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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO _________________
Commission file number: 0-28212
SUNQUEST INFORMATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 86-0378223
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
4801 East Broadway Boulevard
Tucson, Arizona 85711
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (520) 570-2000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 21, 1997, the registrant had 15,362,587 shares of Common Stock
outstanding. The aggregate market value of the Common Stock held by
nonaffiliates of the registrant, based on the closing price of the Common Stock
on March 21, 1997 as reported by Nasdaq, was $42,338,119. Shares of Common
Stock held by shareholders who may be deemed to be affiliates for this purpose
have been excluded. This determination of affiliate status is not necessarily a
determination for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for 1996 are
incorporated by reference into Parts II and IV of this Form 10-K.
Portions of the registrant's Proxy Statement for the 1997 Annual Meeting of
Shareholders are incorporated by reference into Part III of this Form 10-K.
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SUNQUEST INFORMATION SYSTEMS, INC.
Form 10-K - 1996
TABLE OF CONTENTS
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PART I
Item 1 - Business
General 1
Recent Developments 3
Products 3
Third-Party Marketing Arrangements 10
Products Under Development 12
Client Services 13
Marketing 14
Technology 15
Research and Development 15
Competition 16
Regulation 17
Proprietary Rights 19
System Acquisition Agreements 20
Backlog 20
Employees 21
Executive Officers of the Registrant 21
Item 2 - Properties 23
Item 3 - Legal Proceedings 24
Item 4 - Submission of Matters to a Vote of Security Holders 24
PART II
Item 5 - Market for Registrant's Common Equity and Related
Stockholder Matters 24
Item 6 - Selected Financial Data 25
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 25
Item 8 - Financial Statements and Supplementary Data 25
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 25
PART III
Item 10 - Directors and Executive Officers of the Registrant 26
Item 11 - Executive Compensation 26
Item 12 - Security Ownership of Certain Beneficial Owners and
Management 26
Item 13 - Certain Relationships and Related Transactions 26
PART IV
Item 14 - Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 27
Signatures 31
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Part I
Item 1. Business.
General
Sunquest Information Systems, Inc. ("Sunquest" or the "Company") 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. With the
purchase of Antrim Corporation ("Antrim") on November 26, 1996, the Company
acquired significant market share in the commercial and medical reference
laboratory market. See "--Recent Developments." 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, 1996, the Company had an installed
customer base of more than 950 sites in the United States, Canada, Europe,
Mexico and Saudi Arabia. Sunquest is applying its open systems, integration and
clinical experience to develop and service enterprise-wide clinical repository,
point-of-care, managed care, and commercial and reference laboratory systems
targeted at the information needs of the emerging IDN market. The Company's
clinical repository systems are in production use at the Company's initial site,
a multi-entity, 812-bed IDN. Installation at the Company's second site, New
Hanover Regional Medical Center, is nearing completion. Implementation planning
and site pre-work are currently underway at a third site in the United Kingdom.
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 such important processes as: (i) the
patient care process across multiple delivery sites; (ii) the appropriateness of
diagnoses, treatments and resource utilizations; (iii) provider performance and
clinical outcomes; (iv) performance under managed care contracts; and (v)
commercial and medical reference laboratory processing and business practices.
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.
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Sunquest offers four suites of information systems: departmental clinical
systems, clinical repository systems, managed care systems, and commercial and
medical reference laboratory 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. The radiology systems also facilitate accurate
scheduling of diagnostic exams, film management and department specific
reporting. Sunquest estimates that it has installed in its LIS client base over
8,300 interfaces that were developed for approximately 425 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 insurance contract administration
functions of risk-bearing managed care organizations, such as health maintenance
organizations ("HMOs"), and managed care entities within IDNs. These systems
are designed to meet the demands of the evolving capitation and fixed fee
reimbursement structures. The Company's commercial and medical reference
laboratory systems support the distinct needs of high-volume commercial
laboratories including test processing, billing requirements and optimization of
business practices.
Sunquest markets its products and services internationally through its
direct sales force and marketing relationships with other information systems
vendors. These relationships include a marketing partnership with IBM as an
LIS, radiology and clinical repository vendor in IBM's Open Healthcare Alliance.
The Company's customers include Geisinger System Services, Florida Hospital,
Aurora Health Care, IHC Health Services, Inc., Advocate Health Care and
Allegheny Health Management Services.
Sunquest Information Systems, Sunquest, FlexiLab, FlexiRad, CareGiver,
IntelliCare and SCPR, among other marks, are registered trademarks of Sunquest
Information Systems, Inc. CMDR, Flexi-3R, MCM Payor & design and the Sunquest
Information Systems logo & design, among other marks, are trademarks of Sunquest
Information Systems, Inc. Antrim, Answers, The Answer is Antrim, OnlineLab and
the Antrim logo & design, among other marks, are registered trademarks of Antrim
Corporation.
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Recent Developments
In June 1996, the Company completed its initial offering of stock to the
public. A total of 3,450,000 shares of Common Stock were sold at a price of $16
per share, with net proceeds to the Company of $50.1 million after offering
expenses. In connection with the public offering, the Company's status as an S
corporation terminated and, as a result, the Company became subject to federal
and state income taxes.
On November 26, 1996, the Company purchased all of the outstanding stock of
Antrim from Antrim's parent corporation, The Compucare Company, for $5.0 million
in a transaction accounted for under the purchase method of accounting. Antrim
was founded in 1982 and is a leading provider of laboratory information systems
for commercial and medical reference laboratories with 235 client sites
installed at December 31, 1996. The acquisition of Antrim demonstrates the
Company's continued commitment to growth through strategic acquisitions. The
interoperability of Antrim's commercial lab product and the Company's multi-
hospital product is proven in seven IDNs, each having a large commercial
reference laboratory business. The functionality of the combined systems
strengthens the Company's position as a leader serving the changing needs of the
health care industry.
Products
Sunquest offers four 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; (iii) managed care
systems that automate the administrative functions of managed care
organizations; and (iv) commercial and medical reference laboratory systems that
automate the clinical, financial, information support and business management
operations of commercial medical laboratories.
Departmental Clinical Systems
Departmental clinical systems were the first applications developed by
Sunquest. They manage the information needed to automate the operations of
laboratory and radiology departments in one or more facilities and can also
contribute the majority of the clinical data that populates 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.
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Laboratory Information Systems
Sunquest's FlexiLab 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, Sunquest's FlexiLab system immediately informs the technologist of
the validation failure. Sunquest estimates that it has installed in its
LIS client base over 7,600 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.
The General Laboratory module is the core of the FlexiLab 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 Windows-based functionality 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.
The Microbiology module in FlexiLab 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.
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The Mulhos module utilizes the FlexiLab 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 hospital laboratory to
expand beyond the traditional acute care 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.
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
FlexiLab, 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 and is installed at 15 sites.
Clinical Repository Systems
Sunquest began marketing its clinical repository systems in 1995. These
systems 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.
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The Company's clinical repository systems, collectively known as
IntelliCare, 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, diagnoses, 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
diagnoses. Sunquest's open systems approach embraces best-of-fit applications
and legacy departmental systems from other vendors.
Scalable Clinical Patient Repository ("SCPR"), a module within IntelliCare,
is a scalable clinical patient repository utilizing a relational database.
The SCPR module 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 PC 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 supports flexible results display and clinical
decision-making by providing access to results data in multiple formats.
Data can be presented as spreadsheets, graphs, and text, as well as in
icon-based summaries. 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.
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The interface engine, part of which is 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
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 have been successfully installed and are in production
use on an enterprise-wide basis at Moses Cone Health Systems. Moses Cone is a
multi-entity facility in Greensboro, North Carolina and includes a 547-bed acute
care hospital, a 115-bed specialty hospital, a 150-bed extended care facility
and other health care facilities. New Hanover Regional Medical Center is the
Company's second IntelliCare site. New Hanover is a 648-bed tertiary care
medical center associated with four medical schools. New Hanover is a teaching
hospital and major referral center and also includes the 60-bed Coastal
Rehabilitation Hospital as part of its delivery network. The SCPR module was
put into service in November 1996, and the CareGiver Communication and CareGiver
View modules went into service on the first units of the floor of the hospital
in December 1996. Implementation planning and site pre-work are currently
underway at a third site in the United Kingdom.
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's future success will depend to a significant degree upon
its ability to enhance the functionality of, and successfully market, its
clinical repository systems. 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.
Managed Care Systems
The Company's Managed Care Manager Payor ("MCM Payor") 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 Payor 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-bearing managed care products on a small, medium or large scale. MCM
Payor 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.
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The Enrollment System module is the foundation of MCM Payor. 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 Payor.
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.
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 Payor in February 1995 but
did not acquire the installed MCM Payor client base. The Company has furthered
the development of the MCM Payor technology and released a new version for
client-server architecture in September 1996. Subsequent to the release of the
new version, the Company has sold and installed one MCM Payor system.
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Commercial and Medical Reference Laboratory Systems
Antrim offers commercial laboratory systems for the medical laboratory
marketplace. These departmental clinical systems support laboratory processing,
billing processes and business practices of a high-volume commercial laboratory.
Clinical Systems
The Answers: General Laboratory is the core product of Antrim. This
LIS is a high-volume system, supporting the requirements of all of the
departments of a laboratory. The system can be installed in hospital
and commercial laboratories.
The Answers: Microbiology is an additional module to the Answers:
General Laboratory system and fully automates the microbiology
department, allowing it to operate in a paperless environment.
Financial Systems
The Answers: Accounts Receivable/Billing application supports order
entry, billing production, cash receipts processing, accounts
receivable adjustment, management reporting, revenue analysis and cash
collection analysis.
The Answers: General Ledger application supports journal entry,
journal processing, posting to the general ledger and the production
of accounting reports and financial statements.
The Answers: Accounts Payable application supports invoice processing,
disbursement scheduling and selection, checkbook processing, check
production, management reporting and the preparation of accounting
reports and 1099 forms.
The Answers: Materials Management application supports retail sales,
purchasing, receiving, inventory control, issuing and distribution of
supplies and comprehensive management reporting.
The Answers: Payroll application supports timecard processing,
disbursement scheduling and selection, checkbook processing, check
processing, management reporting and the preparation of payroll
reports and W-2 forms.
The Answers: Fixed Assets application supports asset acquisition,
transfer and disposition. Comprehensive periodic and management
reporting capabilities are available.
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The Answers: Electronic Claims/EDI services provides the capabilities
to electronically transmit insurance claims to Medicare, Medicaid and
other carriers.
Information Support Systems
The Answers: OnlineLab application electronically unites laboratories
with the physicians' offices they serve. Special features provide for
the online submission of laboratory orders and reporting of results at
the physician's office. Comprehensive reporting features are
provided, including ad hoc cumulative report generation.
The Answers: Report Writer application supports query requests,
information retrieval from Antrim's systems, data formatting for
reporting and disposition of reports to other applications, terminals
and/or printers.
The Answers: Optical Disk Archiving application downloads data from
the laboratory's host computer and reformats data for long-term
storage. It provides rapid access to archived information and
expedient reporting of information to terminals, export files,
printers and facsimile machines.
Business Management Systems
The Answers: Courier Management application provides the ability to
optimize courier routes using route quality electronic maps. This
leads to more efficient courier routes, allowing the laboratory to
realize savings in courier expenses and increased customer service.
Third-Party Marketing Arrangements
Sunquest believes that there are advantages to open system solutions that
facilitate the interoperation of products from other vendors. Consequently, the
Company has entered into an assortment of value added remarketer ("VAR")
agreements, joint marketing agreements and licensing agreements with other
vendors.
Hardware and resold software are purchased from third-party vendors under
VAR agreements and sold to customers in conjunction with the Company's software
products. Hardware support is the responsibility of the hardware manufacturers
under agreements negotiated directly between the supplier and the customer or
agreements where Sunquest acts as an intermediary in negotiating the support
agreement.
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Subsequent to December 31, 1995, the Company entered into agreements with
third parties to offer the following functionalities in conjunction with the
Company's products:
Point-of-Care
In May 1996 the Company entered into a joint marketing-referral agreement
with PACE Health Management Systems, Inc. ("PACE"). PACE is a growing
provider of advanced point-of-care modules, including care planning,
assessments, clinical notes, critical pathways and discharge education.
Enterprise Scheduling
In January 1997 the Company entered into a VAR agreement with Centennial
Systems, Inc. which grants Sunquest a non-exclusive license to market,
sublicense, support and otherwise use the Baseline 2000 Multi-Resource
Scheduling System . This stand-alone product allows clinicians to schedule
IDN resources such as rooms, beds, lab tests and outpatient clinics across
the IDN's multiple facilities and services.
Rules-Based Orders
In February 1997 the Company entered into a non-exclusive license agreement
with Multum Information Services, Inc. ("Multum") whereby Sunquest will
market Multum's MediSource drug information service to be provided as an
option with Sunquest's proprietary system. The Company anticipates that
the first use of the Multum software development kit will be in
enhancements to the CareGiver Communication module to provide
comprehensive, patient-specific drug and pharmacy clinical information
during the clinical ordering cycle.
Anatomic Pathology
In February 1997, the Company entered into a VAR agreement with Dynamic
Healthcare Technologies, Inc. ("Dynamic"). The agreement grants the Company
a non-exclusive license to modify, interface, market, sublicense, support
and otherwise use the Dynamic software program known as CoPath
Client/Server ("CoPath") which is a computer clinical information system
used in surgical pathology, cytology and autopsy. Dynamic has over 250
clients using CoPath.
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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 Event Management will provide alerts and decision support to
health care providers to assure high quality patient care. The system will
accept standardized input from feeder systems in the IntelliCare
environment, check this information against a variety of rules and provide
prompt notification to clinicians of any adverse situation. The system
will also provide expert advice to assist clinicians in determining the
optimum, cost effective antibiotic treatment of infectious diseases.
Cost Management Data Repository ("CMDR") is the planned 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.
Lab Data Network ("LDN") is a product and service offering comprised of
numerous component solutions to address the laboratory consolidation trend
in the health care industry. LDN enables disparate lab systems within a
health care network to send orders, specimens and results to each other and
to a central lab data warehouse. Core lab and "Centers of Excellence"
models can be effectively automated with LDN. The outreach client base is
provided with a GUI longitudinal results view from the lab data warehouse
populated by disparate lab systems.
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Global Participant Index ("GPI") is a generic term for a software product
required by IDNs for administration of their membership. This product will
uniquely identify a patient or client who may have different identifiers at
various hospitals, clinics and physician practices before they joined the
integrated network. The GPI accepts inputs from network entities, assigns
unique identifiers, if required, and provides positive identification of
the member. Enhanced versions of the product enable patient registration,
physicians registration, physicians credentialling, automated member chart
location and emergency admission data capture in hospitals and others.
The AnswerNet application is a remote information access system that
accesses information on the various Antrim information systems, utilizing
industry standard web technology on a corporation intranet.
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.
Client Services
At December 31, 1996, the Company employed a service organization of
approximately 370 professionals who provide implementation, application and
system support, education and consulting services to the Company's clients. The
client services 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 rigorous training including,
where required, 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 the
Company's and the clients' 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
13
<PAGE>
establishing new commercial laboratories. Additional client education services
are provided through computer-based training or formal ongoing educational
courses and seminars.
Balance View Consulting is a division of Sunquest that performs consulting
primarily to the Company's installed base. The consulting ranges from training
in the better use of Sunquest's products to full reengineering projects.
Balanced View Consulting will also provide System Managers on a monthly or
yearly basis, implementation assistance and specific project work on a hourly-
fee basis.
Marketing
The primary markets for the Company's systems and services are comprised of
approximately 3,500 acute care hospitals in the United States and Canada that
have more than 250 beds and approximately 4,000 commercial and medical reference
laboratories in the United States. 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, the Antrim User Group meetings, 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 Limited, a wholly owned subsidiary of
the Company, 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.
The Company's marketing department is composed of a team of specialists in
product management, sales support, competitive analysis, quoting, proposals and
advertising. Its sales force is organized into six divisions: (i) FlexiLab
Sales, offering LISs information systems; (ii) FlexiRad Sales, offering
radiology information systems; (iii) European Sales, offering the Company's
systems in the United Kingdom and Germany; (iv) IntelliCare Sales, offering
clinical information repositories, order entry and enterprise-wide results and
data viewing systems; (iv) MCM Payor Sales, targeting third party
administrators, insurers and HMOs; and (vi) Antrim Sales, offering commercial
and medical reference laboratory systems.
14
<PAGE>
Technology
Sunquest's HCISs operate on IBM RS6000 and a variety of Digital Equipment
Corporation ("DEC") server systems. Users access the Company's applications
using IBM compatible PCs and/or terminals. FlexiLab and FlexiRad are offered on
both IBM and DEC platforms. IntelliCare, CareGiver Communication, CareGiver View
and MCM Payor are offered on the IBM RS6000 and will also be offered on DEC
platforms. Antrim's suite of products is being offered on IBM RS6000 and 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 Payor 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
relational database layer. The PC operating system is Windows (currently
Windows 3.11 or Windows 95), and the server operating system is UNIX. Antrim
has developed all its information systems in the M language. Antrim's Online Lab
for Windows system was developed in Visual Basic. The AnswerNet product under
development utilizes both M and web standard HTML languages.
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.
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<PAGE>
Sunquest's product development managers are responsible for product
architecture, improvements to existing products, construction verification and
inspection. 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 December 31, 1996, approximately 156 product development
engineers were assigned to improving and extending the Company's existing
systems and approximately 56 engineers were assigned to the development of
products in new product areas.
In 1996, 1995 and 1994, the Company's research and development expenses
before capitalization of software development costs totaled approximately $12.8
million, $11.8 million and $9.7 million, respectively.
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 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.
The Company's principal competitors are Cerner Corporation, HBO & Company,
Medical Information Technology, Inc., Shared Medical Systems Corporation, Soft
Computer Consultants, Inc. and Triple G Corporation. In addition, the Company
competes with a large number of other information system 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.
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<PAGE>
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 information systems more rapidly than the Company or
clinical information 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.
Regulation
The United States Food and Drug Administration ("FDA") is authorized to
regulate medical devices under the Federal Food, Drug and Cosmetic Act, as
amended. In 1989, the FDA issued a draft policy addressing the regulation of
certain computer software products as medical devices. The draft policy stated
that the FDA would regulate certain computer software products via the FDA's
"general controls," which include registration listing, good manufacturing
practices and the clearance of pre-market notifications ("501(k)s"), and that
other types of computer software products also considered by the FDA to be
medical devices would not be actively regulated.
The FDA has been inconsistent in its interpretation, application and
enforcement of this draft policy. At present, the FDA is actively reevaluating
this draft policy to determine the types of computer software products it will
consider to be medical devices and how they will be regulated. Recent public
statements made by FDA representatives suggest that certain computer software
products will be regulated via a variety of FDA controls, including clearance of
a 510(k) demonstrating "substantial equivalence" to other products prior to
marketing. Other computer software products may be regulated via "software
quality audits" verifying that the computer software has been appropriately
developed plus other regulatory controls. Other types of computer software
products would be only minimally regulated.
17
<PAGE>
Depending on how the FDA interprets and applies it policies as well as the
type of computer software at issue, the Company's software products may be
subject to any of these requirements. It is also possible that the Company's
software products, other than its blood bank software products, will not be
actively regulated.
In March 1994, the FDA issued a letter advising that the FDA considers
medical devices to include software products intended for use in the manufacture
of blood and blood components or for the maintenance of 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, including the submission of
510(k)s. In October 1995, the FDA extended the time for blood bank software
manufacturers to file 510(k)s with the FDA to March 31, 1996. Sunquest complied
with this requirement within such deadline. Antrim complied with this
requirement in April 1996, having applied for and received an extension of time
to file its 510(k).
Antrim was the subject of a good manufacturing practices ("GMP") audit
conducted by the FDA in March 1996. As a result of the audit, Antrim received a
warning letter from the FDA in June 1996 instructing Antrim to resolve certain
GMP issues and to contract with an independent, third-party auditor to certify
that certain procedures were in place. The independent audit was conducted in
November 1996 and the results of the audit indicated that the non-compliance
issues had not been resolved. Sunquest intends to assist Antrim in achieving
compliance with FDA policies going forward and to help Antrim sunset Antrim's
blood bank product and replace it with Sunquest's blood bank product. Until
then, Sunquest intends to (i) provide quality assurance management, guidance and
assistance to Antrim, (ii) oversee Antrim's implementation of good manufacturing
practices, and (iii) assist Antrim in developing the necessary procedures and
processes for software testing and support.
Compliance with the FDA's current 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 effect the procurement practices and
operation 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 HCISs.
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 HCISs and services. The Company cannot predict
with any
18
<PAGE>
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.
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 Sunquest 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 Sunquest in the United Kingdom and Germany. The trade name Antrim and other
trade names used by Antrim in its business, such as Answers and The Answer is
Antrim, have also been registered with the United States Patent and Trademark
Office. See "--General." 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
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<PAGE>
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.
System Acquisition Agreements
The Company 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, the Company also resells certain items of hardware to its clients.
Clients pay specified fees for the license of software proprietary to the
Company and the sublicense of software proprietary to third parties. Clients
also pay specified fees for hardware, installation and training in the use of
the system. License fees for the Company's systems are typically based on a
number of factors, including the number and type of software modules included in
the system, as well as the volume of use by the client. The Company generally
supports and maintains the licensed systems and provides modifications,
enhancements and upgrades for a monthly fee under separate maintenance
agreements.
Backlog
At December 31, 1996, the Company had a total contract backlog of $87.3
million, which consisted of $41.9 million of system sales and $45.4 million of
support and service. At December 31, 1995, total contract backlog was $62.7
million, which consisted of $33.7 million of system sales and $29.0 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.
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<PAGE>
Employees
As of December 31, 1996, the Company had 755 employees. None of the
Company's employees are represented by a labor union, nor has the Company
experienced any work stoppages. The Company believes that it has good relations
with its employees.
Executive Officers of the Registrant
Information concerning the executive officers of the Company is set forth
below.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Sidney A. Goldblatt 62 President, Chief Executive Officer and
Director
Richard A. Wesson 56 Chief Operating Officer
Nina M. Dmetruk 44 Executive Vice President-Chief Financial
Officer, Secretary and Director
Albert A. DeStefano 53 Executive Vice President-Sales and Marketing
James F. Garliepp 45 Executive Vice President-Chief Technology
Officer
Joanna S. Broder 53 Senior Vice President-Client Services
Samuel A. Miller 58 Senior Vice President-Engineering
T. Paul Thomas 37 Senior Vice President-Marketing
Bradley L. Goldblatt 33 Treasurer and Director
</TABLE>
Sidney A. Goldblatt, M.D., a co-founder of the Company, has been President
of the Company since 1986, Chief Executive Officer since December 1994 and a
director of the Company since its formation in 1979. 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 and as Vice President of the Systems Division from February 1992 to
July 1993.
Nina M. Dmetruk has been Executive Vice President-Chief Financial Officer
of the Company since September 1991 and a director of the Company since December
1991. She has served as Secretary of the Company since August 1996. 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
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<PAGE>
basis. 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 is a
CPA and a CFP and until May 1996 was the sole owner of a public accounting firm
for more than five years.
Albert A. DeStefano has been Executive Vice President-Sales and Marketing
since February 1997. From May 1996 until he joined the Company, Mr. DeStefano
was employed by the Emtek Division of Motorola, a health care software company,
where he served as President and Chief Executive Officer. From July 1993 to May
1996, Mr. DeStefano was employed by Emtek Healthcare Systems, Inc., a health
care software company, where he served as Director and Chief Executive Officer.
From October 1992 to July 1993, Mr. DeStefano was a Consultant for Sheldon
Dornfest Associates, LTD, a health care consulting company. From October 1989
to October 1992, Mr. DeStefano was Chief Operating Officer of the Company.
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.
Joanna S. Broder joined the Company in March 1997 as Senior Vice President-
Client Services. From January 1995 until she joined the Company, Ms. Broder was
employed by AT&T Government Markets, a telecommunications company, where she
served as Assistant Vice President, Collaborative Solutions. From November 1989
to November 1994, Ms. Broder was employed by Digital Equipment Corporation, a
computer manufacturing company, where she served as Program Manager.
Samuel A. Miller has been Senior Vice President-Engineering since January
1997. From August 1996 until January 1997, Mr. Miller served as Vice President-
Strategic Planning of the Company. From March 1996 to July 1996, Mr. Miller was
a Consultant for the Worldcare Corporation, a health care telemedicine company.
From March 1994 to December 1995, Mr. Miller was employed by Massachusetts
General Hospital, where he served as Senior Vice President of Operations and
Chief Information Officer. From January 1992 to March 1994, Mr. Miller was
employed by Chedoke-McMaster Hospitals, where he served as Vice President of
Professional Services and Chief Information Officer.
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
22
<PAGE>
served as Manager of Marketing Operations from January 1991 to September 1992
and as Director of Channel Development from September 1992 to November 1993.
Bradley L. Goldblatt has been Treasurer and a director of the Company since
December 1992. From June 1991 to February 1993, he was a Research Laboratory
Technician at the Eye and Ear Institute of Pittsburgh. Bradley Goldblatt is the
son of Dr. Goldblatt.
The executive officers of the Company are elected by and serve at the
discretion of the Board of Directors.
Item 2. 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, Inc., a travel agency located in Tucson,
Arizona, which is owned by related parties. 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 2001. 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 $70,940
and expires in May 2004. Sunquest receives monthly rental payments under the
subleases totaling approximately $46,000. 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.
On February 21, 1997, the Company purchased land and a building in Tucson,
Arizona, for cash in the amount of $1.8 million. The Company anticipates the
facility will be used for customer-related activities.
Antrim leases office space in Plano, Texas, containing approximately 47,420
square feet. The lease currently requires monthly rental payments of $55,323
and expires in May 2001.
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.
23
<PAGE>
Item 3. 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.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of shareholders during the quarter
ended December 31, 1996.
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
The Company's Common Stock is traded on the over-the-counter market and is
quoted on the Nasdaq National Market System under the symbol "SUNQ." Trading
commenced May 31, 1996 as a result of the Company's initial offering of stock to
the public. The following table sets forth, for the periods indicated, the high
and low sales prices of the Common Stock as reported by the Nasdaq National
Market System.
<TABLE>
<CAPTION>
Price Range
Period High Low
- ------------------------------------------------------
<S> <C> <C>
1996
Second quarter (from May 31) $19.750 $12.000
Third quarter $19.000 $10.125
Fourth quarter $18.625 $13.000
</TABLE>
24
<PAGE>
Except for S corporation distributions, no dividends have been declared or
paid on the Company's Common Stock. The Company anticipates that it will retain
future earnings, if any, to fund the development and growth of its business and
does not anticipate paying any cash dividends on its Common Stock in the
foreseeable future. The Company's line of credit and guaranty agreements
prohibit the payment of any capital distributions or dividends other than the S
corporation distributions. At March 21, 1997, there were 18 holders of record of
the Common Stock, and the Company believes that on that date there were in
excess of 700 beneficial owners of the Common Stock.
Item 6. Selected Financial Data.
The information required by this item is included in the Company's Annual
Report to Shareholders for the fiscal year ended December 31, 1996 (the "Annual
Report") and is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The information required by this item is included in the Annual Report
and is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
The financial statements, together with the report thereon of Ernst & Young
LLP dated February 14, 1997, and supplementary data required by this item are
included in the Annual Report and are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
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 report on the Company's financial statements for the year ended December 31,
1995. 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 the
fiscal year 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
25
<PAGE>
& Young LLP, the Company had not consulted with Ernst & Young LLP regarding
accounting principles.
Part III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item with respect to directors is
included in the Company's Proxy Statement for the 1997 Annual Meeting of
Shareholders (the "Proxy Statement") and is incorporated herein by reference.
The information required by this item with respect to executive officers is
included in Item 1 of this Form 10-K under "Executive Officers of the
Registrant."
Item 11. Executive Compensation.
The information required by this item is included in the Proxy Statement
and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
The information required by this item is included in the Proxy Statement
and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is included in the Proxy Statement
and is incorporated herein by reference.
26
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as a part of this Report:
(1) Financial Statements (Incorporated by reference in Item 8)
----------------------------------------------------------
Report of Independent Auditors dated February 14, 1997
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Income for the years ended December 31, 1996,
1995 and 1994
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements
[All financial statement schedules are omitted as inapplicable or
because the required information is included in the Consolidated
Financial Statements or the Notes to Consolidated Financial Statements]
(2) Exhibits
--------
2A Stock Purchase Agreement with The Compucare Company, dated as of
November 26, 1996, filed as Exhibit 2A to Form 8-K dated December 11,
1996 and incorporated herein by reference.
3A Amended and Restated Articles of Incorporation of the registrant. (1)
3B Amended and Restated Bylaws of the registrant. (1)
10A Profit Sharing Plan, as amended December 28, 1994, together with
Profit Sharing Trust Agreement. (1) (2)
10B Lease Agreement dated as of September 17, 1991 between the registrant,
as lessee, and Any Travel, Inc., as lessor, with respect to the premises
located at 4801 East Broadway Boulevard, Tucson, Arizona. (1)
27
<PAGE>
10C Promissory Note dated as of June 15, 1992 from Any Travel, Inc. to
the registrant. (1)
10D Continuing Guaranty Agreement dated June 4, 1992, as amended March
1 1996, of the registrant to Bank of America Arizona, together with
related Promissory Note dated June 4, 1992 from Any Travel, Inc. to
Bank of America Arizona. (1)
10E Triple Net Lease Agreement dated as of May 2, 1994 between the
registrant, as lessee, and Any Travel, Inc., as lessor, with
respect to the premises located at 1121-1161 North El Dorado Place
in Tucson, Arizona. (1)
10F Promissory Note dated as of May 2, 1994 from Any Travel, Inc. to
the registrant. (1)
10G Employment Agreement dated May 6, 1994 between Reid Scott Holbrook
and the registrant. (1) (2)
10G.1 Amendment dated May 24, 1996 to Exhibit 10G. (2) (3)
10H Employment Agreement dated July 24, 1994 between Richard A. Wesson
and the registrant. (1) (2)
10H.1 Amendment dated May 26, 1996 to Exhibit 10H. (2) (3)
10I.1 Stock Incentive Plan of 1996, as amended November 8, 1996. (2) (3)
10K Business Loan Agreement dated as of March 8, 1996, as amended March
11, 1996, among the registrant, Sunquest Europa Limited and Bank of
America Arizona, and related Security Agreements. (1)
10K.1 Amendment dated November 29, 1996 to Exhibit 10K. (3)
10L Management Services Agreement dated as of March 28, 1996, between
the registrant and LabFUSION, Inc. (1)
10M Trademark License Agreement dated as of April 1, 1993, between the
registrant, as licensor, and LabFUSION, Inc., as licensee. (1)
10N Tax Indemnification Agreement dated as of April 30, 1996, between
the registrant and its shareholders of record as of
April 30, 1996. (1)
10O Agreement dated as of September 23, 1994 between the registrant and
IDX Corporation. (1)
28
<PAGE>
10P Employment Agreement effective May 26, 1996 between Nina M. Dmetruk
and the registrant. (1) (2)
10Q Lease dated June 1, 1996 between Antrim Corporation, as lessee, and
Massachusetts Mutual Life Insurance Company, as lessor, with
respect to office space in Plano, Texas. (3)
10R Employment Agreement dated as of January 31, 1997 between Albert A.
DeStefano and the registrant. (2) (3)
10S Form of Underwriting Agreement dated May 30, 1996, filed as Exhibit
1A to Registration Statement No. 333-2790 and incorporated herein
by reference.
13A Financial Information Section of Annual Report to Shareholders for
1996. (3)
16A Letter regarding change in independent auditors, dated
May 9, 1996. (1)
21B Subsidiaries of the registrant. (3)
23G Consent of Independent Auditors dated March 23, 1997. (3)
27B Financial Data Schedule for the year ended December 31, 1996. (3)
___________________
(1) Filed, under the same number, as an exhibit to Registration Statement
No. 333-2790 and incorporated herein by reference.
(2) Management contract or compensatory plan or arrangement.
(3) Filed herewith.
29
<PAGE>
(b) Reports on Form 8-K
A Current Report on Form 8-K, dated December 11, 1996, was filed by the
registrant during the quarter ended December 31, 1996 reporting the
purchase of all of the outstanding stock of Antrim Corporation.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Johnstown, Commonwealth of Pennsylvania, on March 27, 1997.
SUNQUEST INFORMATION SYSTEMS, INC.
(Registrant)
By: /s/ Sidney A. Goldblatt
-------------------------------------
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Sidney A. Goldblatt President and Chief Executive March 27, 1997
- ------------------------ Officer (Principal Executive
Sidney A. Goldblatt Officer) and Director
/s/ Nina M. Dmetruk Executive Vice President and March 27, 1997
- ------------------------ Chief Financial Officer
Nina M. Dmetruk (Principal Financial and
Accounting Officer) and Director
/s/ Bradley L. Goldblatt Director March 27, 1997
- -------------------------
Bradley L. Goldblatt
/s/ Richard W. Barker Director March 27, 1997
- ------------------------
Richard W. Barker
/s/ Stanley J. Lehman Director March 27, 1997
- ------------------------
Stanley J. Lehman
</TABLE>
31
<PAGE>
SUNQUEST INFORMATION SYSTEMS, INC.
Form 10-K For Fiscal Year Ended December 31, 1996
Commission File No. 0-28212
----------------------------------
EXHIBIT INDEX
-------------
Exhibit No. Document
----------- --------
2A Stock Purchase Agreement with The Compucare Company, dated as
of November 26, 1996.*
3A Amended and Restated Articles of Incorporation of the
registrant.*
3B Amended and Restated Bylaws of the registrant.*
10A Profit Sharing Plan, as amended December 28, 1994, together
with Profit Sharing Trust Agreement.*
10B Lease Agreement dated as of September 17, 1991 between the
registrant, as lessee, and Any Travel, Inc., as lessor, with
respect to the premises located at 4801 East Broadway
Boulevard, Tucson, Arizona.*
10C Promissory Note dated as of June 15, 1992 from Any Travel, Inc.
to the registrant.*
10D Continuing Guaranty Agreement dated June 4, 1992, as amended
March 15, 1996, of the registrant to Bank of America Arizona,
together with related Promissory Note dated June 4, 1992 from
Any Travel, Inc. to Bank of America Arizona.*
<PAGE>
10E Triple Net Lease Agreement dated as of May 2, 1994 between the
registrant, as lessee, and Any Travel, Inc., as lessor, with
respect to the premises located at 1121-1161 North El Dorado
Place in Tucson, Arizona.*
10F Promissory Note dated as of May 2, 1994 from Any Travel, Inc.
to the registrant.*
10G Employment Agreement dated May 6, 1994 between Reid Scott
Holbrook and the registrant.*
10G.1 Amendment dated May 24, 1996 to Exhibit 10G.
10H Employment Agreement dated July 24, 1994 between Richard A.
Wesson and the registrant.*
10H.1 Amendment dated May 26, 1996 to Exhibit 10H.
10I.1 Stock Incentive Plan of 1996, as amended November 8, 1996.
10K Business Loan Agreement dated as of March 8, 1996, as amended
March 11, 1996, among the registrant, Sunquest Europa Limited
and Bank of America Arizona, and related Security Agreements.*
10K.1 Amendment dated November 29, 1996 to Exhibit 10K.
10L Management Services Agreement dated as of March 28, 1996
between the registrant and LabFUSION, Inc.*
<PAGE>
10M Trademark License Agreement dated as of April 1, 1993
between the registrant, as licensor, and LabFUSION,
Inc., as licensee.*
10N Tax Indemnification Agreement dated as of April 30, 1996
between the registrant and its shareholders of record as of
April 30, 1996.*
10O Agreement dated as of September 23, 1994 between the registrant
and IDX Systems Corporation.*
10P Employment Agreement effective May 26, 1996 between Nina M.
Dmetruk and the registrant.*
10Q Lease dated June 1, 1996 between Antrim Corporation, as lessee,
and Massachusetts Mutual Life Insurance Company, as lessor,
with respect to office space in Plano, Texas.
10R Employment Agreement dated as of January 31, 1997 between
Albert A. DeStefano and the registrant.
10S Form of Underwriting Agreement dated May 30, 1996.*
13A Financial Information Section of Annual Report to
Shareholders for 1996.
16A Letter regarding change in independent auditors, dated May 9,
1996.*
21B Subsidiaries of the registrant.
23G Consent of Independent Auditors, dated March 23, 1997.
27B Financial Data Schedule for the year ended December 31, 1996.
___________________
*Incorporated by reference.
<PAGE>
EXHIBIT 10G.1
ADDENDUM TO EMPLOYMENT AGREEMENT
--------------------------------
This Addendum ("Addendum") to the Employment Agreement (hereinafter
defined) is made and entered into as of the 24th day of May, 1996, by and
between Sunquest Information Systems, Inc. (the "Company") and Reid Scott
Holbrook (the "Employee").
WITNESSETH THAT:
WHEREAS, the parties executed an Employment Agreement as of the 6th day of
May, 1994 (the "Employment Agreement"); and
WHEREAS, the parties desire to modify the terms of the Employment Agreement
to be effective on the effective date of the Company's Registration Statement
Form S-1 filed by the Company with the Securities and Exchange Commission on
March 27, 1996, as amended on May 10, 1996 (the "Public Offering"); and
WHEREAS, the parties desire to memorialize those terms by this Addendum;
and
WHEREAS, the parties desire to terminate this Addendum such that it has no
effect should the Public Offering not occur.
NOW, THEREFORE, in consideration of the foregoing, and intending to be
legally bound, the parties do hereby covenant and agree as follows:
1. If the Public Offering is consummated, paragraph 5.04 of the Employment
Agreement, entitled Deferred Compensation ("Former Paragraph 5.04"), is deleted
---------------------
in its entirety and shall be null and void as if it had never existed.
2. If the Public Offering is consummated, Employee agrees that no sums of
money or other obligations are owed or will be owed to the Employee by the
Company in connection with Former Paragraph 5.04.
3. If the Public Offering is consummated, Paragraph 5.04 of the Employment
Agreement shall be amended and restated in its entirety to read as follows:
5.04 Nonqualified Stock Options. (a) On the effective date of the
--------------------------
Registration Statement, Employee shall be awarded a non-qualified stock
option (as that term is used in the Nonqualified Stock Option Agreement
attached hereto as Exhibit A) to purchase 52,521 shares of the
Company's Common Stock exercisable at the price stated in, and subject
to the terms and conditions of,
<PAGE>
the Nonqualified Stock Option Agreement attached hereto as Exhibit A.
(b) The Company and Employee hereby agree to execute a Nonqualified
Stock Option Agreement simultaneously herewith.
4. The parties hereby affirm and ratify in all other respects,
except as herein modified, the Employment Agreement. To the extent that any
provisions in the Employment Agreement are inconsistent with any terms in this
Addendum, the terms of this Addendum shall govern.
5. This Addendum and the Employment Agreement constitute the entire
agreement of the parties and supersede all prior proposals and discussions.
6. If the Public Offering does not occur, this Addendum shall
terminate and be void as if it never had been executed.
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound
hereby, have set their respective hands and seals as of the date first written
above.
ATTEST: SUNQUEST INFORMATION SYSTEMS, INC.
/s/ Stanley J. Lehman By: /s/ Nina M. Dmetruk
WITNESS: EMPLOYEE:
/s/ Stanley J. Lehman /s/ Reid Scott Holbrook
Reid Scott Holbrook
2
<PAGE>
EXHIBIT 10H.1
ADDENDUM TO EMPLOYMENT AGREEMENT
--------------------------------
This Addendum ("Addendum") to the Employment Agreement (hereinafter
defined) is made and entered into as of the 26th day of May, 1996, by and
between Sunquest Information Systems, Inc. (the "Company") and Richard A. Wesson
(the "Employee").
WITNESSETH THAT:
WHEREAS, the parties executed an Employment Agreement as of the 24th day of
July, 1994 (the "Employment Agreement"); and
WHEREAS, the parties desire to modify the terms of the Employment Agreement
to be effective on the effective date of the Company's Registration Statement
Form S-1 filed by the Company with the Securities and Exchange Commission on
March 27, 1996, as amended on May 10, 1996 (the "Public Offering"); and
WHEREAS, the parties desire to memorialize those terms by this Addendum;
and
WHEREAS, the parties desire to terminate this Addendum such that it has no
effect should the Public Offering not occur.
NOW, THEREFORE, in consideration of the foregoing, and intending to be
legally bound, the parties do hereby covenant and agree as follows:
1. If the Public Offering is consummated, paragraph 6(b) of the Employment
Agreement, entitled Long Term Incentive Bonus ("Former Paragraph 6(b)"), is
-------------------------
deleted in its entirety and shall be null and void as if it had never existed.
2. If the Public Offering is consummated, Employee agrees that no sums of
money or other obligations are owed or will be owed to the Employee by the
Company in connection with Former Paragraph 6(b).
3. If the Public Offering is consummated, Paragraph 6(b) of the Employment
Agreement shall be amended and restated in its entirety to read as follows:
(b) Non-Qualified Stock Options. On the effective date of the Registration
---------------------------
Statement, Employee shall be awarded a non-qualified stock option (as
that term is used in the Nonqualified Stock Option Agreement attached
hereto as Exhibit A) to purchase 108,718 shares of the Company's Common
Stock exercisable at the price stated in, and subject to the terms and
conditions of, the
<PAGE>
Nonqualified Stock Option Agreement attached hereto as Exhibit A. The
Company and the Employee hereby agree to execute a Nonqualified Stock
Option Agreement simultaneously herewith.
4. The parties hereby affirm and ratify in all other respects, except as
herein modified, the Employment Agreement. To the extent that any provisions in
the Employment Agreement are inconsistent with any terms in this Addendum, the
terms of this Addendum shall govern.
5. This Addendum and the Employment Agreement constitute the entire
agreement of the parties and supersede all prior proposals and discussions.
6. If the Public Offering does not occur, this Addendum shall terminate
and be void as if it never had been executed.
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound
hereby, have set their respective hands and seals as of the date first written
above.
ATTEST: SUNQUEST INFORMATION SYSTEMS, INC.
/s/ Stanley J. Lehman By: /s/ Sidney A. Goldblatt
WITNESS: EMPLOYEE:
/s/ Stanley J. Lehman /s/ R. A. Wesson
Richard A. Wesson
2
<PAGE>
EXHIBIT 10I.1
SUNQUEST INFORMATION SYSTEMS, INC.
STOCK INCENTIVE PLAN OF 1996/1/
1. Purpose of the Plan.
-------------------
The purpose of the Sunquest Information Systems, Inc. Stock Incentive Plan of
1996 is to promote the interests of Sunquest Information Systems, Inc. and its
shareholders by providing an opportunity for employees of the Company and its
subsidiaries and other eligible persons to acquire Common Stock of the Company.
By promoting such stock ownership, the Company seeks to attract, retain and
motivate such employees and other persons and to encourage them to devote their
best efforts to the business and financial success of the Company. It is the
view of the Company that this purpose will be best achieved by granting certain
forms of stock-based incentives and stock options as provided herein. Under the
Plan, the Committee shall have the authority to grant incentive stock options,
nonqualified stock options, restricted stock and stock appreciation rights on
the terms set forth herein.
2. Definitions.
-----------
For purposes of the Plan, the following terms shall have the meanings set forth
below, unless a different meaning is clearly required by the context:
2.1 "Award" means an Option, SAR or Restricted Stock.
2.2 "Board" means the Board of Directors of the Company.
2.3 "Change in Control" means the occurrence of any of the following events:
(i) there is a report filed on Schedule 13D or Schedule 14D-1 (or any
successor schedule, form, or report), each as adopted under the
Exchange Act, disclosing the acquisition of twenty-five percent
(25%) or more of the voting stock of the Company in a transaction
or series of transactions by any person (as the term "person" is
used in Section 13(d) and Section 14(d)(2) of the Exchange Act),
(ii) during any period of twenty-four (24) consecutive calendar
months, individuals who at the beginning of such period
constitute the directors of the Company cease for any reason to
constitute at least a majority thereof unless the election of
each new director of the Company was approved or recommended by
the vote of at least two-thirds of the directors of the Company
then still in office who were directors of the Company at the
beginning of any such period,
- -----------------------------
/1/ as amended by the Board of Directors on November 8, 1996.
1
<PAGE>
(iii) the Company merges with or into or consolidates with another
corporation and, after giving effect to such merger or
consolidation, less than sixty percent (60%) of the then
outstanding voting securities of the surviving or resulting
corporation represent or were issued in exchange for voting
securities of the Company outstanding immediately prior to such
merger or consolidation,
(iv) there is a sale, lease, exchange, or other transfer (in one
transaction or a series of related transactions) of all or
substantially all the assets of the Company, or
(v) the shareholders of the Company shall approve any plan or
proposal for the liquidation or dissolution of the Company.
2.4 "Code" means the Internal Revenue Code of 1986, as amended from time to
time, and any regulations and rulings issued pursuant thereto.
2.5 "Committee" means the committee appointed by the Board to administer the
Plan as described in Section 4.1 hereof or, if no such committee has been
appointed by the Board, "Committee" means the Board.
2.6 "Common Stock" means the Common Stock of the Company.
2.7 "Company" means Sunquest Information Systems, Inc., a Pennsylvania
corporation.
2.8 "Disability" means an inability to engage in any substantial gainful
activity by reason of any medically determinable physical or mental
impairment that may be expected to result in death or which has lasted or
can be expected to last for a continuous period of not less than twelve
(12) months. The determination of Disability shall be made by the
Committee on the basis of medical evidence satisfactory to it.
2.9 "Eligible Independent Contractor" means an independent contractor hired by
the Company or a Subsidiary to provide consulting services or management
advice on a regular basis for the Company or Subsidiary.
2.10 "Employee" means a person who is employed by the Company or any Subsidiary
(including directors).
2.11 "Exchange Act" means the Securities Exchange Act of 1934, as amended from
time to time, and the rules promulgated thereunder by the Securities and
Exchange Commission.
2.12 "Fair Market Value" means, as of any day, the average of the closing prices
of sales of shares of Common Stock on all national securities exchanges on
which the Common Stock may at the time be listed or, if there shall have
been no sales on such day, the average of the highest bid and lowest asked
prices on all such exchanges at the end of such day, or if on any day the
Common Stock shall not be so listed, the average of the representative bid
and asked prices quoted in the National Association of Securities Dealers,
Inc.
2
<PAGE>
Automated Quotation ("NASDAQ") System for such date or the next preceding
date that Common Stock was traded on such market. If at any time there is
no public market for the Common Stock, the fair market value of a share of
Common Stock shall be the amount determined in good faith by the Committee.
2.13 "ISO" means an Option which, at the time granted, constitutes and shall be
treated as an "incentive stock option" as defined in Section 422 of the
Code, or its successor.
2.14 "NSO" means an Option that is intended to be, and qualifies as, a "non-
qualified stock option" as described in Treasury Regulation Section 1.83-7
(and which shall not constitute nor be treated as an ISO).
2.15 "Option" means a right to purchase Common Stock granted pursuant to the
Plan either in the form of an ISO granted to an Employee or a NSO granted
to an Employee or Eligible Independent Contractor.
2.16 "Optionee" means an Employee or Eligible Independent Contractor to whom an
Option is granted under the Plan.
2.17 "Option Price" means the purchase price for Common Stock under an Option,
as determined in Section 6.1(b) of the Plan.
2.18 "Plan" means the Sunquest Information Systems, Inc. Stock Incentive Plan of
1996, as set forth in this document, as the same may be amended from time
to time.
2.19 "Recipient" means an Employee or Eligible Independent Contractor to whom an
Award is granted under the Plan.
2.20 "Restricted Stock" means an award of shares of Common Stock that is subject
to restrictions pursuant to Section 8 of the Plan.
2.21 "Rules" means Section 16 of the Exchange Act and the regulations
promulgated thereunder by the Securities and Exchange Commission.
2.22 "Stock Appreciation Rights" or "SAR" means the rights granted pursuant to
an award under Section 7 of the Plan.
2.23 "Subsidiary" means any corporation which, on the date of determination,
qualifies as a subsidiary corporation of the Company under Section 424 of
the Code, or any successor provision.
Except where otherwise indicated by the context, any masculine terminology used
herein shall also include the feminine and vice versa, and the definition of any
term herein in the singular shall also include the plural and vice versa.
3. Stock Subject to the Plan.
-------------------------
3
<PAGE>
3.1 The maximum number of shares of Common Stock for which Awards may be
granted under the Plan shall not exceed in the aggregate two million five
hundred thousand (2,500,000) shares of Common Stock, subject to adjustment
pursuant to Section 3.2 below. Such shares may be authorized but unissued
shares, treasury shares, or reacquired shares. In the event the number of
shares of Common Stock for which Awards are granted under the Plan (taking
into account the share counting requirements established under the Rules)
equals the maximum number of shares of Common Stock authorized under the
Plan, no further Awards shall be made unless the Plan is amended (in
accordance with the Rules, if applicable) or additional shares of Common
Stock become available for further Awards. In the event that an Option
expires (or otherwise terminates unexercised) or is converted under Section
6.2 of the Plan, the Common Stock subject to Option shall again be
available for subsequent Awards.
3.2 In the event of any change to the Common Stock (whether by reason of
merger, consolidation, reorganization, recapitalization, stock dividend,
stock split, combination of shares, exchange of shares or any other change
in capital structure made without receipt of consideration), then unless
such event or change results in the termination of all outstanding Awards,
the Committee shall preserve the value of Awards by appropriately adjusting
the number or classes of shares that may be subject to Awards, the number
or classes of shares theretofore subject to Awards, the Option Price for
Options or the per share price of SARs theretofore granted, and by making
any and all other adjustments deemed appropriate by the Committee.
4. Administration of the Plan.
--------------------------
4.1 The Plan shall be administered by the Board or by a committee of two (2) or
more members of the Board who shall be appointed by the Board and who shall
serve at the pleasure of the Board.
4.2 The Committee shall, subject to the limitations and terms of the Plan, have
the authority:
(a) to determine the Recipients of Awards,
(b) to determine the number of shares to be covered by each Award,
(c) to determine the terms, conditions, limitations and restrictions, not
inconsistent with the terms of the Plan, of Awards (including, without
limitation, whether any Option to be granted shall be an ISO or a NSO
and the time and conditions for the exercise of Options);
(d) to determine the form of the consideration that may be used to
purchase shares of Common Stock upon the exercise of any Option,
(e) to amend the terms of any outstanding Awards (with the consent of the
Recipient) to reflect terms not otherwise inconsistent with the Plan,
including amendments concerning vesting, acceleration, forfeiture, or
waiver regarding any Award or the extension of a Recipient's right
under an Award, as a result of termination of
4
<PAGE>
employment or service (or otherwise), based on such factors as the
Committee shall determine in its sole discretion.
4.3 The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it
shall, from time to time, deem advisable, and to interpret the terms and
provisions of the Plan and any Award (and any agreements relating thereto
and to otherwise supervise the administration of the Plan). All decisions
made by the Committee pursuant to the provisions of the Plan shall be final
and binding on all persons, including the Company, any Subsidiary, and the
Recipients. No member of the Committee shall be liable for any action
taken or decision made in good faith relating to the Plan or any Award.
4.4 It is intended that the Plan comply with Rule 16b-3 under the Exchange Act
and all interpretations of the Plan shall be consistent with such Rule and
the Exchange Act. In order to maintain compliance with such Rule and the
Exchange Act, the Committee may make such rules and impose such limitations
as it deems advisable.
5. Eligibility to Participate in the Plan.
--------------------------------------
5.1 The Committee may grant NSOs, SARs and Restricted Stock to any Employee or
Eligible Independent Contractor. The Committee may grant ISOs to any
Employee. The Committee shall have the sole authority to select the
Recipients of Awards and the type of Award. Recipients of Awards shall be
selected by the Committee from among those Employees and Eligible
Independent Contractors who, in the opinion of the Committee, have the
capacity to contribute significantly to the long-term value-added
performance and growth of the Company or Subsidiary.
5.2 No award may be granted to an Employee or Eligible Independent Contractor
within six months of his expected retirement date (or expected date of
termination of employment or service).
6. Options.
-------
6.1 Options may be granted alone, in addition to, or in tandem with other
Awards. Options granted under the Plan shall be in such form as the
Committee may from time to time approve. The terms and conditions of each
Option granted under the Plan shall be specified by the Committee and shall
be set forth in a written agreement between the Company and the Optionee in
such form as the Committee shall approve (the "Option Agreement"). The
terms and conditions of each Option need not be identical to those of any
other Option granted hereunder. Each Option Agreement shall contain the
following terms and conditions, and such other terms and conditions, not
inconsistent with the purpose of the Plan and the requirements of
applicable law, as the Committee shall determine:
(a) Each Option Agreement shall state the total number of shares of Common
Stock to which the Option relates.
5
<PAGE>
(b) Each Option Agreement shall state the Option Price per share for the
Common Stock to which the Option relates, which shall not be less than
the Fair Market Value per share of the Common Stock on the date the
Option is granted, except for certain ISOs described in Subsection
6.1(j) hereof.
(c) Each Option Agreement shall state the expiration date of the Option to
which it relates, which date shall not be later than the tenth
anniversary of the date that the Option is granted, except for certain
ISOs described in Subsection 6.1(j) hereof. No Option may be
exercised by any person after expiration of the term of the Option.
(d) Each Option Agreement shall state the time or times at which Options
shall be exercisable and the terms and conditions applicable to such
exercise, all as determined by the Committee; provided, however, that
except as provided below in Section 6.1(f), (g) and (h) and in Section
11.1, and unless otherwise determined by the Committee at or after the
date of the grant, no Option shall be exercisable for a period of six
(6) months from the date of grant.
(e) Upon termination of an Optionee's employment or service with the
Company and Subsidiaries for reasons other than termination at or
after age 65, Disability or death, the Optionee's Option shall, unless
expressly provided otherwise in the Option Agreement, expire on the
date of such termination.
(f) If an Optionee's employment or service with the Company and
Subsidiaries terminates at or after age 65, then unless expressly
provided otherwise in the Option Agreement, the Optionee may exercise
the Option to the extent exercisable at the date of such termination
until the earlier of (i) the expiration date of the Option, or (ii)
the one hundred eightieth (180) day following such termination.
(g) In the event of the death of the Optionee while in the employment or
service of the Company or Subsidiary, then unless expressly provided
otherwise in the Option Agreement, the Option may be exercised, to the
extent the Optionee was entitled to do so on the date of his death, by
the person or persons to whom the Optionee's rights under the Option
pass by will or by applicable law, or if no such person has such
right, by his executors or administrators, until the earlier of (i)
the expiration date of the Option, or one (1) year after the
Optionee's death.
(h) If an Optionee's employment or service with the Company and
Subsidiaries terminates by reason of Disability, then unless expressly
provided otherwise in the Option Agreement, the Optionee may exercise
the Option to the extent exercisable at the date of such termination
until the earlier of (i) the expiration date of the Option, or (ii)
one (1) year after the date of such termination.
(i) The Option Price may be paid, as permitted by the Committee, in cash
or check (payable to the order of the Company), in shares of Common
Stock already owned by the Optionee having a total Fair Market Value
equal to the purchase price, by sale of shares of Common Stock
acquired in the exercise of an Option (to the extent
6
<PAGE>
such cashless exercise is permitted by the Committee and under the
Rules), or any combination thereof approved by the Committee. If
payment of the exercise price of an Option is made in whole or in part
in shares of Common Stock already owned by the Optionee, the Committee
may require that the stock be owned for a period of at least six (6)
months. Following the exercise of an Option and the payment of the
full Option price, the Company shall issue a stock certificate
evidencing the Optionee's ownership of such Common Stock. No shares
shall be delivered pursuant to any exercise of an Option until payment
in full of the Option Price is received by the Company.
(j) Any Option intended to be an ISO shall be designated as such in the
applicable Option Agreement. No ISO shall be granted to any Employee
who, at the time the Option is granted, owns more than 10% of the
total combined voting power of all classes of stock of the Company or
of its parent corporation (within the meaning of Section 424(e) of the
Code) or Subsidiary, unless the Option Price is at least 110% of the
Fair Market Value of the Common Stock subject to the ISO on the date
of grant and the Option by its terms is not exercisable after the
expiration of five years from the date the Option is granted. In
addition, as determined at the time an ISO is granted, the aggregate
Fair Market Value of the Common Stock subject to the ISO (under all
plans of the Company and of its parent corporation and Subsidiaries)
first exercisable in any calendar year shall not exceed one hundred
thousand dollars ($100,000).
(k) Options by their terms shall not be transferable other than by will or
the laws of descent and distribution, and during an Optionee's
lifetime, shall be exercisable only by the Optionee.
6.2 The Committee may, in its sole discretion, elect to cash out all or part of
the Common Stock to be exercised under an Option by paying the Optionee an
amount, in cash, equal to the excess of the Fair Market Value of the Common
Stock over the Option Price on the effective date of such exercise. If
this conversion right is exercised, an Optionee shall forfeit all other
rights associated with such converted Option.
7. Stock Appreciation Rights.
-------------------------
7.1 Grant of SARs. The Committee may grant Stock Appreciation Rights separate
-------------
and apart from, or in tandem with, any Option granted under the terms of
the Plan. When granted in tandem with Options, SARs may be granted with
respect to all or part of the Common Stock under a particular Option, and
may be granted coincident with or after the date of grant of the related
Option.
7.2 Exercise of SARs. SARs may be exercised from time to time by written
----------------
notice from the holder thereof to the Company of the holder's intent to
exercise the SARs with respect to a specified number of shares. SARs shall
entitle the holder thereof, upon exercise, in whole or in part, to receive
payment in the amount and form determined pursuant to Section 7.3(c). SARs
granted in tandem with Options may be exercised only to the extent that the
related Option has not been exercised. The exercise of a tandem SAR shall
result
7
<PAGE>
in a pro rata surrender of the related Option to the extent that the tandem
SAR has been exercised. Similarly, the exercise of a related Option shall
result in a pro rata surrender of the tandem SAR to the extent that the
Option has been exercised.
7.3 Terms and Conditions. The grant of SARs shall be evidenced by a written
--------------------
SAR agreement in a form approved by the Committee. Each SAR agreement
shall be consistent with the following express terms and conditions, and
shall include such other terms and conditions, consistent with the purposes
of the Plan and the requirements of applicable law, as the Committee shall
determine:
(a) SARs shall be exercisable at such time or times and only to the extent
specified in the SAR agreement. SARs shall in no event be exercisable
during the first six (6) months after the date of grant.
(b) SARs shall not be transferable other than by will or by the laws of
descent and distribution, and during the holder's lifetime, shall be
exercisable only by the holder.
(c) Upon exercise of SARs, the holder thereof shall be entitled to receive
an amount equal to the excess of (i) the Fair Market Value per share
of Common Stock on the day preceding the exercise date over (ii) the
price per share stated in the SAR agreement for a SAR not granted in
tandem with an Option or the Option Price per share of any related
Option for a SAR granted in tandem with an Option, multiplied by the
number of shares in respect of which the SARs shall have been
exercised. Such amount shall be paid, as determined by the Committee,
in the form of (i) cash, (ii) shares of Common Stock with a Fair
Market Value on the day preceding the exercise date equal to such
amount, or (iii) a combination of cash and such Common Stock.
(d) In no event shall a SAR be exercisable at a time when the Fair Market
Value per share of Common Stock is less than the price per share
stated in the SAR agreement for a SAR not granted in tandem with an
Option or the Option Price per share of any related Option for a SAR
granted in tandem with an Option.
(e) SARs shall terminate in accordance with the rules in Section 6.1(c),
(e), (f), (g), and (h) hereof regarding termination of Options.
8. Restricted Stock.
----------------
8.1 Rights As A Stockholder. The grant of Restricted Stock shall be evidenced
-----------------------
by a Restricted Stock agreement issued in accordance with Section 8.2. The
Committee shall direct that a certificate or certificates for Restricted
Stock be issued to the grantee, and registered in the name of the grantee,
who shall have all the rights of a shareholder with respect to the
Restricted Stock subject to such restrictions set forth in the Restricted
Stock agreement. The certificate or certificates representing the
Restricted Stock shall be inscribed with a legend as to the restrictions on
sale, transfer, assignment, pledge or other encumbrance during the
restricted period as the Committee may impose, and may, if the
8
<PAGE>
Committee in its sole discretion should direct, be delivered to and held
during the restricted period by the Company, together with a stock power
endorsed in blank by the grantee.
8.2 Restrictions. Each Restricted Stock agreement shall include such terms and
------------
conditions, including with respect to the restricted period, restrictions
on sale, transfer, assignment, pledge, or other encumbrance, forfeiture and
vesting, that are consistent with the purposes of the Plan and the
requirements of applicable law, as the Committee shall determine at the
time of granting the Restricted Stock. Any new, additional or different
shares or securities resulting from any change to the Common Stock under
Section 3.2 shall be subject to the same terms, conditions and restrictions
contained in the Restricted Stock agreement to which the Restricted Stock
was subject immediately prior to such change. The Committee may, in its
discretion, remove, modify or accelerate the release of restrictions on any
Restricted Stock in the event of hardship or of Disability of the grantee
while employed or in the service of the Company or Subsidiary, or for such
other reasons as the Committee may deem appropriate in the event that the
grantee ceases to be in employment or service with the Company and
Subsidiaries. In the event of the grantee's death following the delivery
of Restricted Stock, the personal representative of the grantee's estate or
the person or persons to whom the Restricted Stock shall have passed by
bequest or the laws of descent and distribution shall take such Restricted
Stock subject to the same terms, conditions and restrictions in effect at
the time of the grantee's death, to the extent applicable.
9. Amendment and Termination.
-------------------------
The Board may amend or discontinue the Plan at any time and for any reason
(either by resolution or unanimous consent), but no amendment or
discontinuation shall be made which would impair a Recipient's rights under
an Award theretofore granted without the Recipient's consent, or which,
without approval of the Company's shareholders, would require shareholder
approval under the Rules.
The Committee may amend the terms of any Award theretofore granted,
prospectively or retroactively, but no such amendment shall impair the
rights of the Recipient of the Award without the Recipient's consent.
10. Unfunded Status of the Plan.
---------------------------
The Plan is an unfunded plan for incentive compensation. With respect to
any payments not yet made to a Recipient, the Recipient shall not have any
rights that are greater than those of a general creditor of the Company. In
its sole discretion, the Committee may authorize the creation of trusts or
other arrangements to meet the obligations created under the Plan and to
deliver Common Stock or payments in lieu thereof with respect to any
Awards.
9
<PAGE>
11. General Provisions.
------------------
11.1 The Committee, in its sole discretion, may provide at the time of granting
any Award that the terms of the Award, including but not limited to, the
date on which an award vests or becomes exercisable, may be modified in the
event of a Change in Control.
11.2 Each Award may provide that the recipient shall deliver to the Committee,
upon demand by the Committee, at the time of delivery of any certificates
representing shares of Common Stock a written representation that the
shares are to be acquired for investment and not for resale or with a view
to the distribution thereof. Upon such demand, delivery of such
representation prior to delivery of any shares shall be a condition
precedent to the right of the Recipient (or any other person) to acquire
any shares.
11.3 Nothing contained in the Plan shall prevent the Board from adopting other
or additional compensation arrangements (subject to shareholder approval,
if such shareholder approval is required) of general applicability or
otherwise.
11.4 Neither the Plan nor any Award shall confer upon any Recipient any right to
continued employment or service with the Company or Subsidiary and shall
not interfere in any way with the right of the Company or Subsidiary to
terminate its relationship with any of its employees, directors or
independent contractors at any time.
11.5 No later than the date as of which an amount first becomes includible in
the gross income of a Recipient for applicable income tax purposes with
respect to any Award, the Recipient shall pay to the Company or make
arrangements satisfactory to the Committee regarding the payment of any
federal, state or local taxes of any kind required by law to be withheld
with respect to such amount. Unless otherwise determined by the Committee,
the minimum required withholding obligations may be settled with Common
Stock, including Common Stock that is subject to the Award that gives rise
to the withholding requirement. The obligations of the Company under the
Plan shall be conditioned upon such payment or arrangements and the Company
shall to the extent permitted by law have the right to deduct any such
taxes from any payment of any kind otherwise due to the Recipient.
11.6 The Committee shall establish such procedures as it deems appropriate for a
Recipient to designate a beneficiary to whom any amount payable in the
event of the Recipient's death are to be paid.
11.7 An Award shall be subject to the condition that any payment thereunder is
subject to any listing or registration of the shares of Common Stock
subject to the Award, any consent or approval of any governmental body, or
any other agreement or consent that the Committee determines is necessary
or desirable for such payment.
11.8 The actions of the Committee (including without limitation the
determination of Recipients and the terms and conditions of any Awards)
need not be uniform and may be undertaken selectively whether or not the
Recipients are similarly situated.
10
<PAGE>
11.9 The existence of Awards shall not effect in any way the right or the
power of the Company or its shareholders to make or authorize any or all
adjustments, recapitalizations, reorganizations or other changes in the
Company's capital structure or its business, or any merger or
consolidation of the Company, or any issue of bonds, debentures,
preferred or prior preference stocks ahead of or effecting the Common
Stock or the rights thereof, or the dissolution or liquidation of the
Company, or any sale or transfer of all or any part of its assets or
business, or any other corporate act or proceeding, whether of a similar
character or otherwise.
11.10 The Plan shall be governed by and subject to all applicable laws and to
the approvals by any governmental agency as may be required.
11.11 If any provision of the Plan shall be illegal or invalid for any reason,
such illegality or invalidity shall not affect the remaining provisions
of the Plan, but the Plan shall be construed and enforced as if such
illegal or invalid provision had never been included herein.
11.12 In addition to such other rights of indemnification as they may have as
directors or employees of the Company or Subsidiary, the members of the
Board and members of the Committee shall be indemnified by the Company
against the reasonable expense, including attorney's fees, actually and
necessarily incurred in connection with the defense of any action, suit
or proceeding, or in connection with any appeal thereof, to which they or
any of them may be a party by reason of any action taken or failure to
act under or in connection with the Plan or any Award, and against all
amounts paid by them in settlement therefor (provided such settlement is
approved by independent legal counsel selected by the Company) or paid by
them in satisfaction of a judgment in any such action, suit or
proceeding, except in relation to matters as to which it shall be
adjudicated in such action, suit or proceeding, that such member is
liable for negligence or misconduct in the performance of his duties;
provided that within sixty (60) days after institution of any such
action, suit or proceeding, a member shall in writing offer the Company
the opportunity, at its own expense, to handle and defend the same.
12. Effective Date and Term of the Plan.
-----------------------------------
The Plan shall become effective upon approval of the Plan by the
Company's shareholders. No Awards shall be granted pursuant to the Plan
on or after the tenth anniversary of the Plan's approval by shareholders,
but Awards granted prior to such date may extend beyond that date.
Date Approved by
Board of Directors: March 25, 1996
Date Approved by
Stockholders: March 25, 1996
11
<PAGE>
EXHIBIT 10K.1
Bank of America Amendment to Documents
FOURTH AMENDMENT TO BUSINESS LOAN AGREEMENT
This Fourth Amendment to Business Loan Agreement is entered into as of November
29, 1996, between Bank of America Arizona ("Bank") and Sunquest Information
Systems, Inc. ("Borrower 1") and Sunquest Europa Limited ("Borrower 2")
(Borrower 1 and Borrower 2 are sometimes referred to collectively as the
"Borrowers" and individually as the "Borrower").
RECITALS
--------
A. WHEREAS, Bank and Borrower have entered into that certain Business Loan
Agreement dated March 8, 1996, and amended on March 11, 1996, September 30, 1996
and October 30, 1996 (collectively the "Agreement"); and
B. WHEREAS, Borrower and Bank desire to amend certain terms and provisions of
said Agreement as more specifically hereinafter set forth.
AGREED
------
NOW, THEREFORE, in consideration of the foregoing recitals, Bank and Borrower
mutually agree to amend said Agreement as follows:
1. In Paragraph 1.2 (Availability Period) of the Agreement, the date
"September 30, 1997" is substituted for the date "November 29, 1996".
2. Paragraph 1.5 (Letters of Credit) of the Agreement is amended and restated
in its entirety to read as follows:
1.5 Letters of Credit. This line of credit may be used for financing:
(a) commercial letters of credit with a maximum maturity of 365 days but
not to extend more than 365 days beyond the Expiration Date. Each
commercial letter of credit will require drafts payable at sight.
(b) standby letters of credit with a maximum maturity of 365 days but not
to extend more than 365 days beyond the Expiration Date.
(c) The amount of the letters of credit outstanding at any one time
(including amounts drawn on the letters of credit and not yet
reimbursed) may not exceed Five Million and No/100 Dollars ($
5,000,000.00).
The Borrower agrees:
(a) any sum drawn under a letter of credit may, at the option of the Bank,
be added to the principal amount outstanding under this Agreement.
The amount will bear interest and be due as described elsewhere in
this Agreement.
(b) if there is a default under this Agreement, to immediately prepay and
make the Bank whole for any outstanding letters of credit.
<PAGE>
(c) the issuance of any letter of credit and any amendment to a letter of
credit is subject to the Bank's written approval and must be in form
and content satisfactory to the Bank and in favor of a beneficiary
acceptable to the Bank.
(d) to sign the Bank's form Application and Agreement for Commercial
Letter of Credit or Application and Agreement for Standby Letter of
Credit.
(e) to pay any issuance and/or other fees that the Bank notifies the
Borrower will be charged for issuing and processing letters of credit
for the Borrower.
(f) to allow the Bank to automatically charge its checking account for
applicable fees, discounts, and other charges.
3. Paragraph 8.2 (Financial Information) of the Agreement is amended and
restated in its entirety to read as follows:
8.2 Financial Information. To provide the following financial information
and statements and such additional information as reasonably requested by
the Bank from time to time:
(a) Within 120 days of the Borrowers' fiscal year end, the Borrowers'
annual financial statements, including a compliance certificate. These
financial statements must be audited (with an unqualified opinion) by
a Certified Public Accountant ("CPA") acceptable to the Bank, in its
reasonable discretion. The statements shall be prepared on a
consolidated basis.
(b) Within 50 days of the period's end, the Borrowers' quarterly financial
statements, including a compliance certificate. These financial
statements may be Borrower prepared. The statements shall be prepared
on a consolidated basis.
(c) Annual one year projections within 150 days of each fiscal year end.
4. Paragraph 8.3 (Quick Ratio) of the Agreement is amended and restated in its
entirety to read as follows:
8.3 Quick Ratio. With respect to the Borrowers, to maintain on a
consolidated basis a ratio of quick assets to current liabilities of at
least 2.00:1.0, to be measured quarterly.
"Quick assets" means cash, short-term cash investments, net trade
receivables and marketable securities not classified as long-term
investments.
5. Paragraph 8.4 (Tangible Net Worth) of the Agreement is amended and restated
in its entirety to read as follows:
8.4 Tangible Net Worth. With respect to the Borrowers, to maintain on a
consolidated basis tangible net worth equal to at least Forty-seven Million
and No/100 Dollars ($47,000,000.00) plus 50% of net income after income
taxes (without subtracting for losses) earned in each quarterly accounting
period commencing after September 30, 1996 less the lesser of Twenty-Five
Million and No/100 Dollars ($25,000,000.00) or the amount of any
intangibles associated with any permitted acquisitions as defined in
paragraph 8.23 (e) below. At no time will the Tangible Net Worth fall below
$25,000,000.00.
"Tangible net worth" means the gross book value of the Borrowers' assets on
a consolidated basis (excluding goodwill, patents, trademarks, trade names,
organization expense, unamortized debt discount and expense, deferred
research and development costs, deferred marketing expenses, and other like
intangibles) less total liabilities, including but not limited to accrued
and deferred income taxes, and any reserves against assets.
<PAGE>
6. Paragraph 8.5 (Total Liabilities to Tangible Net Worth Ratio) of the
Agreement is amended and restated in its entirety to read as follows:
8.5 Total Liabilities to Tangible Net Worth Ratio. With respect to the
Borrowers, to maintain on a consolidated basis a ratio of Total Liabilities
to Tangible Net Worth not exceeding 1.00:1.0, to be measured quarterly.
"Total Liabilities" means the sum of current liabilities plus long term
liabilities.
7. Paragraph 8.6 (Cash Flow Ratio) of the Agreement is amended and restated in
its entirety to read as follows:
8.6 Cash Flow Ratio. With respect to the Borrowers, to maintain on a
consolidated basis a cash flow ratio of at least the amounts indicated for
each period specified below:
Period Ratio
------ -----
September 30, 1996 through 1.25:1.0
December 30, 1996
December 31, 1996 and 2.00:1.0
thereafter
"Cash flow ratio" means the ratio of cash flow to the sum of debt service
(including the current portion of long term debt, the current portion of
long term capitalized leases and interest expense) plus capital
expenditures of One Million and No/100 Dollars ($1,000,000.00). "Cash
flow" is defined as net income after taxes, plus interest expense,
depreciation, amortization and other non-cash charges, minus dividends or S
Corporation distributions, except for a special Two Million Six Hundred
Thousand and No/100 Dollars ($2,600,000.00) S Corporation distribution paid
during the fiscal year ended December 31, 1995 and up to Nineteen Million
Five Hundred Thousand and No/100 Dollars ($19,500,000.00) in declared
distributions during the fiscal year ended December 31, 1996, capitalized
software costs (excluding capitalized software costs relating to
acquisitions) and income taxes paid.
This ratio will be calculated at the end of each fiscal quarter, using the
results of that quarter and each of the 3 immediately preceding quarters.
The current portion of long term debt and the current portion of long term
capitalized leases will be measured as of the last day of the preceding
fiscal year.
8. Paragraph 8.9 (Capital Expenditures) of the Agreement is amended and
restated in its entirety to read as follows:
8.9 Capital Expenditures. Not to spend or incur obligations (including
the total amount of any capital leases) for more than Six Million and
No/100 Dollars ($6,000,000.00) in any single fiscal year to acquire fixed
or capital assets, exclusive of any acquisitions as defined in paragraph
8.23 (e).
9. Paragraph 8.10 (b) (Dividends) of the Agreement is amended and restated in
its entire to read as follows:
8.10 Dividends. Not to declare or pay any dividends or distributions on
any of the Borrowers' shares, except for:
(a) a special distribution for the transfer of Cash Surrender Value of
Life Insurance and the associated pro-rata distribution paid during
the fiscal year ended December 31, 1995.
<PAGE>
(b) a distribution of up to $19,500,000.00 declared during the fiscal year
ended December 31, 1996. For purposes of this Section 8.10, the words
"declare" and "declared" mean the creation of a liability on the
balance sheet of the Borrowers' for the payment of dividends or
distributions.
(c) a second S Corporation distribution of less than $4,500,000.00 which
was declared in April 1996 and will be paid on May 15, 1997.
10. Paragraph 8.11 (Loans to Related Entities) of the Agreement is amended and
restated in its entirety to read as follows:
8.11 Loans to Related Entities. Not to make any loans, advances (other
than in the ordinary course of business for expense) or other
extensions of credit to Approved Related Entities in excess of
$1,000,000.00. "Approved Related Entities" include the Borrowers
executives, officers, directors, shareholders, any relatives of any of
the foregoing, LabFusion, Inc., and Any Travel, Inc.
11. In Paragraph 8.12 (Change of Ownership) of the Agreement, the word
"Borrowers" is substituted for the words "Borrower 1's".
12. Paragraph 8.23 (e) (Additional Negative Covenants) of the Agreement is
amended and restated in its entirety to read as follows:
(e) acquire a business through a stock acquisition which is not approved
by the acquiree's board of directors or which is otherwise a "hostile"
or "unfriendly" acquisition.
Borrower to provide Bank with proforma financial statement reflecting
any proposed friendly acquisitions to confirm covenant compliance
after completion of proposed acquisition.
This Amendment will become effective as of November 29, 1996 (the "Effective
Date"), provided that each of the following conditions precedent have been
satisfied:
The Bank has received from the Borrower a duly executed original of this
Amendment
Except as provided in this Amendment, all of the terms and provisions of the
Agreement shall remain in full force and effect.
This Amendment shall be effective between the parties as of the date hereof.
The Agreement, as amended hereby, shall hereinafter constitute the Agreement
between the parties.
<PAGE>
IN WITNESS WHEREOF, this Amendment has been executed by the parties hereto as of
the date first written above.
Borrower 1
BANK OF AMERICA ARIZONA Sunquest Information Systems, Inc.
/c/ S.D. Fell By: /c/ Nina M. Dmetruk
- ------------------------------------------- ---------------------------
By: Steven D. Fell, Vice President Name:
Title: Exec. V.P. & C.F.O.
Borrower 2
Sunquest Europa Limited
By: /c/ Nina M. Dmetruk
---------------------------
Name:
Title: Exec. V.P. & C.F.O.
with a copy to:
(if applicable)
Stanley J. Lehman, Esq.
Klett Lieber Rooney & Schorling
40th Floor, One Oxford Centre
Pittsburgh, PA 15219
<PAGE>
EXHIBIT 10Q
OFFICE LEASE
THIS LEASE, made as of this 1st day of June, 1996 by and between MASSACHUSETTS
MUTUAL LIFE INSURANCE COMPANY, a Massachusetts corporation ("Landlord") through
its agent CORNERSTONE REAL ESTATE ADVISERS, INC., having an address at 1500 Main
Street, Suite 1400, Springfield, Massachusetts 01115-5288 and ANTRIM
CORPORATION, a Texas corporation ("Tenant") having its principal office at 101
East Park Blvd., Suite 1200, Plano, TX. 75074.
INDEX
Article Title Page
1. Basic Provisions 2
2. Premises, Term and Commencement Date 3
3. Rent 3
4. Taxes and Operating Expenses 4
5. Landlord's Work, Tenant's Work, Alterations and Additions 5
6. Use 6
7. Services 6
8. Insurance 8
9. Indemnification 9
10. Casualty Damage 9
11. Condemnation 10
12. Repair and Maintenance 10
13. Inspection of Premises 11
14. Surrender of Premises 11
15. Holding Over 12
16. Subletting and Assignment 12
17. Subordination, Attornment and Mortgagee Protection 13
18. Estoppel Certificate 13
19. Defaults 14
20. Remedies of Landlord 14
21. Quiet Enjoyment 15
22. Accord and Satisfaction 15
23. Security Deposit 15
24. Brokerage Commission 16
25. Force Majeure 16
26. Parking 17
27. Hazardous Materials 17
28. Additional Rights Reserved by Landlord 18
29. Defined Terms 19
30. Miscellaneous Provisions 22
<PAGE>
ARTICLE 1.
BASIC PROVISIONS
A. Tenant's Tradename: Antrim Corporation
B. Tenant's Address: 101 East Park Boulevard, Suite 1200
Plano, Texas 75074
Attention: President
C. Office Building Name: Nationsbank Plano Tower
Address: 101 East Park Boulevard
Plano, Texas 75074
D. Premises: Suite/Unit No.: Suites 1001, 1100, 1200, 1300
Square feet (Rentable): approximately 47,420 r.s.f.
E. Landlord: Massachusetts Mutual Life
Insurance Company
F. Landlord's Address: 1901 Avenue of the Stars, Suite 555
Los Angeles, California 90067
Attention: Managing Director
G. Building Manager/Address: Transwestern Property Company
101 E. Park Boulevard, Suite 451
Plano, Texas 75074
H. Commencement Date: June 1, 1996
I. Expiration Date: May 31, 2001
J. Security Deposit: $0.00
K. Monthly Rent: Year 1: $55,323.33 Year 3: $61,250.83
Year 5: $67,178.33
Year 2: $58,287.08 Year 4: $64,214.58
Provided, however, that Tenant shall be entitled
to a credit in the amount of $332.97 per day, up
to a maximum of 30 days, for each day in June
prior to the day that Landlord substantially
completes the Tenant Improvements to Suite 1300 as
contemplated in Exhibit "B", attached hereto.
L. Operating Expenses Base: 1996 Base Year
M. Tax Base: 1996 Base Year
N. Tenant's Pro Rata Share: 21.06%. Tenant's Pro Rata Share shall be
-----
determined by dividing the Tenant's Rentable Square Feet of the Premises by
the rentable area of the Building and multiplying the resulting quotient, to
the second decimal place, by one hundred. The Building contains 225,154
square feet of
3
<PAGE>
rentable area.
O. Normal Business Hours of Building:
Monday through Friday: 7:00 a.m. to 6:00 p.m.
-----------------------
Saturday: 8:00 a.m. to 1:00 p.m.
-----------------------
Sunday: n/a a.m. to n/a p.m.
--------------------
P. Brokers: Fults Associates, Inc.
Q. Parking Fee: None
The foregoing provisions shall be interpreted and applied in accordance with the
other provisions of this Lease set forth below. The capitalized terms, and the
terms defined in Article 29, shall have the meanings set forth herein or therein
(unless otherwise modified in the Lease) when used as capitalized terms in other
provisions of the Lease.
ARTICLE 2.
PREMISES, TERM AND COMMENCEMENT DATE
Landlord hereby leases and demises to the Tenant and Tenant hereby takes and
leases from Landlord that certain space identified in Article 1 and shown on a
plan attached hereto as Exhibit A ("Premises") for a term ("Term") commencing on
the Commencement Date and ending on the Expiration Date set forth in Article 1,
unless sooner terminated as provided herein, subject to the provisions herein
contained. Such date shall be confirmed by execution of the Commencement Date
Confirmation in the form as set forth in Exhibit E. If Landlord delays
delivering possession of the Premises or substantial completion of any
Landlord's Work under Exhibit B, this Lease shall not be void or voidable,
except as provided in Article 5.
ARTICLE 3.
RENT
A. Monthly Rent. Tenant shall pay Monthly Rent in advance on or before the
first day of each month of the Term. If the Term shall commence and end on a day
other than the first day of a month, the Monthly Rent for the first and last
partial month shall be prorated on a per diem basis.
B. Additional Rent. All costs and expenses which Tenant assumes or agrees to
pay and any other sum payable by Tenant pursuant to this Lease, including,
without limitation, its share of Taxes and Operating Expenses, shall be deemed
Additional Rent.
C. Rent. Monthly Rent, Additional Rent, Taxes and Operating Expenses and any
other applicable and prior identified amounts which Tenant is or becomes
obligated to pay Landlord under this Lease are herein referred to collectively
as "Rent", and all remedies applicable to the nonpayment of Rent shall be
applicable thereto. Landlord may apply payments received from Tenant to any
obligations of Tenant then accrued, without regard to such obligations as may be
designated by Tenant.
D. Place of Payment, Late Charge, Default Interest. Rent and other charges
required to be paid under this Lease, no matter how described, shall be paid by
Tenant to Landlord at the Building Manager's address listed in Article 1, or to
such other person and/or address as Landlord may timely designate in writing
prior to the due date, without any prior notice or demand therefor and without
deduction or set-off or counterclaim and without relief from any valuation or
appraisement laws. In the event Tenant fails to pay Rent due under this Lease
within ten (10) days of due date of said Rent, Tenant shall pay to Landlord a
late charge of five percent (5%) on the amount overdue; provided, however, this
late charge shall not be assessed if Tenant has not been in monetary default
with respect
4
<PAGE>
to any rental obligation under the Lease at any time during the immediately
previous 12 month period. Any Rent not paid when due shall also bear interest
at the Default Rate.
ARTICLE 4.
TAXES AND OPERATING EXPENSES
A. Payment of Taxes and Operating Expenses. It is agreed that during each
Lease Year beginning with the first month of the second Lease Year and each
month thereafter during the original Lease Term, or any extension thereof,
Tenant shall pay to Landlord as Additional Rent, at the same time as the Monthly
Rent is paid, an amount equal to one-twelfth (1/12) of Landlord's estimate (as
determined by Landlord in its sole, yet reasonable, discretion) of Tenant's Pro
Rata Share of any projected increase in the Taxes or Operating Expenses for the
particular Lease Year in excess of the Tax Base or Operating Expenses Base, as
the case may be (the "Estimated Escalation Increase"). A final adjustment (the
"Escalation Reconciliation") will be made between the parties as soon as
practicable following the end of each Lease Year, but in no event later than
ninety (90) days after the end of each Lease Year. In computing the Estimated
Escalation Increase for any particular Lease Year, Landlord shall take into
account any prior increases in Tenant's Pro Rata Share of Taxes and Operating
Expenses. If during any Lease Year the Estimated Escalation Increase is less
than the Estimated Escalation Increase for the previous Lease Year on which
Tenant's share of Taxes and Operating Expenses were based for said year, such
Additional Rent payments attributable to Estimated Escalation Increase, to be
paid by Tenant for the new Lease Year shall be decreased accordingly; provided,
however, in no event will the Rent paid by Tenant hereunder ever be less than
the Monthly Rent plus all other amounts of Additional Rent.
As soon as practicable following the end of each Lease Year (but in any event
within 90 days following the end of any calendar year), Landlord shall submit to
Tenant a statement setting forth the Estimated Escalation Increase, if any.
Upon request, Landlord shall provide Tenant with reasonable back-up materials
upon which Landlord relied in calculating the Estimated Escalation Increase.
Beginning with said statement for the second Lease Year, it shall also set forth
the Escalation Reconciliation for the Lease Year just completed. To the extent
that the Operating Expense Escalation is different from the Estimated Escalation
Increase upon which Tenant paid Rent during the Lease Year just completed,
Tenant or Landlord, as the case may be, shall pay the difference in cash within
thirty (30) days following receipt by Tenant of such statement from Landlord.
Until Tenant receives such statement, Tenant's Rent for the new Lease Year shall
continue to be paid at the rate being paid for the particular Lease Year just
completed, but Tenant shall commence payment to Landlord of the monthly
installment of Additional Rent on the basis of said statement beginning on the
first day of the month following the month in which Tenant receives such
statement. In addition to the above, if, during any particular Lease Year,
there is a change in the information on which Landlord based the estimate upon
which Tenant is then making its estimated payment of Taxes and Operating
Expenses so that such Estimated Escalation Increase furnished to Tenant is no
longer accurate, Landlord shall be permitted to revise such Estimated Escalation
Increase by notifying Tenant, and there shall be such adjustments made in the
Additional Rent on the first day of the month following the serving of such
statement on Tenant as shall be necessary by either increasing or decreasing, as
the case may be, the amount of Additional Rent then being paid by Tenant for the
balance of the Lease Year (but in no event shall any such decrease result in a
reduction of the rent below the Monthly Rent plus all other amounts of
Additional Rent). Landlord's and Tenant's responsibilities with respect to the
Tax and Operating Expense adjustments described herein shall survive the
expiration or early termination of this Lease for a period of two (2) years.
If the Building is not fully occupied during any particular Lease Year, Landlord
may adjust those Operating Expenses which are affected by Building occupancy for
the particular Lease Year, or portion thereof, as the case may be, to reflect an
occupancy of not less than ninety-five percent (95%) of all such rentable area
of the Building.
Notwithstanding anything to the contrary contained herein, in no event shall
Tenant be required to pay the Tenant's portion of Operating Expenses and Taxes
(excluding, however, amounts attributable to utilities, insurance and taxes)
which exceed the Operating Expense Base plus 6 1/2% per year, calculated
cumulatively.
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B. Disputes Over Taxes or Operating Expenses. If Tenant disputes the amount of
an adjustment or the proposed estimated increase or decrease in Taxes or
Operating Expenses, Tenant shall give Landlord written notice of such dispute
within sixty (60) days after Landlord advises Tenant of such adjustment or
proposed increase or decrease. Tenant's failure to give such notice shall waive
its right to dispute the amounts so determined. If Tenant timely objects,
Tenant shall have the right to engage its own accountants ("Tenant's
Accountants") for the purpose of verifying the accuracy of the statement (and/or
the back-up materials used in preparing such statement) in dispute, or the
reasonableness of the adjustment or estimated increase or decrease. If Tenant's
Accountants determine that an error has been made, Landlord and Tenant's
Accountants shall endeavor to agree upon the matter, failing which Landlord and
Tenant's Accountants shall jointly select an independent certified public
accounting firm (the "Independent Accountant") which firm shall conclusively
determine whether the adjustment or estimated increase or decrease is
reasonable, and if not, what amount is reasonable. Both parties shall be bound
by such determination. If Tenant's Accountants do not elect to participate in
choosing the Independent Accountant within 20 days notice by Landlord, then
Landlord's determination of the adjustment or estimated increase or decrease
shall be conclusively determined to be reasonable and Tenant shall be bound
thereby. All costs incurred by Tenant in obtaining Tenant's Accountants and the
cost of the Independent Accountant shall be paid by Tenant unless Tenant's
Accountants disclose an error, acknowledged by Landlord (or found to have
conclusively occurred by the Independent Accountant), of more than five percent
(5%) in the computation of the total amount of Taxes or Operating Expenses as
set forth in the statement submitted by Landlord with respect to the matter in
dispute; in which event Landlord shall pay all of the reasonable costs incurred
by Tenant in obtaining such audits, including the cost of the Independent
Accountant. Tenant shall continue to timely pay Landlord the amount of the
prior year's adjustment and adjusted Additional Rent determined to be incorrect
as aforesaid until the parties have concurred as to the appropriate adjustment
or have deemed to be bound by the determination of the Independent Accountant in
accordance with the preceding terms. Landlord's delay in submitting any
statement contemplated herein for any Lease Year shall not affect the provisions
of this Paragraph, nor constitute a waiver of Landlord's rights as set forth
herein for said Lease Year or any subsequent Lease Years during the Lease Term
or any extensions thereof.
ARTICLE 5.
LANDLORD'S WORK, TENANT'S WORK,
ALTERATIONS AND ADDITIONS
A. Landlord's Work. Landlord shall construct the Premises in accordance with
Landlord's obligations as set forth in the work letter attached hereto as
Exhibit B, and hereinafter referred to as "Landlord's Work." Landlord will
deliver the Premises to Tenant with all of Landlord's Work completed (except for
minor and non-material punch list items which in Landlord's reasonable judgment
will not delay completion of Tenant's Work, as defined in subparagraph B of this
Article) on or before the dates specified in Exhibit B and Tenant agrees
thereupon to commence and complete Tenant's Work on or before the Commencement
Date. If Landlord is delayed in completing Landlord's Work by strike, shortages
of labor or materials, delivery delays or other matters beyond the reasonable
control of Landlord, then Landlord shall give notice thereof to Tenant and the
date on which Landlord is to turn the Premises over to Tenant for Tenant's Work
and the Commencement Date shall be postponed for an equal number of days as the
delay as set forth in the notice. If the Commencement Date is postponed as
aforesaid, Tenant agrees upon request of Landlord to execute a writing
confirming the Commencement Date on such form as set forth in Exhibit E attached
hereto.
B. Tenant's Work. On and after the date specified in the immediately preceding
subparagraph A for delivery of the Premises to Tenant for Tenant's Work, Tenant,
at its sole cost and expense, shall perform and complete all other improvements
to the Premises (as set forth in Exhibit C attached hereto and referred to
herein as "Tenant's Work") including but not limited to, all improvements, work
and requirements required of Tenant under the foregoing work letter, if any.
Tenant shall complete all of Tenant's Work in good and workmanlike manner, fully
paid for and free from liens, in accordance with the plans and specifications
approved by Landlord and Tenant as provided in Exhibit C, on or prior to the
scheduled Commencement Date. Tenant shall also have the right during this
period to come onto the Premises to install its fixtures and prepare the
Premises for the operation of Tenant's business. Notwithstanding the fact that
foregoing activities by Tenant will occur prior to the scheduled Commencement
Date,
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Tenant agrees that all of Tenant s obligations provided for in this Lease shall
apply during such period with the exception of any obligation to pay Rent.
C. Alterations. Except as provided in the immediately preceding subparagraph,
Tenant shall make no alterations or additions to the Premises without the prior
written consent of the Landlord, which consent will not be unreasonably withheld
or delayed.
D. Liens. Tenant shall give Landlord at least ten (10) days prior written
notice (or such additional time as may be necessary under applicable laws) of
the commencement of any Tenant's Work, to afford Landlord the opportunity of
posting and recording notices of non-responsibility. Except for liens which
automatically attach by operation of law, Tenant will not cause or permit any
mechanic's, materialman's or similar liens or encumbrances to be filed or exist
against the Premises or the Building in connection with any work done under this
Article. In any event, Tenant shall remove any such lien or encumbrance by bond
or otherwise within a reasonable period. If Tenant fails to do so, Landlord may
pay the amount or take such other action as Landlord deems necessary to remove
any such lien or encumbrance, without being responsible to investigate the
validity thereof. The amounts so paid and costs incurred by Landlord shall be
deemed Additional Rent under this Lease and payable in full upon demand.
E. Compliance with ADA. Notwithstanding anything to the contrary contained in
this Lease, Landlord and Tenant agree that responsibility for compliance with
the Americans With Disabilities Act of 1990 (the "ADA") shall be allocated as
follows: (i) Landlord shall be responsible for compliance with the provisions of
Title III of the ADA for all Common Areas, including exterior and interior areas
of the Building not included within the Premises or the premises of other
tenants; (ii) Landlord shall be responsible for compliance with the provisions
of Title III of the ADA for any construction, renovations, alterations and
repairs made within the Premises if such construction, renovations, alterations
or repairs are made by Landlord at Landlord's request and sole expense for the
purpose of improving the Building generally and not for tenant improvements;
(iii) Tenant shall be responsible for compliance with the applicable provisions
of the ADA for any construction, renovations, alterations and repairs made
within the Premises if such construction, renovations, alterations and repairs
are made by Tenant, its employees, agents or contractors, at Tenant's expense or
at the direction of Tenant.
ARTICLE 6.
USE
A. Use. Tenant shall use the Premises for general office purposes including,
without limitation, the wholesale, development, marketing, service and
maintenance of computer software and hardware and all functions related thereto,
and for no other purpose whatsoever, subject to and in compliance with all other
provisions of this Lease, including without limitation the Building's Rules and
Regulations attached as Exhibit D hereto. Tenant and its invitees shall also
have the non-exclusive right, along with other tenants of the Building and
others authorized by Landlord, to use the Common Areas subject to such rules and
regulations as Landlord in its discretion may timely and reasonably impose from
time to time.
B. Restrictions. Tenant shall not at any time knowingly use or occupy, or
suffer or permit anyone to use or occupy, the Premises or do or permit anything
to be done in the Premises which: (a) causes or is liable to cause injury to
persons, to the Building or its equipment, facilities or systems; (b) impairs or
tends to impair the character, reputation or appearance of the Building as a
first class office building (which shall not be any higher standard than as the
Building exists as of the date of this Lease); (c) impairs or tends to impair
the proper and economic maintenance, operation and repair of the Building or its
equipment, facilities or systems; or (d) annoys or inconveniences or tends to
annoy or inconvenience other tenants or occupants of the Building.
C. Compliance with Laws. Tenant shall keep and maintain the Premises, its use
thereof and its business in compliance with all applicable governmental laws,
ordinances, rules and regulations. Tenant shall comply with all Laws relating
to the Premises and Tenant's use thereof, including without limitation, Laws
requiring the Premises to be closed on Sundays or any other days or hours and
Laws in connection with the health, safety and building
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codes and any permit or license requirements.
ARTICLE 7.
SERVICES
A. Climate Control. Landlord shall furnish heat and air conditioning to the
Premises during Normal Business Hours of Building as set forth in Article I as
required in Landlord's reasonable judgment for the comfortable use and
occupation of the Premises. If Tenant requires heat or air conditioning at any
other time, Landlord shall use reasonable efforts to furnish such service upon
reasonable notice from Tenant, and Tenant shall pay all of Landlord's charges
therefor on demand at Landlord's cost therefore (i.e.. with no markup or
administrative fee).
Tenant shall not use the Premises or any part thereof in a manner exceeding the
heating, ventilating or air-conditioning ("HVAC") design conditions (including
any occupancy or connected electrical load conditions), including the
rearrangement of partitioning which may interfere with the normal operation of
the HVAC equipment, or the use of computer or data processing machines or other
machines or equipment in excess of that normally required for a standard office
use of the Premises (i.e., consistent with Tenant's use of the Premises as of
the date this lease is executed). If any such use requires changes in the HVAC
or plumbing systems or controls servicing the Premises or portions thereof in
order to provide comfortable occupancy, such changes may be made by Landlord at
Tenant's expense and Tenant agrees to promptly pay any such amount to Landlord
as Additional Rent.
B. Elevator Service. If the Building is equipped with elevators, Landlord,
during Normal Business Hours of Building, shall furnish elevator service to
Tenant to be used in common with others (other than the elevator which services
the 13th floor, which shall be for the exclusive use of Tenant for so long as it
is the sole Tenant on the 13th floor). At least one elevator shall remain in
service during all other hours. Landlord may designate a specific elevator for
use as a service elevator.
C. Janitorial Services. Landlord shall provide janitorial and cleaning
services to the Premises, substantially as described in Exhibit D attached
hereto. Tenant shall pay to Landlord on demand the reasonable costs incurred by
Landlord for (i) any cleaning of the Premises in excess of the specifications in
Exhibit D for any reason including, without limitation, cleaning required
because of (A) misuse or neglect on the part of Tenant or Tenant's agents,
contractors, invitees, employees and customers, (B) the use of portions of the
Premises for special purposes requiring greater or more difficult cleaning work
than office areas, (C) interior glass partitions or unusual quantities of
interior glass surfaces installed by Tenant, and (D) non-building standard
materials or finishes installed by Tenant or at its request; and (ii) removal
from the Premises of any refuse and rubbish of Tenant in excess of that
ordinarily accumulated in general office occupancy or at times other than
Landlord's standard cleaning times. Without limiting Tenant's obligations under
this subparagraph, Landlord agrees to make reasonable efforts to notify Tenant
in advance prior to incurring any "excess cleaning" charges.
D. Water and Electricity. Landlord shall make available domestic water in
reasonable quantities to the Common Areas of the Building and to the Premises
and cause electric service sufficient for lighting the Premises and for the
operation of Ordinary Office Equipment. "Ordinary Office Equipment" shall mean
office equipment wired for 120 volt electric service and rated and using less
than 6 amperes or 750 watts of electric current or other office equipment
approved by Landlord in writing. Landlord shall have the exclusive right to
make any replacement of lamps, fluorescent tubes and lamp ballasts in the
Premises. Landlord may adopt a system of relamping and ballast replacement
periodically on a group basis in accordance with good management practice.
Tenant's use of electric energy in the Premises shall not at any time exceed the
capacity of any of the risers, piping, electrical conductors and other equipment
in or serving the Premises. In order to insure that such capacity is not
exceeded and to avert any possible adverse effect upon the Building's electric
system, Tenant shall not, without Landlord's prior written consent in each
instance, connect appliances or heavy duty equipment, other than ordinary office
equipment, to the Building's electric system or make any alteration or addition
to the Building's electric system. Should Landlord grant its consent in
writing, all additional risers, piping and electrical conductors or other
equipment therefor shall be provided by Landlord and the reasonable cost
thereof shall be paid by Tenant within 30 days of Landlord's demand
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therefor. As a condition to granting such consent, Landlord may require Tenant
to agree to an increase in monthly Rent to offset the expected cost to Landlord
of such additional service, that is, the cost of the additional electric energy
to be made available to Tenant based upon the estimated additional capacity of
such additional risers, piping and electrical conductors or other equipment. If
Landlord and Tenant cannot agree thereon, such cost shall be determined by an
independent electrical engineer, to be selected by Landlord and paid equally by
both parties.
E. Separate Meters. If the Premises are separately metered for any utility,
Tenant shall pay a utility charge to Landlord (or directly to the utility
company, if possible) based upon the Tenant's actual consumption as measured by
the meter. Landlord also reserves the right to install separate meters for the
Premises to register the usage of all or any one of the utilities and in such
event Tenant shall pay for the cost of utility usage as metered to the Premises
and which is in excess of the usage reasonably anticipated by Landlord for
normal office usage of the Premises. Tenant shall reimburse Landlord for the
cost of installation of meters if Tenant's actual usage exceeds the anticipated
usage level by more than 10 percent. The term "utility" for purposes hereof may
refer to but is not limited to electricity, gas, water, sewer, steam, fire
protection system, telephone or other communication or alarm service, as well as
HVAC, and all taxes or other charges thereon.
F. Interruptions. Landlord does not warrant that any of the services referred
to above, or any other services which Landlord may supply, will be free from
interruption and Tenant acknowledges Landlord's representation that any one or
more of such services may be suspended by reason of accident, repairs,
inspections, alterations or improvements necessary to be made, or by strikes or
lockouts, or by reason of operation of law, or causes beyond the reasonable
control of Landlord. Any interruption or discontinuance of service shall not be
deemed an eviction or disturbance of Tenant's use and possession of the
Premises, or any part thereof, nor render Landlord liable to Tenant for damages
by abatement of the Rent or otherwise unless such interruption exceeds 10
consecutive days, nor relieve Tenant from performance of Tenant's obligations
under this Lease. Landlord shall however, exercise reasonable diligence to
restore any service so interrupted. This provision is not to be construed such
that Landlord may knowingly and intentionally discontinue providing utility
services to Tenant.
G. Utilities Provided by Tenant. Tenant shall make application in Tenant's own
name for all utilities not provided by Landlord to the Building or to other
tenants of the Building and shall: (i) comply with all utility company
regulations for such utilities, including requirements for the installation of
meters, and (ii) obtain such utilities directly from, and pay for the same when
due directly to, the applicable utility company. The term "utilities" for
purposes hereof shall include but not be limited to electricity, gas, water,
sewer, steam, fire protection, telephone and other communication and alarm
services, as well as HVAC, and all taxes or other charges thereon. Tenant shall
install and connect all equipment and lines required to supply such utilities to
the extent not already available at or serving the Premises, or at Landlord's
option shall repair, alter or replace any such existing items. Tenant shall
maintain, repair and replace all such items, operate the same, and keep the same
in good working order and condition. Tenant shall not install any equipment or
fixtures, or use the same, so as to exceed the safe and lawful capacity of any
utility equipment or lines serving the same. The installation, alteration,
replacement or connection of any utility equipment and lines shall be subject to
the requirements for alterations of the Premises set forth in Article 5. Tenant
shall ensure that all Tenant's HVAC equipment, is installed and operated at all
times in a manner to prevent roof leaks, damage, or excessive noise due to
vibrations or improper installation, maintenance or operation.
ARTICLE 8.
INSURANCE
A. Required Insurance. Tenant shall maintain insurance policies, with
responsible companies licensed to do business in the state where the Building is
located and satisfactory to Landlord, naming Landlord, Landlord's Building
Manager, Cornerstone Real Estate Advisers, Inc., Tenant and any Mortgagee of
Landlord, as their respective interests may appear, at its own cost and expense
including (i) "all risks" property insurance which shall be primary on the lease
improvements referenced in Article 5 and Tenant's property, including its goods,
equipment and inventory, in an amount adequate to cover their replacement cost;
(ii) business interruption insurance, (iii)
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comprehensive general liability insurance on an occurrence basis with limits of
liability in an amount not less than $1,000,000 (One Million Dollars) combined
single limit for each occurrence. The comprehensive general liability policy
shall include contractual liability which includes the provisions of Article 9
herein.
On or before the Commencement Date of the Lease, Tenant shall furnish to
Landlord and its Building Manager, certificates of insurance evidencing the
aforesaid insurance coverage, including naming Landlord, Cornerstone Real Estate
Advisers. Inc. and Landlord's Building Manager as additional insureds. Renewal
certificates must be furnished to Landlord at least thirty (30) days prior to
the expiration date of such insurance policies showing the above coverage to be
in full force and effect.
All such insurance shall provide that it cannot be canceled except upon thirty
(30) days prior written notice to Landlord. Tenant shall comply with all rules
and directives of any insurance board, company or agency determining rates of
hazard coverage for the Premises, including but not limited to the installation
of any equipment and/or the correction of any condition necessary to prevent any
increase in such rates.
Landlord shall during the Lease term maintain in full force the following
insurance: (i) general liability insurance issued by one or more insurance
carriers, insuring against liability for injury to or death of persons and loss
of or damage to property occurring in and on the Common Areas and in and on the
entire Building, with coverage limits of at least One Million Dollars
($1,000,000.00) combined single limits for bodily injury and property damage per
occurrence; and (ii) all risk property damage insurance and a standard extended
coverage endorsement issued by one or more insurance carriers covering the
Premises and all of the other buildings and improvements in the Building to the
extent of their full replacement value. Tenant acknowledges that Landlord's
cost of insurance carried by Landlord is passed through as a component of
Operating Expenses. Landlord shall have the right to self-insure so long as
Landlord's net worth exceeds $100,000,000. Landlord and Tenant may comply with
their insurance obligations hereunder by endorsement to any blanket policy of
insurance. Landlord and Tenant shall deliver to each other certificates issued
by the insurance carrier or carriers for each policy of insurance they are
required to maintain by this Lease within ten (10) days after request therefor.
B. Waiver of Subrogation. Landlord and Tenant each agree that neither Landlord
nor Tenant will have any claim against the other for any loss, damage or injury
which is covered by insurance carried by either party and for which recovery
from such insurer is made, notwithstanding the negligence of either party in
causing the loss. This release shall be valid only if the insurance policy in
question permits waiver of subrogation or if the insurer agrees in writing that
such waiver of subrogation will not affect coverage under said policy. Each
party agrees to use its best efforts to obtain such an agreement from its
insurer if the policy does not expressly permit a waiver of subrogation.
C. Tenant's Waiver of Claims. Except as set forth in paragraph D below, and
except for claims arising from Landlord's (or Landlord's employees, agents,
officers, directors or assigns) willful misconduct (including misconduct by
willful and wrongful omission) and/or negligence that are not covered by
Tenant's insurance required hereunder, Tenant waives all claims against Landlord
for injury or death to persons, damage to property or to any other interest of
Tenant sustained by Tenant or any party claiming, through Tenant resulting from:
(i) any occurrence in or upon the Premises, (ii) leaking of roofs, bursting,
stoppage or leaking of water, gas, sewer or steam pipes or equipment, including
sprinklers, (iii) wind, rain, snow, ice, flooding, freezing, fire, explosion,
earthquake, excessive heat or cold, or other casualty, (iv) the Building,
Premises, or the operating and mechanical systems or equipment of the Building,
being defective, or failing, and (v) vandalism, malicious mischief, theft or
other acts or omissions of any other parties including without limitation, other
tenants, contractors and invitees at the Building. Tenant agrees that Tenant's
property loss risks shall be borne by its insurance, and Tenant agrees to look
solely to and seek recovery only from its insurance carriers in the event of
such losses. For purposes hereof, any deductible amount shall be treated as
though it were recoverable under such policies.
D. Landlord's Waiver of Claims. Except for claims arising from Tenant's (or
Tenant's employees, agents, officers, directors or assigns) willful misconduct
(including misconduct by willful and wrongful omission) and/or negligence or
claims that are covered by Tenant's insurance that is required hereunder,
Landlord waives all claims against Tenant for injury or death to persons,
damage to property or to any other interest of Landlord resulting from (1)
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the willful misconduct and/or negligence of Landlord (or Landlord's employees.
agents. officers directors or assigns), or (2) the acts or omissions of other
tenants in the Building.
ARTICLE 9.
INDEMNIFICATION
Tenant shall indemnify and hold harmless Landlord and its agents, successors and
assigns, including its Building Managers from and against all injury, loss,
costs, expenses, claims or damage (including attorney's fees and disbursements)
to any person or property arising from, related to, or in connection with any
use or occupancy of the Premises by or any act or omission (including, without
limitation, construction and repair of the Premises arising out of Tenant's Work
or subsequent work) of Tenant, its agents, contractors, employees, customers,
and invitees. This indemnification shall survive the expiration or termination
of the Lease Term.
Landlord shall indemnify and hold harmless Tenant and its agents, successors and
assigns, from and against all injury, loss, costs, expenses, claims or damage
(including attorney's fees and disbursements) to any person or property arising
from, related to, or in connection with any negligence or willful misconduct
(including negligent or willful and wrongful acts or omissions) by Landlord, its
agents, contractors, employees, customers, and invitees. This indemnification
shall survive the expiration or termination of the Lease Term.
Landlord shall not be liable to Tenant for any damage by or from any act or
negligence of any co-tenant or other occupant of the Building, or by any owner
or occupants of adjoining or contiguous property. Landlord shall not be liable
for any injury or damage to persons or property resulting in whole or in part
from the criminal activities or willful misconduct of others, unless resulting
from Landlord's willful misconduct or negligence. To the extent not covered by
all risk property insurance, Tenant agrees to pay for all damage to the
Building, as well as all damage to persons or property of other tenants or
occupants thereof, caused by the negligence, fraud or willful misconduct of
Tenant or any of its agents, contractors, employees, customers and invitees.
Nothing contained herein shall be construed to relieve Landlord from liability
for any personal injury resulting from its negligence, fraud or willful
misconduct.
ARTICLE 10.
CASUALTY DAMAGE
A. If the Premises should be damaged by fire or other casualty such that
rebuilding or repairs cannot be completed within 180 days from the date of such
damage, Tenant may, within thirty (30) days of the determination of the number
of days necessary to restore the Premises, terminate this Lease on written
notice to Landlord and, in such event, all charges payable by Tenant hereunder
shall be abated as of the date of the happening of the damage.
B. If the Premises and other portions of the Building should be damaged by fire
or other casualty such that the cost of rebuilding or repairs exceeds fifty
percent (50%) of the replacement cost of the entire Building, then Landlord may,
within thirty (30) days after the determination of the cost of such rebuilding
and repairs, terminate this Lease on written notice to Tenant and, in such
event, all charges payable by Tenant hereunder shall abate as of the date of the
happening of such damage.
C. If the Premises should be damaged and this Lease cannot be or is not
terminated by Landlord or Tenant pursuant to Paragraphs A or B above, then
Landlord shall, at its sole cost and risk, proceed forthwith to rebuild or
repair the Premises in compliance with all Laws to substantially the condition
which existed prior to such damage, except that Tenant shall have the right to
require Landlord to make changes to the Premises in the course of such
restoration, subject to Landlord's reasonable approval of such changes. If the
cost and expense of restoration of the Premises is increased by any change or
changes made by Tenant or if Landlord is damaged by any delay caused solely by
such change or changes, then Tenant shall pay Landlord, within thirty (30) days
after demand therefor,
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the amount or amounts by which the cost or expense or restoration of the
Premises was thereby increased and the reasonable amount by which Landlord was
damaged by such delay.
D. The cost of rebuilding and repair of the Premises and the Building and the
number of days within which the Premises can be rebuilt or repaired shall be
determined by an independent contractor mutually acceptable to both Landlord and
Tenant.
E. If the Premises shall be damaged so that Tenant is unable to conduct its
normal business operations from the Premises for more than 7 consecutive days,
then all charges payable by Tenant hereunder shall abate commencing upon the 8th
day following such damage. Such abatement shall end on the earlier to occur of:
(i) 10 days after completion of rebuilding or repair of damage and the Premises
are in substantially the same condition as prior to the occurrence of the damage
or (ii) the date on which Tenant's conduct of its business from the Premises is
resumed.
F. If this Lease cannot be or is not terminated by Landlord or Tenant pursuant
to Paragraph A or B above, then all insurance proceeds payable with respect to
any damage or destruction of the Premises shall be applied solely to the cost of
the rebuilding or repair of the damage or destruction to the Premises. In the
event the insurance proceeds are insufficient to cover the costs of the
rebuilding or repairs, the excess costs shall be borne by the Landlord (except
with respect to the internal fixturization of the Premises).
G. If more than 50% of the rentable square footage of the Building is damaged
or destroyed and Landlord does not commence within 60 days after such damage or
destruction and diligently continue thereafter to restore the same, Tenant shall
have, as its sole right and remedy, the right to terminate this Lease by giving
written notice of such termination to Landlord, effective upon the expiration of
thirty (30) days following the giving of such notice (provided Landlord has not
commenced the repair during such period).
H. In any event, Landlord will cooperate with Tenant in making other space
available to Tenant during any repair period to the extent reasonably possible
and upon mutually acceptable terms.
ARTICLE 11.
CONDEMNATION
In the event of a condemnation or taking of the entire Premises by a public or
quasi-public authority, this Lease shall terminate as of the date title vests in
the public or quasi-public authority and the Rent shall abate concurrently with
such termination or the earlier vacation of the Premises by Tenant pursuant to
the terms of this paragraph. In the event of a taking or condemnation of
fifteen percent (15%) or more (but less than the whole) of the Building and
without regard to whether the Premises are part of such taking or condemnation,
Landlord may elect to terminate this Lease by giving notice to Tenant within
sixty (60) days of Landlord receiving notice of such condemnation and the Rent
shall abate concurrently with such termination. In the event of a taking or
condemnation of any portion of the Premises, Tenant may elect to terminate this
Lease by giving notice to Landlord within sixty (60) days of tenant receiving
notice of such condemnation and the Rent shall abate concurrently with such
termination. All compensation awarded for any condemnation shall be the
property of Landlord, whether such damages shall be awarded as a compensation
for diminution in the value of the leasehold or to the fee of the Premises, and
Tenant hereby assigns to Landlord all of Tenant's right, title and interest in
and to any and all such compensation. Providing, however that in the event this
Lease is terminated, Tenant shall be entitled to make a separate claim for the
taking of Tenant's personal property (including fixtures paid for by Tenant),
business interruption and for costs of moving. Notwithstanding anything herein
to the contrary, any condemnation award to Tenant shall be available only to the
extent such award is payable separately to Tenant (and Landlord shall have no
interest in any such award made to Tenant) and does not diminish the award
available to Landlord or any Lender of Landlord.
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ARTICLE 12.
REPAIR AND MAINTENANCE
A. Tenant's Obligations. Except to the extent that Landlord is specifically
responsible therefor pursuant to the terms of this Lease, Tenant shall keep the
Premises in good working order, repair (and in compliance with all applicable
Laws now or hereafter adopted) and condition (which condition shall be neat,
clean and sanitary, and free of pests and rodents, ordinary wear and tear
excepted) and shall make all necessary non-structural repairs thereto and any
repairs to non-Building standard mechanical, HVAC, electrical and plumbing
systems or components in or serving the Premises. Tenant's obligations
hereunder shall include but not be limited to Tenant's trade fixtures and
equipment, security systems, signs, interior decorations, floor-coverings, wall-
coverings, entry and interior doors, interior glass, light fixtures and bulbs,
keys and locks, and alterations to the Premises whether installed by Tenant or
Landlord.
B. Landlord's Obligations. Landlord shall make all necessary structural
repairs to the Building and any necessary repairs to the Building standard
mechanical, HVAC, electrical, and plumbing systems in or servicing the Premises
(the cost of which shall be included in Operating Expenses under Article 4),
excluding repairs required to be made by Tenant pursuant to this Article.
Landlord shall have no responsibility to make any repairs to the Premises unless
and until Landlord receives written notice of the need for such repair.
Landlord shall not be liable for any failure to make repairs or to perform any
maintenance unless such failure shall persist for an unreasonable time after
written notice of the need for such repairs or maintenance is received by
Landlord from Tenant. Landlord shall make every reasonable effort to perform
all such repairs or maintenance in such a manner (in its reasonable judgment) so
as to cause minimum interference with Tenant and the Premises but Landlord shall
not be liable to Tenant for any interruption or loss of business pertaining to
such activities; provided, however, that if Landlord fails to act in a
commercially reasonable manner and Tenant is unable to conduct its normal
business operations from the Premises for more than 7 consecutive days, then all
charges payable by Tenant hereunder shall abate commencing upon the 8th day
following such damage. Such abatement shall end on the earlier to occur of: (i)
10 days after completion of rebuilding or repair of damage and the Premises are
in substantially the same condition as prior to the occurrence of the damage or
(ii) the date on which Tenant's conduct of its business from the Premises is
resumed. Landlord shall have the right to require that any damage caused by the
willful misconduct of Tenant or any of Tenant's agents, contractors, employees,
invitees or customers, be paid for and performed by the Tenant (without limiting
Landlord's other remedies herein).
C. Signs and Obstructions. Tenant shall not knowingly or intentionally
obstruct or permit the obstruction of light, halls, Common Areas, roofs,
parapets, stairways or entrances to the Building or the Premises and will not
affix, paint, erect or inscribe any sign, projection, awning, signal or
advertisement of any kind to any part of the Building or the Premises, including
the inside or outside of the windows or doors, without the written consent of
Landlord, except as provided in Exhibit "F" attached hereto. Landlord shall
have the right to reasonably withdraw such consent at any time and to require
Tenant to remove any sign, projection, awning, signal or advertisement to be
affixed to the Building or the Premises. If such work is done by Tenant through
any person, firm or corporation not designated by Landlord, or without the
express written consent of Landlord, Landlord shall have the right to remove
such signs, projections, awnings, signals or advertisements without being liable
to the Tenant by reason thereof and to charge the cost of such removal to Tenant
as Additional Rent, payable within ten (10) days of Landlord's demand therefor.
D. Outside Services. Tenant shall not knowingly or intentionally cause, except
by Landlord or a person or company reasonably satisfactory to and approved by
Landlord: (i) the extermination of vermin in, on or about the Premises; (ii) the
servicing of heating, ventilating and air conditioning equipment; (iii) the
collection of rubbish and trash other than in compliance with local government
health requirements and in accordance with the rules and regulations established
by Landlord, which shall minimally provide that Tenant's rubbish and trash shall
be kept in containers located so as not to be visible to members of the public
and in a sanitary and neat condition; or (iv) window cleaning, janitorial
services or similar work in the Premises.
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ARTICLE 13.
INSPECTION OF PREMISES
Tenant shall permit the Landlord, the Building Manager and its authorized
representatives to enter the Premises to show the Premises during Normal
Business Hours of Building and at other reasonable times to inspect the Premises
and to make such repairs, improvements, alterations or additions in the Premises
or in the Building of which they are a part as Landlord may deem necessary or
appropriate. Reasonable prior written notice to Tenant is required, and
Landlord, Building Manager and its authorized representatives will comply with
Tenant's security procedures.
ARTICLE 14.
SURRENDER OF PREMISES
Upon the expiration of the Term, or sooner termination of the Lease, Tenant
shall quit and surrender to Landlord the Premises, broom clean, in good order
and condition, normal wear and tear and damage by fire and other casualty
excepted. All leasehold improvements and other fixtures, such as light fixtures
and HVAC equipment, wall coverings, carpeting and drapes, in or serving the
Premises, whether installed by Tenant or Landlord, shall be Landlord's property
and shall remain, all without compensation, allowance or credit to Tenant. Any
property not removed (provided that Tenant has had a reasonable opportunity to
remove such property) shall be deemed to have been abandoned by Tenant and may
be retained or disposed of by Landlord at Tenant's expense free of any and all
claims of Tenant, as Landlord shall desire. All property not removed from the
Premises by Tenant may be handled or stored by Landlord at Tenant's expense and
Landlord shall not be liable for the value, preservation or safekeeping thereof.
At Landlord's option all or part of such property may be conclusively deemed to
have been conveyed by Tenant to Landlord as if by bill of sale without payment
by Landlord.
ARTICLE 15.
HOLDING OVER
Tenant shall pay Landlord 150% of the amount of Rent then applicable prorated on
a per diem basis for each day Tenant shall retain possession of the Premises or
any part thereof after expiration or earlier termination of this Lease, together
with all damages sustained by Landlord on account thereof to the extent
permitted by law. The foregoing provisions shall not serve as permission for
Tenant to hold-over, nor serve to extend the Term (although Tenant shall remain
bound to comply with all provisions of this Lease until Tenant vacates the
Premises) and Landlord shall have the right at any time thereafter to enter and
possess the Premises and remove all property and persons therefrom.
ARTICLE 16.
SUBLETTING AND ASSIGNMENT
Except as otherwise permitted by the terms of this Lease, Tenant shall not,
without the prior written consent of Landlord, list the Premises or any part
thereof as available for assignment or sublease with any broker or agent or
otherwise advertise, post, communicate or solicit prospective assignees or
subtenants through any direct or indirect means, nor assign this Lease or any
interest thereunder, or sublet Premises or any part thereof, or permit the use
of Premises by any party other than Tenant. In the event that during the term
of this Lease, Tenant desires to sublease and introduces Landlord to a proposed
replacement tenant for Tenant, which replacement tenant has a good reputation,
is of acceptable financial strength (as determined by Landlord in its
discretion) and has a use for Premises and a number of employees reasonably
consistent with that of Tenant's operation, the Landlord may consider such
replacement tenant and notify Tenant with reasonable promptness (but in any
event within 20 days) as to Landlord's choice, at Landlord's sole discretion, of
the following:
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(1) That Landlord consents to a subleasing of the Premises or assignment of the
lease to such replacement tenant provided that Tenant shall remain fully
liable for all of its obligations and liabilities under this Lease and
provided further that Landlord shall be entitled to one-half of any profit
obtained by Tenant from such subletting or assignment; or:
(2) That upon such replacement tenant's entering into a mutually satisfactory
new Lease for the Premises with Landlord, then Tenant shall be released
from all further obligations and liabilities under this Lease (excepting
only any unpaid rentals or any unperformed covenants then past due under
this Lease or any guarantee by Tenant of replacement tenant's obligations);
or
(3) That Landlord declines to consent to such sublease or assignment due to
insufficient or unsatisfactory documentation furnished to Landlord to
establish tenant's reputation, financial strength and proposed use of and
operations upon Premises; or
(4) That Landlord elects to cancel the Lease and recapture the Premises (in the
case of an assignment) or that Landlord elects to cancel the Lease as to
the portion thereof that Tenant had wished to sublease. In either such
event Tenant shall surrender possession of the Premises, or the portion
thereof which is the subject of Tenant's request on the date set forth in a
notice from Landlord in accordance with the provisions of this Lease
relating to the surrender of the Premises. If this Lease shall be canceled
as to a portion of the Premises only, the Rent payable by Tenant hereunder
shall be abated proportionately according to the ratio that the area of the
portion of the Premises surrendered (as computed by Landlord) bears to the
area of the Premises immediately prior to such surrender. If Landlord
shall cancel this Lease, Landlord may relet the Premises, or the applicable
portion of the Premises, to any other party (including, without limitation,
the proposed assignee or subtenant of Tenant), without any liability to
Tenant.
In no case may Tenant assign any options to sublessee(s) or assignee(s)
hereunder, all such options being deemed personal to Tenant only. Consent by
Landlord hereunder shall in no way operate as a waiver by Landlord of, or to
release or discharge Tenant from, any liability under this Lease or be construed
to relieve Tenant from obtaining Landlord's consent to any subsequent
assignment, subletting, transfer, use or occupancy.
Notwithstanding the foregoing, Landlord's consent shall not be required with
respect to (1) any assignment resulting from a consolidation, merger or purchase
of substantially all of Tenant's assets; or (2) any assignment or sublease to a
person (a) who wholly owns Tenant or who wholly owns the person who wholly owns
Tenant (in either case, a "Parent"), or who is wholly owned by Tenant or a
Parent, or is wholly owned by a person who is wholly owned by Tenant or a
Parent, and (b) whose financial strength, both in terms of net worth and in
terms of reasonably anticipated cash flow over the Lease term, is not materially
less than Tenant's financial strength at the time this Lease was executed or at
the time of such assignment or sublease, whichever is greater. With respect to
any assignment or subletting to which Landlord's consent is not required, the
following provisions shall apply:
a. Tenant shall give Landlord written notice of the assignment or
subletting no less than 45 days prior to the effective date thereof, which
notice shall set forth the identity of the proposed transferee, the reason(s)
why Landlord's consent is not required, and the nature of the proposed
transferee's business to be carried on in the Premises.
b. Tenant shall furnish Landlord (i) no less than 30 days prior to the
effective date of the assignment or subletting, with a current financial
statement of the proposed transferee reasonably acceptable to Landlord, and (ii)
within 5 days following Landlord's demand, with all other information reasonably
requested by Landlord with respect to such transferee.
Any assignment or subletting to which Landlord's consent is not required and
with respect to which the provisions of this paragraph are not complied with
shall, at Landlord's option, be void.
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ARTICLE 17.
SUBORDINATION, ATTORNMENT AND MORTGAGEE PROTECTION
This Lease is subject and subordinate to all Mortgages now or hereafter placed
upon the Building, and all other encumbrances and matters of public record
applicable to the Building, including without limitation any reciprocal easement
or operating agreements, covenants, conditions and restrictions and Tenant shall
not knowingly act or permit the Premises to be operated in violation thereof.
If any foreclosure or power of sale proceedings are initiated by any Lender or a
deed in lieu is granted (or if any ground lease is terminated), Tenant agrees,
upon written request of any such Lender or any purchaser at such foreclosure
sale, to attorn and pay Rent to such party (provided same agrees to accept such
Rent) and to execute and deliver any instruments necessary or appropriate to
evidence or effectuate such attornment. In the event of attornment, no Lender
shall be: (i) liable for any act or omission of Landlord, or subject to any
offsets or defenses which Tenant might have against Landlord (prior to such
Lender becoming Landlord under such attornment), (ii) liable for any security
deposit or bound by any prepaid Rent not actually received by such Lender, or
(iii) bound by any future modification of this Lease not consented to by such
Lender. Any Lender may elect to make this Lease prior to the lien of its
Mortgage, and if the Lender under any prior Mortgage shall require, this Lease
shall be prior to any subordinate Mortgage; such elections shall be effective
upon written notice to Tenant. Tenant agrees to give any Lender by certified
mail, return receipt requested, a copy of any notice of default served by Tenant
upon Landlord, provided that prior to such notice Tenant has been notified in
writing (by way of service on Tenant of a copy of an assignment of leases, or
otherwise) of the name and address of such Lender. Tenant further agrees that
if Landlord shall have failed to cure such default within the time permitted
Landlord for cure under this Lease, any such Lender whose address has been so
provided to Tenant shall have an additional period of thirty (30) days in which
to cure (or such additional time as may be required due to causes beyond such
Lender's control, including time to obtain possession of the Building by power
of sale or judicial action or deed in lieu of foreclosure). The provisions of
this Article shall be self-operative; however, Tenant shall execute such
documentation as Landlord or any Lender may reasonable request from time to time
in order to confirm the matters set forth in this Article in recordable form.
Landlord represents and warrants that, as of the time of this Lease, there are
no mortgages encumbering the Building.
ARTICLE 18.
ESTOPPEL CERTIFICATE
Tenant shall from time to time, upon written request by Landlord or Lender,
deliver to Landlord or Lender, within ten (10) days after from receipt of such
request, a statement in writing certifying: (i) that this Lease is unmodified
and in full force and effect (or if there have been modifications, identifying
such modifications and certifying that the Lease, as modified, is in full force
and effect); (ii) the dates to which the Rent has been paid; (iii) that Landlord
is not in default under any provision of this Lease (or if Landlord is in
default, specifying each such default); and, (iv) the address to which notices
to Tenant shall be sent; it being understood that any such statement so
delivered may be relied upon in connection with any lease, mortgage or transfer.
Tenant's failure to deliver such statement within such time shall be conclusive
upon Tenant that: (i) this Lease is in full force and effect and not modified
except as Landlord may represent; (ii) not more than one month's Rent has been
paid in advance; (iii) there are no defaults by Landlord; and, (iv) notices to
Tenant shall be sent to Tenant's Address as set forth in Article I of this
Lease. Notwithstanding the presumptions of this Article, Tenant shall not be
relieved of its obligation to deliver said statement.
ARTICLE 19.
DEFAULTS
If Tenant: (i) fails to pay when due any installment or other payment of Rent
and such failure shall continue for ten days after Tenant's receipt of
Landlord's demand therefor, or to keep in effect any insurance required to be
maintained hereunder; or (ii) intentionally vacates or abandons the Premises
without the consent of Landlord, or (iii)
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becomes insolvent, makes an assignment for the benefit of creditors, files a
voluntary bankruptcy or an involuntary petition in bankruptcy is filed against
Tenant which petition is not dismissed within sixty (60) days of its filing, or
(iv) fails to perform or observe any of the other covenants, conditions or
agreements contained herein on Tenant's part to be kept or performed and such
failure shall continue for 45 days after notice thereof given by or on behalf of
Landlord, unless such failure will reasonably take longer than 45 days to cure
and Tenant has commenced and is diligently pursuing such cure, or (v) except as
permitted hereby, if the interest of Tenant shall be offered for sale or sold
under execution or other legal process or if Tenant makes any transfer,
assignment, conveyance, sale, pledge, disposition of all or a substantial
portion of Tenant's property, then any such event or conduct shall constitute a
"default" hereunder.
If Tenant shall file a voluntary petition pursuant to the United States
Bankruptcy Reform Act of 1978, as the same may be from time to time be amended
(the "Bankruptcy Code"), or take the benefit of any insolvency act or be
dissolved, or if an involuntary petition be filed against Tenant pursuant to the
Bankruptcy Code and said petition is not dismissed within 60 days after such
filing, or if a receiver shall be appointed for its business or its assets and
the appointment of such receiver is not vacated within 60 days after such
appointment, or if it shall make an assignment for the benefit of its creditors,
then Landlord shall have all of the rights provided for in the event of
nonpayment of the Rent.
If any alleged default on the part of the Landlord hereunder occurs, Tenant
shall give written notice to Landlord in the manner herein set forth and shall
afford Landlord 45 days after notice thereof to cure such alleged default,
unless such default will reasonably take longer than 45 days to cure and
Landlord has commenced and is diligently pursuing such cure. In addition,
Tenant shall send notice of such default by certified or registered mail,
postage prepaid, to the holder of any Mortgage whose address Tenant has been
notified of in writing, and shall afford such Mortgage holder a reasonable
opportunity to cure any alleged default on Landlord's behalf. In no event will
Landlord be responsible for any damages incurred by Tenant for lost profits or
interruption of business as a result of any alleged default by Landlord
hereunder.
ARTICLE 20.
REMEDIES OF LANDLORD
The remedies provided Landlord under this Lease are cumulative.
(a) Upon the occurrence of any default and following any applicable cure period,
Landlord may serve notice on Tenant that the Term and the estate hereby vested
in Tenant and any and all other rights of Tenant hereunder shall cease on the
date specified in such notice and on the specified date this Lease shall cease
and expire as fully and with the effect as if the Term had expired for passage
of time.
(b) Without terminating this Lease in case of a default or if this Lease shall
be terminated for default as provided herein, Landlord may re-enter the
Premises, remove Tenant, or cause Tenant to be removed from the Premises in such
manner as Landlord may reasonably deem advisable, with or without legal process,
and using such reasonable force as may be necessary. In the event of re-entry
without terminating this Lease, Tenant shall continue to be liable for all Rents
and other charges accruing or coming due under this Lease.
(c) If Landlord, without terminating this Lease, shall re-enter the Premises or
if this Lease shall be terminated as provided in paragraph (a) above:
(i) All Rent due from Tenant to Landlord shall thereupon become due and shall
be paid up to the time of re-entry, dispossession or expiration, together with
reasonable costs and expenses (including, without limitation, attorney's fees)
of Landlord;
(ii) Landlord, without any obligation to do so, may relet the Premises or any
part thereof for a term or terms which may at Landlord's option be less than
or exceed the period which would otherwise have constituted the balance of
the Term and may grant such concessions in reletting as Landlord, in the
exercise of its reasonable
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business judgment, deems desirable. In connection with such reletting, Tenant
shall be liable for all costs of the reletting including, without limitation,
rent concessions, leasing commissions legal fees and alteration and remodeling
costs; and
(iii) If Landlord shall have terminated this Lease, Tenant shall also be
liable to Landlord for all damages provided for in law and awarded by a court
of competent jurisdiction resulting from Tenant's breach including, without
limitation, the difference between the aggregate rentals reserved under the
terms of this Lease for the balance of the Term together with all other sums
payable hereunder as Rent for the balance of the Term, less the fair rental
value of the Premises for that period determined as of the date of such
termination. For purposes of this paragraph. Tenant shall be deemed to
include any guarantor or surety of the Lease.
(d) In addition to the above, except as otherwise specified in this Lease,
Landlord and Tenant shall have any and all other rights provided under law or
equity for breach of a lease or tenancy and all remedies and rights existing in
law or in equity are cumulative.
ARTICLE 21.
QUIET ENJOYMENT
Landlord covenants and agrees with Tenant that so long as Tenant pays the Rent
and observes and performs all the terms, covenants, and conditions of this Lease
on Tenant's part to be observed and performed, Tenant may peaceably and quietly
enjoy the Premises subject, nevertheless, to the terms and conditions of this
Lease, and Tenant's possession will not be disturbed by anyone claiming by,
through, or under Landlord.
ARTICLE 22.
ACCORD AND SATISFACTION
No payment by Tenant or receipt by Landlord of an amount less than full payment
of Rent then due and payable shall be deemed to be other than on account of the
Rent then due and payable, nor shall any endorsement or statement on any check
or any letter accompanying any check or payment as Rent be deemed an accord and
satisfaction, and Landlord may accept such check or payment without prejudice to
Landlord's right to recover the balance of such Rent or pursue any other remedy
provided for in this Lease or available at law or in equity.
ARTICLE 23.
SECURITY DEPOSIT
Not applicable.
ARTICLE 24.
BROKERAGE COMMISSION
Landlord and Tenant represent and warrant to each other that neither has dealt
with any broker, finder or agent except for the Broker(s) identified in Article
1. Tenant represents and warrants to Landlord that (except with respect to the
Broker identified in Article 1 and with whom Landlord has entered into a
separate brokerage agreement) no broker, agent, commission salesperson, or other
person has represented Tenant in the negotiations for and procurement of this
Lease and of the Premises and that no commissions, fees, or compensation of any
kind are due and payable in connection herewith to any broker, agent commission
salesperson, or other person. Tenant agrees to indemnify Landlord and hold
Landlord harmless from any and all claims, suits, or judgments (including,
without limitation, reasonable attorneys' fees and court costs incurred in
connection with any such claims, suits, or judgments, or in connection with the
enforcement of this indemnity) for any fees, commissions, or compensation of any
kind which arise out of or are in any way connected with any claimed agency
relationship not referenced in
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Article 1.
ARTICLE 25.
FORCE MAJEURE
Landlord shall be excused for the period of any delay in the performance of any
obligation hereunder when prevented from so doing by a cause or causes beyond
its control, including all labor disputes, civil commotion, war, war-like
operations, invasion, rebellion, hostilities, military or usurped power,
sabotage, governmental regulations or controls, fire or other casualty,
inability to obtain any material, services or financing, or through acts of God.
Tenant shall similarly be excused for delay in the performance of any obligation
hereunder; provided:
(a) nothing contained in this Section shall be deemed to excuse or permit any
delay in the payment of the Rent, or any delay in the cure of any default
which may be cured by the payment of money; and
(b) no reliance by Tenant upon this Section shall limit or restrict in any
way Landlord's right of self-help as provided in this Lease.
ARTICLE 26.
PARKING
(a) Landlord hereby grants to Tenant the right, in common with others
authorized by Landlord, to use the parking facilities owned by Landlord and
shown on Exhibit A, if any. Landlord, at its sole election, may designate the
types and locations of parking spaces within the parking facilities which Tenant
shall be allowed to use. Landlord shall have the right, at Landlord's sole
election, to change said types and locations from time to time; provided,
however, such designation shall be uniformly applied and shall not unfairly
favor any tenant in the Building.
(b) Commencing on the Commencement Date, Tenant shall pay Landlord the
Parking Fee, if any, shown in Article 1, as Additional Rent, payable monthly in
advance with the Monthly Rent. If there is a Parking Fee shown in Article 1,
then thereafter, and throughout the Term, the parking rate for each type of
parking space provided to Tenant hereunder shall be the prevailing parking rate,
as Landlord may designate from time to time, at Landlord's sole election, for
each such type of parking space. In addition to the right reserved hereunder by
Landlord to designate the parking rate from time to time, Landlord shall have
the right to change the parking rate at any time to include therein any amounts
levied, assessed, imposed or required to be paid to any governmental authority
on account of the parking of motor vehicles, including all sums required to be
paid pursuant to transportation controls imposed by the Environmental Protection
Agency under the Clean Air Act of 1970, as amended, or otherwise required to be
paid by any governmental authority with respect to the parking, use, or
transportation of motor vehicles, or the reduction or control of motor vehicle
traffic, or motor vehicle pollution.
(c) If requested by Landlord, Tenant shall notify Landlord of the license
plate number, year, make and model of the automobiles entitled to use the
parking facilities and if requested by Landlord, such automobiles shall be
identified by automobile window stickers provided by Landlord, and only such
designated automobiles shall be permitted to use the parking facilities. If
Landlord institutes such an identification procedure, Landlord may provide
additional parking spaces for use by customers and invitees of Tenant on a daily
basis at prevailing parking rates, if any. At Landlord's sole election,
Landlord may make validation stickers available to Tenant for any such
additional parking spaces, provided, however, if Landlord makes validation
stickers available to any other tenant in the Building, Landlord shall make such
validation stickers available to Tenant.
(d) The parking facilities provided for herein are provided solely for the
accommodation of Tenant and Landlord assumes no responsibility or liability of
any kind whatsoever from whatever cause with respect to the automobile parking
areas, including adjoining streets, sidewalks, driveways, property and
passageways, or the use thereof by Tenant or tenant's employees, customers,
agents, contractors or invitees.
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ARTICLE 27.
HAZARDOUS MATERIALS
A. Definition of Hazardous Materials. The term "Hazardous Materials" for
purposes hereof shall mean any chemical, substance, materials or waste or
component thereof which is now or hereafter listed, defined or regulated as a
hazardous or toxic chemical, substance, materials or waste or component thereof
by any federal, state or local governing or regulatory body having jurisdiction,
or which would trigger any employee or community "right-to-know" requirements
adopted by any such body, or for which any such body has adopted any
requirements for the preparation or distribution of a materials safety data
sheet ("MSDS").
B. No Hazardous Materials. Tenant shall not transport, use, store, maintain,
generate, manufacture, handle, dispose, release or discharge any Hazardous
Materials. However, the foregoing provisions shall not prohibit the
transportation to and from, and use, storage, maintenance and handling within
the Premises of Hazardous Materials customarily used in the business or activity
expressly permitted to be undertaken in the Premises under Article 6 provided:
(a) such Hazardous Materials shall be used and maintained only in such
quantities as are reasonably necessary for such permitted use of the Premises
and the ordinary course of Tenant's business therein, strictly in accordance
with applicable Law, highest prevailing standards, and the manufacturers'
instructions therefor, (b) such Hazardous Materials shall not be disposed of,
released or discharged in the Building, and shall be transported to and from the
Premises in compliance with all applicable Laws, and as Landlord shall
reasonably require, (c) if any applicable Law or Landlord's trash removal
contractor requires that any such Hazardous Materials be disposed of separately
from ordinary trash, Tenant shall make arrangements at Tenant's expense for such
disposal directly with a qualified and licensed disposal company at a lawful
disposal site (subject to scheduling and approval by Landlord), and (d) any
remaining such Hazardous Materials shall be completely, properly and lawfully
removed from the Building upon expiration or earlier termination of this Lease.
C. Notices To Landlord. Tenant shall promptly notify Landlord of: (i) any
enforcement, cleanup or other regulatory action taken or threatened by any
governmental or regulatory authority with respect to the presence of any
Hazardous Materials on the Premises or the migration thereof from or to other
property, (ii) any demands or claims made or threatened by any party relating to
any loss or injury resulting from any Hazardous Materials on the Premises, (iii)
any release, discharge or non-routine, improper or unlawful disposal or
transportation of any Hazardous Materials on or from the Premises or in
violation of this Article, and (iv) any matters where Tenant is required by Law
to give a notice to any governmental or regulatory authority respecting any
Hazardous Materials on the Premises. Landlord shall have the right (but not the
obligation) to join and participate, as a party, in any legal proceedings or
actions affecting the Premises initiated in connection with any environmental,
health or safety law. At such times as Landlord may reasonably request, Tenant
shall provide Landlord with a written list, certified to be true and complete,
identifying any Hazardous Materials then used, stored, or maintained upon the
Premises, the use and approximate quantity of each such materials, a copy of any
MSDS issued by the manufacturer therefor, and such other information as Landlord
may reasonably require or as may be required by Law.
D. Indemnification of Landlord. If any Hazardous Materials are released,
discharged or disposed of by Tenant or their employees, agents, invitees or
contractors, on or about the Building in violation of the foregoing provisions,
Tenant shall immediately, properly and in compliance with applicable Laws clean
up, remediate and remove the Hazardous Materials from the Building and any other
affected property and clean or replace any affected personal property (whether
or not owned by Landlord), at Tenant's expense (without limiting Landlord's
other remedies therefore. Tenant shall further be required to indemnify and
hold Landlord, Landlord's directors, officers, employees and agents harmless
from and against any and all claims, demands, liabilities, losses, damages,
penalties and judgments directly arising out of or attributable to a violation
of the provisions of this Article by Tenant, Tenant's invitees, employees,
contractors or agents. Any clean up, remediation and removal work shall be
subject to Landlord's prior written approval (except in emergencies), and shall
include, without limitation, any testing, investigation, and the preparation and
implementation of any remedial action plan required by any governmental body
having jurisdiction or reasonably required by Landlord. If Landlord or any
Lender or governmental body arranges for any tests or studies showing that this
Article has been violated, Landlord shall pay for the costs of such
20
<PAGE>
tests: provided that if such tests conclusively disclose violations by Tenant
then Tenant shall reimburse Landlord for the costs of such tests on demand. The
provisions of this Article shall survive the expiration or earlier termination
of this Lease. To the actual knowledge of Steve Provencio, the asset manager
responsible for the Building, the Building is not in violation of any
environmental laws.
ARTICLE 28.
ADDITIONAL RIGHTS RESERVED BY LANDLORD
In addition to any other rights provided for herein, Landlord reserves the
following rights, exercisable without liability to Tenant for damage or injury
to property (except as specifically provided for herein), person or business and
without effecting an eviction, constructive or actual, or disturbance of
Tenant's use or possession or giving rise to any claim:
(a) To name the Building and to change the name or street address of the
Building;
(b) To install and maintain all signs on the exterior and interior of the
Building;
(c) To designate all sources furnishing sign painting or lettering for use in
the Building:
(d) During the last ninety (90) days of the Term, if Tenant has vacated the
Premises, to decorate, remodel, repair, alter or otherwise prepare the
Premises for occupancy, without affecting Tenant's obligation to pay Rent
for the Premises;
(e) To have pass keys to the Premises and all doors therein, excluding
Tenant's vaults and safes;
(f) On reasonable prior notice to Tenant, to exhibit the Premises to any
prospective purchaser, Lender, mortgagee, or assignee of any mortgage on
the Building or Land and to others having an interest therein at any time
during the Term, and to prospective tenants during the last six months of
the Term;
(g) To take any and all measures, including entering the Premises for the
purpose of making inspections, repairs, alterations, additions and
improvements to the Premises or to the Building (including for the
purpose of checking, calibrating, adjusting and balancing controls and
other parts of the Building Systems), as may be necessary or desirable
for the operation, improvement, safety, protection or preservation of the
Premises or the Building, or in order to comply with all Laws, orders and
requirements of governmental or other authority, or as may otherwise be
permitted or required by this Lease; provided, however, that during the
progress of any work on the Premises or at the Building, Landlord and its
agents will exercise reasonable efforts not to inconvenience Tenant, but
shall not be liable for inconvenience, annoyance, disturbance, loss of
business, or other damage to Tenant by reason of performing any work or
by bringing or storing materials, supplies, tools or equipment in the
Building or Premises during the performance of any work, and the
obligations of Tenant under this Lease shall not thereby be affected in
any manner whatsoever;
(h) To relocate various facilities within the Building and on the land of
which the Building is a part if Landlord shall determine such relocation
to be in the best interest of the development of the Building and
Property, provided that such relocation shall not materially restrict
access to the Premises; and
(i) To install vending machines of all kinds in the Building and to receive
all of the revenue derived therefrom provided, however, that no vending
machines shall be installed by Landlord in the Premises unless Tenant so
requests.
ARTICLE 29.
DEFINED TERMS
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A. "Building" shall refer to the Building named in Article 1 of which the
leased Premises are a part (including all modifications, additions and
alterations made to the Building during the term of this Lease), the real
property on which the same is located, all plazas, Common Areas and any other
areas located on said real property and designated by Landlord for use by all
tenants in the Building. A plan showing the Building is attached hereto as
Exhibit A and made a part hereof and the Premises is defined in Article 2 and
shown on said Exhibit A by cross-hatched lines.
B. "Common Areas" shall mean and include all areas, facilities, equipment,
directories and signs of the Building (exclusive of the Premises and areas
leased to other Tenants) made available and designated by Landlord for the
common and joint use and benefit of Landlord, Tenant and other tenants and
occupants of the Building including, but not limited to, lobbies, public
washrooms, hallways, sidewalks, parking areas, landscaped areas and service
entrances. Common Areas may further include such areas in adjoining properties
under reciprocal easement agreements, operating agreements or other such
agreements now or hereafter in effect and which are available to Landlord,
Tenant and Tenant's employees and invitees. Landlord reserves the right in its
sole discretion and from time to time on a reasonable basis, to construct,
maintain, operate, repair, close, limit, take out of service, alter, change, and
modify all or any part of the Common Areas but not so that it affects Tenants
access to the Building or Premises or Tenant's rights to quiet enjoyment.
C. "Default Rate" shall mean eighteen percent (18%) per annum, or the highest
rate permitted by applicable law, whichever shall be less. If the application
of the Default Rate causes any provision of this Lease to be usurious or
unenforceable, the Default Rate shall automatically be reduced so as to prevent
such result.
D. "Hazardous Materials" shall have the meaning set forth in Article 27.
E. "Landlord" and "Tenant" shall be applicable to one or more parties as the
case may be, and the singular shall include the plural, and the neuter shall
include the masculine and feminine; and if there be more than one, the
obligations thereof shall be joint and several. For purposes of any provisions
indemnifying or limiting the liability of Landlord, the term "Landlords shall
include Landlord's present and future partners, beneficiaries, trustees,
officers, directors, employees, shareholders, principals, agents, affiliates,
successors and assigns.
E. "Law" or "Laws" shall mean all federal, state, county and local governmental
and municipal laws, statutes, ordinances, rules, regulations, codes, decrees,
orders and other such requirements, applicable equitable remedies and decisions
by courts in cases where such decisions are binding precedents in the state in
which the Building is located, and decisions of federal courts applying the Laws
of such state.
G. "Lease" shall mean this lease executed between Tenant and Landlord,
including any extensions, amendments or modifications and any Exhibits attached
hereto.
H. "Lease Year" shall mean each calendar year or portion thereof during the
Term.
I. "Lender" shall mean the holder of a Mortgage at the time in question, and
where such Mortgage is a ground lease, such term shall refer to the ground
lessee.
J. "Mortgage" shall mean all mortgages, deeds of trust, ground leases and other
such encumbrances now or hereafter placed upon the Building or any part thereof
with the written consent of Landlord, and all renewals, modifications,
consolidations, replacements or extensions thereof, and all indebtedness now or
hereafter secured thereby and all interest thereon.
K. "Operating Expenses" shall mean all operating expenses of any kind or nature
which are necessary, ordinary or customarily incurred in connection with the
operation, maintenance or repair of the Building as reasonably determined by
Landlord in accordance with the Lease.
Operating Expenses shall include, but not be limited to:
22
<PAGE>
1.1 costs of supplies, including, but not limited to, the cost of relamping
all Building standard lighting as the same may be required from time to time;
1.2 costs incurred in connection with obtaining and providing energy for the
Building, including, but not limited to, costs of propane, butane, natural gas,
steam, electricity, solar energy and fuel oils, coal or any other energy
sources:
1.3 costs of water and sanitary and storm drainage services;
1.4 costs of janitorial and security services;
1.5 costs of general maintenance and repairs, including costs under HVAC and
other mechanical maintenance contracts and maintenance, repairs and replacement
of equipment and tools used in connection with operating the Building;
1.6 costs of maintenance and replacement of landscaping;
1.7 insurance premiums, including fire and all-risk coverage, together with
loss of rent endorsements, the part of any claim required to be paid under the
deductible portion of any insurance policies carried by Landlord in connection
with the Building (where Landlord is unable to obtain insurance without such
deductible from a major insurance carrier at reasonable rates), public liability
insurance and any other insurance carried by Landlord on the Building, or any
component parts thereof (all such insurance shall be in such amounts as may be
required by any holder of a Mortgage or as Landlord may reasonably determine);
1.8 labor costs (at or below property manager level), including wages and
other payments, costs to Landlord of worker's compensation and disability
insurance, payroll taxes, welfare fringe benefits, and all legal fees and other
costs or expenses incurred in resolving any labor dispute;
1.9 professional building management fees required for management of the
Building;
1.10 legal, accounting, inspection, and other consultation fees (including,
without limitation, fees charged by consultants retained by Landlord for
services that are designed to produce a reduction in Operating Expenses or to
reasonably improve the operation, maintenance or state of repair of the
Building) incurred in the ordinary course of operating the Building or in
connection with making the computations required hereunder or in any audit of
operations of the Building;
1.11 the costs of capital improvements or structural repairs or replacements
made in or to the Building in order to conform to changes, subsequent to the
date of this Lease, in any applicable laws, ordinances, rules, regulations or
orders of any governmental or quasi-governmental authority having jurisdiction
over the Building (herein "Required Capital Improvements") or the costs incurred
by Landlord to install a new or replacement capital item for the purpose of
reducing Operating Expenses (herein "Cost Savings Improvements"). The
expenditures for Required Capital Improvements and Cost Savings Improvements
shall be amortized over the useful life of such capital improvement or
structural repair or replacement (as determined by Landlord).
The following items are specifically excluded from the definition and
computation of Operating Expenses under the Lease:
1.1 any and all late payments and penalties on payments made by Landlord for
any Operating Expenses.
1.2 expenses for repairs, restoration of other work occasioned by fire, wind,
the elements or other casualty that are required to be covered under this Lease.
1.3 interest or principal payments on any mortgage or other indebtedness of
Landlord.
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1.4 compensation paid to any employee of Landlord above the grade of property
manager.
1.5 income and franchise taxes of Landlord.
1.6 expenses incurred by Landlord in leasing to or procuring of tenants,
leasing commissions, advertising expenses and expenses for renovating of space
for new or existing tenants.
1.7 any depreciation allowance or expense.
1.8 operating expenses which are solely the responsibility of other tenants in
the Building.
In making any computations contemplated hereby, Landlord shall also be permitted
to make such adjustments and modifications to the provisions of this paragraph
and Article 4 as shall be reasonable and necessary to achieve the intention of
the parties hereto.
L. "Rent" shall have the meaning specified therefor in Article 3.
M. "Tax" or "Taxes" shall mean:
1.1 all real property taxes and assessments levied against the Building by
any governmental or quasi-governmental authority. The foregoing shall include
all federal, state, county, or local governmental, special district, improvement
district, municipal or other political subdivision taxes, fees, levies,
assessments, charges or other impositions of every kind and nature, whether
general, special, ordinary or extraordinary, respecting the Building, including
without limitation, real estate taxes, general and special assessments, interest
on any special assessments paid in installments, transit taxes, water and sewer
rents, sales taxes based upon the receipt of rent, personal property taxes
imposed upon the fixtures, machinery, equipment, apparatus, appurtenances,
furniture and other personal property used in connection with the Building which
Landlord shall pay during any calendar year, any portion of which occurs during
the Term (without regard to any different fiscal year used by such government or
municipal authority except as provided below). Provided, however, any taxes
which shall be levied on the rentals of the Building shall be determined as if
the Building were Landlord's only property, and provided further that in no
event shall the term "taxes or assessment," as used herein, include any net
federal or state income taxes levied or assessed on Landlord, unless such taxes
are a specific substitute for real property taxes. Expenses incurred by
Landlord for tax consultants and in contesting the amount or validity of any
such taxes or assessments shall be included in such computations.
1.2 all "assessments", including so-called special assessments, license tax,
business license fee, business license tax, levy, charge, penalty or tax imposed
by any authority having the direct power to tax, including any city, county,
state or federal government, or any school, agricultural, lighting, water,
drainage, or other improvement or special district thereof, against the Premises
of the Building or any legal or equitable interest of Landlord therein. For the
purposes of this lease, any special assessments shall be deemed payable in such
number of installments as is permitted by law, whether or not actually so paid.
If as of the Commencement Date the Building has not been fully assessed as a
completed project, for the purpose of computing the Operating Expenses for any
adjustment required herein or under Article 4, the Tax shall be adjusted by
Landlord, as of the date on which the adjustment is to be made, to reflect full
completion of the Building including all standard Tenant finish work if the
method of taxation of real estate prevailing to the time of execution hereof
shall be, or has been altered, so as to cause the whole or any part of the taxes
now, hereafter or theretofore levied, assessed or imposed on real estate to be
levied, assessed or imposed on Landlord, wholly or partially, as a capital levy
or otherwise, or on or measured by the rents received therefrom, then such new
or altered taxes attributable to the Building shall be included within the term
real estate taxes, except that the same shall not include any enhancement of
said tax attributable to other income of Landlord. All of the preceding clauses
M (1.1 and 1.2) are collectively referred to as the "Tax" or Taxes".
All other capitalized terms shall have the definition set forth in the Lease.
24
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ARTICLE 30.
MISCELLANEOUS PROVISIONS
A. RULES AND REGULATIONS.
Tenant shall comply with all of the rules and regulations promulgated by
Landlord and timely made known to Tenant from time to time for the Building.
A copy of the current rule and regulations is attached hereto as Exhibit D.
B. EXECUTION OF LEASE.
If more than one person or entity executes this Lease as Tenant, each such
person or entity shall be jointly and severally liable for observing and
performing each of the terms, covenants, conditions and provisions to be
observed or performed by Tenant.
C. NOTICES.
All notices under this Lease shall be in writing and will be deemed sufficiently
given for all purposes if, to Tenant, by delivery to Tenant at the Premises
during the hours the Building is open for business or by certified mail, return
receipt requested or by overnight delivery service (with one acknowledged
receipt), to Tenant at the address set forth below, and if to Landlord, by
certified mail, return receipt requested or by overnight delivery service (with
one acknowledged receipt), at the addresses set forth below.
Landlord: at address shown in Article 1, item F.
with a copy sent concurrently to: Building Manager at address shown in
Article 1, item G.
Tenant: at address shown in Article 1, item B.
with copy to: The Compucare Company
2110 Sunset Hill Road
Reston, VA 22090
Attn: CEO
D. TRANSFERS.
The term "Landlord" appearing herein shall mean only the owner of the Building
from time to time and, upon a sale or transfer of its interest in the Building,
the then Landlord and transferring party shall have no further obligations or
liabilities for matters accruing after the date of transfer of that interest and
Tenant, upon such sale or transfer, shall look solely to the successor owner and
transferee of the Building for performance of Landlord's obligations hereunder.
E . RELOCATION.
Not Applicable.
F. TENANT FINANCIAL STATEMENTS.
Upon the written request of Landlord, which Landlord shall only make in the
event of a proposed sale of the Building, Tenant shall submit financial
statements for its most recent financial reporting period and for the prior
Lease Year. Landlord shall make such request no more than once during any Lease
Year or at any time that Tenant is a publicly traded company on a nationally
recognized exchange. All such financial statements shall be certified as true
and correct by the responsible officer or partner of Tenant and if Tenant is
then in default hereunder, the financial statements shall be certified by an
independent certified public accountant.
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G. RELATIONSHIP OF THE PARTIES.
Nothing contained in this Lease shall be construed by the parties hereto, or by
any third party, as constituting the parties as principal and agent, partners or
joint venturers, nor shall anything herein render either party (other than a
guarantor) liable for the debts and obligations of any other party, it being
understood and agreed that the only relationship between Landlord and Tenant is
that of Landlord and Tenant.
H. ENTIRE AGREEMENT: MERGER.
This Lease embodies the entire agreement and understanding between the parties
respecting the Lease and the Premises and supersedes all prior negotiations,
agreements and understandings between the parties, all of which are merged
herein. No provision of this Lease may be modified, waived or discharged except
by an instrument in writing signed by the party against which enforcement of
such modification, waiver or discharge is sought.
I. NO REPRESENTATION BY LANDLORD.
Neither Landlord nor any agent of Landlord has made any representations,
warranties, or promises with respect to the Premises or the Building except as
expressly set forth herein.
J. LIMITATION OF LIABILITY.
Notwithstanding any provision in this Lease to the contrary, under no
circumstances shall Landlord's liability or that of its directors, officers,
employees and agents for failure to perform any obligations arising out of or in
connection with the Lease or for any breach of the terms or conditions of this
Lease (whether written or implied) exceed the greater of (1) $1,500,000 or (2)
Landlord's equity interest in the Building. No personal judgment in excess of
this amount shall lie against Landlord. The provisions hereof shall inure to
Landlord's successors and assigns including any Lender. The foregoing
provisions are not intended to relieve Landlord from the performance of any of
Landlord's obligations under this Lease, but only to limit the personal
liability of Landlord in case of recovery of a judgment against Landlord; nor
shall the foregoing be deemed to limit Tenant's rights to obtain injunctive
relief or specific performance or other remedy which may be accorded Tenant by
law or under this Lease. Nothing in this paragraph shall limit Tenant's right
to the proceeds of any applicable insurance policy obtained in connection with
the Building.
K. MEMORANDUM OF LEASE.
Neither party, without the written consent of the other, will execute or record
this Lease or any summary or memorandum of this Lease in any public recorders
office.
L. NO WAIVERS: AMENDMENTS.
Failure of either party to insist upon strict compliance by the other party of
any condition or provision of this Lease shall not be deemed a waiver of that
condition. No waiver shall be effective against either party unless in writing
and signed by such affected party. Similarly, this Lease cannot be amended
except by a writing signed by Landlord and Tenant.
M. SUCCESSORS AND ASSIGNS.
The conditions, covenants and agreements contained herein shall be binding upon
and inure to the benefit of the parties hereto and their respective heirs,
executors, administrators, successors and assigns.
N. GOVERNING LAW.
This Lease shall be governed by the law of the State where the Building is
located.
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O. EXHIBITS.
All exhibits attached to this Lease are a part hereof and are incorporated
herein by reference and all provisions of such exhibits shall constitute
agreements, promises and covenants of this Lease.
P. CAPTIONS.
The captions and headings used in this Lease are for convenience only and in no
way define or limit the scope, interpretation or content of this Lease.
Q. COUNTERPARTS.
This Lease may be executed in one (1) or more counterparts, each of which shall
be deemed an original but all of which together shall constitute one and the
same instrument.
R. REASONABILITY STANDARD.
All consents and approvals to be given and/or granted hereunder by either party
shall not be unreasonably withheld or delayed.
S. ACKNOWLEDGEMENT OF LANDLORD'S WAIVER.
Landlord acknowledges its execution of that certain Landlord's Waiver in favor
of Central Fidelity National Bank dated February 12, 1996, and agrees that such
waiver shall cover and continue in full force and effect during the term of this
Lease.
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<PAGE>
IN WITNESS WHEREOF, and intending to be legally bound hereby, the parties
hare duly executed this Lease with the Exhibits attached hereto, as of this 1st
day of June 1996.
Attest or Witness: LANDLORD:
MASSACHUSETTS MUTUAL LIFE
INSURANCE COMPANY
By: CORNERSTONE REAL ESTATE
ADVISERS, INC., its agent
/s/ Kelly Kinnon By: /s/ Steven J. Provencio
- ---------------- -----------------------
Name Typed: Steven J. Provencio
Title: Vice President
TENANT:
ANTRIM CORPORATION
Attest or Witness:
/s/ Cathy Hood By:/s/ Richard R. Brink
- -------------- -------------------------
Name Typed: Richard R. Brink
Title: President
Dated: May 31, 1996
28
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Certificate of Tenant
(If A Corporation or Partnership)
I, Randolph H. Elkins, Secretary of Antrim Corporation, Tenant, hereby
certify that the officers executing the foregoing Lease on behalf of Tenant
is/are duly authorized to act on behalf of and bind the Tenant.
(Corporate Seal ) Randolph H. Elkins
------------------
Secretary
Date: May 30, 1996
29
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EXHIBIT 10R
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT is made and entered into as of the 31st day of January,
1997, by and between SUNQUEST INFORMATION SYSTEMS, INC., a Pennsylvania
corporation, (hereinafter referred to as "Employer"), and ALBERT A. DeSTEFANO,
an individual (hereinafter referred to as "Employee").
WITNESSETH THAT:
WHEREAS, Employer is a Pennsylvania corporation specializing in the
design, sale and installation of information systems; and
WHEREAS, Employee was formerly an Executive Vice President and the
Chief Operating Officer of Employer, and after several years of pursuing
alternative career opportunities independent of Employer, Employee desires to
re-establish his ties with Employer and rejoin Employer's team on a full-time
basis; and
WHEREAS, Employer desires to retain Employee and Employee desires to be
employed by Employer, subject to the terms and provisions of this Agreement; and
WHEREAS, Employee shall have access to the various trade secrets,
confidential information, methods and manner of operations of the business of
Employer.
<PAGE>
NOW, THEREFORE, for and in consideration of the mutual covenants
contained herein, including, but not limited to, Employee's assent to be bound
by the Covenant Not To Compete and the Covenant Not To Disclose Proprietary
Information contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged by the parties hereto,
Employer and Employee, each intending to be legally bound, hereby covenant and
agree as follows:
ARTICLE I
EMPLOYMENT
----------
1.01 Employer hereby agrees to employ Employee and Employee hereby
agrees to be employed by Employer under the terms and conditions as set forth in
this Agreement.
ARTICLE II
TERM OF AGREEMENT AND TERMINATION
---------------------------------
2.01 The term of this Agreement shall begin on February 17, 1997 and
shall continue thereafter until terminated in accordance with the terms set
forth in this Agreement.
2.02 This Agreement may be terminated:
(a) at the will of either party at any time, with or without reason,
with sixty (60) days prior written notice; or
-2-
<PAGE>
(b) unilaterally by Employer if Employer determines that cause
("Cause") exists, with prior written notice to Employee. Cause
shall mean gross neglect of duty, the acceptance by Employee of a
position with another employer without consent, intentionally
engaging in any activity which is in conflict with or adverse to
the interests of Employer, willful misconduct on the part of
Employee, misfeasance or malfeasance of duty causing a violation
of any law which is determined to be detrimental to Employer,
breach of a fiduciary duty owed to Employer or any shareholder of
Employer or any material breach of this Agreement which has not
been corrected by Employee within ten (10) days after his receipt
of written notice of such breach from Employer; or
(c) upon the death of Employee; or
(d) by Employer after Employee has been totally disabled for a period
in excess of sixty (60) days ("Total Disability"). Total
Disability shall be defined in the same manner as in the
disability insurance policy provided by Employer and covering
Employee.
2.03 The parties shall be required to carry out any provisions hereof
which contemplate performance by them subsequent to any termination or
expiration of employment, and such termination or expiration of employment shall
not affect any covenant, warranty, liability or other obligation which shall
have arisen or accrued prior to such termination or expiration of employment,
unless otherwise provided in this Agreement.
-3-
<PAGE>
ARTICLE III
TITLE; SCOPE OF DUTIES
----------------------
3.01 Employee shall initially hold the position of Executive Vice
President of Sales and Marketing. Employee shall hold this position and fulfill
the duties of this position in the manner set forth herein for so long as the
Chief Operating Officer ("COO") of Employer shall require during the term of
this Agreement.
3.02 Employee understands that Employer is managed by one Chief
Executive Officer ("CEO"), one COO and several Executive Vice Presidents, each
of the Executive Vice Presidents being equally important in authority and
responsibility in and to Employer. Employee also understands that the Board of
Directors of Employer may create any other management position that it
determines in its sole discretion to be necessary.
3.03 Employee understands that Employee is to report directly to the
COO. In addition, Employee shall interact and work with all Executive Vice
Presidents, Senior Vice Presidents, Vice Presidents and the remainder of
Employer's employees, in a manner which demonstrates and encourages support of,
and empathy and respect for, the other individuals and their needs, skills and
talents.
3.04 Employee's further obligations shall include, but not be limited
to, the following:
-4-
<PAGE>
(a) Devoting his full working time to rendering services on behalf of
Employer and to render such services with competence, efficiency
and fidelity;
(b) Complying with Employer's policies, procedures, standards and
regulations;
(c) Performing all of those duties and discharging all of the
responsibilities with which Employee has been charged in his
capacity as Executive Vice President of Sales and Marketing, from
time to time, by the COO; and
(d) Performing all of the services stated in this Article III
generally from Employer's Western office, located in Tucson,
Arizona and from such other locations to which Employer and
Employee may hereafter agree.
ARTICLE IV
FUTURE SUBSIDIARY
-----------------
4.01 During the term of this Agreement, Employer and Employee will
evaluate the feasibility of Employer forming and operating a subsidiary for the
purpose of negotiating on a cooperative basis with health insurers and public
healthcare payors, suppliers, contractors and other third parties with whom
Employer and/or Employer's clients have business relationships: (a) to market
laboratory services; (b) to achieve economies of scale and favorable rates and
terms in the purchase of laboratory instruments, reagents and services; and (c)
to exploit the commercial use of the data obtained from providing such services
(said subsidiary hereinafter to be referred to as "Virtual Megalab").
-5-
<PAGE>
4.02 The decision whether to begin operation of Virtual Megalab shall
be at the mutual determination of Employer and Employee.
4.03 Should Virtual Megalab begin, Employee agrees to assume the
responsibilities of running the operations of Virtual Megalab and assume the
position of President of Virtual Megalab, directly reportable in such position
to the President of Employer, in addition to his other duties assigned herein.
4.04 If Employee is called upon to assume the position of President of
Virtual Megalab as discussed above, then during the term of Employee's service
in such capacity:
(a) Employer and Employee will coordinate Employee's employment as
President of Virtual Megalab, with Employee's continuation of his
duties and obligations as Executive Vice President of Sales and
Marketing of Employer. Employer will provide such assistance and
resources as shall reasonably be necessary to permit Employee to
accomplish his duties in both capacities;
(b) In addition to the compensation set forth in Article VI of this
Agreement as adjusted pursuant to Section 4.06 hereof, Employer
will provide a compensation arrangement with respect to Employee's
efforts on behalf of Virtual Megalab which will be the transfer to
Employee of six and two-thirds percent (6 2/3%) of all issued and
outstanding shares of stock of Virtual Megalab (the "Megalab
Stock") at the completion of each year of Employee's service as
President of Virtual Megalab, for up to three (3) years, such that
Employee will own twenty
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<PAGE>
percent (20%) of all Megalab Stock at the end of three (3) years.
At the later of Virtual Megalab attaining a value of $25,000,000
and Employee receiving twenty percent (20%) of the Megalab Stock
pursuant to this Subsection 4.04(b), Employer, at the election of
Employee, will purchase fifty percent (50%) of Employee's Megalab
Stock; provided, however, that (i) Employee must be an employee of
Employer or Virtual Megalab at such time; (ii) the valuation of
Virtual Megalab and the Megalab Stock shall be made in accordance
with the procedures and terms set forth on Exhibit A attached
---------
hereto and made part hereof; (iii) Employer may elect to pay the
purchase price for the Megalab Stock in cash or Employer's
securities or any combination thereof; and (iv) that such purchase
price will never exceed THREE MILLION FIVE HUNDRED THOUSAND AND
NO/100 DOLLARS ($3,500,000) for one-half (1/2) of Employee's
Megalab Stock; and
(c) Employee shall be a full voting member of the board of directors
of Virtual Megalab.
4.05 Should Employer employ Employee as President of Virtual Megalab,
Employee shall actively assist in his transition to this new position by, among
other things, promoting Employer, including loyalty to Employer, to all
employees.
4.06 Should Employer employ Employee as President of Virtual Megalab,
Employee's compensation and benefits shall continue in accordance with Article
VI of this Agreement
-7-
<PAGE>
until such time as the parties mutually agree that Employee's duties and efforts
have become more associated with Virtual Megalab than with Employer. At such
time:
(a) Employer will reduce Employee's annual base salary as set forth in
Section 6.01(a) to ONE HUNDRED FIFTY THOUSAND AND NO/100 DOLLARS
($150,000);
(b) Entitlement to the bonus set forth in Section 6.02 of this
Agreement shall cease;
(c) All rights to nonqualified stock options pursuant to Section 6.03
shall continue unaffected;
(d) Employer shall pay Employee, in addition to his base compensation,
two and one-half percent (2 1/2%) of the pre-tax profit of
Virtual Megalab (upon such terms and conditions as the parties may
at the time agree); and
(e) Other employee benefits provided to employees of Employer, such as
health insurance, shall continue.
ARTICLE V
EXCLUSIVE SERVICE
-----------------
5.01 During the term of this Agreement, Employee shall devote his full
time and best efforts to the performance of his employment under this Agreement.
During the term of this Agreement, Employee shall not, at any time or place,
either directly or indirectly, become engaged in any fashion whatsoever by, for
and/or on behalf of any entity which is involved in the design, sale and/or
installation of hospital, laboratory, radiology and/or pharmacy information
systems, and/or critical data management systems, or of any other systems, or
any modules or components thereof, the design, sale or installation of which, or
significant efforts related thereto, are commenced by
-8-
<PAGE>
Employer while Employee is employed by Employer. Furthermore, during the term
of this Agreement, Employee shall not, at any time or place, either directly or
indirectly, become engaged in any fashion whatsoever by, for and/or on behalf of
any entity which is involved in a business which is competitive with the
business of Virtual Megalab while Employee is employed by Employer and/or
Virtual Megalab. This provision is in addition to, and not in lieu of, that
contained in Article VIII hereof.
ARTICLE VI
COMPENSATION
------------
6.01 Base Compensation. As compensation for all services rendered
-----------------
during the term of this Agreement, as well as consideration for Employee's
agreement to be legally bound by the covenants set forth in Articles VII and
VIII herein, Employee shall be entitled to the following, as described in this
Section 6.01 ("Base Compensation"), during the term of this Agreement:
(a) an annual salary of TWO HUNDRED FIFTY THOUSAND AND NO/100 DOLLARS
($250,000) payable in equal bi-weekly installments; and
(b) participation in the benefit plans of Employer which are in effect
or which may be adopted from time to time during the term of this
Agreement, while this Agreement is in effect and for which
Employee satisfies all applicable eligibility requirements;
-9-
<PAGE>
(c) during the term of this Agreement, fifteen (15) days of paid
vacation from the regular duties with Employer. Such vacation is
non-cumulative from year to year; and
(d) TEN THOUSAND AND NO/100 DOLLARS ($10,000) as a one-time, initial
signing bonus if this Agreement is executed before or on January
31, 1997 and Employee begins employment on or before February 17,
1997.
6.02 Bonus.
-----
(a) Employee may be entitled to a bonus ("Bonus") upon the terms and
conditions hereinafter set forth.
(b) Employee's Bonus shall consist of the following:
(i) Effective February 17, 1997, a bonus equal to one-fifth of
one percent (0.20%) of the Gross Profit (hereinafter
defined); provided, however, that if the Discounts
(hereinafter defined) on the sales which comprise the Gross
Profit exceed thirty percent (30%), then the percentage
earned pursuant to this Subsection 6.02(b)(i) will be
decreased to 15/100ths of one percent (0.15%) instead of one-
fifth of one percent (0.20%).
(ii) Any Bonus due to Employee pursuant to this Section 6.02 shall
be paid as follows:
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<PAGE>
(1) Fifty percent (50%) of such Bonus within thirty (30)
days after the end of the month in which the sale
generating the Gross Profit is consummated; and
(2) The remaining fifty percent (50%) of such Bonus on
January 1 of the following calendar year; provided,
however, that the second fifty percent (50%) of the
Bonus due pursuant to this Section 6.02 shall be due and
payable only if Employee is in the employ of Employer on
said payment date, unless Employee's employment with
Employer was terminated by Employer without Cause prior
to said date.
6.03 Nonqualified Stock Options. Upon the effective start date of
--------------------------
Employee's employment with Employer, Employee shall be awarded a nonqualified
stock option (as that term is used in the Nonqualified Stock Option Agreement
attached hereto as Exhibit B) to purchase FIFTY THOUSAND (50,000) shares of
---------
Employer's Common Stock exercisable at the price stated in, and subject to the
terms and conditions of, the Nonqualified Stock Option Agreement. Employer and
Employee agree to execute a Nonqualified Stock Option Agreement in substantially
the form as attached hereto as Exhibit B, to be provided to Employee by Employer
---------
within five (5) business days of his effective start date.
6.04 Definitions. For purposes of this Agreement, and specifically
-----------
this Article VI:
(a) "Gross Profit" shall be defined to mean the net invoice price for
license fees and sales to sites for software and hardware,
including software products which
-11-
<PAGE>
may be purchased from time to time by Employer (including the
Antrim Corporation products), reduced by the invoice price to
Employer from all suppliers of hardware and/or third party
software relating to such sales. Gross Profit shall not include
any amounts charged by Employer to the sites for maintenance,
installation, service and/or service-related products, which
service-related products include, but are not limited to, HIS
interfaces and instrument interfaces (including Intellicare).
Gross Profit shall also be reduced by the present value of any and
all discounts provided on maintenance and service on sales.
(b) "Discounts" shall be defined to mean the amount by which
Employer's list sales price plus the list retail price for
hardware, non-Employer system software and suppliers from other
manufacturers and vendors exceeds the contract price to the site
for such sales and licenses. Discounts shall include any
additional months of free maintenance and/or any other free
consulting or service or other give-aways relating to such
contract with the sites.
ARTICLE VII
COVENANT NOT TO DISCLOSE PROPRIETARY INFORMATION
------------------------------------------------
7.01. Employee recognizes that Employer is engaged in a continuous
program of development and production relating to its business, present and
future, including fields generally related to the business of Employer, and that
Employer possesses and will continue to possess information that has been
created, discovered, developed or otherwise become known to Employer
-12-
<PAGE>
(including, without limitation, information created by, discovered or developed
by, or made known to, Employee during the period of or arising out of employment
by Employer) and/or in which property rights have been assigned or otherwise
conveyed to Employer, which information has commercial value in the business in
which Employer is engaged (hereinafter collectively referred to as "Proprietary
Information"). Proprietary Information includes, without limitation,
algorithms, flow charts, trade secrets, processes, computer software,
inventions, improvements, techniques, data, know-how, proposals, writings,
marketing plans, strategies, forecasts, patentable material, material
registrable under copyright or similar statutes, client and customer lists and
information, and any information applicable to the business of Employer or
applicable to the business of any client or customer of Employer which may be
made known to Employee by Employer or by any client or customer of Employer, or
learned by Employee during the term of this Agreement.
7.02. Employee understands that his employment creates a relationship
of confidence and trust between Employee and Employer with respect to any
Proprietary Information.
7.03. In consideration of Employee's employment by Employer and the
compensation received by Employee from Employer from time to time pursuant to
this Agreement, including, without limitation, as provided in Sections 6.01 and
6.02, respectively, Employee hereby agrees as follows:
(a) Employee acknowledges that all Proprietary Information is the
confidential and exclusive property of Employer that will not be
converted or disclosed to anyone for any purpose whatsoever except
to employees of Employer in furtherance of Employer's business.
Employee will not at any time, whether
-13-
<PAGE>
during or after the termination of his employment, disclose to any
person or entity any of the Proprietary Information of Employer
and Employee will not or permit any person or entity to examine
and/or make copies of any documents which contain or are derived
from any Proprietary Information, whether prepared by Employee or
otherwise coming into Employee's possession or control, without
the prior written consent of Employer. Employee will not make any
use of Proprietary Information except in the discharge of
Employee's duties as an employee of Employer;
(b) All documents, records, apparatus, equipment and other physical
property, whether or not pertaining to the Proprietary
Information, furnished to Employee by Employer or produced by
Employee or others in connection with employment shall be and
remain the sole property of Employer and shall be returned to
Employer immediately as and when requested by Employer. Even if
Employer does not so request, Employee shall return and deliver
all such property to Employer upon termination or expiration of
this Agreement for any reason, and Employee will not take with him
any such property or any reproduction of such property upon such
termination or expiration. Employee shall treat all such property
in accordance with policies established by Employer from time to
time;
(c) Employee will promptly disclose to Employer or any persons
designated by it, all improvements, formulas, ideas, processes,
techniques, know-how, data, computer software, documentation,
proposals, writings, whether or not
-14-
<PAGE>
patentable or registrable under copyright or similar statutes or
subject to analogous protection, made or conceived or reduced to
practice or learned by Employee, either alone or jointly with
others, during the term of employment (all such improvements,
formulas, ideas, processes, techniques, know-how, data, computer
software, documentation, proposals and writings are hereinafter
collectively referred to as "Developments" and individually as a
"Development");
(d) Employee agrees that all Developments which Employee develops (in
whole or in part), either alone or jointly with others, and (i)
uses equipment, supplies, facilities or Proprietary Information of
Employer, or (ii) uses the hours for which Employee is to be
compensated by Employer, or (iii) which relate to the business of
Employer or to its actual or demonstrably anticipated research or
development, or (iv) which result, in whole or in part, from work
performed by Employee for Employer, shall immediately become the
sole and absolute property of Employer and its assigns, and
Employee hereby assigns any rights Employee may have or acquire in
the Developments and benefits and/or rights resulting therefrom to
Employer and its assigns without further compensation and Employee
agrees to communicate, without cost or delay, and without
publishing the same, all available information relating thereto
(with necessary plans and models) to Employer. Upon disclosure of
each Development to Employer, Employee will, during the term of
this Agreement and at any time thereafter, at the request and cost
of Employer, sign, execute, make and do all
-15-
<PAGE>
such deeds, documents, acts and things as Employer and its duly
authorized agents may require:
(i) to apply for, obtain and vest in the name of Employer
alone (unless Employer otherwise directs) letters
patent, copyrights or other analogous protection in any
country throughout the world and when so obtained or
vested to renew and restore the same; and
(ii) to defend any opposition proceedings in respect of such
applications and any opposition proceedings or petitions
or applications for revocation of letters patent,
copyright or analogous protection; and
(e) In the event that Employer is unable, for any reason whatsoever,
to secure Employee's signature on any letters patent, copyright or
analogous protection relating to any Development (including
applications, renewals, extensions, continuations and divisions),
Employee hereby irrevocably designates and appoints Employer and
its duly authorized officers and agents as Employee's agent and
attorney-in-fact, to act for and in behalf of and stead to execute
and file any such application (or otherwise) and to do all other
lawfully permitted acts to further the prosecution and issuance of
letters patent, copyright or other analogous protection thereon
with the same legal force and effect as if executed by Employee.
-16-
<PAGE>
ARTICLE VIII
COVENANT NOT TO COMPETE
-----------------------
8.01 Employee understands and agrees that much of Employer's success,
on an international level, has been due to its ability to create, commercially
exploit and maintain the secrecy of significant trade secrets, proprietary and
confidential information, all of which are recognized as and agreed to be
valuable assets of Employer. It is further recognized that Employer's continued
success and competitive advantage in the marketplace is dependent upon its
ability to prohibit access to any and all of these valuable assets, both as they
currently exist and as they are subsequently expanded, added to, varied and/or
modified, by any person not in the employ of Employer. Accordingly, in
consideration of Employee's employment by Employer and the compensation received
pursuant to this Agreement, including, without limitation, as provided in
Sections 6.01 and 6.02, respectively, Employee hereby agrees to the following:
(a) During the term of Employee's employment hereunder and for a
period of twelve (12) months after the termination of employment
for any reason, Employee shall not become, directly or indirectly,
involved, whether alone or as a partner, joint venturer,
franchisee, franchisor, officer, director, employee, independent
contractor, employer, agent, shareholder or other owner of greater
than one percent (1%) in any of the competitors of Employer named
on Exhibit C attached hereto and made a part hereof.
---------
(b) During the term of employment hereunder and for a period of twelve
(12) months after the termination of Employee's employment for any
reason,
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<PAGE>
Employee shall not, directly or indirectly, solicit or induce or
attempt to solicit or induce, any employee, consultant or
independent contractor of Employer or Virtual Megalab to leave
Employer or Virtual Megalab for any reason whatsoever or hire any
employee, consultant or independent contractor of Employer or
Virtual Megalab.
(c) During the term of employment hereunder and for a period of twelve
(12) months after the termination of Employee's employment for any
reason, Employee shall not, directly or indirectly, solicit the
trade of or trade with, or otherwise do business with any client
or customer of Employer or Virtual Megalab so as to offer or sell
any product or services which would be competitive with any
products or services sold by Employer or Virtual Megalab during
the term of this Agreement or any products or services which
Employee knows are being developed by Employer or Virtual Megalab
during the term of this Agreement. Notwithstanding the foregoing,
this Section 8.01(c) shall not apply to consulting services
provided directly to such clients or customers of Employer or
Virtual Megalab.
(d) During the term of employment hereunder, Employee shall not take
any action which might divert from Employer or Virtual Megalab any
opportunity which would be within the scope of any present or
contemplated future business of Employer or Virtual Megalab.
-18-
<PAGE>
ARTICLE IX
PRIOR EMPLOYMENT, INVENTIONS
----------------------------
9.01 Employee represents that his performance of all of the terms of
this Agreement and as an employee of Employer does not and will not breach any
agreement to keep in confidence proprietary information acquired by Employee in
confidence or trust prior to employment by Employer. Employee has not entered
into, and agrees that he will not enter into, any agreement either written or
oral in conflict herewith.
9.02 As a matter of record, Employee attaches hereto as Exhibit D a
---------
complete list of all inventions, improvements and developments relevant to the
subject matter of his employment by Employer which have been made or conceived
or first reduced to practice by him, alone or jointly with others, prior to the
effective date of this Agreement, that Employee desires to remove from the
operation of this Agreement and Employee represents that such list is complete.
If no such list is attached to this Agreement, Employee represents that he has
no such inventions, improvements and developments that he desires to remove from
the operation of this Agreement.
ARTICLE X
CONSIDERATION FOR RESTRICTIVE COVENANTS
---------------------------------------
10.01(a) The primary intent of Employer throughout this Agreement, and
with particular emphasis on Article VIII hereof, is to secure from Employee his
Covenant Not To Compete against Employer by becoming directly or indirectly
involved with competitors. The parties agree that the payments to be made by
Employer to Employee and the restrictions upon Employee's
-19-
<PAGE>
activities, in the event of the occurrence of any of the stated circumstances,
are fair, reasonable and will not be onerous or unduly burdensome to Employee.
Employee further agrees that the compensation provided for in the Agreement and
the potential Bonus adequately compensates Employee for his agreement to enter
into the restrictive covenants and acknowledges that his experience and
capabilities are such that the provisions of this Agreement will not prevent him
from earning a livelihood, particularly with respect to potential employers
which are not listed on Exhibit C.
---------
(b) It is understood and agreed that an actual or threatened breach by
Employee of any of the provisions of Articles VII or VIII hereof may
immediately result in a significant and substantial impairment of
Employer's competitive advantage and position in the marketplace, which
may or could threaten the continued viability and/or success of
Employer. It is further agreed that Employer may have no adequate
remedy at law. Accordingly, in the event of a reasonably perceived
actual or threatened breach of any provisions of Article VII or VIII,
Employee acknowledges and agrees that a breach of this Agreement by him
will cause irreparable damage to Employer. In the event of such
breach, Employer shall be entitled to, in addition to any and all
remedies at law, an injunction restraining Employee from violating any
of said provisions, specific performance or other equitable relief to
prevent the violation of Employee's obligations hereunder. These
remedies shall be in addition to, and not in lieu of, any other remedy
available to Employer.
-20-
<PAGE>
(c) It is further understood and agreed that for purposes of
interpreting any of the provisions of Articles VII of VIII, the term
"Employer" shall include any successor, assign, subsidiary or division
of Employer.
ARTICLE XI
MISCELLANEOUS
-------------
11.01 Severability. If any clause or provision herein shall be held
------------
to be invalid, void or unenforceable, the remaining provisions shall in no way
be affected or impaired and such provisions shall remain in full force and
effect.
11.02 Governing Law. This Agreement shall be governed in all
-------------
respects, whether as to validity, construction, capacity, performance or
otherwise, by the laws of the State of Arizona.
11.03 Notices. All notices required or permitted to be given under
-------
this Agreement shall be given by certified United States mail, return receipt
requested, to the parties at the following addresses or to such other addresses
as either may designate in writing to the other party:
If to Employer:
Sunquest Information Systems, Inc.
4801 East Broadway
Tucson, Arizona 85711
Attn: Sidney A. Goldblatt, M.D., President
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<PAGE>
If to Employee:
Mr. Albert A. DeStefano
4541 Via Madre
Tucson, AZ 85711
11.04 Non-Waiver. The failure of either Employee or Employer at any
----------
time to require the performance of the other of any of the provisions herein
shall in no way affect the respective rights of Employee or Employer to enforce
the same nor shall the waiver by Employee or Employer of any breach of any
provisions hereof be construed to be a waiver of any succeeding breach or as a
waiver or modification of the provisions of the Agreement itself.
11.05 Binding Effect. The provisions of this Agreement shall be
--------------
binding upon and inure to the benefit of both parties hereto and their
respective successors and assigns.
11.06 Article and Section Headings. The Article and/or Section
----------------------------
headings used in this Agreement are included solely for convenience and shall
not affect, or be used in connection with, the interpretation of this Agreement.
11.07 Assignment. This Agreement is personal to Employee, and he may
----------
neither assign nor delegate any of his rights or obligations hereunder without
first obtaining the written consent of Employer.
11.08 Complete Agreement. This Agreement supersedes all prior oral
------------------
agreements and understandings between the parties and may not be modified or
terminated orally. No modifications,
-22-
<PAGE>
termination or attempted waiver shall be valid unless in writing signed by the
party against whom the same is sought to be enforced.
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound
hereby, have set their respective hands and seals as of the date first written
above.
WITNESS: EMPLOYER:
SUNQUEST INFORMATION SYSTEMS, INC.
/s/ Stanley J. Lehman By: /s/ Nina M. Dmetruk
- --------------------- -------------------
Title: Executive VP & CFO
------------------
1-31-97
WITNESS: EMPLOYEE:
ALBERT A. DeSTEFANO
/s/ Karin A. DeStefano /s/ Albert A. DeStefano
- ---------------------- -----------------------
1-31-97
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<PAGE>
EXHIBIT 13A
SUNQUEST INFORMATION SYSTEMS, INC.
Table of Contents for Financial Section of 1996 Annual Report
<TABLE>
<S> <C>
Management's Discussion and Analysis of
Financial Condition and Results of Operations 2
Report of Independent Auditors 11
Consolidated Financial Statements and Notes 12
Selected Consolidated Financial Data 32
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
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 facilities, including integrated delivery
networks ("IDNs"). The Company was established in 1979 and became public on
June 10, 1996, when it closed its initial public offering of Common Stock. A
total of 3,450,000 shares were sold at a price of $16 per share, with net
proceeds to the Company of $50.1 million, after deducting offering expenses. In
connection with the public offering, the Company's status as an S corporation
terminated and the Company became subject to federal and all applicable state
income taxes. See Note 2 of Notes to Consolidated Financial Statements.
On November 26, 1996, the Company purchased all of the outstanding stock of
Antrim Corporation ("Antrim") from Antrim's parent corporation, The Compucare
Company, for $5.0 million in cash in a transaction accounted for under the
purchase method of accounting. In conjunction with the acquisition, the Company
charged operations $3.3 million for acquired, in-process technology, which
reduced pro forma net income per share for the year ended December 31, 1996 by
$.23. The results of operations of Antrim have been included in the Company's
financial statements since the date of acquisition.
Established in 1982, Antrim is a leading provider of laboratory
information systems for commercial and medical reference laboratories with 235
client sites installed at December 31, 1996. See Note 4 of Notes to Consolidated
Financial Statements.
At December 31, 1996, the Company had an installed customer base of more
than 950 sites in the United States, Canada, Europe, Mexico and Saudi Arabia.
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 laboratory
information systems ("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.
2
<PAGE>
The sales cycle for the Company's clinical, repository and managed care
systems is typically nine to 18 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. The sales cycle for the Company's commercial and medical reference
laboratory systems is typically six to 12 months, and an installation typically
takes from nine 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 December 31, 1996, the Company had a total contract backlog of $87.3
million, which consisted of $41.9 million of system sales and $45.4 million of
support and service. At December 31, 1995, total contract backlog was $62.7
million, which consisted of $33.7 million of system sales and $29.0 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.
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.
3
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, certain items
from the Company's consolidated statements of income expressed as a percentage
of total revenues.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1996 1995 1994
--------- -------- ------
<S> <C> <C> <C>
Revenues:
System sales 55.6% 52.4% 61.3%
Support and service 44.4 47.6 38.7
--------- -------- ------
Total revenues 100.0 100.0 100.0
--------- -------- ------
Operating expenses:
Cost of system sales 24.8 22.9 26.7
Client services 22.7 28.8 27.3
Research and development 12.3 14.7 12.4
Sales and marketing 13.5 14.2 11.1
General and administrative 12.0 11.5 10.9
Write-off of acquired,
in-process technology 4.0 - -
--------- -------- ------
Total operating expenses 89.3 92.1 88.4
--------- -------- ------
Operating income 10.7 7.9 11.6
Other income (expense):
Interest income 1.6 0.7 0.5
Interest expense (1.7) (2.4) (2.1)
Other (0.1) 0.1 -
--------- -------- ------
Income before income taxes 10.5 6.3 10.0
Income tax provision:
Current year operations 3.4 0.1 0.1
Change in tax status 1.4 - -
--------- -------- ------
Net income 5.7% 6.2% 9.9%
========= ======== ======
Pro forma data (unaudited):
Historical income before income taxes 10.5% 6.3% 10.0%
Pro forma income tax provision 5.5 2.7 4.3
--------- -------- ------
Pro forma net income 5.0% 3.6% 5.7%
========= ======== ======
</TABLE>
4
<PAGE>
Comparison of Years Ended December 31, 1996 and December 31, 1995
Revenues. The Company's total revenues were $81.0 million in 1996 compared
to $61.5 million in 1995, an increase of $19.5 million, or 31.6%. Revenues from
system sales were $45.1 million in 1996 compared to $32.3 million in 1995, an
increase of $12.8 million, or 39.7%. This increase was primarily attributable
to increases in installations of hardware and software for existing and new
customers. Revenues from support and service were $35.9 million in 1996
compared to $29.3 million in 1995, an increase of $6.7 million, or 22.8%. This
increase was primarily attributable to the growth in the Company's installed
customer base. Total revenues for Antrim, subsequent to the date of acquisition,
were $2.2 million. Revenues from Antrim's systems sales were $718,000 and
revenues from support and service were $1.4 million.
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 $20.1 million in 1996 compared to $14.1 million in 1995, an
increase of $6.0 million, or 42.4%. This increase was primarily attributable to
increases in hardware and operating system deliveries. Amortization of
previously capitalized software development costs was $2.2 million for 1996
compared to $1.7 million for 1995, an increase of $460,000, or 26.6%.
Client Services. Client services expenses include salaries and expenses of
product installation and support. Client services expenses were $18.4 million in
1996 compared to $17.8 million in 1995, an increase of $637,000, or 3.6%. As
a percentage of total revenues, client services expenses were 22.7% in 1996
compared to 28.8% in 1995. This dollar increase in client services expenses was
primarily attributable to the addition of Antrim in the fourth quarter.
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 $10.0 million in 1996 compared to $9.0 million in
1995, an increase of $948,000, or 10.5%. As a percentage of total revenues,
research and development expenses were 12.3% in 1996 compared to 14.7% in 1995.
This dollar increase in research and development expenses was attributable to
enhancements to the managed care system, development of a clinical documentation
system and the addition of Antrim in the fourth quarter. The Company capitalized
$2.8 million of its software development costs in both years.
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
$10.9 million in 1996 compared to $8.7 million in 1995, an increase of $2.2
million, or 24.8%. This increase was primarily attributable to increased sales
and marketing staff, increased commissions resulting from a 20.0% growth in
sales bookings in 1996, increased customer promotional allowances and the
addition of Antrim.
5
<PAGE>
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 $9.8 million in 1996 compared to $7.1 million in
1995, an increase of $2.7 million, or 38.1%. As a percentage of total revenues,
general and administrative expenses were 12.0% in 1996 compared to 11.5% in
1995. This dollar increase in general and administrative expenses was primarily
attributable to increased compensation and employee benefits resulting from
increased levels of operating income, accruals for sales tax liabilities,
depreciation, the addition of Antrim, increased professional services costs
related to the Company's public status and non-recurring expenses related to the
implementation of the Company's new financial systems.
Write-off of Acquired, In-Process Technology. As a result of the Antrim
acquisition on November 26, 1996, the Company charged operations $3.3 million
for acquired, in-process technology.
Income Taxes. Income taxes were $3.9 million in 1996 compared to $73,000
in 1995, an increase of $3.8 million. This increase was attributable to the
termination of the Company's S corporation status on May 30, 1996. From January
1, 1990 through May 29, 1996, the Company was treated for federal and certain
state income tax purposes as an S corporation under the Internal Revenue Code of
1986, as amended, and similar state statutes. This change in tax status resulted
in the Company recording an additional $1.1 million tax provision for deferred
taxes associated with previously untaxed temporary differences during the second
quarter ended June 30, 1996. At December 31, 1996, the Company had net
operating losses of approximately $5.3 million that were generated by Antrim.
Of this amount, approximately $860,000 can be carried back to Antrim's separate
company tax return for 1994. The remaining balance can be carried forward and
used to offset Antrim's future taxable income. This loss carryforward is
subject to limitations as to the amount and timing of its use. Accordingly, a
valuation allowance of $950,000 has been provided. The minimum amount of future
taxable income that would have to be generated by Antrim to realize the deferred
tax asset net of the valuation allowance would be approximately $2.7 million.
The Company anticipates that future taxable income will be sufficient to realize
the net operating loss carryforward. See Note 1 and Note 9 of Notes to
Consolidated Financial Statements.
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
6
<PAGE>
its LIS and 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. This dollar 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. This dollar 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. Sales and marketing 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.
7
<PAGE>
Liquidity and Capital Resources
Cash provided by operating activities was $6.6 million, $5.4 million and
$11.4 million in 1996, 1995 and 1994, respectively.
As of December 31, 1996, the Company had billed trade receivables of $28.5
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 77 days at December 31, 1996 and 63
days at December 31, 1995. The increase in average collection period is related
to the larger volume of customer contracts which require additional management
attention to accelerate collections. This increase is considered to be temporary
and is expected to improve prospectively through increased collection efforts.
Cash used in investing activities was $7.7 million, $4.5 million and $7.6
million in 1996, 1995 and 1994, respectively. As part of the initial public
offering in 1996, cash of $3.2 million was received in payment of notes
receivable from a related party. The notes were related to the purchases by the
related party of office complexes in 1991 and 1994 which were subsequently
leased to the Company. On November 26, 1996, the Company purchased all of the
outstanding stock of Antrim from The Compucare Company for $5.0 million in a
transaction accounted for under the purchase method of accounting. See Note 4 of
Notes to Consolidated Financial Statements. Approximately $3.3 million of in-
process technology acquired from Antrim was charged to operations in 1996.
Management estimates that approximately $750,000 will be spent in 1997 to bring
the in-process technology purchased from Antrim to market. Capitalized software
development costs were $2.8 million, $2.8 million and $2.0 million in 1996, 1995
and 1994, respectively. The remainder of cash used in investing activities in
each period was for purchases of property and equipment, consisting primarily of
computers and computer-related equipment and leasehold improvements. The
purchases of property and equipment totaled $3.7 million, $2.7 million and $2.4
million in 1996, 1995 and 1994, respectively.
At December 31, 1996, cash and cash equivalents were $31.9 million, an
increase of $31.6 million from December 31, 1995. The majority of this increase
was due to the Company's initial public offering of Common Stock which was
completed in June 1996. Proceeds from the offering, net of related costs, were
$50.1 million partially offset by S corporation distributions of $15.0 million
to the Company's shareholders for the "First S Corporation Distribution" and for
shareholders' tax liabilities associated with the Company's taxable earnings.
The Company expects to pay the "Second S Corporation Distribution," estimated to
be $3.9 million, on May 15, 1997 from internally generated funds. The estimated
amount of the "Second S Corporation Distribution" was revised from the
previously reported estimate of $2.3 million based on the Company's actual
undistributed cumulative S corporation taxable earnings from January 1, 1996
through May 29, 1996. In addition, during 1996, 8,587 shares of the Company's
Common Stock were issued for approximately $120,000 in connection with the
Employee Stock Purchase Plan. At December 31, 1996, working capital was $39.1
million. At that date, the Company had no long-term debt and did not have any
material commitments for capital expenditures.
8
<PAGE>
At December 31, 1996, the Company had a revolving line of credit with a
bank allowing the Company to borrow up to $10.0 million. Any borrowings under
the line of credit will bear interest at the bank reference rate 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 is
due September 30, 1997 except for any amounts outstanding under stand-by letters
of credit which have a maximum maturity of 365 days. Borrowings under the line
of credit are secured by all of the Company's assets. Approximately $204,000 of
the line of credit is used to secure letters of credit and is not available for
immediate expenditure. There were no borrowings outstanding as of December 31,
1996. See Note 8 of Notes to Consolidated Financial Statements.
On February 7, 1997, the Company entered into a Value Added Reseller
agreement with Dynamic Healthcare Technologies, Inc. ("Dynamic"). The agreement
grants the Company a non-exclusive license to modify, interface, market,
sublicense, support and otherwise use the Dynamic software program known as
CoPath Client/Server ("CoPath") which is a computer clinical information system
useful in surgical pathology, cytology and autopsy. In consideration of the
Company's payment to Dynamic of $3.0 million in the aggregate as described
below, the agreement gives the Company the right to sublicense CoPath to all of
the customers of the Company who exist as of February 7, 1997, except those
existing Dynamic customers listed in the agreement. The Company may also
sublicense CoPath to new customers for an additional fee payable to Dynamic.
Pursuant to the terms of this agreement, the Company made a $1.0 million cash
payment with the remaining balance of $2.0 million anticipated to be paid over
the next two years.
On February 21, 1997, the Company purchased land and a building in Tucson,
Arizona, for cash in the amount of $1.8 million. The Company anticipates the
facility will be used for customer-related activities.
The Company expects that continued expenditures of funds will be necessary
to support its future growth and that existing cash and cash equivalents
together with funds generated from operations will be sufficient to fund its
operations and capital requirements over the next 12 months. In the longer term,
the Company may require additional sources of liquidity to fund future growth.
Such sources may include additional equity offerings or debt financings. The
Company continues to be actively involved in identifying and evaluating
potential acquisitions.
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 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
has elected to continue to measure compensation cost under Accounting Board
Opinion No. 25, "Accounting for Stock Issued to Employees." In addition, the
Company has complied with the pro forma
9
<PAGE>
requirements of SFAS No. 123 in the Company's Notes to Consolidated Financial
Statements for those companies which choose not to account for the effects of
stock based compensation in the financial statements under SFAS No. 123. See
Note 13 of Notes to Consolidated Financial Statements.
10
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Sunquest Information Systems, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Sunquest
Information Systems, Inc. and subsidiaries as of December 31, 1996 and 1995 and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1996. 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 consolidated financial position of Sunquest
Information Systems, Inc. and subsidiaries at December 31, 1996 and 1995 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
February 14, 1997
11
<PAGE>
SUNQUEST INFORMATION SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1996 1995
---------------------------------
(in thousands, except share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $31,911 $ 352
Receivables, less allowance for
doubtful accounts of
$3,443 in 1996 and $1,122 in 1995 30,283 17,054
Other receivables 829 339
Loans receivable and accrued interest
from related party 2 537
Inventory 1,843 1,625
Prepaid expenses and other 1,004 833
Deferred tax assets 3,940 -
------- -------
Total current assets 69,812 20,740
Property and equipment, net of
accumulated depreciation 9,371 7,077
Capital leases from related party, net
of accumulated depreciation 4,888 5,680
Software development costs, net of
accumulated amortization 9,936 6,777
Loans receivable from related party - 3,116
Other receivables 1,076 454
Intangibles, net of accumulated
amortization 1,707 -
Other assets 121 30
------- -------
Total assets $96,911 $43,874
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,833 $ 1,987
Line of credit - 1,900
Related party note payable - 380
Current portion of long-term debt 289 200
Obligations under capital leases from
related party 613 511
Obligations under capital lease 40 -
Accrued compensation and related taxes 4,669 2,846
Accrued expenses 6,817 1,194
Deferred revenue 11,586 7,759
Dividend payable 3,900 -
------- -------
Total current liabilities 30,747 16,777
Obligations under capital leases from
related party 5,783 6,396
Obligations under capital lease 138 -
Deferred income taxes 2,076 -
Transition costs 1,400 -
Commitments and Contingencies (Note 11) - -
Shareholders' equity:
Preferred stock, 15,000,000 shares
authorized, no shares issued - -
Common stock, no par value,
35,000,000 shares authorized,
15,362,587 and 11,904,000 shares
issued and outstanding 50,340 57
Other - 17
Retained earnings 6,334 20,645
Foreign currency translation
adjustment 93 (18)
------- -------
Total shareholders' equity 56,767 20,701
------- -------
Total liabilities and
shareholders' equity $96,911 $43,874
======= =======
See accompanying notes.
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
SUNQUEST INFORMATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
1996 1995 1994
-------------------------------------
<S> <C> <C> <C>
(in thousands, except per share data)
Revenues:
System sales $45,059 $32,262 $38,416
Support and service 35,937 29,270 24,202
------- ------- -------
Total revenues 80,996 61,532 62,618
------- ------- -------
Operating expenses:
Cost of system sales 20,056 14,085 16,711
Client services 18,401 17,764 17,116
Research and development 9,988 9,040 7,734
Sales and marketing 10,896 8,734 6,957
General and administrative 9,758 7,068 6,847
Write-off of acquired,
in-process technology 3,252 - -
------- ------- -------
Total operating expenses 72,351 56,691 55,365
------- ------- -------
Operating income 8,645 4,841 7,253
Other income (expense):
Interest income 1,345 408 317
Interest expense (1,395) (1,465) (1,288)
Other (98) 78 23
------- ------- -------
Income before income taxes 8,497 3,862 6,305
Income tax provision:
Current year operations 2,755 73 91
Change in tax status 1,122 - -
------- ------- -------
Net income $ 4,620 $ 3,789 $ 6,214
======= ======= =======
Pro forma data (unaudited):
Historical income before income
taxes $ 8,497 $ 3,862 $ 6,305
Pro forma income tax provision 4,459 1,661 2,711
------- ------- -------
Pro forma net income $ 4,038 $ 2,201 $ 3,594
======= ======= =======
Pro forma net income per common
share $0.29 $0.18 $0.30
======= ======= =======
Weighted-average number of common
shares outstanding 13,919 11,904 11,904
======= ======= =======
See accompanying notes.
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
SUNQUEST INFORMATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Foreign
Currency Total
Common Stock Common Stock Total Share Retained Translation Shareholders'
Shares Amount Shares Amount Capital Earnings Adjustment Equity
---------- ------- ------ ------ ----------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(in thousands, except share data)
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 - - - - - (18,931) - (18,931)
Issuance of common stock
through public offering, net 3,450,000 50,146 - - - - - 50,146
Transfer of outstanding stock
of Sunquest Europa Limited
and Sunquest Germany GmbH to
the Company as a capital
contribution - 17 (3) - (17) - - -
Issuance of common stock
through Employee Stock
Purchase Plan 8,587 120 - - - - - 120
Foreign currency translation
adjustment - - - - - - 111 111
Net income - - - - - 4,620 - 4,620
---------- ------- ----- ----- ---- ------ ---- -------
Balance at December 31, 1996 15,362,587 $50,340 - $ - $ - $6,334 $ 93 $56,767
========== ======= ===== ===== ==== ====== ==== =======
</TABLE>
See accompanying notes.
14
<PAGE>
<TABLE>
<CAPTION>
SUNQUEST INFORMATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
1996 1995 1994
-------- ------- ---------
<S> <C> <C> <C>
(in thousands)
Cash flows from operating activities:
Net income $ 4,620 $ 3,789 $ 6,214
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,077 4,339 4,298
Write-off of acquired, in-process technology 3,252 - -
Loss (gain) on disposition of equipment 102 (1) 96
Bad debt expense 506 495 374
Deferred revenue 1,627 2,809 31
Deferred income taxes 347 - -
Increase in cash surrender value of life insurance - (194) (212)
Changes in operating assets and liabilities, net of acquisition:
Receivables (9,860) (3,914) 1,645
Inventory (107) 481 (1,004)
Prepaid expenses and other (48) (112) (83)
Other assets (107) (280) (4)
Accounts payable (245) (1,625) (67)
Accrued compensation and related taxes 1,007 (32) 115
Other accrued expenses 463 (350) 37
-------- ------- ---------
Net cash provided by operating activities 6,634 5,405 11,440
-------- ------- ---------
Cash flows from investing activities:
Acquisition of Antrim Corporation, net of cash acquired (4,493) - -
Repayment (issuance) of notes receivable to related party 3,271 940 (3,214)
Purchase of property and equipment (3,701) (2,671) (2,398)
Capitalized software development costs (2,785) (2,806) (1,993)
-------- ------- ---------
Net cash used in investing activities (7,708) (4,537) (7,605)
-------- ------- ---------
Cash flows from financing activities:
Net (repayments) borrowings on line of credit (1,900) 1,900 -
Principal payments on debt (297) (300) (360)
Principal payments on capitalized leases from related party (511) (426) (390)
Principal payments on capitalized lease (5) - -
Net proceeds from issuance of stock 50,266 17 -
S corporation distribution (15,031) (2,877) (3,622)
-------- ------- ---------
Net cash provided by (used in) financing activities 32,522 (1,686) (4,372)
-------- ------- ---------
Foreign currency translation adjustment 111 (19) 1
-------- ------- ---------
Net increase (decrease) in cash and cash equivalents 31,559 (837) (536)
Cash and cash equivalents at beginning of year 352 1,189 1,725
-------- ------- ---------
Cash and cash equivalents at end of year $ 31,911 $ 352 $ 1,189
======== ======= =========
Supplemental disclosure of cash flow information:
Cash paid (received) for income taxes $ 3,306 $ 12 $ (7)
======== ======= =========
Cash paid for interest $ 92 $ 82 $ 122
======== ======= =========
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 $ 1,206 $ 4,420 $ -
======== ======= =========
Dividend declared but not paid $ 3,900 $ - $ -
======== ======= =========
</TABLE>
See accompanying notes.
15
<PAGE>
SUNQUEST INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
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, Europe, Mexico and Saudi Arabia. Total revenues are derived
from the licensing of software, the provision of value added services and the
sale of related hardware.
Principles of Consolidation
Effective with the initial public offering (Note 2), the consolidated
financial statements include the accounts of the Company, Sunquest Europa
Limited (Sunquest Europa) and Sunquest Germany GmbH (Sunquest Germany). Antrim
Corporation (Antrim) was acquired on November 26, 1996. All transactions between
the Company and Sunquest Europa, Sunquest Germany and Antrim have been
eliminated in preparing the consolidated financial statements. Prior to the
initial public offering, the financial statements of the Company, Sunquest
Europa and Sunquest Germany were combined for presentation purposes because
these entities were under common control.
Use of Estimates
The preparation of the consolidated 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
consolidated 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 (which are determined based upon actual
hours incurred related to total estimated installation hours) 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.
16
<PAGE>
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 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 three or
five years for equipment and software and five or 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
The Company elected on January 1, 1990 to be taxed under Subchapter S of
the Internal Revenue Code of 1986, as amended, and was treated as an S
corporation in most of the states where business was conducted. As an S
corporation, the Company's shareholders were responsible for any federal and
state income taxes resulting from the Company's taxable income.
Accordingly, the financial statements for the years ended December 31, 1995
and 1994 and the 1996 financial statements prior to the initial public offering
effective date do not include
17
<PAGE>
a provision for federal or certain state income taxes. The unaudited pro forma
income tax provision for 1996, 1995 and 1994 represents federal and the
additional state income tax expense that would have been required had the
Company not made the S corporation election. The S corporation election was
terminated on May 30, 1996. This change in tax status, which transpired just
prior to the initial public offering of the Company's stock in the second
quarter of 1996, resulted in the Company recording a $1,122,000 tax provision
for deferred taxes associated with previously untaxed temporary differences.
The provisions for income taxes subsequent to the change in corporate tax
status are accounted for in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109). Under SFAS No.
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
Intangibles
Certain intangible assets were acquired in connection with the Antrim
acquisition. These assets include in-process technology, assembled work force,
trademark and trade names and customer-related intangibles. The in-process
technology acquired of $3,252,000 was charged to operations in 1996 as the
underlying products had not reached technological feasibility. The remaining
intangible assets are being amortized over their remaining useful lives of five
and seven years. Amortization expense related to these intangibles was $29,000
in 1996. The carrying values of intangibles will be reviewed if facts and
circumstances suggest that they may be impaired.
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
has elected to continue to measure compensation cost under Accounting Board
Opinion No. 25, "Accounting for Stock Issued to Employees." See Note 13 of Notes
to Consolidated Financial Statements.
18
<PAGE>
2. Initial Public Offering
On June 10, 1996, the Company completed its initial offering of stock to
the public. A total of 3,450,000 shares of Common Stock were sold for net
proceeds to the Company of approximately $50,146,000, after deducting expenses
of the offering of approximately $1,190,000 and underwriters' discounts and
commissions of approximately $3,864,000.
Prior to May 30, 1996, the Company was taxed as an S corporation. During
the quarter ended June 30, 1996, the Company declared and paid to shareholders
of record as of April 30, 1996, the "First S Corporation Distribution" of
$14,500,000, which was estimated to be equal to the Company's undistributed
cumulative S corporation taxable earnings from January 1, 1990 through December
31, 1995. During the six months ended June 30, 1996, the Company also made
distributions of $531,000 to shareholders related to the shareholders' tax
liabilities on S corporation taxable earnings. In April 1996, the Company
declared, payable to shareholders of record as of April 30, 1996, the "Second S
Corporation Distribution," estimated to be $3,900,000, equal to the Company's
undistributed cumulative S corporation taxable earnings from January 1, 1996
through May 29, 1996. The Company expects to pay the "Second S Corporation
Distribution" in full on May 15, 1997.
3. Unaudited Pro Forma Information
Pro Forma Net Income
The unaudited pro forma net income for the years ended December 31, 1996,
1995 and 1994, has been computed as if the Company had been subject to federal
and all applicable state income taxes based on an estimated tax rate of 43%.
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 based on the weighted-average number of
shares of Common Stock outstanding during the period. Common share equivalents
consist of shares issuable upon exercise of stock options, that were granted
during 1996. These options were not dilutive for the year ended December 31,
1996.
Supplemental Pro Forma Net Income Per Common Share
Supplemental pro forma net income per common share amounts have been
computed giving effect to the assumed issuance, as of the beginning of the
periods presented, of the number of common shares necessary to replace the
equity distributed as a result of the "First S Corporation Distribution" of
$14,500,000 from the proceeds of the initial public offering and were $.32,
$.17 and $.28 for the years ended December 31, 1996, 1995 and 1994,
respectively.
19
<PAGE>
4. Acquisition
On November 26, 1996, the Company purchased all of the outstanding stock of
Antrim from Antrim's parent corporation, The Compucare Company. Antrim is a
leading provider of laboratory information systems for commercial and medical
reference laboratories. The acquisition has been accounted for under the
purchase method of accounting, and the results of operations of Antrim have been
included in the Company's financial statements since the date of acquisition.
Total consideration for this acquisition consisted of $5,000,000 in cash.
The purchase price of Antrim has been allocated to the identifiable tangible and
intangible assets acquired based on their estimated fair values. The acquired,
in-process technology was immediately charged to operations as required under
generally accepted accounting principles. The intangible assets have estimated
remaining lives of four to seven years.
The allocation of the purchase price is based upon the most current
information available. This allocation may be adjusted prospectively as
information becomes available.
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Current and tangible assets $ 6,475
Developed technology 2,560
In-process technology 3,252
Assembled work force 416
Trademarks and trade names 647
Customer-related intangibles 673
Deferred tax asset 2,700
Liabilities assumed (7,677)
Transition costs (3,557)
Deferred tax liability (489)
----------
$ 5,000
==========
</TABLE>
Transition costs include $2,603,000 associated with the replacement of an
Antrim software product with a similar Sunquest product. Approximately
$2,157,000 of the total transition costs of $3,557,000 are expected to be
incurred within the next year and have been included in accrued expenses on the
balance sheet. The long-term portion is included in transition costs.
20
<PAGE>
The following unaudited pro forma data presents the results of operations
as if the acquisition had occurred at the beginning of each period. This
summary is provided for information purposes only and does not necessarily
reflect the actual results that would have occurred had the acquisition been
made as of those dates or of results that may occur in the future.
<TABLE>
<CAPTION>
1996 1995
------- -------
(in thousands)
<S> <C> <C>
Total revenues $96,152 $82,802
Net income 1,784 897
Pro forma net income (loss) 1,202 (691)
Pro forma net income (loss) per share .09 (.06)
</TABLE>
5. Receivables
Receivables consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------
1996 1995
------- -------
<S> <C> <C>
(in thousands)
Billed receivables $28,546 $13,005
Unbilled receivables 5,180 5,171
------- -------
33,726 18,176
Allowance for doubtful accounts (3,443) (1,122)
------- -------
Total receivables $30,283 $17,054
======= =======
</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, 1996 and 1995 are amounts due from
foreign health care providers of approximately $652,000 and $951,000,
respectively. Total revenues include foreign sales revenues of $1,049,000 and
$1,526,000 for the years ended December 31, 1996 and 1995, respectively.
Credit is extended on an evaluation of the customer's financial condition
and generally collateral is not required. The provision for bad debt expense
recognized in 1996, 1995 and 1994 was $506,000, $495,000 and $374,000,
respectively. During 1996, 1995 and 1994, $185,000, $373,000 and $226,000,
respectively, of receivables were charged against the allowance.
21
<PAGE>
6. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------
1996 1995
------- ------
<S> <C> <C>
(in thousands)
Building $ 371 $ 342
Land 38 38
Computers and software 9,977 7,409
Furniture and fixtures 2,100 1,236
Leasehold improvements 3,043 2,678
Other equipment and vehicles 273 842
------- ------
15,802 12,545
Accumulated depreciation 6,431 5,468
------- ------
Total property and equipment, net $ 9,371 $ 7,077
======= =======
</TABLE>
Depreciation expense for the years ended December 31, 1996, 1995 and 1994
was approximately $2,059,000, $1,819,000 and $1,847,000, respectively.
7. Capitalized Software Development Costs
During the years ended December 31, 1996, 1995 and 1994, the Company
capitalized $2,785,000, $2,806,000 and $1,993,000, respectively, of total
software development costs of $12,773,000, $11,846,000 and $9,727,000,
respectively. Amortization expense related to capitalized software development
costs for the years ended December 31, 1996, 1995 and 1994 was $2,188,000,
$1,728,000 and $1,762,000, respectively, and accumulated amortization was
$10,609,000, $8,421,000 and $6,693,000, respectively. Additionally, $5,812,000
of capitalized software development costs were acquired as part of the Antrim
acquisition, of which $3,252,000 of in-process technology was immediately
charged to operations.
8. Line of Credit and Debt
Line of Credit
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 (discussed below) 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 the Bank of America National Trust and Savings
Association (the Bank of America Rate).
22
<PAGE>
At December 31, 1996, the Optional Rates and the Bank of America Rate
ranged from 6.65% to 8.25%. All outstanding principal and interest under the
line of credit are due September 30, 1997 except for any amounts under the line
of credit outstanding under financing stand-by 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. Approximately $204,000 of the line of
credit is used to secure letters of credit and is not available for immediate
expenditure. The amount of letters of credit outstanding at any one time may not
exceed $5,000,000.
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 the initial public
offering.
There were no borrowings outstanding as of December 31, 1996 under the new
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, 1995, the interest rate was 9.25%. Amounts borrowed under the line
of credit were secured by all of the Company's assets. At December 31, 1995,
the Company had $1,900,000 outstanding under the line of credit and $3,100,000
available to borrow.
Debt
The $289,000 in debt outstanding at December 31, 1996 represents a note
bearing interest at 10%, which matures on March 22, 1997.
The $200,000 in debt outstanding at December 31, 1995 represents various
term loans bearing interest at prime plus 0.75% in 1995, secured by all of the
assets of the Company.
The carrying amounts of the Company's borrowings approximate fair value.
The fair values of the Company's borrowings (see Note 14) are estimated using
discounted cash flow analysis based upon the Company's current incremental
borrowing rates for similar types of debt arrangements.
23
<PAGE>
9. Income Taxes
The provision for income taxes, reconciliation of income tax expense and
components of deferred tax assets and liabilities are set forth below.
Provision for Income Taxes
<TABLE>
<CAPTION>
1996
---------
(in thousands)
<S> <C>
Current tax expense:
Federal $ 2,826
State 704
---------
Total current tax expense 3,530
---------
Deferred tax expense:
Federal 211
State 136
---------
Total deferred tax expense 347
---------
Total income tax expense $ 3,877
=========
</TABLE>
Reconciliation of Income Tax Expense
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Income tax provision at the
statutory rate $ 2,974 $ 1,352 $ 2,207
Increases (decreases):
State income taxes 680 351 574
Deferred taxes attributable to
conversion from S corporation 1,122 - -
Write-off of acquired, in-process
technology 1,138 - -
Taxes absorbed by the shareholders
of the Company prior to
conversion from S corporation (1,725) (1,630) (2,690)
Other (312) - -
------- ------- -------
Total income tax expense $ 3,877 $ 73 $ 91
======= ======= =======
</TABLE>
24
<PAGE>
Components of Deferred Tax Assets and Liabilities at December 31, 1996
<TABLE>
<CAPTION>
1996
--------
<S> <C>
(in thousands)
Deferred tax assets:
Net operating loss carryforwards $1,988
Accrued expenses 1,330
Bad debt allowance 1,319
Vacation and compensation
accruals 1,073
Capital leases 807
Deferred revenue 699
Contract loss reserves 332
--------
Total deferred tax assets 7,548
--------
Deferred tax liabilities:
Book basis in excess of tax basis:
Software development 2,977
Acquired intangibles 1,587
Fixed assets 139
Other 31
--------
Total deferred tax liabilities 4,734
--------
Less: valuation allowance (950)
--------
Net deferred tax assets $1,864
========
</TABLE>
The Company has net operating losses of approximately $5,300,000 that were
generated by Antrim prior to its affiliation with the Company. Of this
amount, approximately $860,000 can be carried back to Antrim's separate company
tax return for 1994. The remaining balance can be carried forward and used to
offset Antrim's future taxable income. The loss carryforward is subject to
limitations as to the amount and timing of its use. Accordingly, a valuation
allowance of $950,000 has been provided against the tax benefit of $1,988,000.
The valuation allowance will be allocated to goodwill in the event the full
benefit of the net operating loss is realized. The net operating loss
carryforward will expire in the years 2010 and 2011.
10. Leases
The Company leases two buildings from Any Travel, Inc. (Any Travel), an
affiliated entity, under capital leases. The affiliation is through 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 May 2004 and may be renewed for periods ranging from
one to five years.
25
<PAGE>
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, 1996:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------- ---------
(in thousands)
<S> <C> <C>
1997 $ 1,876 $ 507
1998 1,876 387
1999 1,842 127
2000 1,809 99
2001 1,809 47
Thereafter 2,285 -
------- ------
Total minimum lease payments 11,497 $1,167
======
Amounts representing interest 4,923
-------
Present value of net minimum lease payments
(including current portion of $653,000) $ 6,574
=======
</TABLE>
At December 31, 1996, aggregate future minimum rental payments to be
received under noncancelable subleases were approximately $411,000.
Rental expense for the years ended December 31, 1996, 1995 and 1994 was
approximately $474,000, $318,000 and $248,000, respectively.
11. Commitments and Contingencies
Any Travel had approximately $3,241,000 of mortgage term debt outstanding
to a third party at December 31, 1996. The Company has guaranteed the payment
of all principal and interest under the mortgage note. The guaranty agreement
prohibits the payment of any dividends other than certain S corporation
distributions in connection with the initial public offering. Payments under
the mortgage note are due in monthly installments through July 1, 1997, at which
time Any Travel may extend the final maturity to July 1, 2002. The mortgage
note is secured by land and a building with a net book value of approximately
$4,460,000 at December 31, 1996.
The Company has granted liens on all of its assets to a vendor to secure
amounts due for purchases of hardware and other equipment.
26
<PAGE>
12. Related Party Transactions
The Company had the following notes receivable from Any Travel at December
31, 1995:
<TABLE>
<CAPTION>
1995
---------------
(in thousands)
<S> <C>
Note receivable, due in monthly
installments of $49,012 including
interest at 8.5% through May 2001 $2,515
Note receivable, due in monthly
installments of $18,743 including
interest at 8.0% through July 2002 1,130
------
Total 3,645
Less amount due in one year 529
------
Long-term portion $3,116
======
</TABLE>
The current portion of notes receivable from a related party included
approximately $8,000 of accrued interest at December 31, 1995. A portion of the
"First S Corporation Distribution" was contributed by shareholders to the
capital of Any Travel and in July 1996 was used by Any Travel to repay the above
notes.
During 1996, 1995 and 1994, the Company received management fees from an
affiliate of $240,000, $240,000 and $140,000, respectively.
As of September 1, 1995, the Company purchased land and a building from
related parties for $380,000. The purchase was financed through the issuance of
a 7.0% demand note to the affiliate from whom the related parties had borrowed
the money to purchase the property. This note was paid in full in March 1996.
On May 30, 1996, all of the outstanding stock of Sunquest Europa and
Sunquest Germany was transferred to the Company by certain of its shareholders
as a capital contribution.
The fair values of the financial instruments that were outstanding at
December 31, 1995 (see Note 14) were estimated using discounted cash flow
analysis at current market interest rates for such assets.
27
<PAGE>
13. Employee Benefit Plans
Profit Sharing Plan
The Company has a Profit Sharing Plan covering substantially all of its
employees. Employees who have both attained age 21 and completed 1,000 or more
hours of service in a twelve-month period are eligible to participate. Under
provisions of the plan, participants 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 $729,000, $337,000 and
$631,000 for the years ended December 31, 1996, 1995 and 1994, respectively,
related to this plan.
Employee Stock Purchase Plan
On March 25, 1996, the Board of Directors adopted and the shareholders
approved the Employee Stock Purchase Plan, which authorizes the sale of up to
450,000 shares of Common Stock to participating employees of the Company and its
subsidiaries. The plan is open to all employees of the Company and its
subsidiaries 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.
Employees may designate up to 10% of their base pay, but not less than $10 per
pay period, for the purchase of Common Stock. Offerings under the plan commence
on the first day of each calendar quarter and end on the last day of the same
calendar quarter. The first offering under the plan commenced July 1, 1996 and
terminated September 30, 1996. The purchase price is equal to 90% of the last
sale price of the Common Stock, as reported on the National Association of
Security Dealer's, Inc. (Nasdaq) Automated Quotation System, on the
commencement date of the offering. No fractional shares of Common Stock are
issued. Any remaining balance in the participant's account is used in the next
offering, unless the participant elects otherwise or the account is otherwise
refunded. During 1996, 8,587 shares of Common Stock were issued under the plan
for an aggregate purchase price of $120,000.
Stock Incentive Plan
On March 25, 1996, the Board of Directors adopted and the shareholders
approved the Stock Incentive Plan of 1996, which authorizes the issuance of up
to 2,500,000 shares of Common Stock pursuant to stock options or other awards
granted to employees and other eligible persons. Options granted allow the
optionees to purchase shares of the Company's Common Stock at prices not less
than the fair market value of the stock at the date of grant. All options
granted have ten year terms and become exercisable as specified in the stock
option agreements. The plan will expire in March 2006.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of SFAS No.
123. The fair value for these options was estimated at the dates of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions for 1996: risk-free interest rate of 6.52%; dividend yield of 0%;
28
<PAGE>
volatility factor of the expected market price of the Company's Common Stock of
.62; and a weighted-average expected life of the options of 4.9 years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The
Company's pro forma information follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1996
-------
<S> <C>
Pro forma net income $3,469
Pro forma net income per share .25
</TABLE>
Because the Company's employee stock options have characteristics
significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion the existing modules do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
A summary of the Company's stock option activity and related information
for the year ended December 31, 1996 follows:
<TABLE>
<CAPTION>
1996
-----------------------------
Options Weighted-Average
(000's) Exercise Price
------- ----------------
<S> <C> <C>
Outstanding-beginning of year - $ -
Granted 821 $15.95
Exercised - $ -
Forfeited (77) $16.00
-------
Outstanding-end of year 744 $15.95
=======
Exercisable at end of year - -
Weighted-average fair value of options
granted during the year $9.28
</TABLE>
29
<PAGE>
Exercise prices for options outstanding as of December 31, 1996 were
$14.875 and $16.000. The weighted-average remaining contractual life of those
options is 9.4 years.
14. Fair Value of Financial Instruments
The carrying amounts and fair values of the Company's financial instruments
at December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ------- -------- -------
(in thousands)
<S> <C> <C> <C> <C>
Cash and cash
equivalents $31,911 $31,911 $ 352 $ 352
Accounts receivable 30,283 30,283 17,054 17,054
Notes receivable
from related party - - 3,645 3,592
Other receivables 1,905 1,905 793 793
Accounts payable 2,833 2,833 1,987 1,987
Line of credit - - 1,900 1,900
Term debt 289 289 200 200
Related party debt - - 380 380
</TABLE>
15. Shareholders' Equity
On March 25, 1996, the Board of Directors amended and restated the
Articles of Incorporation of the Company to, among other things, convert 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, no par
value, with 35,000,000 shares authorized. The Amended and Restated Articles of
Incorporation also authorize the issuance of up to 15,000,000 shares of
Preferred Stock. The issued and outstanding shares at December 31, 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.
30
<PAGE>
16. Quarterly Financial Data (Unaudited)
Summarized quarterly financial data for the years ended December 31, 1996 and
1995 appear below:
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Total
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
(in thousands, except per share amounts)
1996
Total revenues $16,717 $19,922 $19,302 $25,055 $80,996
Operating expenses (1) 15,040 16,419 16,649 24,243 72,351
Operating income (1) 1,677 3,503 2,653 812 8,645
Net income (loss) (1) 1,535 1,939 1,741 (595) 4,620
Pro forma net income (loss) (1), (2), (3) 893 1,999 1,741 (595) 4,038
Pro forma net income (loss) per
common share (1), (2), (3), (4) $0.08 $0.15 $0.11 ($0.04) $0.29
Weighted-average number of
common shares outstanding 11,904 13,054 15,356 15,361 13,919
1995
Total revenues $13,564 $15,156 $15,766 $17,046 $61,532
Operating expenses 14,209 13,619 14,588 14,275 56,691
Operating (loss) income (645) 1,537 1,178 2,771 4,841
Net (loss) income (858) 1,215 948 2,484 3,789
Pro forma net (loss) income (2) (499) 706 552 1,442 2,201
Pro forma net (loss) income per
common share (2), (4) ($0.04) $0.06 $0.05 $0.12 $0.18
Weighted-average number of
common shares outstanding 11,904 11,904 11,904 11,904 11,904
</TABLE>
__________________
(1) Fourth quarter results of operations include a $3,252,000 charge related to
the Antrim acquisition.
(2) The pro forma net income (loss) and pro forma net income (loss) per common
share has been computed as if the Company had been subject to federal and
all applicable state income taxes.
(3) Actual for the third and fourth quarters.
(4) Individual quarterly pro forma net income (loss) per common share does not
equal the year-end amount due to changes in the number of common shares
outstanding during the year.
31
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the five years ended
December 31, 1996, should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements and Notes thereto included herein. The
balance sheet data as of December 31, 1996, 1995 and 1994 and the statement of
income data for each of the four years in the period ended December 31, 1996
have been derived from the Company's Consolidated Financial Statements, which
have been audited (except for pro forma data) by Ernst & Young LLP, independent
auditors. The balance sheet data as of December 31, 1993 and 1992 and the
statement of income data for the year ended December 31, 1992 have been derived
from unaudited financial statements.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1996 1995 1994 1993 1992
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
(in thousands, except per share amounts)
Statement of Income Data:
Revenues:
System sales $45,059 $32,262 $38,416 $43,142 $44,821
Support and service 35,937 29,270 24,202 20,317 13,149
------- ------- ------- ------- -------
Total revenues 80,996 61,532 62,618 63,459 57,970
------- ------- ------- ------- -------
Operating expenses:
Cost of system sales 20,056 14,085 16,711 21,820 19,875
Client services 18,401 17,764 17,116 16,349 14,229
Research and development 9,988 9,040 7,734 6,958 6,055
Sales and marketing 10,896 8,734 6,957 6,554 4,298
General and administration 9,758 7,068 6,847 6,909 7,102
Write-off of acquired, in-process
technology (1) 3,252 - - - -
------- ------- ------- ------- -------
Total operating expenses 72,351 56,691 55,365 58,590 51,559
------- ------- ------- ------- -------
Operating income 8,645 4,841 7,253 4,869 6,411
Other income (expense):
Interest income 1,345 408 317 163 465
Interest expense (1,395) (1,465) (1,288) (881) (1,054)
Other (98) 78 23 767 (442)
Abandonment of leasehold - - - - (703)
------- ------- ------- ------- -------
Income before income taxes 8,497 3,862 6,305 4,918 4,677
Income tax provision:
Current year operations 2,755 73 91 76 -
Change in tax status 1,122 - - - -
------- ------- ------- ------- -------
Net income $ 4,620 $ 3,789 $ 6,214 $ 4,842 $ 4,677
======= ======= ======= ======= =======
Pro forma data: (2)
Historical income before income taxes $ 8,497 $ 3,862 $ 6,305 $ 4,918 $ 4,677
Pro forma income tax provision 4,459 1,661 2,711 2,115 2,011
------- ------- ------- ------- -------
Pro forma net income $ 4,038 $ 2,201 $ 3,594 $ 2,803 $ 2,666
======= ======= ======= ======= =======
Pro forma net income per common share $0.29 $0.18 $0.30 $0.24 $0.22
======= ======= ======= ======= =======
Weighted-average number of common
shares outstanding 13,919 11,904 11,904 11,904 11,904
======= ======= ======= ======= =======
Balance Sheet Data (at end of period):
Cash and cash equivalents $31,911 $ 352 $ 1,189 $ 1,725 $ 1,208
Working capital 39,065 3,963 5,078 6,223 3,324
Total assets 96,911 43,874 42,068 36,992 33,842
Long-term debt, obligations under capital
leases from related party and obligations
under capital lease, net of current portion 5,921 6,396 7,107 4,832 5,466
Total shareholders' equity 56,767 20,701 21,251 18,658 16,032
</TABLE>
- ----------------------
(1) In conjunction with the Antrim acquisition, the Company charged operations
$3.3 million for acquired, in-process technology.
(2) Pro form data has been computed as if the Company had been subject to
federal and all applicable state income taxes.
32
<PAGE>
Exhibit 21B
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Jurisdiction of
Incorporation
Name and Name Under Which Doing Business or Organization
- ---------------------------------------- ----------------
<S> <C>
Sunquest Europa Limited.................................. United Kingdom
Sunquest Germany GmbH.................................... Germany
Antrim Corporation....................................... Texas
</TABLE>
<PAGE>
Exhibit 23G
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Sunquest Information Systems, Inc. of our report dated February 14, 1997,
included in the 1996 Annual Report to Shareholders of Sunquest Information
Systems, Inc.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8, No. 333-06015) pertaining to the Employee Stock Purchase Plan of
Sunquest Information Systems, Inc. of our report dated February 14, 1997 with
respect to the consolidated financial statements of Sunquest Information
Systems, Inc. incorporated by reference in the Annual Report (Form 10-K) for the
year ended December 31, 1996.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
March 23, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 31,911
<SECURITIES> 0
<RECEIVABLES> 33,726
<ALLOWANCES> 3,443
<INVENTORY> 1,843
<CURRENT-ASSETS> 69,812
<PP&E> 15,802
<DEPRECIATION> 6,431
<TOTAL-ASSETS> 96,911
<CURRENT-LIABILITIES> 30,747
<BONDS> 0
0
0
<COMMON> 50,340
<OTHER-SE> 6,427
<TOTAL-LIABILITY-AND-EQUITY> 96,911
<SALES> 80,996
<TOTAL-REVENUES> 80,996
<CGS> 20,056
<TOTAL-COSTS> 38,457
<OTHER-EXPENSES> 9,988
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,395
<INCOME-PRETAX> 8,497
<INCOME-TAX> 3,877
<INCOME-CONTINUING> 4,620
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,620
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.29
</TABLE>
