new technologies, or that the Company will be able to respond
effectively to future technological changes. In particular, the Company
intends to migrate its products to Windows-based and other operating systems
over the next few years. The inability to accomplish this migration or any
significant delay in such migration may have an adverse effect on the
Company's business and results of operations. The failure of the Company to
develop and introduce new HCISs and HCIS enhancements successfully or the
failure to respond effectively to technological changes could have a material
adverse effect on the Company's business and results of operations. See
"Business--Research and Development."
Dependence on Key Personnel; Management of Changing Business. The Company's
future success depends to a significant extent upon Dr. Sidney A. Goldblatt,
the President and Chief Executive Officer of the Company, the Company's other
executive officers and certain other managerial, technical and marketing
personnel. Dr. Goldblatt, 61, is a co-founder of the Company and has served as
the principal executive officer of the Company since 1986. The Company's
Executive Vice President-Chief Financial Officer became an employee of the
Company only in May 1996 and may devote a reasonable amount of her time to
winding down her accounting practice during the first six months of her
employment. The Executive Vice President-Chief Financial Officer also has
relationships with certain affiliates of the Company. The Company believes
that its results of operations in 1994 were adversely affected by changes in
the management of the Company. The loss of the services of any of the
Company's executive officers or other key personnel could have a material
adverse effect on the Company's business and results of operations. The
Company does not have an employment agreement with Dr. Goldblatt. The Company
has employment agreements with only three of its executive officers and each
of these agreements is terminable by the respective officer upon 30 days'
written notice or, in the case of the Executive Vice President-Chief Financial
Officer, upon 90 days' written notice. The Company does not have, and is not
contemplating securing, key man life insurance on any of its executive
officers or other key personnel. The Company's ability to manage growth,
particularly in the clinical repository market, will require it to continue to
attract, motivate and retain additional highly skilled managerial, technical
and marketing personnel, including experienced CPR sales personnel as well as
software developers and systems architects. Competition for such personnel is
intense, and there can be no assurance that the Company will be successful in
attracting, motivating and retaining the personnel required to maintain and
improve its business and results of operations. See "Business--Employees,"
"Management--Directors and Executive Officers," "--Employment Agreements," "--
Compensation Committee Interlocks and Insider Participation" and "Certain
Transactions."
Regulation. The Company expects that the United States Food and Drug
Administration ("FDA") is likely to become increasingly active in regulating
computer software that is intended for use in health care settings. In March
1994, the FDA issued a letter advising that the FDA considers medical devices
to include software products intended to maintain data used to assist
personnel in making decisions concerning the
7
<PAGE>
suitability of blood donors and the release of blood or blood components for
transfusion or further manufacture. As such, the FDA determined that
manufacturers and distributors of these products, such as the Company, are
subject to FDA regulation. The FDA can impose extensive requirements governing
pre- and post-market conditions such as device investigation, approval,
labeling and manufacturing. In February 1995, the FDA specified that blood bank
software manufacturers must file pre-market approval applications and pre-
market notifications with the FDA by March 31, 1996. The Company complied with
this requirement within such deadline. Compliance with these new requirements
and any future requirements imposed by the FDA could be costly and could delay
or preclude the introduction of certain new products.
In addition, the health care industry is subject to changing political,
economic and regulatory influences that may affect the procurement practices
and operations of health care providers. Many lawmakers have announced that
they intend to propose programs to reform the United States health care system.
These programs may contain proposals to increase governmental involvement in
health care, lower reimbursement rates and otherwise change the regulatory
environment in which the Company's clients operate. Health care providers may
react to these proposals and the uncertainty surrounding such proposals by
curtailing or deferring investments, including those for the Company's systems.
Even if health care providers do not curtail or defer investments, they may
institute cost containment measures in anticipation of regulatory reform or for
other reasons. These measures may result in greater selectivity in the
allocation of capital funds, which could have a material adverse effect on the
Company's ability to sell its systems and services. The Company cannot predict
with any certainty what impact, if any, such legislative or market-driven
reforms might have on its business and results of operations. There can be no
assurance that such proposed changes, if adopted, would not have a material
adverse effect on the Company's business and results of operations.
See "Business--HCIS Industry Background" and "--Regulation."
Dependence on Proprietary Rights. The Company's future success depends in
large part upon its ability to protect its technology and proprietary rights.
The Company relies on a combination of patent, copyright, trade secret and
trademark laws, and contractual restrictions to establish and protect its
proprietary rights, although the laws of certain foreign countries in which the
Company licenses or may license its products may not protect the Company's
proprietary rights to the same extent as do laws in the United States. It is
the Company's policy to require employees, consultants, clients and, in certain
circumstances, suppliers to execute nondisclosure agreements upon the
commencement of a relationship with the Company. It may nonetheless be possible
for third parties to misappropriate the Company's technology and proprietary
information or to develop independently similar or superior technology. There
can be no assurance that the legal protections afforded to the Company and the
measures taken by the Company will be adequate to protect its intellectual
property. Any misappropriation of the Company's technology or proprietary
information could have a material adverse effect on the Company's business and
results of operations. Moreover, the Company is subject to the risk that others
will assert adverse claims and commence litigation alleging infringement or
misappropriation of their intellectual property rights. From time to time,
certain persons have made such claims against the Company. Although the Company
does not know of any infringement or misappropriation by the Company of
proprietary rights of others, there can be no assurance that others will not
assert claims or commence litigation with respect to the Company's current or
future HCISs. In any such event, the Company may be required to engage in
protracted and costly litigation, regardless of the merits of such claims;
discontinue the use of certain software codes, processes or trademarks; cease
to manufacture, use and license infringing products; develop non-infringing
technology; or enter into license arrangements with respect to the disputed
intellectual property. There can be no assurance that the Company would be able
to develop alternative technology or that any necessary licenses would be
available or that, if available, such licenses could be obtained on
commercially reasonable terms. Responding to and defending any of these claims
could distract the attention of management and have a material adverse effect
on
the Company's business and results of operations. See "Business--Proprietary
Rights" and "--Legal Proceedings."
Product Liability. The Company's systems include applications that may relate
to confidential patient medical histories and treatment plans. Improper
disclosure of this information or any failure by the Company's
8
<PAGE>
systems to provide accurate and timely information could result in claims
against the Company by its clients or their patients. A successful claim
brought against the Company in excess of its insurance coverage could have a
material adverse effect on the Company's business or results of operations,
and even unsuccessful claims could result in the expenditure of substantial
funds in litigation and the diversion of management time and resources. There
can be no assurance that the Company will not be subject to such claims in the
future, that such claims will not result in liability in excess of any
insurance coverage maintained by the Company with respect to such claims, that
insurance will cover such claims or that appropriate insurance will continue
to be available to the Company at commercially reasonable rates.
Substantial Distribution of Offering Proceeds to Current Shareholders. In
connection with the termination of the Company's status as an S corporation
under the Internal Revenue Code of 1986, as amended (the "Code"), the Company
intends to pay a distribution, estimated at $14,500,000, from the proceeds of
this offering to shareholders of record as of April 30, 1996. The Company
expects to make an additional distribution, estimated at $2,300,000, to the
same shareholders on May 15, 1997. These distributions will be made to such
shareholders in the following percentages: 58.75% to Dr. Sidney A. Goldblatt;
13.75% to Bradley L. Goldblatt, Dr. Goldblatt and Nina M. Dmetruk, as trustees
for the benefit of Bradley L. Goldblatt; 13.75% to Bradley L. Goldblatt, Dr.
Goldblatt and Ms. Dmetruk, as trustees for the benefit of Curtis S. Goldblatt;
and 13.75% to Jodi Beth Gottlieb, Dr. Goldblatt and Ms. Dmetruk, as trustees
for the benefit of Jodi Beth Gottlieb (such trusts being collectively referred
to herein as the "Trusts"). Purchasers of Common Stock in this offering will
not receive any portion of either distribution. See "Use of Proceeds," "S
Corporation Distributions and Termination of S Corporation Status" and
"Certain Transactions."
Control by Current Shareholders; Payments upon Change in Control. Upon
completion of this offering, Dr. Sidney A. Goldblatt and the Trusts will own
approximately 79.9% of the outstanding Common Stock (or approximately 77.5% if
the Underwriters exercise the over-allotment option in full). As a result,
these shareholders, if acting in concert, will be able to elect or remove the
entire Board of Directors and control the outcomes of all other issues
submitted to the Company's shareholders for approval. This concentration of
ownership may enable Dr. Goldblatt and the Trusts to cause or prevent a change
in control of the Company without the approval of other shareholders. There
can be no assurance that this concentration of ownership will not have a
material adverse effect on the market price of the Common Stock. In the event
that Dr. Goldblatt, his three children and trusts created for their benefit
(including the Trusts) cease to own, directly or indirectly, fifty percent or
more of the outstanding stock of the Company, Ms. Dmetruk will be entitled to
elect, during the ninety days following such event, to terminate her
employment with the Company and receive $1.2 million in severance pay. See
"Principal Shareholders."
Limitations on Director Liability; Indemnification. As permitted by
Pennsylvania law, the Articles of Incorporation and Bylaws of the Company
provide that a director shall not be personally liable, in such capacity, for
monetary damages for any action taken, or any failure to take any action,
unless the director has breached or failed to perform the duties of a director
under the Pennsylvania Business Corporation Law and such breach or failure to
perform constitutes self-dealing, willful misconduct or recklessness. As a
result of these provisions, the directors will not be liable to the
shareholders for negligence or even gross negligence in the performance of
their duties as directors. The Bylaws of the Company also provide that all
directors and officers and certain other persons shall be indemnified to the
fullest extent permitted by law in connection with each such person's service
to the Company, with certain limited exceptions. See "Description of Capital
Stock--Limitations on Director Liability and Indemnification."
Effect of Certain Statutory Anti-Takeover Provisions. The Company is subject
to certain anti-takeover provisions of the Pennsylvania Business Corporation
Law. Under these provisions, certain transactions with an "interested
shareholder" must be approved by a majority of votes that all shareholders,
other than the interested shareholder, are entitled to cast, and if any person
or group acquires 20% or more of the voting power of the Company, with certain
exceptions, the remaining shareholders may elect to sell their shares to such
person or group for the fair value of the shares, including a proportionate
amount of any control premium. In addition,
9
<PAGE>
there are special requirements for business combinations between the Company
and interested shareholders, certain restrictions on the voting of shares by
persons who acquire 20% or more of the voting power of the Company, and
requirements for the disgorgement of profits in certain circumstances. See
"Description of Capital Stock--Anti-Takeover Provisions of Pennsylvania Law."
These provisions may have the effect of deterring hostile takeovers or
delaying or preventing changes in control or management of the Company,
including transactions in which shareholders might otherwise receive a premium
for their shares over then current market prices.
Transactions with Affiliates. The Company has historically engaged in
numerous transactions with affiliates, including Dr. Sidney A. Goldblatt, the
President and Chief Executive Officer of the Company, the Trusts and certain
affiliates of the Trusts. See "Certain Transactions." Although the Company
took precautions to achieve results which the Company believes were equivalent
to arm's-length transactions, there can be no assurance that actual results
will be as favorable to the Company as arm's-length transactions. Prior to the
closing of the offering, the Company will adopt a policy that all future
transactions between the Company and its officers, directors, principal
shareholders and their affiliates shall be on terms no less favorable to the
Company than could be obtained by the Company from unrelated third parties,
and shall be approved by a majority of the outside independent and
disinterested directors. This policy will not, however, apply to transactions
entered into before the adoption of the policy or to renewals of existing
transactions on similar terms.
Broad Management Discretion in Use of Proceeds. The Company intends to use
the net proceeds of this offering, other than proceeds used to pay the First S
Corporation Distribution (as defined below), for working capital and general
corporate purposes, including potential acquisitions of businesses,
technologies or products. Accordingly, the Company will have broad discretion
as to the application of such net proceeds. Purchasers of Common Stock in this
offering will not have the opportunity to evaluate the economic, financial or
other information that the Company will use to determine the application of
such proceeds. See "Use of Proceeds."
Risks Associated with Identifying and Integrating Acquisitions. A
substantial portion of the net proceeds of this offering and other funds
available to the Company may be used to acquire complementary products,
technologies or businesses in the HCIS industry. The Company's management has
limited experience in identifying appropriate acquisitions and in integrating
products, technologies and businesses into its operations. The evaluation,
negotiation and integration of any such acquisition may divert the time,
attention and resources of the Company, particularly its management. In
addition, there is significant competition for acquisition opportunities in
the HCIS industry. Consolidation in the industry may intensify such
competition and thereby increase the costs of such opportunities. There can be
no assurance that the Company will be able to integrate successfully any
acquired products, technologies or businesses into its current operations. The
failure to do so could have a material adverse effect on the Company's
business and results of operations. See "Use of Proceeds."
No Prior Public Market; Possible Volatility of Stock Price. Prior to this
offering, there has been no public market for the Company's Common Stock. Each
of Volpe, Welty & Company and Punk, Ziegel & Knoell, L.P. has advised the
Company that it currently intends to make a market in the Common Stock.
Neither such firm is obligated to do so, however, and any market-making
activities with respect to the Common Stock may be discontinued at any time
without notice. In addition, such market-making activities will be subject to
the limits imposed by the Securities Act and the Securities Exchange Act of
1934, as amended. Accordingly, there can be no assurance that an active
trading market will develop or be sustained after this offering. The initial
public offering price of the shares of Common Stock offered hereby was
determined by negotiations between the Company and the Representatives of the
Underwriters and may not be indicative of the price at which the Common Stock
will trade after this offering. See "Underwriting" for the factors considered
in determining the initial public offering price. In recent years, the stock
market in general, and the shares of software technology companies in
particular, have experienced extreme price fluctuations that are often
unrelated to the operating performance of such companies. These broad market
and industry fluctuations may adversely affect the market price of the Common
Stock. The Company also believes that factors such as quarterly fluctuations
in its revenues
10
<PAGE>
or results of operations, general conditions in the information technology
services industry and announcements of new products or services by the Company
or its competitors may cause the market price of the Common Stock to fluctuate
significantly.
Existence of Additional Authorized but Unissued Shares. The Amended and
Restated Articles of Incorporation of the Company (the "Articles") authorize
the issuance of up to 35,000,000 shares of Common Stock, of which 14,904,000
shares will be outstanding immediately after the closing of this offering. An
additional 2,950,000 shares of Common Stock have been reserved for issuance
pursuant to the Company's stock incentive and stock purchase plans, of which
options to purchase 790,000 shares of Common Stock were granted on the date of
this Prospectus. The Articles also authorize the issuance of up to 15,000,000
shares of Preferred Stock. The Company could issue, upon the approval of only
the Board of Directors (unless the nature of transaction would require
shareholder approval), up to an additional 17,146,000 shares of Common Stock
and up to 15,000,000 shares of Preferred Stock for various corporate purposes,
including public and private stock offerings and merger transactions.
Consequently, the Board of Directors will have broad discretion as to future
issuances of capital stock. In addition, the Board of Directors may issue
classes or series of Preferred Stock with voting, dividend or other rights that
may adversely affect the rights of the holders of Common Stock. See
"Description of Capital Stock."
Shares Eligible for Future Sale. Sales of a substantial number of shares of
Common Stock in the public market or the prospect of such sales could adversely
affect the market price of the Common Stock and could impair the ability of the
Company to raise capital through an offering of its equity securities. Upon
completion of this offering and assuming no exercise of the Underwriters' over-
allotment option, the Company will have 14,904,000 shares of Common Stock
outstanding, of which the shares offered hereby will be freely tradeable,
except that shares purchased by "affiliates" of the Company, as that term is
defined in Rule 144 promulgated under the Securities Act, may generally only be
resold in compliance with the conditions of Rule 144. All of the 11,904,000
shares of Common Stock outstanding prior to this offering are subject to lock-
up agreements under which each of the holders of such shares has agreed with
the Underwriters that it will not sell, offer, contract or grant any option or
other right to sell or otherwise dispose of any of the Company's equity
securities, or securities exchangeable or exercisable for or convertible into
the Company's equity securities, or publicly announce an intention to do any of
the foregoing, until 180 days after the date of this Prospectus, without the
prior written consent of Volpe, Welty & Company. In its sole discretion and
without any prior notice, Volpe, Welty & Company may release all or any portion
of the shares subject to lock-up agreements. In recent offerings in which it
has served as lead manager of underwriters, Volpe, Welty & Company has
consented to early releases from lock-up agreements only in a limited number of
instances, after considering all circumstances that it deemed to be relevant.
Volpe, Welty & Company will, however, have complete discretion in determining
whether to consent to early releases from the lock-up agreements delivered in
connection with this offering, and no assurance can be given that it will not
consent to the early release of all or a portion of the shares of Common Stock
and options covered by such lock-up agreements. Upon the expiration of the
lock-up period (or earlier with the consent of Volpe, Welty & Company), all of
the 11,904,000 shares of Common Stock outstanding prior to this offering will
be owned by holders that either (i) will be "affiliates" of the Company within
the meaning of Rule 144 and eligible to sell such shares in the public market
pursuant to Rule 144, subject to compliance with the volume limitations and
other restrictions of Rule 144, or (ii) will have entered into agreements with
the Company and the Representatives providing that such holders may sell such
shares only in accordance with volume limitations identical to those set forth
in Rule 144. As soon as practicable after the closing of this offering, the
Company intends to file a registration statement on Form S-8 to register under
the Securities Act 450,000 shares of Common Stock reserved for issuance under
the Company's employee stock purchase plan. Approximately 90 days after the
closing of this offering, the Company intends to file a registration statement
on Form S-8 to register 2,500,000 shares of Common Stock reserved for issuance
under the Company's stock incentive plan. See "Management--Stock Incentive
Plan," "--Employee Stock Purchase Plan," "Shares Eligible for Future Sale" and
"Underwriting."
11
<PAGE>
Foreign Sales. Although the Company intends to increase sales of its
systems and services to clients located outside the United States, such sales
have accounted for less than ten percent of the Company's total revenues in
each of 1993, 1994, 1995 and the three months ended March 31, 1996. The
Company's operations outside the United States are subject to the risks that
agreements may be more difficult to enforce and receivables more difficult to
collect through a foreign country's legal system; foreign customers often have
longer payment cycles; foreign countries could make unexpected changes in
regulatory requirements or be the subject of significant political and
economic instability; foreign subsidiaries, distributors and sales
representatives may be difficult to manage; foreign countries could impose
additional withholding taxes or otherwise tax the Company's foreign income,
impose tariffs or adopt other restrictions on foreign trade; and intellectual
property rights may be more difficult to enforce in foreign countries. There
can be no assurance that any of these factors will not have a material adverse
effect on the Company's future international sales and, consequently, on the
Company's business, financial condition and results of operations. In
addition, exchange rate fluctuations may render the Company's products less
competitive relative to local product offerings, or could result in foreign
exchange losses, depending upon the currency in which the Company sells its
products. To date, the Company has not engaged in exchange rate hedging
activities to minimize the risks of such fluctuations. The Company may seek to
implement hedging techniques in the future with respect to its foreign
currency transactions. There can be no assurance, however, that the Company
will be successful in such hedging activities. See "Business--Marketing."
Dilution. Investors purchasing shares of Common Stock in this offering will
incur immediate and substantial dilution in the net tangible book value of the
Common Stock from the initial public offering price. See "Dilution."
No Dividends Contemplated. Other than the S Corporation Distributions (as
defined below), the Company does not anticipate that it will pay any dividends
on its Common Stock in the foreseeable future. The Company currently intends
to retain earnings, if any, to fund the development and growth of its
business. The Company has a bank line of credit agreement and a mortgage
guarantee that prohibit the payment of any capital distributions or dividends
other than the S Corporation Distributions. See "Dividend Policy."
12
<PAGE>
THE COMPANY
The Company was incorporated in Arizona in September 1979 and became a
Pennsylvania corporation in January 1996 through the process of domestication.
On May 30, 1996, all of the outstanding stock of Sunquest Europa Limited, a
United Kingdom corporation ("Sunquest Europa"), and Sunquest Germany GmbH, a
German corporation ("Sunquest Germany"), were transferred to the Company by
certain of its shareholders as a capital contribution. See "Certain
Transactions." The Company's principal executive offices are located at 4801
East Broadway Boulevard, Tucson, Arizona 85711, and its telephone number is
(520) 570-2000. Unless the context otherwise requires, the terms "Company" and
"Sunquest" include Sunquest Information Systems, Inc., Sunquest Europa and
Sunquest Germany.
USE OF PROCEEDS
The net proceeds to the Company of the sale of the shares of Common Stock
offered hereby are estimated to be approximately $43,640,000, after deducting
underwriting discounts and commissions and estimated offering expenses.
The principal purposes of this offering are to create a public market for
the Common Stock, to facilitate the Company's future access to capital markets
and to enhance the Company's ability to use Common Stock as consideration for
future acquisitions. The Company intends to use an estimated $14,500,000 of
the net proceeds of this offering to make the First S Corporation Distribution
(as defined below), which is expected to be paid in full on the thirtieth
business day following the closing of this offering. All of the First S
Corporation Distribution will be paid to Dr. Sidney A. Goldblatt and the
Trusts. The Company does not intend to pay the Second S Corporation
Distribution (as defined below), estimated at $2,300,000, out of the net
proceeds of this offering. See "S Corporation Distributions and Termination of
S Corporation Status."
Approximately $3,600,000 of the First S Corporation Distribution will be
contributed by the Trusts to the capital of Any Travel, Inc. ("Any Travel"), a
corporation owned by the Trusts, and will be used by Any Travel to repay
certain indebtedness of Any Travel to the Company on the thirtieth business
day following the closing of this offering. See "Risk Factors--Substantial
Distribution of Offering Proceeds to Current Shareholders," "Certain
Transactions" and Note 9 of Notes to Combined Financial Statements.
The Company intends to use the balance of the net proceeds of this offering
for general corporate purposes, including working capital. A portion of the
net proceeds of this offering may be used to acquire complementary products,
technologies or businesses in the health care industry. Under the Company's
existing bank line of credit, the Company may not, without the consent of the
lender bank: (i) acquire a business or its assets for consideration in excess
of $1,500,000 for each such acquisition or in excess of $3,000,000 for all
such acquisitions; or (ii) acquire a business through a "hostile" or
"unfriendly" acquisition. Although the Company has from time to time engaged
in discussions with respect to potential acquisitions, it has no present
plans, intentions, understandings, commitments or agreements, nor is it
currently engaged in any negotiations, with respect to any such transaction.
Pending such uses, the Company intends to invest the net proceeds of this
offering in government securities or short-term, investment-grade interest-
bearing instruments. The Company currently has no other specific plans for the
use of the net proceeds of this offering, and the Company's management will
have broad discretion in applying the portion of the net proceeds not used to
make the First S Corporation Distribution. See "Risk Factors--Broad Management
Discretion in Use of Proceeds."
13
<PAGE>
S CORPORATION DISTRIBUTIONS AND TERMINATION OF S CORPORATION STATUS
From January 1, 1990 to May 29, 1996, the Company was treated for federal
and certain state income tax purposes as an S corporation under the Code. As a
result, the Company's shareholders, rather than the Company, were required to
pay federal and certain state income taxes based on the Company's taxable
earnings up to May 29, 1996 ("S Corporation Earnings"), whether or not such
amounts were distributed to the Company's shareholders. The Company has made
periodic distributions to its shareholders in amounts greater than or equal to
the shareholders' tax liabilities associated with the Company's annual S
Corporation Earnings. The Company made distributions to its shareholders of
approximately $2,216,000, $3,622,000, $4,337,000 and $531,000 in 1993, 1994,
1995 and the four months ended April 30, 1996, respectively.
In April 1996, the Company declared a dividend (the "First S Corporation
Distribution") to shareholders of record as of April 30, 1996, in an amount,
estimated at $14,500,000, equal to the Company's undistributed cumulative S
Corporation Earnings from January 1, 1990 through December 31, 1995. The First
S Corporation Distribution will be paid in full on the thirtieth business day
following the closing date of this offering and will be paid from the proceeds
of this offering. See "Use of Proceeds." In April 1996, the Company declared a
second dividend (the "Second S Corporation Distribution") to shareholders of
record as of April 30, 1996, in an amount, estimated at $2,300,000, equal to
the Company's undistributed cumulative S Corporation Earnings from January 1,
1996 to May 29, 1996. The Second S Corporation Distribution will be calculated
in accordance with Section 1362(e)(3) of the Code, which provides for an
allocation of the Company's taxable earnings for the calendar year 1996 using
normal tax accounting rules. The Company expects to pay the Second S
Corporation Distribution in full on May 15, 1997. Purchasers of Common Stock
in this offering will not receive any portion of either the First S
Corporation Distribution or the Second S Corporation Distribution (together,
the "S Corporation Distributions").
The Company has entered into an agreement (the "Tax Indemnification
Agreement") with its existing shareholders providing for, among other things,
the indemnification of the Company by those shareholders for any federal and
state income taxes (including interest) incurred by the Company if for any
reason the Company is deemed to have been a C corporation during any period
for which it reported its taxable income as an S corporation. The Tax
Indemnification Agreement further provides for the cross-indemnification of
the Company and each of its existing shareholders for any losses or
liabilities with respect to certain additional taxes (including interest and,
in the case of the existing shareholders, penalties) resulting from the
Company's operations during the period in which it reported its taxable income
as an S corporation. See "Certain Transactions." Purchasers of Common Stock in
this offering will not be parties to the Tax Indemnification Agreement.
Upon the capital contribution to the Company of all of the outstanding stock
of Sunquest Europa and Sunquest Germany by the Trusts on May 30, 1996, the
Company's status as an S corporation terminated and, accordingly, the Company
will be subject to all applicable federal and state income taxes.
DIVIDEND POLICY
The Company anticipates that following the closing of this offering it will
retain future earnings, if any, to fund the development and growth of its
business and does not anticipate paying any cash dividends in the foreseeable
future, other than the S Corporation Distributions. The Company has a bank
line of credit agreement and a mortgage guarantee that prohibit the payment of
any capital distributions or dividends other than the S Corporation
Distributions. See "Risk Factors--No Dividends Contemplated," "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources" and Note 6 of Notes to Combined Financial
Statements.
14
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1996: (i) the actual
capitalization of the Company; (ii) the pro forma capitalization of the
Company after giving effect to the capital contribution to the Company of all
of the outstanding stock of Sunquest Europa and Sunquest Germany, the
declaration of the First S Corporation Distribution and the Second S
Corporation Distribution and the incurrence of the net deferred income tax
liability resulting from the termination of the Company's S corporation
status; and (iii) the pro forma capitalization of the Company as adjusted to
reflect the receipt of the estimated net proceeds from the sale of the
3,000,000 shares of Common Stock offered hereby. This table should be read in
conjunction with the Combined Financial Statements and Notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Long-term obligations:
Obligations under capital leases from related
party, net of current portion................. $ 6,254 $ 6,254 $ 6,254
------- ------- -------
Shareholders' equity:
Preferred stock, 15,000,000 shares authorized,
no shares issued or outstanding............... -- -- --
Common stock, no par value, 35,000,000 shares
authorized; 11,904,000 shares issued and
outstanding, actual and pro forma; 14,904,000
shares issued and outstanding, pro forma as
adjusted(1)................................... 57 74 43,714
Retained earnings.............................. 22,123 4,191 4,191
Other.......................................... (30) (47) (47)
------- ------- -------
Total shareholders' equity.................... 22,150 4,218 47,858
------- ------- -------
Total capitalization......................... $28,404 $10,472 $54,112
======= ======= =======
</TABLE>
- --------
(1) In March 1996, the Company adopted its Stock Incentive Plan of 1996 and
Employee Stock Purchase Plan and reserved 2,950,000 shares of Common Stock
for issuance under these plans. As of March 31, 1996, no options had been
issued under these plans. See "Management--Stock Incentive Plan" and "--
Employee Stock Purchase Plan."
15
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of March 31, 1996
was a deficiency of $59,000, or $0.005 per share of Common Stock. Pro forma
net tangible book value per share represents the amount of the Company's net
tangible assets, less total liabilities, divided by the number of shares of
Common Stock outstanding, after giving effect to the capital contribution to
the Company of all of the outstanding stock of Sunquest Europa and Sunquest
Germany, the declaration of the First S Corporation Distribution and the
Second S Corporation Distribution and the incurrence of the net deferred
income tax liability resulting from the termination of the Company's S
corporation status. After giving effect to the sale of the 3,000,000 shares of
Common Stock offered hereby and after deducting underwriting discounts and
commissions and estimated offering expenses, the Company's pro forma net
tangible book value as of March 31, 1996 would have been $43,581,000 or $2.924
per share. This represents an immediate increase in pro forma net tangible
book value of $2.929 per share to existing shareholders and an immediate
dilution of $13.076 per share to new investors purchasing shares of Common
Stock in this offering. The following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $16.000
Pro forma net tangible book value per share as of March 31,
1996........................................................ $ (0.005)
Increase per share attributable to new investors........... 2.929
--------
Pro forma net tangible book value per share after the
offering.................................................... 2.924
-------
Net tangible book value dilution per share to new
investors................................................... $13.076
=======
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1996,
the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by existing
shareholders and by the new investors.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders...... 11,904,000 79.9% $ 74,000 0.2% $ 0.01
New investors.............. 3,000,000 20.1 48,000,000 99.8 $16.00
---------- ----- ----------- -----
Total.................... 14,904,000 100.0% $48,074,000 100.0%
========== ===== =========== =====
</TABLE>
16
<PAGE>
SELECTED COMBINED FINANCIAL DATA
The following selected combined financial data should be read in conjunction
with the Combined Financial Statements and Notes thereto included elsewhere in
this Prospectus and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The balance sheet data as of December
31, 1994 and 1995 and the statement of income data for each of the three years
in the period ended December 31, 1995 have been derived from the Company's
Combined Financial Statements, which have been audited (except for pro forma
data) by Ernst & Young LLP, independent auditors, and which are included
elsewhere herein. The balance sheet data as of December 31, 1991, 1992 and
1993 and the statement of income data for each of the two years in the period
ended December 31, 1992 have been derived from unaudited financial statements
which are not included herein. The balance sheet data as of March 31, 1996 and
the statement of income data for the three months ended March 31, 1995 and
1996 have been derived from the Company's unaudited Combined Financial
Statements, which have been prepared on the same basis as the audited Combined
Financial Statements included elsewhere in this Prospectus, and in the opinion
of the Company's management reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
position and results of operations for these periods. The results for the
three months ended March 31, 1996 are not necessarily indicative of results
for any future period.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Revenues:
System sales........... $46,679 $44,821 $43,142 $38,416 $32,262 $ 6,961 $ 8,557
Support and service.... 9,465 13,149 20,317 24,202 29,270 6,603 8,160
------- ------- ------- ------- ------- ------- -------
Total revenues........ 56,144 57,970 63,459 62,618 61,532 13,564 16,717
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Cost of system sales... 24,017 19,875 21,820 16,711 14,085 3,694 3,652
Client services........ 11,375 14,229 16,349 17,116 17,764 4,464 4,669
Research and
development........... 4,496 6,055 6,958 7,734 9,040 2,152 2,387
Sales and marketing.... 4,146 4,298 6,554 6,957 8,734 2,044 2,400
General and
administrative........ 6,159 7,102 6,909 6,847 7,068 1,855 1,932
------- ------- ------- ------- ------- ------- -------
Total operating
expenses.............. 50,193 51,559 58,590 55,365 56,691 14,209 15,040
------- ------- ------- ------- ------- ------- -------
Operating income
(loss).................. 5,951 6,411 4,869 7,253 4,841 (645) 1,677
Other income (expense):
Interest income........ 74 465 163 317 408 126 90
Interest expense....... (385) (1,054) (881) (1,288) (1,465) (365) (387)
Other.................. 454 (442) 767 23 78 9 186
Abandonment of
leasehold............. -- (703) -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes............ 6,094 4,677 4,918 6,305 3,862 (875) 1,566
State income tax
provision (benefit)..... -- -- 76 91 73 (17) 31
------- ------- ------- ------- ------- ------- -------
Net income (loss)....... $ 6,094 $ 4,677 $ 4,842 $ 6,214 $ 3,789 $ (858) $ 1,535
======= ======= ======= ======= ======= ======= =======
Pro forma data(1):
Pro forma income before
income taxes.......... $ 3,536 $ 1,491
Pro forma income tax
provision............. 1,521 641
------- -------
Pro forma net income... $ 2,015 $ 850
======= =======
Pro forma net income
per common share...... $ .16 $ .07
======= =======
Pro forma weighted
average number of
common shares
outstanding........... 12,762 12,842
======= =======
BALANCE SHEET DATA (AT
END OF PERIOD):
Cash and cash
equivalents............ $ 383 $ 1,208 $ 1,725 $ 1,189 $ 352 $ 966
Working capital......... 2,617 3,324 6,223 5,078 3,963 5,738
Total assets............ 36,505 33,842 36,992 42,068 43,874 45,441
Long-term debt and
obligations under
capital leases
from related party, net
of current portion..... 6,197 5,466 4,832 7,107 6,396 6,254
Total shareholders'
equity................. 15,685 16,032 18,658 21,251 20,701 22,150
</TABLE>
- --------
(1) Pro forma net income has been computed assuming the elimination of related
party interest income and using an estimated income tax rate of 43%. Pro
forma net income per common share has been computed giving effect to the
assumed issuance, as of the beginning of the pro forma periods presented,
of the number of shares of Common Stock necessary to replace the equity
distributed as a result of the First S Corporation Distribution. See "S
Corporation Distributions and Termination of S Corporation Status," "Use
of Proceeds" and Note 2 of Notes to Combined Financial Statements.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Sunquest designs, develops, markets, installs and supports HCISs for large
and mid-sized hospitals, clinics and other facilities, including IDNs. At
March 31, 1996, the Company had contracts with approximately 440 clients
representing more than 600 sites in the United States, Canada and the United
Kingdom. Total revenues are derived from the licensing of software, the
provision of value added services and the sale of related hardware. To date,
substantially all of the Company's revenues have been derived from the sale of
its LISs and related hardware, support and services.
Revenues from system sales include revenues from software licenses, related
hardware, relicensed software and resold software. Revenues from software
licenses are generated from contracts that grant the right to use the
Company's software products. Hardware revenues are generated from sales of
third-party manufactured hardware which is typically sold in conjunction with
the Company's software. Revenues from relicensed software and resold software
are generated from the Company's licensing and sale of third-party software.
Support and service revenues include revenues from installation, training and
documentation related to software license revenues, miscellaneous consulting
revenues and revenues associated with maintenance and support services.
The Company's total revenues were $61.5 million, $62.6 million and $63.5
million in 1995, 1994 and 1993, respectively, decreasing 1.7% from 1994 to
1995 and 1.3% from 1993 to 1994. System sales revenues were $32,262,000,
$38,416,000 and $43,142,000 in 1995, 1994 and 1993, decreasing 16.0% from 1994
to 1995 and 11.0% from 1993 to 1994. The Company believes that the decline in
revenues from 1993 to 1995 has been caused by several factors, including: (i)
reductions in hardware manufacturers' list pricing; (ii) uncertainty in the
health care community relative to the extent of possible government
intervention in the existing health care financing system; (iii) a
reallocation of Company resources from site installations to research and
development activities focused on enhancing existing products and developing
systems; and (iv) restructuring within the Company's management and its sales
and marketing department.
The sales cycle for the Company's systems is typically nine to 15 months
from initial contact to contract execution, and depending upon the combination
of products purchased and the client's installation schedule, an installation
typically takes from eight to 12 months. Revenues from the software portion of
system sales are recognized on the percentage-of-completion method in
accordance with Statement of Position 91-1, "Software Revenue Recognition,"
based upon completion of specified milestones. Anticipated losses are recorded
in the earliest period in which such losses become evident. Revenues from the
hardware portion of systems sales are recognized upon shipment. Maintenance
and support services are provided under multi-year renewable agreements with
revenues recognized ratably over the term of the agreement. Fees for other
services are recognized as the work is performed or on a percentage-of-
completion basis.
At March 31, 1996, the Company had a total contract backlog of $71.6
million, which consisted of $36.7 million of system sales and $34.9 million of
support and service. At March 31, 1995, total contract backlog was $49.4
million, which consisted of $25.3 million of system sales and $24.1 million of
support and service. System sales backlog consists of the unearned amounts of
signed contracts which have not yet been recognized as revenues. Support and
service backlog consists primarily of contracted software support for a period
of 12 months. The Company is unable to predict accurately the amount of
backlog it expects to fill in any particular period, since it adjusts the
timing of installations to accommodate clients' needs and since installations
typically require eight to 12 months to complete.
18
<PAGE>
Capitalized software development costs are stated at the lower of net
amortized cost or net realizable value. The Company capitalizes software
development costs incurred from the point of technological feasibility until
the product is ready for general release to the public. Amortization of
capitalized software costs begins when the related product is available for
general release to customers and is provided for each product based on the
greater of the relationship of current year revenues of the product to
anticipated total revenues or the straight-line amortization of such costs
over a five-year period.
From January 1, 1990 to May 29, 1996, the Company was treated for federal
and certain state income tax purposes as an S corporation under the Code and
similar state statutes. As a result, the Company's shareholders, rather than
the Company, were required to pay federal and certain state income taxes based
on the Company's taxable earnings. Current state income taxes have been
provided for those states that tax the Company as a C corporation. Upon the
capital contribution to the Company of all of the outstanding stock of
Sunquest Europa and Sunquest Germany by the Trusts on May 30, 1996, the
Company's S corporation status terminated.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the Company's combined statements of income expressed as a percentage of
total revenues.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------- ---------------
1991 1992 1993 1994 1995 1995 1996
----- ----- ----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
System sales............. 83.1% 77.3% 68.0% 61.3% 52.4% 51.3% 51.2%
Support and service...... 16.9 22.7 32.0 38.7 47.6 48.7 48.8
----- ----- ----- ----- ----- ------ ------
Total revenues.......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ------ ------
Operating expenses:
Cost of system sales..... 42.7 34.3 34.4 26.7 22.9 27.2 21.8
Client services.......... 20.3 24.5 25.8 27.3 28.8 32.9 27.9
Research and
development............. 8.0 10.4 11.0 12.4 14.7 15.8 14.3
Sales and marketing...... 7.4 7.4 10.3 11.1 14.2 15.1 14.4
General and
administrative.......... 11.0 12.3 10.9 10.9 11.5 13.7 11.5
----- ----- ----- ----- ----- ------ ------
Total operating
expenses............... 89.4 88.9 92.4 88.4 92.1 104.7 89.9
----- ----- ----- ----- ----- ------ ------
Operating income (loss)... 10.6 11.1 7.6 11.6 7.9 (4.7) 10.1
Other income (expense):
Interest income.......... 0.1 0.8 0.3 0.5 0.7 0.9 0.5
Interest expense......... (0.7) (1.8) (1.4) (2.1) (2.4) (2.7) (2.3)
Other.................... 0.8 (0.8) 1.2 -- 0.1 0.1 1.1
Abandonment of
leasehold............... -- (1.2) -- -- -- 0.0 0.0
----- ----- ----- ----- ----- ------ ------
Income before income
taxes.................... 10.8 8.1 7.7 10.0 6.3 (6.4) 9.4
State income tax provision
(benefit)................ -- -- 0.1 0.1 0.1 (0.1) 0.2
----- ----- ----- ----- ----- ------ ------
Net income................ 10.8% 8.1% 7.6% 9.9% 6.2% (6.3)% 9.2%
===== ===== ===== ===== ===== ====== ======
</TABLE>
Comparison of Three Months Ended March 31, 1996 and March 31, 1995
Revenues. The Company's total revenues were $16.7 million for the three
months ended March 31, 1996 compared to $13.6 million for the three months
ended March 31, 1995, an increase of $3.1 million, or 23.2%. Revenues from
system sales were $8.6 million for the three months ended March 31, 1996
compared to $7.0 million for the three months ended March 31, 1995, an
increase of $1.6 million, or 22.9%. This increase was primarily attributable
to an increase in installations of products for both existing and new
customers. Revenues from support and service were $8.2 million for the three
months ended March 31, 1996 compared to $6.6 million for the three months
ended March 31, 1995, an increase of $1.6 million, or 23.6%. This increase was
primarily attributable to the Company's increased installed customer base.
19
<PAGE>
Cost of System Sales. Cost of system sales includes the costs of computer
hardware, relicensed software and resold software purchased from third parties
and amortization of previously capitalized software development costs. Cost of
system sales was $3.7 million for each of the three months ended March 31,
1996 and 1995. Amortization of previously capitalized software development
costs was $531,000 for the three months ended March 31, 1996 compared to
$432,000 for the three months ended March 31, 1995, an increase of $99,000, or
22.9%. This increase was primarily attributable to increased capitalized
software development costs in 1995.
Client Services. Client services expenses include salaries and expenses of
product installation and support. Client services expenses were $4.7 million
for the three months ended March 31, 1996 compared to $4.5 million for the
three months ended March 31, 1995, an increase of $205,000, or 4.6%. As a
percentage of total revenues, client services expenses were 27.9% for the
three months ended March 31, 1996 compared to 32.9% for the three months ended
March 31, 1995, a decrease of 5.0%. The dollar increase in client services
expenses was primarily attributable to additional expenses related to
severance agreements resulting from a staff reduction in the first three
months of 1996 and salary adjustments resulting from the reclassification of
certain employees from exempt to salaried, non-exempt status.
Research and Development. Research and development expenses include salaries
and expenses related to development and documentation of software systems
reduced by capitalized software development costs. Research and development
expenses were $2.4 million for the three months ended March 31, 1996 compared
to $2.2 million for the three months ended March 31, 1995, an increase of
$235,000, or 10.9%. As a percentage of total revenues, research and
development expenses were 14.3% for the three months ended March 31, 1996
compared to 15.8% for the three months ended March 31, 1995. The dollar
increase in research and development expenses was primarily attributable to
increased quality control testing, enhancements to the managed care system and
development of a clinical documentation system. The Company capitalized
$797,000 of its software development costs for the three months ended March
31, 1996 compared to $668,000 for the three months ended March 31, 1995.
Sales and Marketing. Sales and marketing expenses include salaries,
commissions, advertising, trade show costs, and user group costs related to
the sale and marketing of the Company's systems. Sales and marketing expenses
were $2.4 million for the three months ended March 31, 1996 compared to $2.0
million for the three months ended March 31, 1995, an increase of $356,000, or
17.4%. This increase was primarily attributable to increased commissions
resulting from growth in sales bookings in the comparable three month periods,
increased customer promotional allowances, and increased expenses relating to
the establishment of channel sales opportunities.
General and Administrative. General and administrative expenses include
salaries and expenses for the corporate administration, finance, legal, human
resources, corporate education, facilities administration and internal
purchasing departments as well as depreciation, profit sharing, bonuses,
insurance, and capital lease amortization net of rental credit. General and
administrative expenses were $1.9 million for each of the three month periods
ended March 31, 1996 and 1995.
Comparison of Years Ended December 31, 1995 and December 31, 1994
Revenues. The Company's total revenues were $61.5 million in 1995 compared
to $62.6 million in 1994, a decrease of $1.1 million, or 1.7%. Revenues from
system sales were $32.3 million in 1995 compared to $38.4 million in 1994, a
decrease of $6.1 million, or 16.0%. This decrease was primarily attributable
to a reduction in installations of LISs, reflecting a lower level of system
bookings in 1994 due to weaker industry-wide demand and longer sales cycles
for LISs, changes in the Company's management, and actions taken by the
Company to refocus its sales and marketing efforts in response to changing
hospital purchasing patterns. This decrease also reflected a shift in the
Company's resources in 1995 toward the completion of a major release of its
LIS and
20
<PAGE>
toward the installation of a clinical repository system at the Company's
primary beta site. Revenues from support and service were $29.3 million in
1995 compared to $24.2 million in 1994, an increase of $5.1 million, or 20.9%.
This increase was primarily attributable to growth in the Company's installed
customer base. Approximately $673,000 of additional support and service
revenues were attributable to support of the Tandem systems of Ameritech
Knowledge Data, Inc. ("Ameritech"), pursuant to an agreement under which the
Company assumed responsibility for supporting the Ameritech Tandem systems in
return for the revenue from maintenance agreements in effect and the
opportunity to transition Ameritech's clients to Sunquest systems. This
agreement expired in December 1995 except with respect to one Ameritech client
site.
Cost of System Sales. Cost of system sales was $14.1 million in 1995
compared to $16.7 million in 1994, a decrease of $2.6 million, or 15.7%. This
decrease was primarily attributable to a lower level of system installations
in 1995. Amortization of previously capitalized software development costs was
$1.7 million for 1995 compared to $1.8 million for 1994, a decrease of
$34,000, or 1.9%.
Client Services. Client services expenses were $17.8 million in 1995
compared to $17.1 million in 1994, an increase of $648,000, or 3.8%. As a
percentage of total revenues, client services expenses were 28.8% in 1995
compared to 27.3% in 1994. The increase in client services expenses was
primarily attributable to additional staff dedicated to the support of the
Ameritech Tandem systems and to the installation of the Company's new clinical
repository systems at the Company's primary beta site.
Research and Development. Research and development expenses were $9.0
million in 1995 compared to $7.7 million in 1994, an increase of $1.3 million,
or 16.9%. As a percentage of total revenues, research and development expenses
were 14.7% in 1995 compared to 12.4% in 1994. The increase in research and
development expenses was primarily attributable to the Company's strategic
decisions to accelerate the completion of a new release of its LIS to December
1995, to complete quality control testing of its clinical repository systems
and to begin enhancements to its managed care systems. The Company capitalized
$2.8 million of its software development costs in 1995 compared to $2.0
million in 1994.
Sales and Marketing. These expenses were $8.7 million in 1995 compared to
$7.0 million in 1994, an increase of $1.8 million, or 25.5%. This increase was
primarily attributable to increased commissions resulting from a 27.5% growth
in sales bookings in 1995, increased sales efforts in the United Kingdom and
Germany, the addition of personnel dedicated to establishing sales
opportunities in new distribution channels, the addition of technical product
demonstrators, and additional advertising and mail campaigns promoting the
Company's new systems.
General and Administrative. General and administrative expenses were $7.1
million in 1995 compared to $6.8 million in 1994, an increase of $221,000, or
3.2%. This increase was primarily attributable to the full year impact of
additional staff hired in 1994, certain professional fees related to preparing
the Company for a public offering, and increased communication and maintenance
expenses.
Comparison of Years Ended December 31, 1994 and December 31, 1993
Revenues. The Company's total revenues were $62.6 million in 1994 compared
to $63.5 million in 1993, a decrease of $841,000, or 1.3%. Revenues from
system sales were $38.4 million in 1994 compared to $43.1 million in 1993, a
decrease of $4.7 million, or 11.0%. This decrease was primarily attributable
to reductions in list pricing from third party hardware manufacturers.
Revenues from support and service fees were $24.2 million in 1994 compared to
$20.3 million in 1993, an increase of $3.9 million, or 19.1%. This increase
was primarily attributable to growth in the Company's installed client base.
Cost of System Sales. Cost of system sales was $16.7 million in 1994
compared to $21.8 million in 1993, a decrease of $5.1 million, or 23.4%. Of
this decrease, $3.7 million was attributable to a change in revenue mix to
favor higher margin software components and $1.6 million was the result of
negotiated discounts. Amortization of previously capitalized software
development costs was $1.8 million for 1994 compared to $1.6 million for 1993,
an increase of $159,000, or 9.9%. This increase was primarily attributable to
increased capitalized software development costs in 1993.
21
<PAGE>
Client Services. Client services expenses were $17.1 million in 1994
compared to $16.3 million in 1993, an increase of $767,000, or 4.7%. As a
percentage of total revenues, client services expenses were 27.3% in 1994
compared to 25.8% in 1993. The increase in client services expenses was
primarily attributable to hiring new staff targeted to the installation of the
Company's clinical repository systems and to increased resources required to
install and support more complex LISs and a larger client base.
Research and Development. Research and development expenses were $7.7
million in 1994 compared to $7.0 million in 1993, an increase of $776,000, or
11.2%. As a percentage of total revenues, research and development expenses
were 12.4% in 1994 compared to 11.0% in 1993. The increase in research and
development expenses was primarily attributable to new staff dedicated to
improvements in technical documentation, quality control and new products. The
Company capitalized $2.0 million of its software development costs in 1994
compared to $1.9 million in 1993.
Sales and Marketing. Sales and marketing expenses were $7.0 million in 1994
compared to $6.6 million in 1993, an increase of $403,000, or 6.1%. This
increase was primarily attributable to the addition of a sales office in the
United Kingdom and additional resources in the contracts and proposals areas.
General and Administrative. General and administrative expenses were $6.8
million in 1994, comparable to $6.9 million in 1993.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited quarterly financial data
for each of the nine quarters in the period ended March 31, 1996, including
such amounts expressed as a percentage of total revenues. This quarterly
unaudited information has been prepared on the same basis as the annual
Combined Financial Statements included elsewhere in this Prospectus, and in
the opinion of the Company's management, reflects all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
information for the periods presented. The results of operations for any
quarter are not necessarily indicative of results for any future quarter.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1994 1994 1994 1994 1995 1995 1995 1995 1996
--------- -------- --------- -------- --------- -------- --------- -------- ---------
(IN THOUSANDS)
Revenues:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
System sales........... $ 9,751 $11,029 $ 8,422 $ 9,214 $ 6,961 $ 7,633 $ 8,593 $ 9,075 $ 8,557
Support and service.... 5,393 5,917 6,355 6,537 6,603 7,523 7,173 7,971 8,160
------- ------- ------- ------- ------- ------- ------- ------- -------
Total revenues........ 15,144 16,946 14,777 15,751 13,564 15,156 15,766 17,046 16,717
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Cost of system sales... 4,361 4,600 3,500 4,250 3,694 2,837 4,163 3,391 3,652
Client services........ 4,168 4,348 4,358 4,242 4,464 4,542 4,424 4,334 4,669
Research and
development........... 1,884 1,859 1,928 2,063 2,152 2,288 2,307 2,293 2,387
Sales and marketing.... 1,476 1,546 1,882 2,053 2,044 2,174 2,047 2,469 2,400
General and
administrative........ 1,565 1,919 1,695 1,668 1,855 1,778 1,647 1,788 1,932
------- ------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............. 13,454 14,272 13,363 14,276 14,209 13,619 14,588 14,275 15,040
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income
(loss)................. 1,690 2,674 1,414 1,475 (645) 1,537 1,178 2,771 1,677
Other income (expense):
Interest income........ 30 52 45 190 126 100 93 89 90
Interest expense....... (205) (289) (409) (385) (365) (359) (365) (376) (387)
Other.................. 87 44 (27) (81) 9 (39) 62 46 186
------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes........... 1,602 2,481 1,023 1,199 (875) 1,239 968 2,530 1,566
State income tax
provision (benefit).... 24 35 15 17 (17) 24 20 46 31
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)....... $ 1,578 $ 2,446 $ 1,008 $ 1,182 $ (858) $ 1,215 $ 948 $ 2,484 $ 1,535
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUES
-------------------------------------------------------------------------------------
QUARTER ENDED
-------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1994 1994 1994 1994 1995 1995 1995 1995 1996
--------- -------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
System sales........... 64.4% 65.1% 57.0% 58.5% 51.3% 50.4% 54.5% 53.2% 51.2%
Support and service.... 35.6 34.9 43.0 41.5 48.7 49.6 45.5 46.8 48.8
----- ----- ----- ----- ----- ----- ----- ----- -----
Total revenues........ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- ----- -----
Operating expenses:
Cost of system sales... 28.8 27.1 23.7 27.0 27.2 18.7 26.4 19.9 21.8
Client services........ 27.5 25.7 29.5 26.9 32.9 30.0 28.1 25.4 27.9
Research and
development........... 12.4 11.0 13.0 13.1 15.8 15.2 14.7 13.4 14.3
Sales and marketing.... 9.8 9.1 12.7 13.0 15.1 14.3 13.0 14.5 14.4
General and
administrative........ 10.3 11.3 11.5 10.6 13.7 11.7 10.4 10.5 11.5
----- ----- ----- ----- ----- ----- ----- ----- -----
Total operating
expenses............. 88.8 84.2 90.4 90.6 104.7 89.9 92.6 83.7 89.9
----- ----- ----- ----- ----- ----- ----- ----- -----
Operating income
(loss)................. 11.2 15.8 9.6 9.4 (4.7) 10.1 7.4 16.3 10.1
Other income (expense):
Interest income........ 0.2 0.3 0.3 1.2 0.9 0.8 0.6 0.5 0.5
Interest expense....... (1.4) (1.7) (2.8) (2.5) (2.7) (2.4) (2.3) (2.2) (2.3)
Other.................. 0.6 0.2 (0.2) (0.5) 0.1 (0.3) 0.4 0.3 1.1
----- ----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before
income taxes........... 10.6 14.6 6.9 7.6 (6.4) 8.2 6.1 14.9 9.4
State income tax
provision (benefit).... 0.2 0.2 0.1 0.1 (0.1) 0.2 0.1 0.3 0.2
----- ----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)....... 10.4% 14.4% 6.8% 7.5% (6.3)% 8.0% 6.0% 14.6% 9.2%
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
The Company's quarterly revenues and results of operations have varied
significantly as a result of a number of factors, including: the volume and
timing of systems sales and installations; the timing of client acceptances;
the length and complexity of the systems sales and installation cycles;
seasonal buying trends as a result of clients' annual purchasing and budgeting
practices; and the Company's sales commission practices. The Company expects
that these variations will continue for the foreseeable future. The timing of
revenue recognition is difficult to forecast because the Company's systems
sales and installation cycles are relatively long and frequently depend on
factors such as the size and scope of installations and general economic
conditions. During the sales cycle, the Company commits substantial time,
effort and funds to prepare a contract proposal and negotiate the contract. In
addition, the Company recognizes revenues from the software portion of system
sales on a percentage-of-completion method based upon completion of specified
milestones. As a result, the timing of revenue recognition varies considerably
and could be impeded by a number of factors, including availability of Company
personnel, the Company's need to allocate system installation resources to
other installations or to research and development activities, availability of
client personnel and other resources, complexity of clients' needs and delays
imposed by clients. Any delays in progress toward completing a system
installation could reduce the revenues recognized in any given period and
could have a material adverse effect on the Company's business and results of
operations. Because a significant percentage of the Company's total expenses,
particularly employee compensation, is relatively fixed, variations in the
timing of systems sales and installations can cause significant variations in
operating results from quarter to quarter. If total revenues are below
expectations in any period, the Company's inability to adjust spending to
compensate fully for the lower revenues may magnify the adverse effect of such
a shortfall on the Company's results of operations. Accordingly, the Company
believes that period-to-period comparisons of revenues and results of
operations are not necessarily meaningful and should not be relied upon as
indicators of future performance. See "Risk Factors--Significant Fluctuations
in Quarterly Operating Results; Revenue Recognition Policy."
23
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since inception in 1979, the Company has funded its operations primarily
through cash generated from operations. Cash provided by operating activities
was $6.5 million, $11.4 million and $5.4 million in 1993, 1994 and 1995,
respectively. Cash provided by operating activities was $3.5 million and $3.2
million in the three months ended March 31, 1995 and 1996. In 1995 and the
three months ended March 31, 1996, the Company also funded its operations in
part through borrowings under available lines of credit.
As of March 31, 1996, the Company had billed trade receivables of $16.2
million. The Company maintains an allowance for doubtful accounts that it
believes is adequate to cover any potential credit losses. The average
collection period on trade receivables was 83 days at December 31, 1994 and 63
days at December 31, 1995 and March 31, 1996. Management attributes the
improvement in collection period to accelerated collection efforts and
improved billing methodologies.
Cash used in investing activities was $3.1 million, $7.6 million, $4.5
million, $1.6 million and $1.3 million in 1993, 1994, 1995 and the three
months ended March 31, 1995 and 1996, respectively. Purchases of property and
equipment, consisting primarily of computers and computer-related equipment
and leasehold improvements, were $1.3 million, $2.4 million, $2.7 million,
$815,000 and $146,000 in 1993, 1994, 1995 and the three months ended March 31,
1995 and 1996, respectively. The remainder of cash used in investing
activities in each period was for capitalized software development costs. In
1994, the Company loaned $3.1 million to a related party in connection with
the purchase by the related party of an office complex which it subsequently
leased to the Company. After the closing of this offering, this related party
loan will be repaid. See "Use of Proceeds," "S Corporation Distributions and
Termination of S Corporation Status" and "Certain Transactions."
Cash used in financing activities was $2.9 million, $4.4 million, $1.7
million, $268,000 and $1.2 million in 1993, 1994, 1995 and the three months
ended March 31, 1995 and 1996, respectively. Cash flows relating to financing
activities have principally been comprised of S corporation distributions to
the Company's shareholders to fund payment of their individual tax liabilities
attributable to their respective allocations of the Company's income. These
cash distributions were $2.2 million, $3.6 million, $2.9 million, $87,000 and
$57,000 in 1993, 1994, 1995 and the three months ended March 31, 1995 and
1996, respectively. The Company made an additional distribution of $474,000 in
April 1996. The Company will pay the First S Corporation Distribution from the
proceeds of this offering and will pay the Second S Corporation Distribution
on May 15, 1997.
At March 31, 1996, cash and cash equivalents were $966,000 and working
capital was $5.7 million. At that date, the Company had no long-term debt and
did not have any material commitments for capital equipment.
At December 31, 1995, the Company had a line of credit providing working
capital of up to $5.0 million, under which $1.9 million was outstanding. On
March 13, 1996, the Company refinanced this line of credit and $150,000
current portion of long-term debt using proceeds from a $10.0 million line of
credit agreement entered into with the Bank of America Arizona on March 8,
1996. At March 31, 1996, $1.1 million was outstanding under the new line of
credit and $8.9 million was available to borrow. The new line of credit bears
interest at the reference rate of the Bank of America National Trust and
Savings Association unless the Company elects a fixed rate or certain variable
rates contemplated by the agreement. All outstanding principal and interest
under the line of credit are due September 30, 1996, except for any amounts
outstanding under stand-by letters of credit which have a maximum maturity of
365 days. Upon its expiration, the Company intends to renew the agreement or
enter into alternative bank financing arrangements. Borrowings under the line
of credit are secured by all of the Company's assets. This line of credit
contains requirements as to minimum levels of working capital, net worth and
cash flow, places restrictions on the incurrence of new debt and prohibits the
payment of any capital distributions or dividends other than the S Corporation
Distributions. Moreover, the Company may not, without the consent of the Bank
of America Arizona: (i) acquire a business or its assets for consideration in
excess of $1.5 million for each such acquisition or in excess of $3.0 million
for all such acquisitions; (ii) acquire a business
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through a "hostile" or "unfriendly" acquisition; (iii) make loans to any
related party in excess of $4.5 million; or (iv) allow the ownership interests
of Dr. Goldblatt and the Trusts in the Company to fall below 50.1%. See Note 6
of Notes to Combined Financial Statements.
The Company expects that continued expenditures of funds will be necessary
to support its future growth and that current operating funds along with the
proceeds of this offering will be sufficient to fund its operations and
capital requirements for at least the next 12 months. In the longer term, the
Company may require additional sources of liquidity to fund future growth.
Such sources of liquidity may include additional equity offerings or debt
financings. While the Company continually evaluates potential acquisitions,
there are no present agreements or commitments with respect to any
acquisition. See "Use of Proceeds."
To date, inflation has not had a material impact on the Company's revenues
or income, and the Company does not expect inflation to have a material impact
in the foreseeable future.
In January 1996, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." The adoption of this Statement did not
have a material effect on the Company's financial position or results of
operations.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 123 establishes financial accounting
and reporting standards for stock-based compensation plans and for
transactions in which an entity issues its equity instruments to acquire goods
and services from non-employees. The new accounting standards prescribed by
SFAS No. 123 are optional, and the Company is permitted to account for its
stock incentive and stock purchase plans under previously issued accounting
standards. The Company does not expect to adopt the new accounting standards;
consequently, SFAS No. 123 will not have an impact on the Company's financial
condition or results of operations.
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BUSINESS
Certain terms used in this Prospectus are defined under "Glossary of
Selected Terms."
INTRODUCTION
Sunquest provides health care information systems ("HCISs") to large and
mid-sized hospitals, clinics and other facilities, including integrated
delivery networks ("IDNs") comprised of multi-entity, multi-site health care
organizations. Sunquest was established in 1979 and has become a market leader
in the sale of laboratory information systems ("LISs") that integrate
disparate equipment and data sources in order to automate a laboratory
department's specialized processes and manage its large volumes of clinical
data. As of December 31, 1995, the Company had an installed LIS base of more
than 600 sites in the United States, Canada and the United Kingdom. Sunquest
is applying its open systems, integration and clinical experience to develop
and service enterprise-wide clinical repository and managed care systems
targeted at the information needs of the emerging IDN market. The Company's
clinical repository systems are currently being implemented on an enterprise-
wide basis at the Company's primary beta site, a multi-entity, 812-bed IDN.
In order to lower health care delivery costs while improving the quality of
patient care, IDNs need detailed clinical and management information that
enables providers within the IDN to manage: (i) the patient care process
across multiple delivery sites; (ii) the appropriateness of diagnoses,
treatments and resource utilizations; (iii) provider performance and clinical
outcomes; and (iv) performance under managed care contracts. A comprehensive
clinical repository addresses these information needs by integrating clinical
and financial data from various information systems of the IDN's clinical
departments and administrative areas. A clinical repository forms the
foundation for a computerized patient record ("CPR"), which offers providers
throughout an IDN immediate on-line access to more complete patient data
across multiple delivery sites. Significant market opportunities exist for
HCIS vendors offering open architecture clinical repository systems. These
systems permit IDNs to select and integrate best-of-fit information systems by
either retaining existing legacy systems or selecting from an array of new and
existing systems from different vendors.
Sunquest offers three suites of information systems: departmental clinical
systems, clinical repository systems and managed care systems. The Company's
departmental clinical systems consist of laboratory information systems and
radiology information systems. These systems capture departmental information,
communicate with patient care areas and other information systems, provide
comprehensive management reports and incorporate rules-based decision tools
for ordering tests and analyzing results. Sunquest estimates that it has
installed in its LIS client base over 6,500 interfaces that were developed for
approximately 350 separate instruments and 550 HCISs of other vendors. The
Company's clinical repository systems are comprised of a clinical database, an
interface engine, and integration and access tools. These systems collect
clinical data from legacy departmental systems and then organize, index and
store these data in a relational database. With these clinical repository
systems, a clinician can access, from a single source, a comprehensive record
of prior illnesses, treatments, orders, results and diagnoses for which data
have been stored in the clinical repository. The Company's managed care
systems support the administrative functions of managed care organizations,
such as health maintenance organizations ("HMOs"), and managed care entities
within IDNs, and are designed to meet the demands of the evolving capitation
and fixed fee reimbursement structures.
Sunquest markets its products and services in the United States, Canada, the
United Kingdom and Germany through its direct sales force. Sunquest's
marketing relationships with other information systems vendors include a
marketing partnership with IBM as an LIS vendor in IBM's Open Healthcare
Alliance and a cooperative marketing agreement for systems replacements with
IDX Systems Corporation for its LIS clients. The Company's customers include
The Cleveland Clinic Foundation, Intermountain Health Care, Kaiser Foundation
Health Plan of Colorado, Moses Cone Health System, St. Lukes-Roosevelt
Hospital Center and The University of Illinois at Chicago Medical Center.
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HCIS INDUSTRY BACKGROUND
Over the past two decades, health care costs have risen dramatically
relative to the overall rate of inflation. In 1994, health care costs exceeded
14% of gross domestic product. Historically, reimbursement for health care
services provided by hospitals, physicians, clinics and other health care
organizations has been based on a fee-for-service model of payment. With
increasing pressure to reduce costs, managed care organizations and other
payors are shifting the economic risk for the delivery of care to providers
through alternative reimbursement models, including capitation and fixed fees.
In response to this changing reimbursement environment, health care
organizations such as hospitals, multi-specialty physician groups,
laboratories, pharmacies, home health services and nursing homes are
integrating horizontally and vertically to create IDNs. IDNs, often dominated
by large hospitals, are designed to serve all of the health care needs of
regional populations while achieving economies of scale. Large metropolitan
areas are increasingly being served by only a few competing IDNs where once
many hospitals and physicians competed for patients.
In order for IDNs to lower health care delivery costs while improving the
quality of patient care, IDNs need access to detailed clinical and management
information that enables providers within the IDN to: (i) manage the patient
care process across multiple delivery sites; (ii) analyze the appropriateness
of diagnoses, treatments and resource utilizations; (iii) compare provider
performance and clinical outcomes; (iv) monitor performance under managed care
contracts; (v) monitor practice patterns of providers; and (vi) support
communication among members of the care team. A comprehensive clinical
repository captures clinical and financial data from disparate systems to form
the foundation of a CPR, which integrates multiple data repositories and
information systems in order to support care management throughout the IDN.
With the deployment of a CPR, providers will have immediate on-line access to
more complete patient care data across multiple delivery sites to guide them
in controlling health care costs, improving patient care and facilitating
responsiveness to competitive and regulatory changes in the health care
market.
Certain information intensive departments of health care organizations, such
as laboratory, radiology, intensive care and pharmacy, were early adopters of
information systems that manage the workflow and clinical data of stand-alone
departments. These clinical information systems have evolved to meet the needs
of individual departments, as well as the information needs of emerging IDNs
that require these systems to be accessible on an enterprise-wide basis. As an
example, LISs have evolved from serving autonomous laboratory departments to
serve two distinct laboratory needs in an IDN: (i) the centralized reference
laboratory, which provides competitively priced, high volume testing services
to providers throughout the IDN; and (ii) numerous acute care laboratories
across the IDN, which provide point of service laboratory support. As multiple
legacy systems such as LISs become increasingly prominent on an enterprise-
wide basis, the implementation of a multi-entity, multi-site CPR becomes
challenging given the different technologies, information management
strategies and legacy systems of the different entities comprising an IDN.
Most advanced CPR systems are being designed using an "open" system
architecture and a best-of-fit approach. These CPR systems are intended to
integrate disparate departmental and administrative information systems
regardless of differences among the platforms, architectures and data
structures of those information systems. The development of CPR systems has
been enabled by advances in information technology such as multi-tiered
client-server architectures, relational database management systems, data
warehousing, object-oriented design and standard query language. Unlike an
integrated single vendor system architecture, the best-of-fit, open
architecture permits an IDN to retain its existing best-of-fit systems and to
select from an array of new and existing systems from different vendors. This
approach allows an IDN to preserve its investment in legacy systems, yet adapt
to the changing requirements of the IDN over time.
The Company believes that IDNs will be served by many suppliers of best-of-
fit clinical systems, but that each IDN will rely on a strategic open systems
supplier to integrate and service the clinical repository that will form the
foundation of the CPR. The Company believes that developing and servicing LISs
for large multi-hospitals and IDNs has provided the Company with the
experience in the design, implementation and integration of complex clinical
information systems, which are core competencies necessary to compete
effectively as a strategic best-of-fit CPR supplier.
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BUSINESS STRATEGY
Sunquest has established itself as a leading LIS vendor and seeks to
participate as a strategic supplier to the emerging open systems, best-of-fit
CPR market. The key elements of this strategy are to:
Pursue Best-of-Fit Strategy. A best-of-fit strategy for HCISs enables the
providers that comprise an IDN, and the departments within those providers, to
purchase information systems from any vendor that best meets their needs,
regardless of the platforms, architectures and data structures of those
systems. Sunquest's clinical repository systems enable clients to pursue this
strategy with their open systems architecture and client-server technology,
both of which leverage the Company's experience with interfacing and
integrating complex clinical information systems in large and mid-sized
hospitals, clinics and other facilities, including IDNs. This approach allows
IDNs to preserve their investments in legacy systems, yet adapt to their
evolving information requirements, by retaining existing best-of-fit systems
or selecting from an array of systems from different vendors.
Become a Leading Provider within the Enterprise-wide CPR Market. The
horizontal and vertical consolidation of health care providers into IDNs has
created significant demand for CPRs that integrate multiple disparate systems
and data repositories to provide on-line access to patient clinical data
throughout the health care enterprise. Sunquest believes that its position as
a leading provider of LISs to large and mid-sized hospitals, and its knowledge
of complex systems and interfacing derived from its experience in the LIS
market, will enable it to become a leading provider in the emerging CPR
market. The Company is leveraging its open systems expertise, depth of
clinical experience and complex systems integration capabilities to continue
to develop and introduce clinical repository systems that address the clinical
information needs of IDNs. Since the centralization of laboratories typically
occurs early in the formation of an IDN, the Company believes that it has a
competitive advantage in marketing its LISs, clinical repository systems and
integration and network services early in the IDN's purchase decision process.
Diversify and Expand Systems and Service Offerings. Sunquest is committed to
developing and enhancing its existing systems and services offerings to
support the clinical requirements of an IDN. In addition to recently releasing
its clinical repository systems and a new version of its LIS, the Company is
developing other systems that address the information needs of an IDN, such
as: (i) systems that track quality and cost of care for case management; (ii)
enterprise-wide communication systems to address the trend toward outpatient
care; and (iii) automated clinical pathways that track patient progress and
allow for outcomes assessment. The Company is also in the process of
implementing service offerings that target the implementation of clinical
repositories and CPR systems. Providing implementation and network services
leverages the Company's expertise in applications protocols used to exchange
information between disparate systems. This is exemplified by the Company's
experience in designing flexible networking capabilities, open systems
products, LIS instrument interfaces, HCIS interfaces and multi-hospital
systems integration.
Cross-Sell to Installed Base of Clients. Sunquest's installed LIS client
base consists of over 600 hospitals, clinics and other facilities, including
more than 350 large and mid-sized hospitals and 63 groups of hospitals and
developing IDNs. Sunquest believes it is well positioned to market enterprise-
wide clinical information systems to this client base due to: (i) its track-
record of developing quality clinical information systems; (ii) its clients'
increasing preference for an open systems architecture; (iii) its in-depth
knowledge of client system installations, requirements and decision-making
criteria; and (iv) its clients' satisfaction with and loyalty to the Company's
existing systems.
Increase Overall Sales and Marketing Efforts. HCIS vendors seeking to take
advantage of the opportunities provided by the emerging CPR market must
complement their CPR systems offerings with sales and marketing efforts
targeted toward the enterprise-wide information needs of IDNs. As HCISs have
evolved from departmental clinical and administrative systems to complex
enterprise-wide clinical repositories and CPRs, purchasing decisions have
shifted from department heads to senior executive officers. The Company has
restructured its sales and marketing organization to establish a dedicated
clinical repository sales force with
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experience in selling to chief information officers, chief financial officers
and chief executive officers of health care providers. The Company is in the
process of executing an extensive national roll-out of its clinical repository
systems, including multiple city user conferences and national advertising.
Distribution channels are established in the LIS market, and the Company is
seeking to increase its market share by selling LISs to reference and
commercial laboratories, as well as acute care laboratories dispersed
throughout an IDN. Sunquest is also entering into arrangements with other
industry vendors such as: (i) a marketing partnership with IBM as an LIS
vendor in IBM's Open Healthcare Alliance; (ii) a cooperative marketing
agreement for systems replacements with IDX for its LIS clients; and (iii)
current discussions regarding collaborative marketing arrangments with
laboratory robotics vendors toward deployment of this cost saving technology
at Sunquest's client hospitals and IDNs.
PRODUCTS
Sunquest offers three suites of information systems: (i) departmental
clinical systems that automate the operations of laboratory and radiology
departments within a hospital; (ii) clinical repository systems that integrate
departmental systems and serve as the foundation for the CPR; and (iii)
managed care systems that automate the administrative functions of managed
care organizations.
Departmental Clinical Systems
Departmental clinical systems are the core applications of the Sunquest
information systems. They manage the information and automate the operations
of laboratory and radiology departments in one or more facilities and also
contribute significant volumes of clinical information that populate a
clinical repository. These systems capture departmental information,
communicate with patient care areas and other information systems, provide
comprehensive management reports and incorporate rules-based decision tools
for ordering tests and analyzing results. The rules-based logic in the
Company's LISs provides clinicians immediate access to current and archived
information about the patient with complete data integrity checking. For
example, the LISs perform checks for duplicate, inconsistent or illogical test
orders.
Laboratory Information Systems
Sunquest's FlexiLabxl system manages the workflow and reporting
requirements of the chemistry, hematology, blood bank, anatomic
pathology and outreach areas of the laboratory. Quality assurance
validations occur dynamically as results are entered. For example, a
clinician can define normal test result ranges by age, sex and test
method. Later, if the results are out of range, FlexiLabxl immediately
informs the technologist of the validation failure. Sunquest estimates
that it has installed in its LIS client base over 6,500 interfaces that
were developed for approximately 350 separate instruments and 550 HCISs
of other vendors. This interface library allows the Company to
seamlessly integrate virtually any lab instrument or HCIS into a
client's LIS. All data gathered by the system can be accessed from a
clinical repository. The Company uses a variety of configuration
options to support multi-hospitals and IDNs. Currently, the Company's
departmental LISs are installed in over 600 hospitals, clinics and
other facilities and are generally priced between $500,000 and $1.2
million.
The General Laboratory module is the core of the FlexiLabxl system
and manages the processes of the high test volume areas of the
laboratory. This module includes volume and performance statistics,
patient archiving, demographics, patient reporting, security and
audit trails. Sunquest has recently released a Windows-based
upgrade to its General Laboratory module that features a new
database schema, episodal management and outpatient tracking
capabilities. Episodal management enables the entire on-line
clinical patient record to be viewed at the laboratory level for
clinical treatment analysis and financial and managed care cost
analysis. Outpatient tracking capabilities enable separate tracking
of the patient and the specimen, improving the efficiency with
which a provider can manage concurrent care processes.
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The Microbiology module in FlexiLabxl provides a comprehensive,
paperless environment that enhances the communication of
microbiology and epidemiological results. User definable, automated
rules assist the microbiologist in measuring the effectiveness of
medications on specific organisms in order to predict effects on a
patient's outcome.
The Blood Bank module automates a hospital's complete transfusion
service, including inventory and distribution of blood products to
the patient. This module, which uses rules-based logic, is designed
to prevent the distribution of inappropriate blood products. For
example, the Blood Bank module automatically provides notice if the
blood product has not been appropriately matched to the patient at
the time of issue. The donor module automates the collection
procedures and management of blood product inventories. It also
manages and tracks blood donated by patients for their own use and
provides quality controls to assure compliance with rules of good
practice.
The Anatomic Pathology module is designed to manage specimens and
reports, including reports for surgical pathology and cytology. The
main features of this module are the archiving and retrieving of
patient records. For example, the pathologist, while examining
specimens, can automatically retrieve historic specimen results
including previous tissue diagnoses, thereby improving the
timeliness and quality of patient care. The module supports special
cytology reports, such as pap smear reports.
The Mulhos module utilizes the FlexiLabxl system to support
multiple facilities. Each facility can have its own individualized
reports, rules and options which allow for differences among
facilities. The Mulhos module manages vital inter-institutional
issues such as the security of patient information and conflicts
between each facility's patient identification system.
The Outreach/Commercial Lab module enables the laboratory to expand
beyond the traditional acute care hospital to support the needs of
an IDN. Automated results reporting to remote physician offices and
rapid order entry are among the features that support the
commercial laboratory environment. Other features include the
ability to update client data and courier routes in order to
improve the laboratory's ability to manage its operations.
Customized client reports assist the laboratory in designing its
own patient reports.
The Flexi-3R module provides redundancy and high systems
availability within the LIS. Flexi-3R provides a secondary database
that allows high volume printing of management and patient reports.
Queries can be made into this database without affecting the
response time of the primary database.
The Flexi-$ module, when combined with other Company systems,
provides an automated billing and accounts receivable solution for
financial management of a commercial laboratory business. Flexi-$
is a payor-driven system which manages self-pay and third-party
receivables including insurance, group billing and collections.
Radiology Information Systems
Sunquest's FlexiRad system is designed to streamline the operations of
the radiology department and facilitate orders, intelligent scheduling,
film management and reporting. FlexiRad, when used in conjunction with
FlexiLabxl, provides an integrated view of results for radiology
professionals. For example, laboratory results may be viewed before
certain invasive radiology procedures. FlexiRad offers the option of
processing patient orders directly via an order entry format, through
an order communications interface with a hospital information system or
through an interface to the clinical repository system. FlexiRad is
functionally complete, is installed at multiple sites and is generally
priced between $200,000 and $250,000.
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Clinical Repository Systems
Sunquest recently began marketing its clinical repository systems, which are
designed to integrate both the Company's departmental clinical systems as well
as those provided by other systems vendors, regardless of the architectures,
platforms and data structures of those systems. This approach to integrating
disparate information systems across an enterprise with a common clinical
repository supports a provider's best-of-fit strategy and preserves the
provider's investment in existing legacy departmental systems.
The Company's clinical repository systems are comprised of a clinical
database, integration and access tools, and an interface engine. The systems
form the foundation for the CPR. The clinical repository systems collect
clinical data from legacy departmental systems, which may be provided by
Sunquest or other vendors. These data are organized, indexed and stored in a
relational database for access and reporting as required for patient care and
outcomes research. Examples of data stored include patient demographic data,
diagnosis, system and problem lists, procedures and treatments, orders and
results and physician notes that document the care process. The clinician can
access these data from a single source and have a comprehensive record of
prior illnesses, treatments, orders, results and diagnosis. Sunquest's open
systems approach embraces best-of-fit applications and legacy departmental
systems from other vendors.
IntelliCare is a clinical repository system that provides access to
clinical data and medical knowledge for point of care and
retrospective analysis of all data in the clinical repository. It is
a scalable system capable of integrating single or multiple
applications across many entities, such as laboratories. For
example, patient demographic data entered in a physician's office
can be combined and correlated with demographic data entered in the
patient registration area of a hospital to ensure that patient
information is current and accurate.
Scalable Clinical Patient Repository ("SCPR"), a module within
IntelliCare, is a scalable clinical patient repository utilizing a
relational database. The SCPR accepts standard HL-7 formatted data
from existing and new systems and allows clinicians, administrators
and analysts to access patient information at the point of care.
The Company's integration and access tools collect clinical data from
departmental systems to populate a client's clinical repository. The clinical
data can be displayed according to each provider's needs through the CareGiver
software residing on the clinician's workstation. This software supports
patient care decisions by providing patient test results more efficiently and
offers flexible results reporting capabilities. For example, a clinician can
"drill down" and see numeric results, and then display a graph of any of the
available results. The clinician can also use the CareGiver software to place
orders. Health care providers can be located in the hospital, at the
physician's office or at a remote location, allowing patient care to be
delivered with increased efficiency by making information available on an
enterprise-wide basis.
The CareGiver Communication module provides an easy-to-use,
comprehensive order and results communication system designed for
physicians, nurses, clerks, technologists, therapists and
administrators. The system allows individual user preferences,
generates enterprise-wide order communications and uses scalable
client-server architecture.
The CareGiver View module enhances the CareGiver Communication
results display. CareGiver View supports clinical decision-making by
providing access to results data in multiple formats. CareGiver View
presents results data in spreadsheets, graphs, and text, as well as
in icon-based summaries. CareGiver View can be used with CareGiver
Communication or with FlexiLabxl. Results views can be customized
for a specific clinician or group, and can easily be defined.
CareGiver View allows trending of results for one encounter or
across encounters and allows providers to "drill down" for more
detailed results information.
The interface engine, licensed or purchased from a third-party, links
applications that use HL-7 or proprietary communications protocols through a
single-point interface hub. This single point interface connection
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facilitates the installation of the clinical data repository. The interface
engine connects all systems on the network, converts communications protocols
and routes network communications among all systems that need to share data.
IntelliCare, including the SCPR module, and the CareGiver Communication and
CareGiver View modules are currently being implemented on an enterprise-wide
basis at Moses Cone Health System, a multi-entity facility in Greensboro,
North Carolina that is serving as the Company's primary beta site. Moses Cone
Health System includes a 547-bed acute care hospital, a 115-bed specialty
hospital, a 150-bed extended care facility and other health care facilities.
The clinical repository systems being installed at Moses Cone Health System
continue to be modified through quarterly releases, although the systems have
completed the beta process as defined for purposes of the client contract.
Installation of the Company's clinical repository systems was also commenced
at another beta site, but has not proceeded beyond a preliminary stage,
pending discussions between the Company and the client as to whether to
continue the beta test process. Because the Company has only recently begun to
market its clinical repository systems, it has not yet established firm market
prices for these systems. The Company anticipates that it will price these
systems in excess of $1.0 million. See "Risk Factors--Dependence on Successful
Introduction of Clinical Repository Systems."
Managed Care Systems
The Company's Managed Care Manager Payor ("MCM") is a system that supports
the administrative insurance functions of managed care organizations, such as
HMOs, management services organizations and IDNs that offer their own managed
care insurance products. MCM is designed to meet the demands of evolving
point-of-care and capitated payment structures. The systems have the
flexibility to meet the requirements of health care organizations seeking to
offer risk-assuming managed care products on a small, medium or large scale.
MCM includes a claims administration system that automates capitation/risk
management, claims adjudication, enrollment, premium billing and accounts
receivable, referral tracking, utilization reports, coordination of benefits,
patient history, medical referrals, authorizations and membership services.
The Enrollment System module is the foundation of MCM. The
Enrollment System maintains group and membership information and
supports all functions in an integrated system. Enrollment is
maintained interactively, providing on-line eligibility information
and a variety of enrollment reports.
The Billing and Accounts Receivable module generates group and
direct pay bills, maintains accounts receivable, posts cash
receipts, and provides revenue and accounts receivable reports.
The Capitation module produces monthly capitation checks, rosters
and activity reports to designated providers.
The Claims module addresses claims adjudication for pharmacy,
hospital and physician claims.
The Utilization Reports module details and summarizes data in MCM.
The Coordination of Benefits module maintains coordination of
benefits information for health plan members known to be covered by
other insurance companies.
The Referral module manages referrals for a patient to see a
specialist or other provider. On an interactive basis, it maintains
a description of the referral, including information regarding the
patient, the referring physician, the referred specialist, the range
of dates for the referral, the number of visits authorized and the
amount of money authorized.
The Authorization module manages pre-certifications of hospital
stays or expensive outpatient procedures. The number of days for a
stay can be pre-certified with additional days approved or denied
with an attached explanation.
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The Inpatient Census module monitors inpatient admissions beginning
with pre-certification, then documents the subsequent admission and
discharge. The module is used to monitor pre-certifications, current
admissions and length of stay and to provide utilization reports and
financial reports of incurred inpatient expenses.
Sunquest purchased the technology underlying MCM in February 1995. The
Company did not acquire the installed MCM client base. Although the Company
has not sold any MCM systems since acquiring the technology, it is furthering
the development of the MCM technology for the release of a new version for
client-server architecture. The Company expects to increase its marketing
efforts for MCMs in preparation for the scheduled release in mid-1996. The
Company anticipates pricing its MCM systems between $200,000 and $300,000.
PRODUCTS UNDER DEVELOPMENT
The following products are under development utilizing the same client-
server architecture as the Company's existing clinical repository systems.
CareGiver Workstation will provide a common application for Sunquest's
and other vendors' systems, including single point log-on, a common
patient finder and device control for display and printing. Sunquest
and non-Sunquest applications will have a common "look and feel" for
patient inquiry and users will not be required to exit the system to
access other vendors' systems. This product will facilitate the inter-
operation of CareGiver software with other vendors' open clinical
systems. When developed, CareGiver Workstation will supplement or
replace CareGiver View.
CareGiver Documentation will provide tools for planning and documenting
patient care throughout the enterprise. The system will support
multiple health care professionals, including nurses, therapists and
physicians, and will address ambulatory and in-patient settings.
CareGiver Documentation will support managed care through clinical
pathways defined by the enterprise as well as outcomes management and
variance tracking. CareGiver Documentation will significantly enhance
the functionality of CareGiver modules by providing a structured, user-
friendly methodology for inputting patient information into the
clinical repository.
CareGiver Rules will provide alerts and decision support to the
clinical repository to assure high quality care. In addition to using
structured data, decision support requires the mining of data derived
from narrative reports. To accomplish this, a vocabulary server will
map various medical terms to a standard definition. This standard
definition will provide input to an expert system rules library which,
when triggered, will provide immediate notification to the caregiver of
a change in the patient's condition. Each medical term will be mapped
to a structured set of concepts in order to "data-drive" an expert
system.
Cost Management Data Repository ("CMDR") is in the specification phase
of design as the financial data repository to be integrated with
IntelliCare. Data from financial information sources, including actual
or estimated service costs, hospital claims, physician claims, patient
accounting records and managed care applications, will comprise the
repository. By linking financial data to clinical data, CMDR will
enable clients to improve the quality and cost of patient care.
There can be no assurance that the Company will not experience difficulties
that could delay or prevent the successful and timely development,
introduction and marketing of new and enhanced products. See "Risk Factors--
Dependence on Successful Introduction of Clinical Repository Systems" and "--
Rapid Technological Change and Dependence on New Product Development,
Enhancement and Acceptance."
CLIENT SERVICES
Sunquest maintains a service organization of approximately 250 professionals
who provide implementation, application and system support, education and
consulting services to the Company's clients. The client services
33
<PAGE>
organization primarily employs medical technologists and other health care
professionals in supporting and implementing clinical information systems.
These personnel are complemented by computer professionals to support complex
IDNs. Client services employees attend a formal nine to 12-month initial
training program to comply with the Company's certification requirements.
Sunquest utilizes a "train the trainer" philosophy to educate its clients.
This training consists of a structured process of project management and
education with flexible schedule options, with training held at both Sunquest
and client sites. System conversion, instrument training and operations
training are included in the Company's post-implementation program. Each
client is assigned a support analyst who understands how the software has been
tailored for the client and how best to provide ongoing support. Full
application and systems support coverage is available from the Company's "help
desk" 24-hours a day and seven days a week. The Company is developing systems
to track the quality of its services by providing immediate on-line project
status reports to clients and providing on-line client support through an
expert system. Instrument interface, network consulting, operating system and
hardware support are provided by experts in each area.
Sunquest also provides consulting services to assist clients in analyzing
and implementing strategic organizational changes, such as planning an IDN
expansion program, reengineering departmental processes, redesigning local or
wide-area networks, and establishing new commercial laboratories. Additional
client education services are provided through computer-based training or
formal ongoing educational courses and seminars.
MARKETING
The primary market for the Company's systems and services comprises
approximately 3,500 acute care hospitals in the United States and Canada that
have more than 250 beds. The Company also markets its systems and services to
approximately 600 hospitals in the United Kingdom and Germany that have more
than 100 beds. Sunquest's principal sources of referrals are its clients and
consultants. Sunquest also seeks to enhance its market recognition through
participation in industry seminars and trade shows, Company sponsored
seminars, the Sunquest User Group and Regional User Group meetings in the
United States and the United Kingdom, direct mail campaigns, telemarketing and
advertisements in trade journals.
The Company is also entering into marketing relationships with other
industry vendors. For example, in June 1995, the Company joined the IBM Open
Healthcare Alliance in which IBM acts as a value-added remarketer of the
Company's systems and those of other providers of HCISs. The Company's
agreement with IBM covers marketing activities in the United States and Puerto
Rico. In October 1995, Sunquest Europa entered into an agreement with IBM
under which IBM will serve as a value-added remarketer of the Company's
systems in certain Asian-Pacific countries. To date, IBM has not sold any of
the Company's products. Both IBM agreements are terminable by either IBM or
Sunquest upon 90 days' notice. In September 1994, the Company entered into an
agreement with IDX Systems Corporation under which the parties agreed to
market each other's products to their respective existing and future clients
on a non-exclusive basis. The agreement with IDX expires in September 1996.
The Company's marketing department is comprised of a team of specialists in
product management, sales support, competitive analysis, quoting, proposals
and advertising. Its sales force is organized into five divisions: (i)
IntelliCare Sales, offering clinical information repositories, order entry and
enterprise-wide results and data viewing systems; (ii) FlexiLabxl and FlexiRad
Sales, offering LISs and radiology information systems; (iii) MCM Sales,
targeting third party administrators, insurers and HMOs; (iv) Corporate and
Channel Sales, targeting large and multi-hospitals and partner vendors; and
(v) European Sales, offering the Company's systems in the United Kingdom and
Germany.
TECHNOLOGY
Sunquest's HCISs operate on IBM RS6000 and a variety of Digital Equipment
Corporation ("DEC") server systems. The Company's client-based software is
designed to operate on IBM compatible PCs. FlexiLabxl,
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<PAGE>
FlexiRad and Flexi-$ are offered on both IBM and DEC platforms. IntelliCare,
CareGiver Communication, CareGiver View and MCM are deployed on the IBM RS6000
and will also be offered on DEC platforms.
The Company utilizes the M computer language (also known as "MUMPS" or
"Massachusetts General Hospital Utility Multi-Programming System") in the
development of its departmental clinical systems. IntelliCare and the
CareGiver systems have been developed, and MCM is being developed, using a
three-tier client-server architecture with the presentation layer (user
interface) on the client, the business logic layer on both the client and the
server, and the database layer (either a relational or object model) on the
server. The client operating system is Windows (currently Windows 3.11 or
Windows 95), and the server operating system is UNIX.
Sunquest is migrating departmental clinical systems to the three-tier
client-server model by developing the object-oriented presentation layer and
client-side business logic layer so that M-based data structures, relational
data structures and object database structures (all residing on the server)
can be deployed incrementally, depending on the state of product evolution.
Although the Company does not believe that such migration is currently
necessary to satisfy its clients' needs, the Company expects to transition all
of its systems and modules to object orientation using the C++ programming
language and relational and object database technology.
Sunquest sells third-party terminals, label and page printers, storage
devices and other peripheral devices. The Company also provides services to
configure computer systems and networks. The Company has one-year renewable
reseller agreements with DEC and IBM and a variety of reseller agreements with
other middleware and device vendors.
RESEARCH AND DEVELOPMENT
The Company believes that the continuing rapid evolution of the HCIS market
has made a substantial and sustained commitment to product development
essential to the long-term success of its business. The Company has a defined
product development process characterized by its release management
methodology. This process includes on-going analysis of the HCIS marketplace,
determination of users' requirements, preparation of design specifications,
and usability testing to ensure that new systems meet clients' standards.
Sunquest's product development managers are responsible for product
architecture, improvements to existing products, construction verification and
inspection, and the management and motivation of the Company's product
development personnel. The Company's product development engineers are
assigned to one of three distinct functional groups: (i) the product
engineering group, which is responsible for the ongoing evolution of the
Company's existing products to meet the changing demands of the market; (ii)
the service engineering group, which prioritizes corrections and improvements
to deployed systems; and (iii) the infrastructure engineering group, which
researches industry-standard components and develops new technologies for
integration into the Company's current and future products. As of March 15,
1996, approximately 150 product development engineers were assigned to
improving and extending the Company's existing systems and approximately 60
engineers were assigned to the development of products in new product areas.
In 1993, 1994, 1995 and the three months ended March 31, 1996, the Company's
research and development expenses before capitalization of software
development costs totaled approximately $8.9 million, $9.7 million, $11.8
million and $3.2 million, respectively. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Results of
Operations."
COMPETITION
The markets for HCISs, including the markets for the Company's information
systems, are highly competitive. Most of the Company's revenues are derived
from lengthy, competitive procurement processes managed by sophisticated
purchasers that extensively investigate and compare the products offered by
the Company and its competitors. The Company believes that the principal
competitive factors influencing the market for its HCISs include vendor and
product reputation, product architecture, functionality and features, ease
35
<PAGE>
of use, rapidity of implementation, quality of client support, product
performance and price. There can be no assurance that the Company will be able
to compete successfully with respect to any of such factors.
In the LIS market, the Company's principal competitors are Cerner
Corporation, HBO & Company, Medical Information Technology, Inc., Shared
Medical Systems Corporation and Soft Computer Consultants, Inc. In addition,
the Company competes with a large number of other LIS vendors. The market for
clinical repository systems is in an early stage, and a significant number of
vendors are currently offering or developing competitive versions of clinical
repository systems. These vendors include not only existing clinical
information systems suppliers, but other vendors throughout the HCIS industry,
such as suppliers of practice management systems.
Many of the Company's current and potential competitors have significantly
greater financial, managerial, development, technical, marketing and sales
resources than the Company and may be able to devote those resources to
develop and introduce clinical repository systems more rapidly than the
Company or clinical repository systems with significantly greater
functionality than, and superior overall performance to, those offered by the
Company. These competitors may also be able to initiate and withstand
significant price decreases more effectively than the Company. Moreover, the
continuing consolidation of hospitals and other health care providers has
resulted in fewer individual purchasing decisions, a trend that may favor
larger vendors with greater numbers of hospitals currently under contract.
To be competitive, the Company must be able to respond effectively to the
introduction of new and improved HCISs by its competitors. There can be no
assurance that the Company will be able to develop new or improved HCISs and
services in a timely and cost effective manner or that the Company's current
and future HCISs and services will achieve and maintain market acceptance.
See "Risk Factors--Competition."
REGULATION
The FDA is authorized to regulate medical devices under the 1976 Medical
Device Amendments to the Federal Food, Drug, and Cosmetic Act ("FFDCA"). The
FDA has issued a draft policy addressing the regulation of certain computer
products as medical devices. Although the policy is written in draft form, it
is currently being followed by the FDA. To the extent that computer software
is considered a medical device under the policy, the Company may be required
to, depending on the software product: (i) obtain pre-market approval of the
product by filing an application with the FDA that establishes the safety and
effectiveness of the product; (ii) notify the FDA and demonstrate substantial
equivalence to other products prior to marketing the product; (iii) register
and list products with the FDA; and (iv) follow the FFDCA's general controls
including those relating to good manufacturing practices and medical device
reporting.
The Company expects that the FDA is likely to become increasingly active in
regulating computer software that is intended for use in health care settings.
In March 1994, the FDA issued a letter advising that the FDA considers medical
devices to include software products intended to maintain data used to assist
personnel in making decisions concerning the suitability of blood donors and
the release of blood or blood components for transfusion or further
manufacture. As such, the FDA determined that manufacturers and distributors
of these products, such as the Company, are subject to FDA regulation. The FDA
can impose extensive rquirements governing pre- and post-market conditions
such as device investigation, approval, labeling and manufacturing. In
February 1995, the FDA specified that blood bank software manufacturers must
file the pre-market approval applications and pre-market notifications with
the FDA by March 31, 1996. The Company complied with this requirement within
such deadline. Compliance with these new requirements and any future
requirements imposed by the FDA could be costly and could delay or preclude
the introduction of certain new products. The Company is unable to determine
at this time the effect, if any, that these requirements may have on its
business.
In addition, the health care industry is subject to changing political,
economic and regulatory influences that may affect the procurement practices
and operations of health care providers. Many lawmakers have announced that
they intend to propose programs to reform the United States health care
system. These programs may contain
36
<PAGE>
proposals to increase governmental involvement in health care, lower
reimbursement rates and otherwise change the regulatory environment in which
the Company's clients operate. Health care providers may react to these
proposals and the uncertainty surrounding such proposals by curtailing or
deferring investments, including those for the Company's HCISs. Even if
healthcare providers do not curtail or defer investments, they may institute
cost containment measures in anticipation of regulatory reform or for other
reasons. These measures may result in greater selectivity in the allocation of
capital funds, which could have a material adverse effect on the Company's
ability to sell its HCISs and services. The Company cannot predict with any
certainty what impact, if any, such legislative or market-driven reforms might
have on its business and results of operations. There can be no assurance that
such proposed changes, if adopted, would not have a material adverse effect on
the Company's business and results of operations.
See "Risk Factors--Regulation."
PROPRIETARY RIGHTS
The Company's future success depends in large part upon its ability to
protect its technology and proprietary rights. The Company relies on a
combination of patent, copyright, trade secret and trademark laws and
contractual restrictions to establish and protect its proprietary rights,
although the laws of certain foreign countries in which the Company licenses
or may license its products may not protect the Company's proprietary rights
to the same extent as do laws in the United States. It is the Company's policy
to require employees, consultants, clients and, in certain circumstances,
suppliers to execute nondisclosure agreements upon the commencement of a
relationship with the Company.
The system acquisition agreements under which the Company licenses its
software products to its clients generally prohibit the assignment or transfer
of the software or use of the software by any person or entity other than the
named client or its affiliates or successors. The agreements provide that the
Company retains ownership of the software and proprietary information and of
all rights therein. Except for information which is in the public domain, the
client is required to hold the software and proprietary information in
confidence and use reasonable care to preserve and safeguard such information.
The trade name Sunquest and other trade names used by the Company in its
business, such as FlexiLab and FlexiRad, have been registered in the United
States Patent and Trademark Office. The name Sunquest has also been registered
by the Company in the United Kingdom and Germany. In addition, certain of the
Company's products are the subject of patent protection or a pending patent
application.
Despite the actions taken by the Company to protect its technology and
proprietary rights, it may nonetheless be possible for third parties to
misappropriate the Company's technology and proprietary information or to
develop independently similar or superior technology. There can be no
assurance that the legal protections afforded to the Company and the measures
taken by the Company will be adequate to protect its intellectual property.
Any misappropriation of the Company's technology or proprietary information
could have a material adverse effect on the Company's business and results of
operations. Moreover, the Company is subject to the risk that others will
assert adverse claims and commence litigation alleging infringement or
misappropriation of their intellectual property rights. From time to time,
certain persons have made such claims against the Company. Although the
Company does not know of any infringement or misappropriation by the Company
of proprietary rights of others, there can be no assurance that others will
not assert claims or commence litigation with respect to the Company's current
or future HCISs. In any such event, the Company may be required to engage in
protracted and costly litigation, regardless of the merits of such claims;
discontinue the use of certain software codes, processes or trademarks; cease
to manufacture, use and license infringing products; develop non-infringing
technology; or enter into license arrangements with respect to the disputed
intellectual property. There can be no assurance that the Company would be
able to develop alternative technology or that any necessary licenses would be
available or that, if available, such licenses could be obtained on
commercially reasonable terms. Responding to and defending any of these claims
could distract the attention of management and have a material adverse effect
on the Company's business and results of operations.
See "Risk Factors--Dependence on Proprietary Rights."
37
<PAGE>
SYSTEM ACQUISITION AGREEMENTS
Sunquest typically furnishes its systems to its clients pursuant to system
acquisition agreements that grant perpetual, non-exclusive and non-
transferable licenses to use those systems, including the source code for
certain of the Company's proprietary software included therein. Under these
agreements, Sunquest also resells certain items of hardware to its clients.
Clients pay specified fees for the software license, the hardware and the
installation of the system. License fees for the Company's systems are
typically based on a number of factors, including the number and type of
modules included in the system, as well as the size of the user. The Company
generally maintains the licensed systems and provides modifications,
enhancements and upgrades for a monthly fee under separate maintenance
agreements.
EMPLOYEES
As of April 30, 1996, the Company had 540 full-time and 23 part-time and
temporary employees. None of the Company's employees are represented by a
labor union, nor has the Company experienced any work stoppage. The Company
believes that it has good relations with its employees.
PROPERTIES
The Company's principal executive and administrative offices and its sales
and marketing, customer services and product development facilities are
located in two buildings containing 102,000 square feet of office space and
85,000 square feet of office space, respectively, in Tucson, Arizona, which
the Company leases from Any Travel. The lease for the 102,000 square foot
building, which includes an adjacent two-level parking facility, currently
requires monthly rental payments of $92,128 and expires in September 1996. The
Company has an option to extend the lease for an additional five years. The
Company occupies approximately 36,000 square feet of office space in the other
building and subleases the remaining space to a number of subtenants. The
lease for the second building currently requires monthly rental payments of
$69,000 and expires in May 2004. Sunquest receives monthly rental payments
under the subleases totaling approximately $40,000. The Company also owns a
two-story building, containing approximately 18,000 square feet, in Johnstown,
Pennsylvania, which it intends to use as an office facility. See "Certain
Transactions."
The Company believes that its facilities will be adequate for its current
operations for at least the next twelve months.
Borrowings under the Company's line of credit with Bank of America Arizona
are secured by all of the Company's assets. The Company has also granted liens
on all of its assets to a vendor to secure amounts due for the purchase of
hardware and other equipment.
LEGAL PROCEEDINGS
As of the date hereof, the Company is not a party to any proceedings the
outcome of which, in the opinion of management, would have a material adverse
effect on the Company's results of operations or financial condition.
On June 20, 1995, the Company received a letter from the attorney for a
software producer in California claiming that certain communications between
the companies gave rise to a contract for, among other things, the development
of a Sunquest radiology scheduling system using technology developed by the
software producer. The letter alleged that the software producer had incurred
damages of approximately $3.9 million as a result of Sunquest's breach of the
alleged contract and further asserted that the software producer was prepared
to commence litigation immediately. By letter of June 22, 1995, the attorney
was informed of Sunquest's position that it had not entered into a contract
with the software producer and that the asserted claim for breach of contract
was meritless. To the Company's knowledge, no lawsuit has been filed. In the
event that the alleged claim is pursued in court, the Company believes that
the resolution of the claim will not have a material adverse effect on its
results of operations or financial condition.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors and executive officers and their ages are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Sidney A. Goldblatt.............. 61 President, Chief Executive Officer and Director
Richard A. Wesson................ 55 Chief Operating Officer
Nina M. Dmetruk.................. 43 Executive Vice President-Chief Financial Officer
and Director
R. Scott Holbrook................ 48 Executive Vice President-Chief Marketplace Officer
James F. Garliepp................ 44 Executive Vice President-Chief Technology Officer
Julie D. Klapstein............... 41 Executive Vice President-Chief Client Services and
Business Management Officer
T. Paul Thomas................... 36 Senior Vice President-Marketing
Stanley J. Lehman................ 42 Secretary and Director
Bradley L. Goldblatt............. 32 Treasurer and Director
</TABLE>
Within 90 days of the closing of this offering, the Company expects to have
two directors who will be "independent" for purposes of the rules of the
Nasdaq National Market. Failure to appoint such directors within such period
could result in the removal of the Common Stock from quotation on the Nasdaq
National Market.
Sidney A. Goldblatt, M.D., a co-founder of the Company, has been President
of the Company since 1986, Chief Executive Officer of the Company since
December 1994 and a director of the Company since its formation in 1979. Dr.
Goldblatt has been a director of Sunquest Europa since December 1992 and a
managing director of Sunquest Germany since October 1994. Dr. Goldblatt also
served as Chief Operating Officer of the Company from December 1992 to August
1994. Dr. Goldblatt has served as President and sole shareholder of S.
Goldblatt Pathology Associates, P.C. since 1971.
Richard A. Wesson, Ph.D. has been Chief Operating Officer since August 1994.
From July 1990 until he joined the Company, Dr. Wesson was employed by Wyse
Technology, a supplier of computer terminals, where he served as Vice
President of Business Development and Strategic Management from July 1993 to
June 1994, as Vice President of the Systems Division from February 1992 to
July 1993 and as Vice President and General Manager of Advanced Systems from
July 1990 to February 1992.
Nina M. Dmetruk has been Executive Vice President-Chief Financial Officer
since September 1991 and a director of the Company since December 1991.
Effective May 26, 1996, Ms. Dmetruk entered into an employment agreement with
the Company under which she agreed to serve as the Executive Vice President-
Chief Financial Officer of the Company on a full-time basis. See "--Employment
Agreements." During her earlier service as Executive Vice President-Chief
Financial Officer, Ms. Dmetruk was not an employee of the Company and devoted
approximately 60% to 80% of her time to the Company's business. Ms. Dmetruk
has also served as the Executive Vice President and a director of Any Travel
since April 1994 and of LabFUSION, Inc. ("LabFUSION") since March 1993. Ms.
Dmetruk has served as a managing director of Sunquest Germany since July 1994
and as a director of Sunquest Europa since December 1993. From 1985 to
September 1991, Ms. Dmetruk was a consultant to the Company. She is a CPA and
a CFP and until May 1996 was the sole proprietor of an accounting firm for
more than five years.
R. Scott Holbrook has been Executive Vice President-Chief Marketplace
Officer responsible for sales and marketing since December 1994. He joined the
Company in January 1991, served as Senior Vice President responsible for
laboratory product operations until December 1993 and as Senior Vice President
responsible for all sales, marketing, support and implementation until
December 1994. From 1988 to January 1991, Mr. Holbrook was employed by GTE
Health Systems, Inc., a developer of hospital information systems.
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<PAGE>
James F. Garliepp has been Executive Vice President-Chief Technology Officer
since September 1991. Mr. Garliepp previously served as Senior Vice President-
Technology from 1989 to September 1991 and served in various other positions
from 1982 to 1989.
Julie D. Klapstein has been Executive Vice President-Chief Client Services
and Business Management Officer since March 1996. She joined the Company in
February 1994 as Senior Vice President with the same duties. From February
1992 until joining the Company, Ms. Klapstein served as National Marketing and
Sales and Client Support Manager of the hospital information systems unit of
Shared Medical Systems Corporation. From June 1990 to February 1992, Ms.
Klapstein served as Assistant Vice President of GTE Corporation and General
Manager of GTE Health Systems, Inc.
T. Paul Thomas joined the Company in May 1996 as Senior Vice President-
Marketing. From October 1994 until he joined the Company, Mr. Thomas was
employed by Apple Computer, Inc., where he served as Director of Channel
Strategy from October 1994 to January 1996 and as Senior Director of Channel
Marketing from January 1996 to April 1996. From November 1993 to October 1994,
Mr. Thomas was employed by Artisoft, Inc., a hardware, software and systems
sales and marketing company, where he served as Vice President of Channel
Development from November 1993 to February 1994 and as Vice President of
Worldwide Marketing from February 1994 to October 1994. From January 1990 to
November 1993, Mr. Thomas was employed by Compaq Computer Corp., Inc., where
he served as Manager of Sales Operations from January 1990 to January 1991, as
Manager of Marketing Operations from January 1991 to September 1992 and as
Director of Channel Development from September 1992 to November 1993.
Stanley J. Lehman has been Secretary and a director of the Company since
1989. Mr. Lehman has also been Secretary of Any Travel and LabFUSION since
March 1990 and March 1993, respectively; Secretary and a director of Sunquest
Europa since December 1992; and a managing director of Sunquest Germany since
October 1994. He has been an attorney with the firm of Klett Lieber Rooney &
Schorling, a professional corporation that has served as general counsel to
the Company, for more than five years.
Bradley L. Goldblatt has been Treasurer and a director of the Company since
December 1992. Mr. Goldblatt has also served as Vice President and a director
of Any Travel and LabFUSION since April 1994, a director of Sunquest Europa
since December 1992 and a managing director of Sunquest Germany since October
1994. From June 1991 to February 1993, he was a Research Laboratory Technician
at the Eye and Ear Institute of Pittsburgh.
The directors of the Company are elected annually and serve until their
respective successors are elected and qualified. The executive officers of the
Company are elected by and serve at the discretion of the Board of Directors.
Bradley Goldblatt is the son of Dr. Goldblatt. There are no other family
relationships among the directors and executive officers of the Company. Any
Travel and LabFUSION are affiliates of the Company. Sunquest Europa and
Sunquest Germany became subsidiaries of the Company on May 30, 1996. See "The
Company" and "Certain Transactions."
BOARD COMMITTEES
It is expected that within 90 days after the closing of this offering, the
Board of Directors will appoint a Compensation Committee and an Audit
Committee. The Compensation Committee will provide recommendations concerning
salaries and incentive compensation for employees of, and consultants to, the
Company and will administer the Stock Incentive Plan of 1996. See "Stock
Incentive Plan." Until the election of the Compensation Committee, the entire
Board of Directors will continue to determine the compensation of the
executive officers of the Company. The Audit Committee will review the results
and scope of the annual audit of the Company's financial statements conducted
by the Company's independent auditors, the scope of other services provided by
the Company's independent auditors, proposed changes in the Company's
financial and accounting standards and principles, and the Company's policies
and procedures with respect to its internal accounting, auditing and financial
controls. The Audit Committee will also make recommendations to the Board of
Directors on the engagement of the independent auditors.
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<PAGE>
DIRECTOR COMPENSATION
Each non-employee director of the Company serves without compensation but is
reimbursed, upon request, for expenses incurred in attending meetings of the
Board of Directors, except that Mr. Lehman's law firm receives fees at his
regular professional hourly rate for time devoted to board meetings. Until she
became an employee of the Company in May 1996, Ms. Dmetruk was also
compensated at her regular hourly professional rate for time devoted to board
meetings. Directors who are employees of the Company are not paid any separate
fees for serving as directors.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued by the
Company for services rendered in all capacities during the year ended December
31, 1995 by the Chief Executive Officer and each of the four other most highly
compensated executive officers of the Company (collectively, the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------- ALL OTHER
NAME AND PRINCIPAL POSITION (1) SALARY BONUS COMPENSATION (2)
- ------------------------------- ---------- --------- ----------------
<S> <C> <C> <C>
Sidney A. Goldblatt................... $208,000 $ -- $ --
President and Chief Executive Officer
Richard A. Wesson..................... 195,000 26,000 1,186
Chief Operating Officer
R. Scott Holbrook..................... 155,546 44,360(3) 2,636
Executive Vice President-Chief
Marketplace Officer
James F. Garliepp..................... 141,075 18,516 2,636
Executive Vice President-Chief
Technology Officer
Julie D. Klapstein.................... 134,616 15,144 2,264
Executive Vice President-Chief Client
Services and
Business Management Officer
</TABLE>
- --------
(1) T. Paul Thomas, who joined the Company as Senior Vice President-Marketing
in May 1996, currently receives an annual salary of $160,000. Nina M.
Dmetruk, the Company's Executive Vice President-Chief Financial Officer,
became a full-time employee of the Company in May 1996 and currently
receives an annual salary of $220,000 and other benefits under the terms
of her employment agreement. See "--Employment Agreements."
(2) Represents contributions by the Company to the Company's profit sharing
plan for the account of the Named Executive Officer. See "--Profit Sharing
Plan."
(3) Paid under Mr. Holbrook's employment agreement. See "--Employment
Agreements."
On the date of this Prospectus, the Company granted options under the Stock
Incentive Plan of 1996 to purchase 108,718, 52,521, 52,521, 52,521, 7,878 and
126,050 shares of Common Stock to Dr. Wesson, Mr. Holbrook, Mr. Garliepp, Ms.
Klapstein, Mr. Thomas, and Ms. Dmetruk, respectively, at an exercise price
equal to the initial public offering price of the Common Stock offered hereby.
For certain conditions on the grants of options to Dr. Wesson and Mr.
Holbrook, see "--Employment Agreements."
PROFIT SHARING PLAN
The Company maintains the Sunquest Information Systems, Inc. Profit Sharing
Plan (the "Plan"), which is qualified under Section 401(k) of the Code. The
Plan is administered by the Company. Dr. Sidney A. Goldblatt is the sole
trustee of the trust fund established by the Company to manage and administer
the amounts contributed to the Plan. The Plan covers all employees of the
Company and the affiliates of the Company that have adopted the Plan, but
excludes employees covered by any collective bargaining agreement unless that
agreement provides for their participation. An eligible employee begins
participation in the Plan on the first day
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<PAGE>
of the month following the date he or she has both attained age 21 and
completed at least 1,000 hours of service in a computation period of 12
consecutive months.
Each participant may elect to contribute a percentage of his or her
compensation to the Plan on a pre-tax basis (up to a statutorily prescribed
limit, which was $9,240 for 1995). The Company, in its discretion, may elect
to make qualified non-elective contributions to the Plan. Any qualified non-
elective contributions for a Plan year are allocated among the participants in
proportion to their compensation for the Plan year. Participants direct the
investment of these contributions in various investment funds designated by
the Company for the investment of the contributions. The contributions made by
the participants and the qualified non-elective contributions allocated to the
participant, and the earnings thereon, are fully vested at all times.
The Company, in its discretion, may also elect to make matching
contributions or profit sharing contributions to the Plan. Any matching
contributions are allocated to participants who made contributions to the Plan
in proportion to the contributions made by the participants in a manner that
does not discriminate against or in favor of highly compensated employees. Any
profit sharing contributions for a Plan year are allocated among the
participants who are employed at the end of the Plan year and who have
completed at least 1,000 hours of service in the Plan year in proportion to
their compensation for the Plan year. The matching and profit sharing
contributions allocated to a participant are invested by the Company on the
participant's behalf in a trust fund, and the participant is fully vested in
those contributions and the earnings thereon after five years of service with
the Company, or if earlier, upon attainment of age 65, disability or death
while employed by the Company (and if not vested before then).
The vested contributions made by or allocated to a participant and the
earnings thereon are generally distributed in a single sum to the participant
upon the participant's retirement, disability or termination of employment
with the Company, or to the participant's beneficiary upon the participant's
death. Prior to age 59 1/2, a participant may withdraw his or her
contributions in certain prescribed cases of financial hardship. Upon
attaining age 59 1/2, a participant may withdraw his or her contributions and
the earnings thereon at any time.
The Plan contains provisions which take effect if the Plan (or any group of
qualified plans of the Company) is determined to be "top-heavy." In general,
these provisions accelerate the vesting schedule with respect to matching and
profit-sharing contributions by the Company and require the Company to make
certain mandatory minimum contributions to the accounts of certain non-key
employees in any year in which the Plan (or such group) is top-heavy.
STOCK INCENTIVE PLAN
The Company's Stock Incentive Plan of 1996 (the "Incentive Plan") authorizes
the issuance of up to 2,500,000 shares of Common Stock pursuant to stock
options or other awards granted to employees and independent contractors of
the Company and its subsidiaries. The Incentive Plan will expire in March 2006
unless earlier terminated by the Board of Directors. The Incentive Plan is to
be administered by a committee of two or more directors (the "Committee")
which will select the optionees and other participants and determine the terms
and provisions of each option grant or other award, within the parameters set
forth in the Incentive Plan. Upon appointment, the Compensation Committee will
serve as the Committee under the Incentive Plan.
Each option granted under the Incentive Plan may qualify as an "incentive
stock option" within the meaning of the Code or may not so qualify, as
determined by the Committee. The exercise price of the options must be at
least the fair market value of the Common Stock on the date the option is
granted, and each option must expire no later than ten years from the date of
grant. To exercise an option, the optionee must deliver to the Company full
payment for the shares purchased, provided that the Committee may in its
discretion (i) accept as payment shares of Common Stock having a market value
equal to the purchase price of the shares being purchased or (ii) permit the
optionee to surrender the option in exchange for a payment from the Company
(in cash or shares of Common Stock, or both) equal to the excess of the market
price of the Common Stock on the date of surrender over the exercise price of
the option, multiplied by the number of options being exercised.
The Committee is authorized to grant stock appreciation rights ("SARs")
separate from or in tandem with any stock option granted under the Incentive
Plan. Upon the exercise of an SAR, the holder will be entitled to
42
<PAGE>
receive an amount equal to the difference between the price per share assigned
to the SAR, or the exercise price per share of any related stock option, and
the fair market value of the Common Stock on the day preceding the date of
exercise. Such amount may be paid in cash or Common Stock, or both. The
exercise of a tandem SAR will result in a pro rata surrender of the related
stock option, and the exercise of a related stock option will result in a pro
rata surrender of the tandem SAR.
The Committee is also authorized to grant shares of Common Stock under the
Incentive Plan with such terms, conditions and restrictions, consistent with
the purposes of the Incentive Plan, as it may determine.
The Board of Directors may amend or discontinue the Incentive Plan at any
time without shareholder approval, except where such approval is required to
comply with certain rules promulgated under Section 16 of the Securities
Exchange Act of 1934, as amended.
Prior to the date of this Prospectus, no options or other awards have been
granted under the Incentive Plan. On the date of this Prospectus, the Company
granted options under the Incentive Plan to purchase an aggregate of 790,000
shares of Common Stock at an exercise price equal to the initial public
offering price, as set forth in the following table. The options will not be
exercisable until May, 1998.
NEW PLAN BENEFITS
STOCK INCENTIVE PLAN OF 1996
<TABLE>
<CAPTION>
NAME AND POSITION DOLLAR VALUE NUMBER OF SHARES OPTIONED
- ----------------- ------------ -------------------------
<S> <C> <C>
Richard A. Wesson...................... (1) 108,718(2)
Chief Operating Officer
R. Scott Holbrook...................... (1) 52,521(2)
Executive Vice President-Chief
Marketplace Officer
James F. Garliepp...................... (1) 52,521
Executive Vice President-Chief
Technology Officer
Julie D. Klapstein..................... (1) 52,521
Executive Vice President-Chief Client
Services and Business Management
Officer
All executive officers as a group (9
persons)(3)........................... (1) 400,209
All employees as a group (539
persons).............................. (1) 790,000
</TABLE>
- --------
(1) The dollar values of the awards are not determinable at this time.
Although the options were granted at an exercise price equal to the
initial public offering price of the Common Stock, no market price
information with respect to the Common Stock is available as of the date
of this Prospectus because the Common Stock has not been publicly traded
prior to such date.
(2) For certain conditions on the grants of options to Dr. Wesson and Mr.
Holbrook, see "--Employment Agreements."
(3) Nina M. Dmetruk, the Company's Executive Vice President-Chief Financial
Officer, received an option to purchase 126,050 shares of Common Stock. T.
Paul Thomas, the Company's Senior Vice President- Marketing, received an
option to purchase 7,878 shares of Common Stock. See footnote 1 to this
table.
EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan (the "Purchase Plan") authorizes
the sale of up to 450,000 shares of Common Stock to participating employees of
the Company and its subsidiaries. The Purchase Plan is open to all employees
who are regularly scheduled to work more than 20 hours per week and have
completed at least one year of service, except those who own shares possessing
5% or more of the total combined voting power or value of all outstanding
shares of all classes of equity securities of the Company. The first offering
period under the Purchase Plan will commence on July 1, 1996 and terminate on
September 30, 1996. Thereafter,
43
<PAGE>
offerings will commence on the first day of each calendar quarter and end on
the last day of the same calendar quarter. The Purchase Plan will expire in
March 2016 unless earlier terminated by the Board of Directors.
Employees who wish to participate in an offering must elect to have
deductions made from their pay for each pay period of between 1% to 10% of
their base pay (but not less than $10). On the last day of the offering
period, the participant is deemed to have purchased from the Company such
number of shares of Common Stock as his or her accumulated payroll deductions
would buy at a price equal to 90% of the fair market value of the Common Stock
on the first business day of the offering period. No employee may participate
in an offering if such participation would permit his or her rights to
purchase Common Stock under the Purchase Plan and any similar employee stock
purchase plans of the Company to accrue at a rate which exceeds $25,000 of
fair market value of Common Stock for the calendar year in which the offering
is made.
EMPLOYMENT AGREEMENTS
The Company has an employment agreement with Dr. Richard A. Wesson under
which he agreed to serve as Chief Operating Officer of the Company at a base
annual salary of $195,000. The agreement is terminable by either party upon 30
days written notice and by the Company immediately for cause or for Dr.
Wesson's breach of his agreement not to compete with the Company. Dr. Wesson
is entitled to participate in any discretionary bonuses paid to officers in
general and is also entitled to a long term incentive bonus if the sum of the
net income and net loss of the Company and LabFUSION ("Net Profit") for 1995,
1996, 1997 or 1998 exceeds the Net Profit for 1993. If the Net Profit for any
one of those years is two times the Net Profit for 1993, the bonus is
$750,000; if three times the Net Profit for 1993, the bonus includes an
additional $500,000; and if four times the Net Profit for 1993, the bonus
includes an additional $1,000,000. The maximum long term incentive bonus that
Dr. Wesson may receive is $2,250,000 in the aggregate, and is payable only if
Dr. Wesson is in the Company's employ on December 31, 1998. However, if Dr.
Wesson's employment is terminated by the Company without cause (as defined) or
by reason of death or disability, then he will be entitled to any bonus which
may have accrued as of the date of such termination, reduced by 60% if the
termination occurs during 1996, by 40% if the termination occurs during 1997
and by 20% if the termination occurs during 1998. Dr. Wesson was not entitled
to a long-term incentive bonus for 1995. On or before the closing of this
offering, the Company and Dr. Wesson will enter into an agreement under which
Dr. Wesson will relinquish his right to collect any long term incentive bonus
under his employment agreement upon the grant of options to purchase 108,718
shares of Common Stock at the initial public offering price. If the Company
terminates Dr. Wesson's employment without cause during the first year, during
the second year or after the second year of employment, the agreement entitles
Dr. Wesson to receive severance payments equal to two, three or four months,
respectively, of his salary and benefits.
The Company also has an employment agreement with Scott Holbrook under which
he agreed to serve as an Executive Vice President of the Company at a base
annual salary of $150,000, subject to annual adjustments based on the consumer
price index. For 1994 and 1995, Mr. Holbrook was entitled to bonuses equal to
0.2% of the Company's gross profit (as defined, including the gross profit
from sales of LabFUSION products) or, in the event certain discounts exceed a
predetermined level, a bonus equal to 0.15% of the Company's gross profit. For
1995, Mr. Holbrook earned a bonus of $44,360 pursuant to the foregoing
formula. Mr. Holbrook is also entitled to receive: (i) deferred compensation
of $350,000 if the Company's gross profit for 1996 is at least 1.73 times the
gross profit of the Company and LabFUSION for 1993; and (ii) additional
deferred compensation of $650,000 if the Company's gross profit for 1998 is at
least 2.5 times the gross profit of the Company and LabFUSION for 1993. The
deferred compensation for 1996 will be payable only if Mr. Holbrook is in the
Company's employ on January 1, 1997, and the deferred compensation for 1998
will be payable only if he is in the Company's employ on January 1, 1999,
unless his employment is terminated by the Company for other than cause or
because of his death or total disability. On or before the closing of this
offering, the Company and Mr. Holbrook will enter into an agreement under
which Mr. Holbrook will relinquish his right to collect any deferred
compensation under his employment agreement upon the grant of options to
purchase 52,521 shares of Common Stock at the initial public offering price.
Effective May 26, 1996, the Company entered into an employment agreement
with Nina M. Dmetruk under which she agreed to serve as the Company's
Executive Vice President-Chief Financial Officer at a base annual
44
<PAGE>
salary of $220,000. The agreement is terminable by either party upon 90 days'
written notice and by the Company immediately for cause, including any breach
by Ms. Dmetruk of her agreement not to compete with the Company, as described
below. Ms. Dmetruk agreed to devote her full working time to the Company's
business, except that during the first six months of her employment she may
devote a reasonable amount of time to winding down her accounting practice,
with an appropriate reduction of her base compensation for time devoted to
that activity. Ms. Dmetruk is entitled to participate in any discretionary
bonuses paid to officers in general. Under the terms of the employment
agreement, Ms. Dmetruk received, on the date of this Prospectus, an option
under the Incentive Plan to purchase 126,050 shares of Common Stock at the
initial public offering price. Ms. Dmetruk will be entitled to $1.2 million in
severance pay in the event that the employment agreement is terminated: (i) by
the Company at any time for other than cause; (ii) by Ms. Dmetruk within 90
days of such time as Sidney A. Goldblatt, Bradley L. Goldblatt, Curtis S.
Goldblatt and Jodi Beth Gottlieb, and trusts created for their benefit, cease
to own, directly or indirectly, fifty percent or more of the outstanding stock
of the Company; or (iii) by Ms. Dmetruk because of a material breach of the
agreement by the Company which has not been corrected by the Company within
ten days' written notice of such breach or because of certain gross
negligence, willful misconduct or malfeasance by the Company which is
determined to be detrimental to Ms. Dmetruk.
The employment agreements also contain covenants prohibiting the improper
disclosure or use by the employees of the Company's proprietary information as
well as provisions assigning to the Company all inventions and discoveries
made, conceived, learned or reduced to practice by the employees during and in
connection with their employment by the Company. Each of Dr. Wesson, Mr.
Holbrook and Ms. Dmetruk has agreed that during the term of his or her
employment and for a period of one year thereafter he or she will not become
involved directly or indirectly with certain named competitors of the Company,
solicit or induce any employee of the Company to leave the Company, or
solicit, trade with or otherwise do business with any client of the Company
with regard to products or services that compete with the products or services
offered by the Company during the employee's employment or any products which
the employee knows are being developed by the Company during his or her
employment.
As of March 28, 1996, LabFUSION and the Company entered into an agreement
under which LabFUSION agreed to reimburse the Company for any portion of a
bonus payable to Dr. Wesson or Mr. Holbrook that is attributable to net income
or gross profit of LabFUSION.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Except as contemplated by the agreements described under "Employment
Agreements" above, the compensation of the officers of the Company for the
year ended December 31, 1995 was determined by the Board of Directors,
composed of Dr. Sidney A. Goldblatt, Nina M. Dmetruk, Stanley J. Lehman and
Bradley L. Goldblatt, each of whom participated in the deliberations of the
Board of Directors concerning the compensation of the executive officers of
the Company. Dr. Goldblatt, Ms. Dmetruk and Bradley L. Goldblatt are executive
officers of the Company; none of these individuals participated in
deliberations concerning his or her own compensation.
Certain interlocking relationships exist between the directors and executive
officers of the Company and the directors and executive officers of four other
corporations: Any Travel, LabFUSION, Sunquest Europa and Sunquest Germany. Ms.
Dmetruk and Bradley L. Goldblatt are directors and executive officers of Any
Travel and LabFusion; each of Dr. Goldblatt, Ms. Dmetruk, Mr. Lehman and
Bradley L. Goldblatt is a director of Sunquest Europa and a managing director
of Sunquest Germany; and Mr. Lehman is the sole executive officer of Sunquest
Europa. The outstanding shares of Any Travel and LabFUSION are held one-third
by Bradley L. Goldblatt, Dr. Goldblatt and Ms. Dmetruk, as trustees for the
benefit of Bradley L. Goldblatt (the "BLG Trust"); one-third by Bradley L.
Goldblatt, Dr. Goldblatt and Ms. Dmetruk, as trustees for the benefit of
Curtis S. Goldblatt (the "CSG Trust"); and one-third by Jodi Beth Gottlieb,
Dr. Goldblatt and Ms. Dmetruk, as trustees for the benefit of Jodi Beth
Gottlieb (the "JBG Trust"). The BLG Trust, the CSG Trust and the JBG Trust are
collectively referred to herein as the "Trusts." Dr. Goldblatt is the father
of Bradley L. Goldblatt, Curtis S. Goldblatt and Jodi Beth Gottlieb. See
"Certain Transactions" and "Principal Shareholders."
45
<PAGE>
CERTAIN TRANSACTIONS
Sunquest's principal administrative, sales and marketing, customer services
and product development facilities are located in two buildings in Tucson,
Arizona which are owned by Any Travel. One of the buildings is located at 4801
East Broadway Boulevard (the "Broadway Property") and the other is located at
1121-1161 North El Dorado Place (the "El Dorado Property"). The Company
purchased the Broadway Property on September 16, 1991 and immediately sold it
to Broadway Enterprises, Inc., a special purpose company owned by the Trusts
("Broadway Enterprises"), for a ten-year promissory note in the principal
amount of $5,165,000, the same consideration paid by the Company for the
purchase of the Broadway property, and bearing interest at a rate of 10.0% per
year (the "First Note"). Simultaneously with the sale, the Company leased the
Broadway Property from Broadway Enterprises. On September 17, 1991, Broadway
Enterprises conveyed the Broadway Property to Any Travel in exchange for Any
Travel's agreement to assume Broadway Enterprises' obligations under the lease
and the First Note. The lease provides for an initial term of five years at a
triple-net annual rent of $1,020,760, subject to adjustment in accordance with
a formula based on the consumer price index. Such annual rental was determined
in accordance with an independent appraisal of the appropriate fair rental
value of the property. The Company has an option to renew the lease for an
additional five-year term. During 1993, 1994 and 1995, the Company paid Any
Travel rent of $1,020,760, $1,028,790 and $1,066,053, respectively. For the
three months ended March 31, 1996, the Company paid Any Travel rent of
$276,384.
In June 1992, Any Travel agreed to prepay $3,450,000 under the First Note in
exchange for a 2.0% reduction in the interest rate on the remaining balance.
Upon the prepayment, the Company canceled the First Note and Any Travel issued
to the Company a new ten-year promissory note in the principal amount of
$1,539,413 and bearing interest at the rate of 8.0% per year (the "Second
Note"). The Second Note requires monthly principal and interest payments of
$18,743, matures July 15, 2002 and may be paid at any time without penalty.
During each of 1993, 1994 and 1995, Any Travel paid the Company $224,914 under
the Second Note. During the three months ended March 31, 1996, Any Travel paid
the Company $56,229 under the Second Note. The Second Note will be paid in
full on the thirtieth business day following the closing of this offering.
In order to make the prepayment, Any Travel borrowed $3,450,000 from the
Bank of America Arizona. Bank of America's loan was secured by a mortgage on
the Broadway Property, a mortgage note in the principal amount of $3,450,000
(the "Mortgage Note") and a guaranty by the Company of all payments required
under the Mortgage Note. The Mortgage Note requires monthly principal payments
of $11,500 with interest at an annual rate equal to 3.25% over the one-year
Treasury rate, matures July 1, 1997 and may be prepaid at any time without
penalty. Any Travel may extend the maturity date to July 1, 2002 upon payment
of a $34,500 fee. The unpaid principal balance of the Mortgage Note at March
31, 1996 was $3,280,000.
In February 1994, the Company agreed to purchase the El Dorado Property for
$3,100,000. Prior to the closing in May 1994, the Company assigned to Any
Travel all of its rights and obligations under the purchase agreement and
loaned Any Travel $3,116,813 to fund the purchase of the property. Despite the
assignment, the Company remains liable for the performance of its obligations
under the purchase agreement. At the time of closing, Any Travel issued a
seven-year promissory note to the Company in the principal amount of
$3,116,813 and bearing interest at the rate of 8.5% per year (the "El Dorado
Note"), leased the entire premises to the Company under a ten-year, triple net
lease (the "El Dorado Lease"), and assigned to the Company the existing tenant
leases. Monthly rentals under the El Dorado Lease are currently $69,000 and
are subject to future adjustment in accordance with a formula based on the
consumer price index. Such monthly rentals were determined in accordance with
an independent appraisal of the appropriate fair rental value of the property.
The El Dorado Note requires monthly principal and interest payments of
$49,012, matures May 1, 2001 and may be prepaid at any time without penalty.
The unpaid principal balance at March 31, 1996 was $2,483,837. The El Dorado
Note will be paid in full on the thirtieth business day following the closing
of this offering.
Jodi Beth Gottlieb, the daughter of Dr. Goldblatt and the beneficial owner
of approximately 13.7% of the Common Stock of the Company, is a director,
beneficial stockholder and President of Any Travel. The Company uses Any
Travel as its travel agent on an on-going basis. Any Travel has advised the
Company that in 1993, 1994, 1995 and the three months ended March 31, 1996,
Any Travel received gross commissions of $172,000, $158,000, $206,000 and
$43,000, respectively, from hotels, airlines and car rental agencies with
respect to its travel services for the Company.
46
<PAGE>
On August 7, 1995, the Trusts purchased the Westmont Professional Building
from Westmont Professional Building Associates, a general partnership of which
Dr. Goldblatt owned a 30.0% interest. Dr. Goldblatt loaned the Trusts $380,000
to fund the purchase. Subsequently, the Company agreed to purchase the
Westmont Professional Building from the Trusts as of September 1, 1995. As
consideration for the purchase, the Company agreed to assume the Trusts'
obligation to repay the $380,000 loan to Dr. Goldblatt and, as evidence of
such obligation, issued to Dr. Goldblatt a promissory note in the principal
amount of $380,000 bearing interest at the rate of 7.0% per year. Sunquest has
managed the Westmont Professional Building from August 7, 1995 to present. All
principal and interest under the promissory note were paid in full on March 4,
1996.
The Company provides management services to LabFUSION for which LabFUSION
paid fees of $120,000, $140,000, $240,000 and $60,000 in 1993, 1994, 1995 and
the three months ended March 31, 1996, respectively. As of March 28, 1996, the
Company and LabFUSION entered into an agreement, terminable by either party on
30 days' notice, under which the Company will provide management services to
LabFUSION for $20,000 per month.
In March 1993, the Company executed an agreement to purchase certain assets,
properties and rights related to the LabFUSION software from Health Care
Affiliated Services, Inc. for a minimum of $800,000, payable in equal
quarterly installments from 1993 to 1996. Subsequently in March 1993, the
Company assigned its rights and obligations under the purchase agreement to
LabFUSION. The Company markets and licenses LabFUSION's products.
In April 1993, the Company granted LabFUSION a non-exclusive, royalty-free
license to use its registered sun and mountain logo trademark. The Company may
terminate the license upon 90 days' notice to LabFUSION.
On March 26, 1987, the Company purchased two insurance policies on the life
of Dr. Goldblatt having a total face value of $10,000,000. In connection with
the distribution of dividends declared in December 1995, the Company conveyed
these life insurance policies to Dr. Goldblatt in lieu of $1,460,000 that he
was entitled to receive as a dividend.
The Company markets its products in the United Kingdom and Germany through
Sunquest Europa, a United Kingdom corporation formed by the Trusts in December
1992. Sunquest Europa agreed to pay Sunquest a monthly license fee equal to
50% of its software license and maintenance revenues, which fee amounted to
$286,557, $401,601 and $151,288 in 1994, 1995 and the three months ended March
31, 1996, respectively. As of March 31, 1996, Sunquest Europa owed the Company
$839,446 in unpaid fees. In October 1994, the Trusts formed Sunquest Germany
to market the Company's products in Germany. No sales have as yet been made by
that company. As of March 31, 1996, the Company had loaned Sunquest Germany
$90,732 to cover start-up costs. On May 30, 1996, the Trusts transferred to
the Company all of the outstanding stock of Sunquest Europa and Sunquest
Germany as a capital contribution. Accordingly, these transactions between the
Company and each of Sunquest Europa and Sunquest Germany have been eliminated
in the preparation of the Combined Financial Statements. See Note 1 of Notes
to Combined Financial Statements.
On April 30, 1996, the Company entered into the Tax Indemnification
Agreement with Dr. Goldblatt and the Trusts. See "S Corporation Distributions
and Termination of S Corporation Status."
On or before the closing of this offering, the Company will adopt a policy
that all future transactions between the Company and its officers, directors,
principal shareholders and their affiliates shall be on terms no less
favorable to the Company than could be obtained by the Company from unrelated
third parties, and shall be approved by a majority of the outside independent
and disinterested directors. This policy will not, however, apply to
transactions entered into before the adoption of the policy or to renewals of
existing transactions on similar terms.
For a description of certain employment arrangements between the Company and
certain executive officers, see "Management--Employment Agreements."
47
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of March 15, 1996 and as adjusted
to reflect the sale of the shares of Common Stock offered hereby, by: (i) each
director of the Company; (ii) each Named Executive Officer; (iii) each person
(or group of affiliated persons) known by the Company to be the beneficial
owner of more than five percent of the outstanding Common Stock; and (iv) all
of the Company's directors and executive officers as a group. Beneficial
ownership for purposes of the table means sole or shared voting or investment
power with respect to the shares.
<TABLE>
<CAPTION>
DIRECTORS, NAMED EXECUTIVE NUMBER OF PERCENT OF SHARES BENEFICIALLY OWNED
OFFICERS AND SHARES ------------------------------------
FIVE PERCENT SHAREHOLDERS BENEFICIALLY OWNED PRIOR TO OFFERING AFTER OFFERING (1)
- -------------------------- ------------------ ----------------- ------------------
<S> <C> <C> <C>
Sidney A. Goldblatt
(2).................... 11,904,000(3) 100.0% 79.9%
Nina M. Dmetruk (2)..... 4,909,140(4) 41.2 32.9
Bradley L. Goldblatt
(2).................... 3,272,760(5) 27.5 22.0
Jodi Beth Gottlieb (6).. 1,636,380(7) 13.7 11.0
Stanley J. Lehman (2)... -- -- --
Richard A. Wesson....... -- -- --
R. Scott Holbrook....... -- -- --
James F. Garliepp....... -- -- --
Julie D. Klapstein...... -- -- --
All directors and
executive officers
as a group (9
persons)............... 11,904,000(8) 100.0% 79.9%
</TABLE>
- --------
(1) Assumes no exercise of the Underwriters' over-allotment option. If the
Underwriters' over-allotment option is exercised in full, then the percent
of shares beneficially owned after the offering will be: Dr. Goldblatt,
77.5%; Ms. Dmetruk, 32.0%; Bradley Goldblatt, 21.3%; Ms. Gottlieb, 10.7%;
and all directors and executive officers as a group, 77.5%. The number of
shares of Common Stock outstanding prior to this offering consists of
11,904,000 shares of Common Stock. The number of shares of Common Stock
outstanding after this offering also includes the shares being offered
hereby.
(2) Address is c/o the Company, 1407 Eisenhower Boulevard, Suite 200,
Johnstown, Pennsylvania 15904.
(3) Includes 1,636,380 shares held by each of the BLG Trust, the CSG Trust and
the JBG Trust. Dr. Goldblatt is a trustee of each of the Trusts with
shared investment power but no voting power with respect to the shares
held by the Trusts.
(4) Consists of 1,636,380 shares held by each of the BLG Trust, the CSG Trust
and the JBG Trust. Ms. Dmetruk is a trustee of each of the Trusts with
shared investment power and shared voting power with respect to all of
such shares.
(5) Consists of 1,636,380 shares held by each of the BLG Trust and the CSG
Trust. Bradley Goldblatt is a trustee of each of such Trusts with shared
investment power and shared voting power with respect to all of such
shares.
(6) Address is c/o Any Travel, 1181 North El Dorado Place, Tucson, Arizona
85715.
(7) Consists of 1,636,380 shares held by the JBG Trust. Jodi Beth Gottlieb is
a trustee of the JBG Trust with shared investment power and shared voting
power with respect to all of such shares.
(8) See Notes 3, 4 and 5 above.
48
<PAGE>
COMMON STOCK
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue up to 35,000,000 shares of Common Stock
having no par value. As of the date of this Prospectus, the Company has
11,904,000 shares of Common Stock issued and outstanding. An additional
2,500,000 shares and 450,000 shares of Common Stock are reserved for issuance
under the Incentive Plan and the Purchase Plan, respectively. On the date of
this Prospectus, the Company granted options to purchase a total of 790,000
shares of Common Stock to certain officers and other employees of the Company
under the Incentive Plan. See "Management--Stock Incentive Plan." There are
currently four shareholders of record. The holders of outstanding shares of
Common Stock are entitled to receive dividends out of assets legally available
therefor at such times and in such amounts as the Board of Directors may from
time to time determine. Each shareholder is entitled to one vote per share on
all matters to be voted on by shareholders. There is no cumulative voting in
the election of directors. The Common Stock is not entitled to preemptive
rights and is not subject to redemption. Upon liquidation, dissolution or
winding up of the Company, the assets legally available for distribution to
holders of Common Stock will be distributed ratably among such holders. All of
the outstanding shares of Common Stock are, and all shares sold in this
offering when issued will be, duly authorized, validly issued, fully paid and
non-assessable.
Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that a public market will develop after
the closing of this offering. See "Risk Factors--Existence of Additional
Authorized but Unissued Shares," "--Shares Eligible for Future Sale," "--No
Prior Public Market; Possible Volatility of Stock Price" and "Shares Eligible
for Future Sale."
PREFERRED STOCK
The Company is authorized to issue up to 15,000,000 shares of Preferred
Stock having no par value. The Preferred Stock may be issued in one or more
classes or series and to determine the designation and number of shares of the
class or series and the voting rights, preferences, limitations and special
rights, if any, of the shares of the class or series. The issuance of
Preferred Stock could adversely affect the voting power of holders of Common
Stock and the likelihood that such holders will receive dividend payments and
payments upon liquidation; could dilute the equity interest of holders of
Common Stock to the extent Preferred Stock is converted into Common Stock; and
could have the effect of delaying, deferring or preventing a change in control
of the Company. The Company has no present plans to issue any shares of
Preferred Stock. See "Risk Factors--Existence of Additional Authorized but
Unissued Shares."
LIMITATIONS ON DIRECTOR LIABILITY AND INDEMNIFICATION
As permitted by the Pennsylvania Business Corporation Law of 1988, as
amended (the "BCL"), the Articles and Bylaws of the Company provide that a
director shall not be personally liable, in such capacity, for monetary
damages for any action taken, or any failure to take any action, unless the
director has breached or failed to perform the duties of a director under the
BCL and such breach or failure to perform constitutes self-dealing, willful
misconduct or recklessness. This limitation of liability does not apply to the
responsibility or liability of a director pursuant to any criminal statute or
to the liability of a director for the payment of taxes pursuant to local,
state or federal laws.
The Bylaws of the Company also provide that every person who is or was a
director or officer of the Company, or who is identified by the Company as an
indemnified representative, shall be indemnified by the Company to the fullest
extent permitted by law against all expenses and liabilities incurred in
connection with any proceeding in which he or she may be involved by reason of
the fact that he or she is or was serving in an indemnified capacity. This
indemnification does not apply where the conduct giving rise to the claim is
finally determined by a court or in arbitration to have constituted willful
misconduct or recklessness, or to have involved the receipt from the Company
of a personal benefit to which the officer or director was not entitled, or
where such indemnification has been determined in a final adjudication to be
unlawful. The Company may create a fund, trust or other arrangement, or
maintain insurance, to secure the indemnification. In addition, the Company is
required to pay the expenses of defending any such claim in advance of final
adjudication upon the receipt of an undertaking by the director or officer to
repay such advanced amounts if it is ultimately determined that the director
or officer is not entitled to indemnification.
49
<PAGE>
ANTI-TAKEOVER PROVISIONS OF PENNSYLVANIA LAW
Upon the registration of this offering of securities, the Company became a
"registered corporation" subject to various statutory anti-takeover provisions
of the BCL.
The BCL imposes certain requirements on registered corporations for approval
of certain transactions with "interested shareholders." For purposes of this
provision, an interested shareholder is defined as a shareholder who is a
party to the relevant transaction or who is treated differently from other
shareholders, as well as any person or group acting in concert with an
interested shareholder or in a control relationship with such a shareholder.
Transactions covered by this provision must be approved by the affirmative
vote of at least a majority of votes that all shareholders, other than the
interested shareholder, are entitled to cast with respect to the transaction,
without counting the vote of the interested shareholder. This provision
applies to any of the following transactions: (i) a merger, consolidation,
share exchange or sale of assets involving a registered corporation or a
subsidiary thereof and a shareholder of a registered corporation; (ii) a
division of the registered corporation in which the interested shareholder
receives a disproportionate amount of any of the shares or other securities of
any corporation surviving or resulting from the plan of division; (iii) any
transaction related to the voluntary dissolution and winding up of the
registered corporation in which a shareholder is treated differently from
other shareholders of the same class, with certain exceptions for dissenting
shareholders; or (iv) an amendment of the articles of incorporation in which
the percentage of voting or economic share interest in the registered
corporation of a shareholder is materially increased relative to substantially
all other shareholders. Certain exceptions to these requirements apply where:
(i) the transaction is approved by a majority of non-interested directors;
(ii) the consideration paid by the interested shareholder to acquire shares of
a certain class is not greater than the consideration to be received by other
shareholders for shares of that class; or (iii) the transaction is effected
pursuant to a plan of merger or consolidation approved by the board of
directors and immediately prior to the adoption of such plan and at all times
thereafter prior to its effective date, another corporation that is a party to
the merger or consolidation owns directly or indirectly 80% or more of the
outstanding shares of each class of the registered corporation.
The BCL also provides that if any person or group acquires 20% or more of
the voting power of a registered corporation, with certain exceptions, the
remaining shareholders may elect to sell their shares to such person or group
for the fair value of the shares, including a proportionate amount of any
control premium.
Furthermore, the BCL imposes requirements on "business combinations" between
an "interested shareholder" and a registered corporation. The term "business
combination" is defined to include: (i) certain mergers, consolidations, share
exchanges or divisions of the corporation involving the interested
shareholder; (ii) certain sales, leases and other dispositions of assets of
the corporation or a subsidiary in certain quantities involving the interested
shareholder; (iii) the issuance or transfer of shares of the corporation or a
subsidiary in certain quantities to the interested shareholder, with certain
exceptions; (iv) the adoption of a plan or proposal of liquidation or
dissolution proposed by or pursuant to an agreement with the interested
shareholder; (v) certain reclassifications of securities or recapitalizations
of the corporation and certain mergers or consolidations of the corporation or
other transactions that increase the voting power of the interested
shareholder; and (vi) the receipt by the interested shareholder of the benefit
of any loans or other financial assistance or any tax advantages from the
corporation. For purposes of this provision, an "interested shareholder" is
defined generally as the beneficial owner of at least 20% of a corporation's
voting shares, and affiliates or associates of the interested shareholder are
included with the interested shareholder. A registered corporation may only
engage in such transactions with an interested shareholder where the
transaction has been approved under one of the following procedures: (i) by
the board of directors prior to the interested shareholder becoming such or
following the acquisition of that status if the acquisition was approved in
advance by the board of directors; (ii) by a majority of votes exclusive of
the votes controlled by the interested shareholder at a meeting of
shareholders no earlier than three months after the interested shareholder
became the beneficial owner of shares entitling it to cast at least 80% of the
votes of shareholders in a directors' election, with certain other conditions;
(iii) by the vote of the holders of all outstanding common shares; (iv) by the
vote of shareholders entitled to cast a majority of votes, excluding votes
controlled by the interested shareholder, not less than five years after the
interested shareholder's acquisition; or
50
<PAGE>
(v) by a majority vote of all shareholders not less than five years after the
interested shareholder's acquisition, subject to certain other conditions.
A corporation may exempt itself from the provisions described in the
foregoing three paragraphs by amendment to its articles of incorporation,
subject to certain limitations. The Company has not exempted itself from any
of these provisions.
The BCL also bars, with certain exceptions, a person who has acquired 20% or
more of the voting power of a registered corporation (a "controlling person")
from voting such shares unless the "disinterested" shareholders approve such
voting rights. Failure to obtain such approval exposes the owner to the risk
of a forced sale of such shares to the issuer. If shareholder approval is
obtained, the corporation must provide minimum severance payments to certain
employees terminated within 90 days before and two years after the approval.
The corporation also becomes subject to a prohibition on the abrogation of
certain labor contracts prior to their stated date of expiration where such
abrogation results from certain business combination transactions.
The BCL may require disgorgement of profits in the event that (i) any person
or group publicly discloses that the person or group may acquire control of
the corporation or (ii) a person or group acquires (or publicly discloses an
offer or intent to acquire) 20% or more of the voting power of the corporation
and, in either case, sells shares within 18 months thereafter. With certain
exceptions, any profits from sales of equity securities of the corporation of
the person or group during the 18-month period belong to the corporation if
the securities that were sold were acquired during the 18-month period or
within 24 months prior thereto.
A corporation may exempt itself from the provisions described in the
foregoing two paragraphs by amending its articles of incorporation within 90
days after becoming a registered corporation. The Company does not intend to
exempt itself from these provisions.
In addition, the BCL permits an amendment of the corporation's articles of
incorporation, or other corporate action, if approved by shareholders
generally, to provide mandatory special treatment for specified groups of
nonconsenting shareholders of the same class by providing, for example, that
shares of common stock held only by designated shareholders of record, and no
other shares of common stock, shall be cashed out at a price determined by the
corporation, subject to applicable dissenters' rights.
The BCL also provides that directors may, in discharging their duties,
consider the interests of a number of different constituencies, including
shareholders, employees, suppliers, customers, creditors and the communities
in which the corporation is located. Directors are not required to consider
the interests of shareholders to a greater degree than other constituencies'
interests. The BCL expressly provides that directors do not violate their
fiduciary duties solely by relying upon the anti-takeover provisions of the
BCL.
Finally, Pennsylvania law requires registration with the Pennsylvania
Securities Commission before an acquisition of or offer to acquire more than
five percent of any class of outstanding securities of a Pennsylvania
corporation.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Chemical Mellon
Shareholder Services, L.L.C., Pittsburgh, Pennsylvania.
51
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, 14,904,000 shares of Common Stock will be
outstanding (assuming no exercise of the Underwriters' over-allotment option).
The shares sold in this offering will be freely tradeable without restriction
or further registration under the Securities Act, unless acquired by an
"affiliate" of the Company as that term is defined in Rule 144 promulgated
under the Securities Act ("Rule 144"), which shares will be subject to the
resale limitations of Rule 144 described below.
Immediately prior to the closing of the offering, 11,904,000 shares of
Common Stock will be outstanding. These shares were issued by the Company in
private placement transactions or to effectuate a stock split. All of these
shares will be owned by holders that either will constitute "affiliates" of
the Company within the meaning of Rule 144 or will enter into agreements with
the Company and the Representatives providing that such holders will sell
shares only in accordance with volume limitations identical to those set forth
in Rule 144. See "Principal Shareholders." Commencing 180 days after the date
of this Prospectus, these shares will be available for sale in the public
market, subject to the volume and manner of sale restrictions imposed by Rule
144 or subject to the volume limitations of such agreements.
In general, under Rule 144 as currently in effect, a shareholder who has
beneficially owned for at least two years shares privately acquired directly
or indirectly from the Company or from an affiliate of the Company, and
persons who are affiliates of the Company who have acquired the shares in the
public market, will be entitled to sell within any three-month period a number
of shares that does not exceed the greater of: (i) 1% of the outstanding
shares of Common Stock (approximately 149,040 shares immediately after the
closing of this offering, or approximately 153,540 shares if the Underwriters'
over-allotment option is exercised in full); or (ii) the average weekly
trading volume of the Common Stock during the four calendar weeks preceding
such sale. Sales under Rule 144 are also subject to certain requirements
relating to the manner and notice of sale and the availability of current
public information about the Company.
The Company, each of its directors and executive officers, and each of the
holders of outstanding shares of Common Stock have agreed with the
Underwriters not to offer, sell, contract to sell, or otherwise dispose of any
shares of Common Stock or securities convertible into or exercisable or
exchangeable for, or any right to purchase or acquire, shares of Common Stock
for a period of 180 days following the date of this Prospectus without the
prior written consent of Volpe, Welty & Company, except for the grant or
exercise of options pursuant to the Incentive Plan and the Purchase Plan, each
as currently in effect.
On the date of this Prospectus, there are outstanding options to purchase
790,000 shares of Common Stock, none of which will vest within 180 days
following the date of this Prospectus. The Company has undertaken not to
accelerate the vesting of any options within such period. As soon as
practicable after the closing of this offering, the Company intends to file a
registration statement on Form S-8 to register under the Securities Act
450,000 shares of Common Stock reserved for issuance under the Purchase Plan.
Approximately 90 days after the closing of this offering, the Company intends
to file a registration statement on Form S-8 to register 2,500,000 shares of
Common Stock reserved for issuance under the Incentive Plan.
Prior to this offering, there has been no market for the Common Stock. No
predictions can be made with respect to the effect, if any, that public sales
of shares of Common Stock or the availability of shares for sale in the public
market will have on the market price of the Common Stock after this offering.
Sales of substantial amounts of Common Stock in the public market following
this offering, or the perception that such sales may occur, could adversely
affect the market price of the Common Stock or the ability of the Company to
raise capital through sales of its equity securities. See "Risk Factors--
Shares Eligible for Future Sale."
52
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the underwriters named below (the
"Underwriters"), and each of such Underwriters, for whom Volpe, Welty &
Company and Punk, Ziegel & Knoell, L.P. (together, the "Representatives") are
acting as representatives, has agreed severally to purchase from the Company
the respective number of shares of Common Stock set forth opposite its name
below. The Underwriters are committed to purchase and pay for all shares if
any shares are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Volpe, Welty & Company............................................. 1,110,000
Punk, Ziegel & Knoell, L.P......................................... 1,110,000
Donaldson, Lufkin & Jenrette Securities Corporation................ 120,000
Hambrecht & Quist LLC.............................................. 120,000
Lehman Brothers Inc................................................ 120,000
UBS Securities LLC................................................. 120,000
Adams, Harkness & Hill, Inc........................................ 50,000
Dain Bosworth Incorporated......................................... 50,000
First Albany Corporation........................................... 50,000
Needham & Company, Inc............................................. 50,000
Parker/Hunter Incorporated......................................... 50,000
Piper Jaffray Inc.................................................. 50,000
---------
Total............................................................ 3,000,000
=========
</TABLE>
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public at the initial public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession of not in excess of $0.67 per share,
of which $0.10 may be reallocated to other dealers. After the initial public
offering, the public offering price, concession and reallowance to dealers may
be reduced by the Representatives. No such reduction will change the amount of
proceeds to be received by the Company as set forth on the cover page of this
Prospectus.
The Company has granted the Underwriters an option for 30 days after the
date of this Prospectus to purchase, at the initial public offering price,
less the underwriting discounts and commissions as set forth on the cover page
of this Prospectus, up to 450,000 additional shares of Common Stock solely to
cover over-allotments, if any. If the Underwriters exercise their over-
allotment option, the Underwriters have severally agreed, subject to certain
conditions, to purchase approximately the same percentage thereof that the
number of shares of Common Stock to be purchased by each of them, as shown in
the foregoing table, bears to 3,000,000 shares of Common Stock offered hereby.
The Underwriters may exercise such option only to cover over-allotments in
connection with the sale of the 3,000,000 shares of Common Stock offered
hereby.
The Company, each of its directors and officers, and each of the holders of
the outstanding shares of Common Stock have agreed not to offer, sell,
contract to sell or otherwise dispose of any shares of Common Stock or
securities convertible into or exercisable or exchangeable for, or for any
rights to purchase or acquire, shares of Common Stock for a period of 180 days
following the date of this Prospectus, without the prior written consent of
Volpe, Welty & Company, except for the grant or exercise of options pursuant
to the Incentive Plan and the Purchase Plan, each as currently in effect.
Volpe, Welty & Company, in its discretion, may waive the foregoing
restrictions in whole or in part, with or without a public announcement of
such action. In recent offerings in which it has served as lead manager of
underwriters, Volpe, Welty & Company has consented to early releases from
lock-up agreements only in a limited number of instances, after considering
all circumstances that it deemed to be relevant. Volpe, Welty & Company will,
however, have complete discretion in determining
53
<PAGE>
whether to consent to early releases from the lock-up agreements delivered in
connection with this offering, and no assurance can be given that it will not
consent to the early release of all or a portion of the shares of Common Stock
and options covered by such lock-up agreements.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to accounts over which the Underwriters have
discretionary authority.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price of the Common Stock was determined by
negotiations between the Company and the Representatives. Among the factors
considered in determining the initial public offering price of the Common
Stock, in addition to prevailing market conditions, were the Company's
historical performance, estimates of the business potential and earnings
prospects of the Company, an assessment of the Company's management and the
consideration of the above factors in relation to market valuations of
companies in related businesses.
The Company and Dr. Sidney A. Goldblatt have agreed to indemnify the
Underwriters against certain liabilities that may be incurred in connection
with this offering, including liabilities under the Securities Act, or to
contribute to payments that the Underwriters may be required to make in
respect thereof.
54
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Klett Lieber Rooney & Schorling, a Professional
Corporation, Pittsburgh, Pennsylvania. Stanley J. Lehman, the Secretary and a
director of the Company, is a shareholder in Klett Lieber Rooney & Schorling.
Certain legal matters relating to the shares of Common Stock offered hereby
will be passed upon for the Underwriters by Foley, Hoag & Eliot, Boston,
Massachusetts.
EXPERTS
The Combined Financial Statements of the Company at December 31, 1994 and
1995 and for each of the three years in the period ended December 31, 1995
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
CHANGE IN INDEPENDENT ACCOUNTANTS
At a meeting on March 6, 1996, the Company's Board of Directors ratified
management's decision to retain Ernst & Young LLP as the independent
accountants for the Company and dismissed the Company's former auditors. The
former auditors did not audit the financial statements included in this
registration statement and as such, its report on the financial statements for
the two years ended December 31, 1994 does not cover the financial statements
of the Company included in this Prospectus. Such report did not contain an
adverse opinion or disclaimer of an opinion and was not qualified or modified
as to uncertainty, audit scope or accounting principles. There were no
disagreements with the former auditors on any matter regarding accounting
principles or practices, financial statement disclosures or auditing scope or
procedures related to the financial statements which the former auditors
reported on at the time of the change or with respect to the Company's
financial statements which the former auditors reported on for fiscal years
1993 and 1994, which, if not resolved to the former auditors' satisfaction
would have caused it to make reference to the subject matter of the
disagreement in connection with its report. Prior to retaining Ernst & Young
LLP, the Company had not consulted with Ernst & Young LLP regarding accounting
principles.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act and the rules and regulations promulgated
thereunder, covering the Common Stock offered hereby. This Prospectus omits
certain information contained in the Registration Statement, and reference is
made to the Registration Statement and the exhibits thereto for further
information with respect to the Company and the Common Stock offered hereby.
Statements contained in this Prospectus as to the contents of any contract,
agreement or other document filed as an exhibit to the Registration Statement
are not necessarily complete, and in each instance, reference is made to the
exhibit for a more complete description of the matter involved, each such
statement being qualified in its entirety by such reference. The Registration
Statement may be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices of the Commission
maintained at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and
Seven World Trade Center, Suite 1300, New York, New York 10048. Copies of such
materials may be obtained from the Public Reference Section of the Commission,
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates.
The Company intends to furnish its shareholders with annual reports
containing financial statements audited by independent auditors.
55
<PAGE>
GLOSSARY OF SELECTED TERMS
<TABLE>
<C> <S>
ACCESS TOOLS................... A set of software tools specifically designed
to facilitate the access of data.
BEST-OF-FIT.................... A selection strategy by which an institution
evaluates the value of a system according to
how well it plays in the institutions's
particular environment.
BETA SITE...................... A site where production code is being tested
prior to general release.
BETA TEST...................... The activity of testing software at a beta
site.
CAPITATION..................... A fixed payment by an insurance company or
other purchaser of health care services
(usually an HMO) on a per member basis to a
provider as compensation for providing
services over a fixed period of time.
CLINICAL DATABASE.............. The portion of a database composed of medical
information.
CLINICAL INFORMATION REPOSITORY
OR CLINICAL REPOSITORY........ A repository in a healthcare institution which
enables a longitudinal view of patient
activity throughout an entire lifetime; both
inpatient activity and outpatient activity.
CLINICAL PATHWAYS.............. A standard treatment plan by diagnosis which
enables the institution to track variance from
standards.
CLINICAL REPOSITORY SYSTEM..... The system which establishes the clinical
information repository; typically a series of
computer applications.
COMPUTERIZED PATIENT
RECORD OR CPR................. A single patient's clinical information
repository.
DATABASE....................... A collection of data organized especially for
rapid search and retrieval (as by a computer
system).
DATABASE SCHEMA................ A structured framework or plan for storage of
data within a database.
DATA REPOSITORY................ A collection of data in a database usually
with an associated viewing application
commonly known as a "data browser."
DATA STRUCTURE................. The architecture by which data is stored.
DATA WAREHOUSE................. A collection of data in a database usually
serving data up through a standard query
language such as SQL.
DECISION TOOLS................. A series of user-defined conditions for data
which controls the application.
DESIGN SPECIFICATIONS.......... The design assumptions which will govern the
construction of a software product.
DEPARTMENTAL CLINICAL SYSTEMS.. Clinical systems designed to address needs at
the department level of a health care
institution.
EXPERT SYSTEM.................. A system intended to process and provide
information normally obtained from medical or
other experts.
HEALTHCARE INFORMATION SYSTEM
OR HCIS....................... An information system designed to facilitate
processing and/or exchange of healthcare-
related information.
HL-7........................... The data messaging standard for exchange of
healthcare information known as "Health Level
Seven."
HEALTH MAINTENANCE ORGANIZATION
OR HMO........................ An organized health care system that is
responsible for both the financing and
delivery of a broad range of comprehensive
health care services to an enrolled population
for a prepaid, fixed fee.
</TABLE>
56
<PAGE>
<TABLE>
<C> <S>
INTEGRATED DELIVERY NETWORK
OR IDN....................... A group of organizations horizontally
integrated to improve delivery of health care
services.
INTEGRATION TOOLS............. Tools designed to facilitate the integration of
multiple software applications.
INTERFACE..................... Software constructed to facilitate data
exchange between two or more systems.
INTERFACE ENGINE.............. An application designed to enable multiple
systems to exchange data.
INTERFACE HUB................. Software which allows messages to be multi-cast
to multiple targets; usually maintains routing
information for messages.
INSTRUMENTS................... Medical devices used to perform laboratory
tests and report the results of those tests.
LABORATORY INFORMATION
SYSTEM OR LIS................ An information system designed to facilitate
the processing and/or communication of
laboratory information.
LEGACY SYSTEM................. An institution's incumbent computer system.
MASSACHUSETTS GENERAL HOSPITAL
UTILITY MULTI-PROGRAM SYSTEM,
M TECHNOLOGY OR MUMPS........ The computer language developed at
Massachusetts General Hospital in 1967 that is
characterized by shared-file capabilities and
powerful string primitives intended to handle
the textual data being processed in the
hospital environment.
MANAGED CARE.................. A system of health care delivery that seeks to
manage the cost, quality and access to health
care, often under a fixed reimbursement system.
MANAGED CARE SYSTEM........... A system which supports the administrative,
claims processing and claims adjudication
functions of a managed care organization.
OPEN ARCHITECTURE............. A governing philosophy of software design which
enables inter-operation of discrete systems to
achieve a common or cooperative goal.
OPEN SYSTEM................... A software system built utilizing the open
architecture paradigm of software construction.
PRACTICE MANAGEMENT
SYSTEM....................... Medical software designed to facilitate the
operation of a physician's practice.
RADIOLOGY INFORMATION
SYSTEM....................... An information system designed to facilitate
access and/or exchange of radiology
information.
RELATIONAL DATABASE........... Scheme by which data can be organized into a
series of tables which enables preservation of
relationships from table to table.
RULES-BASED................... Software which executes processes according to
predefined rules.
USABILITY TESTING............. The act of gathering feedback about a software
product prior to release by having it "test
driven" by a representative target user.
USER-DEFINABLE................ Software system features which the user can
customize to his or her preference.
</TABLE>
57
<PAGE>
INDEX TO COMBINED FINANCIAL STATEMENTS
----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors, Ernst & Young LLP........................ F-2
Combined Balance Sheets as of December 31, 1994 and 1995 and March 31,
1996 (unaudited)........................................................ F-3
Combined Statements of Income for the years ended December 31, 1993, 1994
and 1995 and for the three-month periods ended March 31, 1995 and 1996
(unaudited)............................................................. F-4
Combined Statements of Shareholders' Equity for the years ended December
31, 1993, 1994 and 1995 and for the three-month period ended March 31,
1996 (unaudited)........................................................ F-5
Combined Statements of Cash Flows for the years ended December 31, 1993,
1994 and 1995 and the three-month periods ended March 31, 1995 and
1996 (unaudited)........................................................ F-6
Notes to Combined Financial Statements................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Sunquest Information Systems, Inc. and affiliates
We have audited the accompanying combined balance sheets as of December 31,
1994 and 1995 of the companies listed in Note 1, and the related combined
statements of income, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the companies' 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 combined financial position at December 31, 1994
and 1995 of the companies listed in Note 1, and the combined results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
Pittsburgh, Pennsylvania Ernst & Young LLP
February 12, 1996, except Notes 6 and 12,
as to which the date is March 25, 1996
F-2
<PAGE>
SUNQUEST INFORMATION SYSTEMS, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- MARCH 31, MARCH 31,
1994 1995 1996 1996
------- ------- ----------- -----------
(UNAUDITED) (PRO FORMA)
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............ $ 1,189 $ 352 $ 966 $ 966
Receivables, less allowance for
doubtful accounts of $1,000 in 1994,
$1,122 in 1995, and $1,272 at March
31, 1996............................ 13,635 17,054 17,720 17,720
Other receivables.................... 189 339 376 376
Loans receivable and accrued interest
from related party.................. 948 537 689 689
Inventory............................ 2,106 1,625 2,141 2,141
Prepaid expenses and other........... 721 833 883 883
Deferred Tax Assets.................. -- -- -- 1,003
------- ------- ------- -------
Total current assets................ 18,788 20,740 22,775 23,778
Property and equipment, net of
accumulated depreciation............. 5,844 7,077 6,687 6,687
Capital leases from related party, net
of accumulated amortization.......... 6,472 5,680 5,482 5,482
Software development costs, net of
accumulated amortization............. 5,699 6,777 7,043 7,043
Loans receivable from related party... 3,645 3,116 2,977 2,977
Other receivables..................... -- 454 442 442
Other assets.......................... 1,620 30 35 35
------- ------- ------- -------
Total assets........................ $42,068 $43,874 $45,441 $46,444
======= ======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable..................... $ 3,612 $ 1,987 $ 2,583 $ 2,583
Line of credit....................... -- 1,900 1,054 1,054
Related party note payable........... -- 380 -- --
Current portion of long-term debt.... 300 200 -- --
Obligations under capital leases from
related party....................... 426 511 535 535
Accrued compensation and related
taxes............................... 2,878 2,846 3,553 3,553
Accrued expenses..................... 1,544 1,194 899 899
Deferred revenue..................... 4,950 7,759 8,413 8,413
Dividend payable..................... -- -- -- 14,500
------- ------- ------- -------
Total current liabilities........... 13,710 16,777 17,037 31,537
Long-term debt........................ 200 -- -- --
Obligations under capital leases from
related party......................... 6,907 6,396 6,254 6,254
Dividend payable...................... -- -- -- 2,300
Deferred income taxes................. -- -- -- 2,135
Commitments and contingencies
(Note 8)............................. -- -- -- --
Shareholders' equity:
Preferred stock, 15,000,000 shares
authorized, no shares issued........ -- -- -- --
Common stock, no par value,
35,000,000 shares authorized,
11,904,000 shares issued and
outstanding......................... 57 57 57 74
Common stock, par value 1(Pounds) per
share, 10,000 shares authorized,
3 shares issued and outstanding..... -- -- -- --
Total share capital, 3 shares
outstanding, DM17,000 each.......... -- 17 17 --
Retained earnings.................... 21,193 20,645 22,123 4,191
Foreign currency translation
adjustment.......................... 1 (18) (47) (47)
------- ------- ------- -------
Total shareholders' equity.......... 21,251 20,701 22,150 4,218
------- ------- ------- -------
Total liabilities and
shareholders' equity............. $42,068 $43,874 $45,441 $46,444
======= ======= ======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE>
SUNQUEST INFORMATION SYSTEMS, INC.
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------- -----------------------
1993 1994 1995 1995 1996
------- ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues:
System sales............... $43,142 $38,416 $32,262 $ 6,961 $ 8,557
Support and service........ 20,317 24,202 29,270 6,603 8,160
------- ------- ------- ------- -------
Total revenues............ 63,459 62,618 61,532 13,564 16,717
------- ------- ------- ------- -------
Operating expenses:
Cost of system sales....... 21,820 16,711 14,085 3,694 3,652
Client services............ 16,349 17,116 17,764 4,464 4,669
Research and development... 6,958 7,734 9,040 2,152 2,387
Sales and marketing........ 6,554 6,957 8,734 2,044 2,400
General and
administrative............ 6,909 6,847 7,068 1,855 1,932
------- ------- ------- ------- -------
Total operating expenses.. 58,590 55,365 56,691 14,209 15,040
------- ------- ------- ------- -------
Operating income (loss)..... 4,869 7,253 4,841 (645) 1,677
Other income (expense):
Interest income............ 163 317 408 126 90
Interest expense........... (881) (1,288) (1,465) (365) (387)
Other...................... 767 23 78 9 186
------- ------- ------- ------- -------
Income (loss) before income
taxes....................... 4,918 6,305 3,862 (875) 1,566
State income tax provision
(benefit)................... 76 91 73 (17) 31
------- ------- ------- ------- -------
Net income (loss)........... $ 4,842 $ 6,214 $ 3,789 $ (858) $ 1,535
======= ======= ======= ======= =======
Pro forma data (unaudited):
Pro forma income before
income taxes.............. $ 3,536 $ 1,491
Pro forma income tax
provision................. 1,521 641
------- -------
Pro forma net income....... $ 2,015 $ 850
======= =======
Pro forma net income per
common share.............. $ 0.16 $ 0.07
======= =======
Pro forma weighted average
number of common shares
outstanding............... 12,762 12,842
======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE>
SUNQUEST INFORMATION SYSTEMS, INC.
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND THE THREE MONTH PERIOD ENDED
MARCH 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK
--------------- --------------
FOREIGN
CURRENCY TOTAL
TOTAL SHARE RETAINED TRANSLATION SHAREHOLDERS'
SHARES COST SHARES COST CAPITAL EARNINGS ADJUSTMENT EQUITY
---------- ---- ------- ------ ----------- -------- ----------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1992................... 11,904,000 $57 -- $ -- $-- $15,975 $-- $16,032
S corporation
distributions......... -- -- -- -- -- (2,216) -- (2,216)
Net income............. -- -- -- -- -- 4,842 -- 4,842
---------- --- ----- ------ ---- ------- ---- -------
Balance at December 31,
1993................... 11,904,000 57 -- -- -- 18,601 -- 18,658
S corporation
distributions......... -- -- -- -- -- (3,622) -- (3,622)
Issuance of Sunquest
Europa Limited stock.. -- -- 3 -- -- -- -- --
Foreign currency
translation
adjustment............ -- -- -- -- -- -- 1 1
Net income............. -- -- -- -- -- 6,214 -- 6,214
---------- --- ----- ------ ---- ------- ---- -------
Balance at December 31,
1994 11,904,000 57 3 -- -- 21,193 1 21,251
S corporation
distributions......... -- -- -- -- -- (2,877) -- (2,877)
Life insurance
distribution.......... -- -- -- -- -- (1,460) -- (1,460)
Issuance of Sunquest
Germany GmbH share
capital............... -- -- -- -- 17 -- -- 17
Foreign currency
translation
adjustment............ -- -- -- -- -- -- (19) (19)
Net income............. -- -- -- -- -- 3,789 -- 3,789
---------- --- ----- ------ ---- ------- ---- -------
Balance at December 31,
1995................... 11,904,000 57 3 -- 17 20,645 (18) 20,701
S corporation
distributions......... -- -- -- -- -- (57) -- (57)
Foreign currency
translation
adjustment............ -- -- -- -- -- -- (29) (29)
Net income............. -- -- -- -- -- 1,535 -- 1,535
---------- --- ----- ------ ---- ------- ---- -------
Balance at March 31,
1996 (unaudited)....... 11,904,000 $57 3 $ -- $ 17 $22,123 $(47) $22,150
========== === ===== ====== ==== ======= ==== =======
</TABLE>
See accompanying notes.
F-5
<PAGE>
SUNQUEST INFORMATION SYSTEMS, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------- -----------------------
1993 1994 1995 1995 1996
------- ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income (loss)..... $ 4,842 $ 6,214 $ 3,789 ($ 858) $1,535
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities:
Depreciation and
amortization........ 4,059 4,298 4,339 1,070 1,265
Loss (gain) on
disposition of
equipment........... -- 96 (1) -- --
Bad debt expense..... 112 374 495 70 150
Deferred revenue..... (201) 31 2,809 808 654
Deferred income
taxes............... -- --
Increase in cash
surrender value of
life insurance...... (222) (212) (194) (47) --
Changes in operating
assets and
liabilities:
Receivables.......... (4,364) 1,645 (3,914) 2,975 (816)
Inventory............ 1,519 (1,004) 481 (506) (516)
Prepaid expenses and
other............... (412) (83) (112) 22 (50)
Other assets......... (251) (4) (280) (124) (30)
Accounts payable..... 502 (67) (1,625) (97) 596
Accrued compensation
and related taxes... 437 115 (32) 482 707
Other accrued
expenses............ 510 37 (350) (299) (295)
------- ------- ------- ------ ------
Net cash provided by
operating
activities......... 6,531 11,440 5,405 3,496 3,200
------- ------- ------- ------ ------
Cash flows from
investing activities:
Repayment (issuance)
of notes receivable
to related party..... 109 (3,214) 940 (111) (393)
Purchase of property
and equipment........ (1,256) (2,398) (2,671) (815) (146)
Proceeds on disposal
of property and
equipment............
Capitalized software
development costs.... (1,927) (1,993) (2,806) (668) (797)
------- ------- ------- ------ ------
Net cash used in
investing
activities......... (3,074) (7,605) (4,537) (1,594) (1,336)
------- ------- ------- ------ ------
Cash flows from
financing activities:
Proceeds on
borrowings...........
Net borrowings on line
of credit............ -- -- 1,900 -- (846)
Principal payments on
debt................. (492) (360) (300) (75) (200)
Principal payments on
capitalized leases
from related party... (232) (390) (426) (100) (118)
Proceeds from issuance
of stock............. -- -- 17 (6) 0
S corporation
distributions........ (2,216) (3,622) (2,877) (87) (57)
Purchase of treasury
stock................ -- -- -- -- --
------- ------- ------- ------ ------
Net cash used in
financing
activities......... (2,940) (4,372) (1,686) (268) (1,221)
------- ------- ------- ------ ------
Foreign currency
translation
adjustment............ -- 1 (19) (1) (29)
------- ------- ------- ------ ------
Net increase
(decrease) in cash
and cash
equivalents........ 517 (536) (837) 1,633 614
Cash and cash
equivalents at
beginning of year..... 1,208 1,725 1,189 1,189 352
------- ------- ------- ------ ------
Cash and cash
equivalents at end of
year.................. $ 1,725 $ 1,189 $ 352 $2,822 $ 966
======= ======= ======= ====== ======
Supplemental disclosure
of cash flow
information:
Cash paid (received)
for income taxes..... $ 38 $ (7) $ 12 $ -- $ --
======= ======= ======= ====== ======
Cash paid for
interest............. $ 58 $ 122 $ 82 $ 12 $ 36
======= ======= ======= ====== ======
Supplemental disclosure
of non cash investing
and financing
activities:
Capital lease from
related party........ $ -- $ 3,117 $ -- $ -- $ --
======= ======= ======= ====== ======
Distribution of cash
surrender value of
insurance............ $ -- $ -- $ 1,460 $ -- $ --
======= ======= ======= ====== ======
Debt related to
acquisition of
facility............. $ -- $ -- $ 380 $ -- $ --
======= ======= ======= ====== ======
Disposal of property
and equipment........ $ 1,117 $ -- $ 4,420 $ -- $ --
======= ======= ======= ====== ======
</TABLE>
See accompanying notes.
F-6
<PAGE>
SUNQUEST INFORMATION SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Sunquest Information Systems, Inc. (the Company) designs, develops, markets,
installs and supports health care information systems for large and mid-sized
hospitals, clinics and other health care facilities in the United States,
Canada, and the United Kingdom. Total revenues are derived from the licensing
of software, the provision of value added services and the sale of related
hardware.
Basis of Combination
The combined financial statements include the accounts of the Company,
Sunquest Europa Limited (Sunquest Europa) and Sunquest Germany GmbH (Sunquest
Germany). The financial statements are combined as a result of common
ownership, management and business. All transactions between the Company and
each of Sunquest Europa and Sunquest Germany have been eliminated in
preparation of the combined financial statements. All amounts presented for
the three months ended March 31, 1995 and 1996 are unaudited but in the
opinion of management include all adjustments necessary for a fair
presentation in accordance with generally accepted accounting principles and
Securities and Exchange Commission rules for interim presentations of
financial information. The results of these interim periods are not
necessarily indicative of the results of the related annual periods.
Use of Estimates
The preparation of the combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
combined financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition
Revenues for the proprietary software, training and installation portion of
system sales are recognized using a percentage of completion method based on
the achievement of specified milestones in accordance with Statement of
Position No. 91-1, "Software Revenue Recognition." Anticipated losses are
recorded in the earliest period in which such losses become evident.
Revenues for the hardware portion of system sales are recognized upon
shipment. Support and maintenance fees are recognized ratably over the
contract period as the related costs are incurred. Revenues for other services
are recognized as the services are rendered.
Customer payment terms vary and are typically different from the revenues
recognized. Revenues recognized in advance of billings are classified with
current assets as unbilled receivables and are included in the balance sheet
as receivables. Billings recognized in advance of revenues are classified with
current liabilities as deferred revenue.
Software Development Costs
Software development costs incurred internally are expensed as research and
development until the technological feasibility of the newly designed product
is established. Thereafter, all software development costs are capitalized
until the product is ready for general release to the public. Capitalized
software development costs are stated at the lower of unamortized cost or net
realizable value. Net realizable value relating to a particular software
product is assessed based on anticipated gross margins applicable to sales of
the product in future periods. Amortization of capitalized software
development costs begins when the related product is available for
F-7
<PAGE>
SUNQUEST INFORMATION SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
general release to clients and is provided for each product based on the
greater of the relationship of current year revenues of the product to
anticipated total revenues or the straight-line amortization of such costs
over a five-year period. Historically, the straight-line approach has produced
the greater amortization amount.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Cash equivalents are
stated at cost, which approximates market value.
Inventory
Inventory consists primarily of computer hardware held for resale and is
recorded at the lower of cost (first-in, first-out) or market.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided
principally on the straight-line basis over estimated useful lives of five
years for equipment and software and seven years for furniture and fixtures.
Leasehold improvements are depreciated over the estimated useful life of the
asset or the term of the lease, whichever is less.
Income Taxes
For federal and certain state income tax purposes, the Company elected on
January 1, 1990 to be taxed under Subchapter S of the Internal Revenue Code
and is treated as an S corporation in most of the states where business is
conducted. As an S corporation, the Company's shareholders are responsible for
any federal and state income taxes resulting from the Company's taxable
income. Current state income taxes have been provided for the states which tax
the Company as a C corporation.
Impact of Recently Issued Accounting Standards
During the first quarter of 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." The adoption of this
Statement did not have a material effect on the Company's financial position
or results of operations.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). SFAS No. 123 establishes financial accounting
and reporting standards for stock-based compensation plans and for
transactions in which an entity issues its equity instruments to acquire goods
and services from non-employees. The new accounting standards prescribed by
SFAS No. 123 are optional, and the Company is permitted to account for its
stock incentive and stock purchase plans under previously issued accounting
standards. The Company does not expect to adopt the new accounting standard;
consequently, SFAS No. 123 will not have an impact on the Company's results of
operations.
2. UNAUDITED PRO FORMA INFORMATION
Pro Forma Amounts
The accompanying financial statements and related pro forma amounts have
been prepared in contemplation of an initial public offering of 3,000,000
shares (3,450,000 assuming the exercise of the underwriters' over-allotment
option) of the Company's Common Stock. In conjunction with this offering, the
following will occur:
All of the outstanding stock of Sunquest Europa and Sunquest Germany will be
transferred to the Company as a capital contribution. These entities will be
consolidated with the Company prospectively for reporting purposes.
F-8
<PAGE>
SUNQUEST INFORMATION SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
A dividend equal to the Company's undistributed S corporation taxable
earnings through December 31, 1995, estimated to be $14,500,000, was declared
in April 1996 and will be paid to shareholders of record as of April 30, 1996
from the proceeds of the offering. A second dividend was declared in April
1996, also payable to shareholders of record as of April 30, 1996, in an
amount equal to the Company's undistributed S corporation taxable earnings
from January 1, 1996 to May 29, 1996, estimated to be $2,300,000.
A portion of the first S corporation distribution will be contributed by
shareholders to the capital of Any Travel and will be used by Any Travel to
repay certain indebtedness of Any Travel to the Company ($3,653,000 and
$3,666,000 at December 31, 1995 and March 31, 1996, respectively. See Note 9).
The Company's tax status will change from an S corporation to a taxable C
corporation.
Pro Forma Net Income
The unaudited pro forma net income for the year ended December 31, 1995 and
the three months ended March 31, 1996 recognizes the elimination of interest
income of $326,000 and $75,000, respectively, as a result of the assumed
repayment of the related party notes receivable as of January 1, 1995 and
1996, respectively, and income tax expense estimated at 43% of pro forma
income before taxes. The recognition of a deferred tax liability will be
affected by a charge against operations in the reporting period in which the
Company's S corporation status is terminated. This net deferred tax liability
amount is estimated to be $1,132,000 at March 31, 1996.
Pro Forma Net Income Per Common Share
The pro forma net income per common share presented in the accompanying
statements of income has been computed giving effect to the assumed issuance,
as of the beginning of the pro forma periods presented, of the number of
shares of Common Stock necessary to replace the equity distributed as a result
of the first distribution of $14,500,000.
3. RECEIVABLES
Receivables consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------- 1996
1994 1995 (UNAUDITED)
------- ------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Billed receivables................................ $14,066 $13,005 $16,207
Unbilled receivables.............................. 569 5,171 2,785
------- ------- -------
14,635 18,176 18,992
Allowance for doubtful accounts................... (1,000) (1,122) (1,272)
------- ------- -------
Total receivables................................. $13,635 $17,054 $17,720
======= ======= =======
</TABLE>
Unbilled receivables represent recorded revenue that is billable by the
Company at future dates based on contractual payment terms.
Substantially all receivables are derived from sales and related support and
maintenance of the Company's clinical information systems to health care
providers located throughout the United States and in certain foreign
countries. Included in receivables at December 31, 1994 and 1995 and March 31,
1996 are amounts due from foreign health care providers of approximately
$494,000, $951,000 and $936,000, respectively. Combined total revenues
included foreign sales revenues of $1,053,000 and $1,526,000 for the years
ended December 31, 1994 and 1995, respectively, and $267,000 and $400,000 for
the three months ended March 31, 1995 and 1996, respectively.
F-9
<PAGE>
SUNQUEST INFORMATION SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The provision for bad debt expense recognized in 1993, 1994, and 1995 was
$112,000, $374,000 and $495,000 respectively. During 1993, 1994 and 1995,
$38,000, $226,000 and $373,000, respectively, of receivables were charged
against the allowance.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------- 1996
1994 1995 (UNAUDITED)
------- ------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Building............................................ $ -- $ 342 $ 342
Land................................................ -- 38 38
Computers and software.............................. 8,725 7,409 7,552
Furniture and fixtures.............................. 1,494 1,236 1,236
Leasehold improvements.............................. 2,152 2,678 2,681
Other equipment and vehicles........................ 1,543 842 842
------- ------- -------
13,914 12,545 12,691
Accumulated depreciation............................ 8,070 5,468 6,004
------- ------- -------
Total property and equipment, net................... $ 5,844 $ 7,077 $ 6,687
======= ======= =======
</TABLE>
Depreciation expense for the years ended December 31, 1993, 1994 and 1995
was approximately $1,976,000, $1,847,000 and $1,819,000, respectively.
Depreciation expense for the three months ended March 31, 1995 and 1996 was
approximately $440,000 and $536,000, respectively.
5. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
During the years ended December 31, 1993, 1994 and 1995, the Company
capitalized $1,927,000, $1,993,000 and $2,806,000, respectively, of total
software development costs of $8,885,000, $9,727,000 and $11,846,000,
respectively. For the three months ended March 31, 1995 and 1996, the Company
capitalized $668,000 and $797,000, respectively, of total software development
costs of $2,820,000 and $3,184,000, respectively. Amortization expense related
to capitalized software development costs for the years ended December 31,
1993, 1994, and 1995 was $1,603,000, $1,762,000 and $1,728,000, respectively,
and accumulated amortization was $4,931,000, $6,693,000 and $8,421,000,
respectively. Amortization expense related to capitalized software development
costs for the three months ended March 31, 1995 and 1996 was $432,000 and
$531,000, respectively, and accumulated amortization was $7,125,000 and
$8,952,000, respectively.
6. LINE OF CREDIT AND DEBT
Line of Credit
The Company had a line of credit that provided working capital up to
$5,000,000 based upon specified amounts of eligible accounts receivable. The
line of credit required interest at an annual rate of prime plus 0.75%. At
December 31, 1994 and 1995, these interest rates were 8.5% and 9.25%,
respectively. Amounts borrowed under the line of credit are secured by all of
the Company's assets. At December 31, 1995, the Company had $1,900,000 ($0 at
December 31, 1994) outstanding under the line of credit and had $3,100,000
available to borrow.
On March 8, 1996, the Company entered into a $10,000,000 line of credit
agreement with the Bank of America Arizona. A portion of the line of credit
was used to refinance the existing line of credit and current portion of long-
term debt. Unless the Company elects one of the optional interest rates (the
"Optional Rates"), the interest rate is the reference rate as announced from
time to time by Bank of America National Trust and
F-10
<PAGE>
SUNQUEST INFORMATION SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Savings Association (the "Bank of America Rate"). At March 8, 1996, the
Optional Rates and the Bank of America Rate ranged from 6.43% to 8.25%. All
outstanding principal and interest under the line of credit are due September
30, 1996 except for any amounts under the line of credit outstanding under
financing standby letters of credit which have a maximum maturity of 365 days.
Amounts borrowed under the line of credit are secured by all of the Company's
assets. The amount of letters of credit outstanding at any one time may not
exceed $1,000,000.
The new line of credit contains requirements as to minimum levels of working
capital, net worth and cash flow and places certain restrictions on new debt,
acquisitions, capital expenditures and loans to related parties. The agreement
prohibits the payment of any capital distributions or dividends other than
certain S corporation distributions in connection with an initial public
offering.
At March 31, 1996, the Company had $1,054,000 outstanding under the new line
of credit and had $8,946,000 available to borrow. The interest rate associated
with the amounts outstanding at March 31, 1996 was 8.25%.
Debt
Long-term debt represents various term loans bearing interest at a certain
financial institution's prime commercial rate plus 0.75% in 1994 and 1995,
secured by all assets of the Company. The amounts outstanding on the debt
payable at December 31, 1994 and 1995 were $500,000 and $200,000,
respectively. The remaining balance at December 31, 1995 was repaid on March
13, 1996.
The carrying amounts of the Company's borrowings approximate fair value. The
fair values of the Company's borrowings (see Note 11) are estimated using
discounted cash flow analysis based upon the Company's current incremental
borrowing rates for similar types of debt arrangements.
7. LEASES
The Company leases two buildings from Any Travel, Inc. (Any Travel), an
affiliated entity, under capital leases. The affiliation is through the common
ownership of the Company and Any Travel. The Company also leases certain
buildings and equipment from third parties under noncancelable lease
arrangements that may be adjusted for increases in maintenance and insurance
costs and the consumer price index. These capital and operating leases expire
in various years through July 1998 and may be renewed for periods ranging from
one to five years.
Amortization of leased assets is included in depreciation and amortization
expense.
Future minimum payments under capital leases and noncancelable operating
leases with initial terms of one year or more consisted of the following at
December 31, 1995:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN THOUSANDS)
<S> <C> <C>
1996........................................................ $ 1,809 $288
1997........................................................ 1,809 269
1998........................................................ 1,809 164
1999........................................................ 1,809 --
2000........................................................ 1,809 --
Thereafter.................................................. 4,076 --
------- ----
Total minimum lease payments................................ 13,121 $721
====
Amounts representing interest............................... 6,214
-------
Present value of net minimum lease payments (including
current portion of $511,000)............................... $ 6,907
=======
</TABLE>
F-11
<PAGE>
SUNQUEST INFORMATION SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1995 and March 31, 1996, aggregate future minimum rental
payments to be received under noncancelable subleases were approximately
$484,000 and $429,000, respectively.
Rental expense for the years ended December 31, 1993, 1994 and 1995 was
approximately $222,000, $248,000 and $318,000, respectively. Rental expense
for the three months ended March 31, 1995 and 1996 was approximately $62,000
and $91,000, respectively.
8. COMMITMENTS AND CONTINGENCIES
Any Travel had approximately $3,292,000 of mortgage term debt outstanding to
a third party at December 31, 1995 ($3,280,000 at March 31, 1996). The Company
has guaranteed the payment of all principal and interest under the mortgage.
The Continuing Guarantee prohibits the payment of any dividends other than
certain S corporation distributions in connection with an initial public
offering. Payments are due in monthly installments through July 1, 1997, at
which time Any Travel may extend the final maturity to July 1, 2002. Any
Travel's obligation is secured by land and a building with a net book value of
approximately $4,610,000 at December 31, 1995.
The Company has granted liens on all of its assets to a vendor to secure
amounts due for purchases of hardware and other equipment.
9. RELATED PARTY TRANSACTIONS
The Company had the following notes receivable from Any Travel at December
31, 1994 and 1995:
<TABLE>
<CAPTION>
MARCH 31,
1996
1994 1995 (UNAUDITED)
------ ------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Note receivable, due in monthly installments of
$49,012 including
interest at 8.5% through May 2001................... $3,117 $2,515 $2,484
Note receivable, due in monthly installments of
$18,743 including
interest at 8.0% through July 2002.................. 1,259 1,130 1,119
------ ------ ------
Total................................................ 4,376 3,645 3,603
Less amount due in one year.......................... 731 529 626
------ ------ ------
Long-term portion.................................... $3,645 $3,116 $2,977
====== ====== ======
</TABLE>
The current portion of notes receivable from related parties included
approximately $217,000 and $8,000 of accrued interest at December 31, 1994 and
1995, respectively. At March 31, 1996, the current portion of notes receivable
from related parties included approximately $63,000 of accrued interest. In
connection with the proposed initial public offering, these notes will be
repaid (see Note 2).
During 1993, 1994 and 1995, the Company received management fees from an
affiliate of $120,000, $140,000 and $240,000, respectively. During each of the
three-month periods ended March 31, 1995 and 1996, the Company received
management fees from an affiliate of $60,000.
On September 1, 1995, the Company purchased land and a building from an
affiliate for $380,000. The purchase was financed through the issuance of a
7.0% demand note payable to the affiliate. This note was paid subsequent to
year end.
The fair market values of these financial instruments (see Note 11) were
estimated using discounted cash flow analysis at current market interest rates
for such assets.
F-12
<PAGE>
SUNQUEST INFORMATION SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
10. PROFIT SHARING PLAN
The Company has a Profit Sharing Plan covering substantially all of its
employees. Employees who have both attained the age 21 and completed 1,000 or
more hours of service in a twelve-month computation period are eligible to
participate. Under provisions of the plan, each participant may contribute up
to 12% of their eligible compensation to the plan and the Company can make
discretionary contributions to the plan. The Company incurred expenses of
approximately $569,000, $631,000 and $337,000 for the years ended December 31,
1993, 1994 and 1995, respectively, related to this plan. For the three months
ended March 31, 1995 and 1996, the Company incurred expenses of approximately
$84,000 and $144,000, respectively, related to this plan.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the Company's financial instruments
at December 31, 1994 and 1995 were as follows:
<TABLE>
<CAPTION>
1994 1995
---------------- ----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents............. $ 1,189 $ 1,189 $ 352 $ 352
Accounts receivable................... 13,635 13,635 17,054 17,054
Notes receivable...................... 4,376 4,146 3,645 3,592
Accounts payable...................... 3,612 3,612 1,987 1,987
Line of credit........................ -- -- 1,900 1,900
Term debt............................. 500 500 200 200
Related party debt.................... -- -- 380 380
</TABLE>
12. SHAREHOLDERS' EQUITY
On March 25, 1996, the Board of Directors amended the Articles of
Incorporation of the Company to change the Class A Common Stock (10,000,000
shares authorized) and Class B Common Stock (5,000,000 shares authorized) into
a single class of Common Stock with 35,000,000 shares authorized. The
amendment also authorizes 15,000,000 shares of Preferred Stock. The issued and
outstanding shares at December 31, 1994 and 1995 have been adjusted to reflect
these changes.
On March 25, 1996, the Board of Directors approved a 1780.3836-for-1 split
of the Common Stock. All share amounts have been retroactively adjusted to
reflect this split.
F-13
<PAGE>
===============================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY UNDERWRITER OR ANY OTHER PERSON.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, ANY SECURITIES OTHER THAN THE SHARES OF COMMON STOCK OFFERED
HEREBY NOR DOES IT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION
IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DE-
LIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUM-
STANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS COR-
RECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................................................... 3
Risk Factors............................................................... 5
The Company................................................................ 13
Use of Proceeds............................................................ 13
S Corporation Distributions and
Termination of S Corporation Status....................................... 14
Dividend Policy............................................................ 14
Capitalization............................................................. 15
Dilution................................................................... 16
Selected Combined Financial Data........................................... 17
Management's Discussion and
Analysis of Financial Condition
and Results of Operations................................................. 18
Business................................................................... 26
Management................................................................. 39
Certain Transactions....................................................... 46
Principal Shareholders..................................................... 48
Description of Capital Stock............................................... 49
Shares Eligible for Future Sale............................................ 52
Underwriting............................................................... 53
Legal Matters.............................................................. 55
Experts.................................................................... 55
Change in Independent Accountants.......................................... 55
Additional Information..................................................... 55
Glossary of Selected Terms................................................. 56
Index to Combined Financial Statements..................................... F-1
</TABLE>
------------
UNTIL JUNE 25, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT PAR-
TICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACT-
ING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
===============================================================================
===============================================================================
3,000,000 SHARES
LOGO
COMMON STOCK
------------
PROSPECTUS
MAY 31, 1996
------------
VOLPE, WELTY & COMPANY
PUNK, ZIEGEL & KNOELL
===============================================================================
