<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
____________ TO ___________
Commission file number: 0-28212
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 office) (Zip Code)
(520) 570-2000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address, and former fiscal year, if changed
since last report)
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
On August 11, 1997, there were 15,371,779 shares of Common Stock
outstanding.
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Sunquest Information Systems, Inc.
Form 10-Q
For the Quarterly Period Ended June 30, 1997
Table of Contents
Page
----
Part I. Financial Information
Item 1. Financial Statements
(a.) Condensed consolidated balance sheets as 3
of June 30, 1997 (unaudited) and December 31,
1996
(b.) Condensed consolidated statements of 4
income for each of the three and six months
ended June 30, 1997 and June 30, 1996
(unaudited)
(c.) Condensed consolidated statements of cash 5
flows for each of the six months ended
June 30, 1997 and June 30, 1996 (unaudited)
(d.) Notes to condensed consolidated financial 6
statements
Item 2. Management's Discussion and Analysis of 9
Financial Condition and Results of Operations
Part II. Other Information
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security 21
Holders
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 22
(a.) Exhibits 22
(b.) Reports on Form 8-K 22
Signatures 23
2
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Part I. Financial Information
Item 1. Financial Statements
Sunquest Information Systems, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- ------------
<S> <C> <C>
(unaudited)
ASSETS
Cash and cash equivalents $17,133 $31,911
Trade receivables, net 41,791 30,283
Receivable from related party 13 2
Other current assets 2,281 3,676
Deferred tax asset 3,750 3,940
------- -------
Total current assets 64,968 69,812
Property and equipment, net 11,369 9,371
Capital leases from related party, net 4,492 4,888
Software development costs, net 13,124 9,936
Other assets 2,139 2,904
------- -------
Total assets $96,092 $96,911
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $4,213 $2,833
Current portion of long-term debt - 289
Accrued compensation and related taxes 4,057 4,669
Accrued expenses 5,239 6,817
Obligations under capital leases
from related party 673 613
Obligations under capital lease 60 40
Deferred revenue 9,384 11,586
Related party payable - 3,900
Other liabilities 1,000 -
------- -------
Total current liabilities 24,626 30,747
Obligations under capital leases
from related party 5,431 5,783
Obligations under capital lease 86 138
Deferred income taxes 3,083 2,076
Transition costs 1,400 1,400
Other liabilities 1,000 -
Shareholders' equity 60,466 56,767
------- -------
Total liabilities and
shareholders' equity $96,092 $96,911
======= =======
</TABLE>
See accompanying notes.
3
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Sunquest Information Systems, Inc.
Condensed Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
System sales $14,435 $11,421 $27,253 $19,978
Support and service 13,545 8,501 25,334 16,661
------- ------- ------- -------
Total revenues 27,980 19,922 52,587 36,639
------- ------- ------- -------
Operating expenses:
Cost of system sales 7,762 4,878 14,155 8,530
Client services 7,303 4,321 13,422 8,990
Research and development 2,556 2,355 5,866 4,742
Sales and marketing 3,687 2,744 6,866 5,144
General and administrative 3,058 2,121 6,472 4,053
------- ------- ------- -------
Total operating expenses 24,366 16,419 46,781 31,459
------- ------- ------- -------
Operating income 3,614 3,503 5,806 5,180
Other income (expense):
Interest income 274 260 659 350
Interest expense (501) (352) (625) (739)
Other 201 96 35 282
------- ------- ------- -------
Income before income taxes 3,588 3,507 5,875 5,073
Income tax provision:
Current year operations 1,468 446 2,452 477
Change in tax status - 1,122 - 1,122
------- ------- ------- -------
Net income $2,120 $1,939 $3,423 $3,474
======= ======= ======= =======
Earnings per share determination:
Historical income before
income taxes $3,588 $3,507 $5,875 $5,073
Income tax provision:
Actual 1,468 - 2,452 -
Pro forma - 1,508 - 2,181
------- ------- ------- -------
Applicable net income $2,120 $1,999 $3,423 $2,892
======= ======= ======= =======
Weighted-average shares
outstanding 15,365 13,054 15,364 12,479
======= ======= ======= =======
Net income per share:
Actual $0.14 - $0.22 -
======= ======= ======= =======
Pro forma - $0.15 - $0.23
======= ======= ======= =======
</TABLE>
See accompanying notes.
4
<PAGE>
Sunquest Information Systems, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $3,423 $3,474
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 3,848 2,508
Bad debt expense 488 210
Deferred revenue (2,202) 1,539
Deferred income taxes 1,197 1,107
Changes in operating assets and liabilities:
Receivables (11,996) (2,614)
Inventory 1,352 (709)
Prepaid expenses and other (300) 135
Other assets 975 30
Accounts payable 1,380 (31)
Accrued compensation and related taxes (612) 363
Other accrued expenses (1,578) 288
-------- --------
Net cash (used in) provided by
operating activities (4,025) 6,300
-------- --------
Cash flows from investing activities:
(Issuance) repayment of notes
receivable from related party (11) 3,268
Purchase of property and equipment (3,510) (904)
Capitalized software development costs (2,995) (1,481)
-------- --------
Net cash (used in) provided by
investing activities (6,516) 883
-------- --------
Cash flows from financing activities:
Net repayments under line of credit - (1,900)
Principal payments on debt (289) (200)
Principal payments on capitalized
leases from related party (292) (243)
Principal payments on capitalized lease (32) -
Net proceeds from initial public offering - 50,234
Net proceeds from employee stock
purchase plan 92 -
S corporation distributions (3,601) (15,031)
-------- --------
Net cash (used in) provided by
financing activities (4,122) 32,860
-------- --------
Foreign currency translation adjustment (115) (12)
-------- --------
Net (decrease) increase in cash and
cash equivalents (14,778) 40,031
Cash and cash equivalents at beginning of
period 31,911 352
-------- --------
Cash and cash equivalents at end of
period $17,133 $40,383
======== ========
</TABLE>
See accompanying notes.
5
<PAGE>
Notes to Condensed Consolidated Financial Statements
Note 1 - Interim Statement Presentation
The unaudited consolidated financial statements of Sunquest
Information Systems, Inc. (the "Company") have been prepared by
the Company pursuant to the rules and regulations of the
Securities and Exchange Commission (the "Commission") and in
accordance with generally accepted accounting principles for the
preparation of interim financial statements. Accordingly,
certain information and footnote disclosures normally included in
annual financial statements have been omitted or condensed.
These unaudited consolidated financial statements should be read
in conjunction with the consolidated financial statements and the
notes thereto incorporated by reference into the Company's 1996
Annual Report on Form 10-K filed with the Commission. The 1996
balance sheet amounts were derived from audited statements.
In the opinion of management, all necessary adjustments have been
made to provide a fair presentation. The operating results for
the three and six months ended June 30, 1997 are not necessarily
indicative of the results that may be expected for any other
interim period or for the full year ending December 31, 1997.
Note 2 - Initial Public Offering
On June 10, 1996, the Company completed its initial public
offering. A total of 3,450,000 shares of Common Stock were sold
for net proceeds to the Company of approximately $50.1 million,
after deducting expenses of the offering of approximately $1.2
million and underwriters' discounts and commissions of
approximately $3.9 million.
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 $14.5 million, which was estimated
to be equal to the Company's undistributed cumulative S
corporation 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 $3.9 million, equal to
the Company's undistributed cumulative S corporation taxable
earnings from January 1, 1996 through May 29, 1996. The
estimated "Second S Corporation Distribution" was reduced by
approximately $300,000 when the actual calculations of S
Corporation Distributions were finalized. The Company paid the
adjusted "Second S Corporation Distribution" of $3.6 million in
full on May 14, 1997.
6
<PAGE>
Note 3 - Income Taxes
Prior to May 30, 1996, the Company was taxed as an S corporation
and, accordingly, was not subject to federal and certain state
income taxes. As a result, the Company's shareholders, rather
than the Company, were required to pay federal and certain state
income taxes based on the Company's taxable earnings through May
29, 1996, whether or not the earnings were distributed to such
shareholders. The Company had provided for income taxes in
states in which it operated that did not recognize S corporation
status.
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."
Note 4 - Employee Stock Purchase Plan
For the three months ended June 30, 1997, the Company issued
6,357 shares of its Common Stock for approximately $57,000
pursuant to the Employee Stock Purchase Plan. For the six months
ended June 30, 1997, the Company has issued a total of 9,192
shares of its Common Stock for approximately $92,000 pursuant to
the Employee Stock Purchase Plan.
Note 5 - Stock Incentive Plan
On April 3, 1997, the Compensation Committee of the Board of
Directors modified the exercise price applicable to outstanding
options to purchase 800,282 shares of Common Stock which had been
granted under the Stock Incentive Plan. As a result of such
modification, the exercise prices of such options were reduced to
$10.50 per share, the average of the high and low reported
trading prices of the Common Stock on April 3, 1997.
Note 6 - Pro Forma Net Income and Net Income Per Share Information
Pro forma net income has been computed as if the Company had been
subject to federal and all applicable state income taxes at an
estimated tax rate of 43%. Pro forma net income per share is
based on the weighted-average number of shares of Common Stock
outstanding during the period. Common share equivalents consist
of shares issuable upon the exercise of stock options, using the
treasury stock method and were not dilutive for the periods
presented.
7
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Note 7 - Recently Issued Accounting Standard
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" (SFAS No. 128), which is required to be adopted by
the Company for the year ending December 31, 1997. The
provisions of SFAS No. 128 will be adopted in the Company's
financial statements in its 1997 Annual Report. At that time,
the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods.
Under the new provisions for calculating earnings per share, the
dilutive effect of stock options will be excluded in the
determination of "basic earnings per share" and only included in
"diluted earnings per share." The impact of SFAS No. 128 on the
calculation of actual and pro forma earnings per share for the
three and six month periods ended June 30, 1997 and 1996 is not
expected to be material.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Sunquest Information Systems, Inc. designs, develops,
markets, installs and supports health care information systems
("HCISs") for large and mid-sized hospitals, clinics and other
facilities, including integrated delivery networks. Total
revenues are derived from the licensing of software, the
provision of value-added services and the sale of related
hardware.
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. The results of operations of Antrim have been
included in the Company's financial statements since the date of
acquisition.
The results of operations for the three and six months ended
June 30, 1997 are not necessarily indicative of the results that
may be expected for any other interim period or for the full year
ending December 31, 1997.
Results of Operations
- ---------------------
Comparison of Three Months Ended June 30, 1997 and June 30, 1996
Revenues. The Company's total revenues were $28.0 million
for the three months ended June 30, 1997 compared to $19.9
million for the three months ended June 30, 1996, an increase of
$8.1 million, or 40.4%. Revenues from system sales were $14.4
million for the three months ended June 30, 1997 compared to
$11.4 million for the three months ended June 30, 1996, an
increase of $3.0 million, or 26.4%. This increase was primarily
attributable to an increase in installations of hardware to
existing customers, the addition of Antrim and increases in
installations of software and hardware to new customers.
Revenues from support and service were $13.5 million for the
three months ended June 30, 1997 compared to $8.5 million for the
three months ended June 30, 1996, an increase of $5.0 million, or
59.3%. This increase was primarily attributable to the addition
of Antrim, the Company's increased installed customer base and
custom services for existing customers.
At June 30, 1997, the Company had a total contract backlog
of $85.2 million, which consisted of $37.3 million of system
sales and $47.9 million of support and service. The Company's
total contract backlog at March 31, 1997, was $82.2 million,
which consisted of $37.0 million of system sales and $45.2
million of support and service. At June 30, 1996, total contract
backlog was $71.7 million, which consisted of $35.7 million of
system sales and $36.0 million of support and service.
Cost of System Sales. Cost of system sales was $7.8 million
for the three months ended June 30, 1997 compared to $4.9 million
for the three months ended June 30, 1996, an increase of $2.9
million, or 59.1%. This increase was primarily attributable to
increases in hardware and operating system deliveries, the
addition of Antrim and increased amortization of previously
9
<PAGE>
capitalized software development costs. Amortization of
previously capitalized software development costs was $932,000
for the three months ended June 30, 1997 compared to $531,000 for
the three months ended June 30, 1996, an increase of $401,000, or
75.5%.
Client Services. Client services expenses were $7.3 million
for the three months ended June 30, 1997 compared to $4.3 million
for the three months ended June 30, 1996, an increase of $3.0
million, or 69.0%. This increase was primarily attributable to
the addition of Antrim and additional staff dedicated to the
installation and support of the Company's systems.
Research and Development. Research and development expenses
were $2.6 million for the three months ended June 30, 1997
compared to $2.4 million for the three months ended June 30,
1996, an increase of $201,000, or 8.5%. This increase in
research and development expenses was primarily attributable to
additional staff dedicated to the evaluation of new technologies
for future development and a new release of the Company's
laboratory information system product. The Company capitalized
$1.3 million of its software development costs for the three
months ended June 30, 1997 compared to $684,000 for the three
months ended June 30, 1996, an increase of 624,000, or 91.2%.
This increase in capitalized software development costs was
primarily attributable to Antrim.
Sales and Marketing. Sales and marketing expenses were $3.7
million for the three months ended June 30, 1997 compared to $2.7
million for the three months ended June 30, 1996, an increase of
$943,000, or 34.4%. This increase was primarily attributable to
additional sales management staff, additional sales staff
dedicated to sales of the Company's clinical repository systems
and consulting services, the addition of Antrim, increased
commissions resulting from growth in sales bookings in the
comparable three month periods and increased advertising expense
related to the marketing of the Company's products.
General and Administrative. General and administrative
expenses were $3.1 million in the three months ended June 30,
1997 compared to $2.1 million in the three months ended June 30,
1996, an increase of $937,000, or 44.2%. This increase was
primarily attributable to the addition of Antrim, increased
depreciation expense resulting from additions of property and
equipment, additional staff, increased professional services
costs and other expenses related to the Company's public status
and maintenance expense related to the Company's new financial
systems.
For the three months ended June 30, 1997, the Company
incurred transition costs of $564,000 which were charged against
accruals established at the time of the Antrim acquisition.
These costs were primarily associated with replacing certain
Antrim software products with Sunquest products.
Comparison of Six Months Ended June 30, 1997 and June 30, 1996
Revenues. The Company's total revenues were $52.6 million
for the six months ended June 30, 1997 compared to $36.6 million
for the six months ended June 30, 1996, an increase of $15.9
million, or 43.5%. Revenues from system sales were $27.3 million
for the six months
10
<PAGE>
ended June 30, 1997 compared to $20.0 million for the six months
ended June 30, 1996, an increase of $7.3 million, or 36.4%. This
increase was primarily attributable to an increase in
installations of hardware to existing and new customers, the
addition of Antrim and an increase in installations of software
to new customers. Revenues from support and service were $25.3
million for the six months ended June 30, 1997 compared to $16.7
million for the six months ended June 30, 1996, an increase of
$8.7 million, or 52.1%. This increase was primarily attributable
to the addition of Antrim, the Company's increased installed
customer base and custom services for existing customers.
Cost of System Sales. Cost of system sales was $14.2
million for the six months ended June 30, 1997 compared to $8.5
million for the six months ended June 30, 1996, an increase of
$5.6 million, or 65.9%. This increase was primarily attributable
to increases in hardware and operating system deliveries, the
addition of Antrim and increased amortization of previously
capitalized software development costs. Amortization of
previously capitalized software development costs was $1.8
million for the six months ended June 30, 1997 compared to $1.1
million for the six months ended June 30, 1996, an increase of
$745,000, or 70.2%.
Client Services. Client services expenses were $13.4
million for the six months ended June 30, 1997 compared to $9.0
million for the six months ended June 30, 1996, an increase of
$4.4 million, or 49.3%. This increase was primarily attributable
to the addition of Antrim and additional staff dedicated to the
support and installation of the Company's systems.
Research and Development. Research and development expenses
were $5.9 million for the six months ended June 30, 1997 compared
to $4.7 million for the six months ended June 30, 1996, an
increase of $1.1 million, or 23.7%. This increase in research
and development expenses was primarily attributable to additional
staff dedicated to the evaluation of new technologies for future
development, a new release of the Company's laboratory
information system product and enhancements to the managed care
system. The Company capitalized $2.0 million of its software
development costs for the six months ended June 30, 1997 compared
to $1.5 million for the six months ended June 30, 1996, an
increase of $514,000, or 34.7%. This increase in capitalized
software development costs was primarily attributable to Antrim.
Sales and Marketing. Sales and marketing expenses were $6.9
million for the six months ended June 30, 1997 compared to $5.1
million for the six months ended June 30, 1996, an increase of
$1.7 million, or 33.5%. This increase was primarily attributable
to the addition of Antrim, additional sales management staff,
additional sales staff dedicated to sales of the Company's
clinical repository systems and consulting services, increased
advertising expense related to the marketing of the Company's
products and additional marketing staff.
General and Administrative. General and administrative
expenses were $6.5 million in the six months ended June 30, 1997
compared to $4.1 million in the six months ended June 30, 1996,
an increase of $2.4 million, or 59.7%. This increase was
primarily attributable to the addition of Antrim, increased
depreciation expense resulting from additions of property and equipment,
11
<PAGE>
additional staff, increased professional services costs and other
expenses related to the Company's public status and maintenance
expense associated with the Company's new financial systems.
For the six months ended June 30, 1997, the Company incurred
transition costs of $1.0 million which were charged against
accruals established at the time of the Antrim acquisition. These
costs were primarily associated with replacing certain Antrim
software products with Sunquest products, employee costs and
professional services related to the acquisition.
Liquidity and Capital Resources
- -------------------------------
Cash used in operating activities was $4.0 million for the
six months ended June 30, 1997 compared to $6.3 million provided
by operating activities for the six months ended June 30, 1996.
This $10.3 million differential was primarily due to the increase
in net trade receivables.
As of June 30, 1997, the Company had net trade receivables
of $41.8 million which consisted of $27.7 million in net billed
trade receivables and $14.1 million in unbilled trade
receivables. At December 31, 1996, the Company had net trade
receivables of $30.3 million which consisted of $25.1 million in
net billed trade receivables and $5.2 million in unbilled trade
receivables. Net trade receivables have increased by $11.5
million since December 31, 1996, with $8.9 million related to the
unbilled portion. The unbilled receivables represent revenue
that has been recognized in accordance with the percentage-of-
completion accounting method, but which has not yet been billed
to customers. The Company believes that this increase in
unbilled receivables is primarily a result of the timing of
system sales and installations in the period. These unbilled
receivables will be billed and collected in accordance with their
terms, subject to the Company's allowance for doubtful accounts.
The Company maintains an allowance for doubtful accounts that it
believes is adequate to cover potential credit losses. The
average collection period on net billed trade receivables was 79
days at June 30, 1997 compared to 77 days at December 31, 1996.
This increase in average collection period is primarily the
result of resource restraints in collections staffing.
Cash used in investing activities was $6.5 million for the
six months ended June 30, 1997. Purchases of property and
equipment totaled $3.5 million. Of this amount, $1.8 million was
used by the Company on February 21, 1997 to purchase land and a
building located in Tucson, Arizona, that will be used for
customer-related activities. The remaining $1.7 million was used
primarily for computers and computer-related equipment and office
equipment. Capitalized software development costs totaled $3.0
million. Of this amount, $1.0 million was related to the initial
payment under the Value Added Reseller ("VAR") agreement of
February 7, 1997 with Dynamic Healthcare Technologies, Inc.
("Dynamic") for the license of a software program known as CoPath
Client/Server ("CoPath"). CoPath is a computer clinical
information system used in surgical pathology, cytology and
autopsy. Pursuant to the terms of this agreement, the remaining
balance of $2.0 million is expected to be paid by the Company
over the next two years.
12
<PAGE>
Cash used in financing activities was $4.1 million for the
six months ended June 30, 1997. Of this amount, $3.6 million
was used to pay the "Second S Corporation Distribution" on May
14, 1997 and $613,000 was used for principal payments on debt and
capital leases. These amounts were partially offset by the
issuance of 9,192 shares of the Company's Common Stock for
approximately $92,000 under the Employee Stock Purchase Plan.
At June 30, 1997, cash and cash equivalents were $17.1
million, and working capital was $40.3 million. At December 31,
1996, cash and cash equivalents were $31.9 million, and working
capital was $39.1 million.
The Company has 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 are
due September 30, 1997 except for any amounts outstanding under
stand-by letters of credit which have a maximum maturity of 365
days. Approximately $204,000 of the line of credit is used to
secure a letter of credit and is not available for immediate
expenditure. There were no borrowings outstanding as of June 30,
1997.
Other than the $2.0 million related to the VAR agreement
with Dynamic, the Company currently has no significant
commitments for capital expenditures; however, the Company
continues to be actively involved in identifying and evaluating
potential acquisitions which may result in capital expenditures.
Management believes that existing cash and cash equivalents
together with funds generated from operations will be sufficient
to meet operating requirements for at least the next twelve
months.
Forward-Looking Statements
- --------------------------
This report, and other reports and communications to
shareholders, may contain forward-looking statements with
respect to, among other things, the market for the Company's
products, the Company's future revenues and prospects, and
certain plans and objectives of the Company's management. The
following are certain factors that may cause the Company's actual
results to vary materially from those which are the subject of
any such forward-looking statements.
13
<PAGE>
Material Factors
Dependence on Single Product. To date, the Company has
derived substantially all of its revenues from sales of
laboratory information systems ("LISs") and related
implementation support services. The Company expects that it
will continue to derive a significant portion of its total
revenues for the foreseeable future from sales of LISs and
related implementation and support services. Accordingly, market
factors adversely affecting sales of LISs could have a material
adverse effect on the Company's business and results of
operations. Such factors include, but are not limited to,
consolidation among the Company's customers, changes in the
criteria used by such customers in making purchase decisions, and
competitive pricing pressures. The Company's target market for
its LISs, consisting primarily of large and mid-sized hospitals,
is characterized by a high degree of consolidation resulting in
fewer purchasing decisions at a higher dollar value, a trend that
may favor larger vendors with greater numbers of hospitals
currently under contract. There can be no assurance that the
Company will continue to be the vendor of choice as newly
consolidated customers replace legacy systems. In addition,
changes in the criteria used in making purchasing decisions such
as a shift from purchasing best-of-fit systems to purchasing
single vendor, hospital-wide systems may have a material adverse
effect on the Company's ability to attract new customers.
Competitive pressures or other factors, including the Company's
efforts to expand its LIS offerings to new markets, may result in
significant price decreases that could have a material adverse
effect on the Company's business and results of operations.
There can be no assurance that the Company will be able to
sustain or increase the level of revenues from sales of its LISs
on an annual or quarterly basis.
Rapid Technological Change and Dependence on New Product
Development, Enhancement and Acceptance. The HCIS market is
characterized by rapid technological advances, frequent new
product introductions and evolving industry standards that are
outside the control of the Company. The development and sale of
additional applications is a principal means of competition in
the HCIS market. Advances in both hardware and software
technology, including the introduction of new hardware platforms,
new programming languages and new software applications, will
require the Company to make significant ongoing expenditures for
research and development in order to adapt the Company's existing
and subsequently introduced HCISs to such new technologies and to
take advantage of the benefits they offer. For the foreseeable
future, the Company intends to continue to devote substantial
financial, managerial and personnel resources to its product
development efforts. The development of new and enhanced HCISs
is a complex and uncertain process requiring high levels of
innovation and the accurate anticipation of technological and
market trends, and from time to time the Company has experienced
delays in introducing new HCISs and HCIS enhancements. The
Company intends to complete its migration of products and clients
to Windows-based and year 2000 compliant software. The inability
to accomplish this development or any significant delay in such
development may have an adverse effect on the Company's business
and results of operations. The failure of the Company to develop
and introduce new HCISs and HCIS enhancements successfully or the
failure to respond effectively to technological changes could
have a material adverse effect on the Company's business and
results of operations.
14
<PAGE>
Dependence on Successful Introduction of Clinical Repository
Systems. The Company's long-term growth may depend to a
significant degree upon its ability to enhance the functionality
of, and successfully market, its suite of clinical repository
systems ("CRSs"). To date, the Company has sold three systems.
The Company's CRSs are in production use at the Company's first
two sites, and implementation is underway at a third site in the
United Kingdom. The Company is currently developing additional
modules for its CRSs and is also investigating the possible
acquisition of additional modules developed by third parties for
its CRSs. There can be no assurance that the Company will be
successful in completing the development or acquisition of
additional modules or that such development or acquisitions will
be completed in a timely manner. The market for clinical
repository products is in an early stage, and a significant
number of vendors are currently offering or developing
competitive versions of CRSs. These vendors include not only
existing clinical information system suppliers, but other vendors
throughout the HCIS industry. Any significant delay in the
scheduled availability of the Company's CRSs could have a
material adverse effect on the Company's ability to compete
successfully in the emerging clinical repository marketplace.
Moreover, there is a wide variation in the approach and
functionality of CRSs currently being offered or developed by
vendors, and no assurance can be given that the Company's CRSs,
if successfully developed, will achieve and maintain marketplace
acceptance. If the Company's CRSs are not developed
substantially on schedule, do not perform substantially as
expected or are not accepted in the marketplace, the Company's
ability to maintain long-term growth may be materially adversely
affected.
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 HCISs offered
by the Company and its competitors. The Company believes that
the principal competitive factors influencing the market for its
HCISs include vendor and product reputation, product
architecture, functionality and features, ease of use, rapidity
of implementation, quality of client support, product performance
and price. There can be no assurance that the Company will be
able to compete successfully with respect to any of such factors.
In addition, 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 new products more rapidly than the Company or 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. 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.
Significant Fluctuations in Quarterly Operating Results;
Revenue Recognition Policy. The Company's quarterly revenues and
results of operations have varied significantly as a result of a
number of factors, including (i) the volume and timing of systems
sales and installations; (ii) the timing of client acceptances;
(iii) the length and complexity of the systems sales and
installation cycles; (iv) seasonal buying trends as a result of
clients' annual purchasing and
15
<PAGE>
budgeting practices; and (v) the Company's sales commission
practices. The Company expects that these variations will
continue for the foreseeable future. The Company recognizes
revenues from the software portion of system sales on a
percentage-of-completion method based upon completion of
specified milestones (which are determined based upon actual
hours incurred related to total estimated installation hours).
As a result, the timing of revenue recognition varies
considerably and could be impeded by a number of factors,
including availability of Company personnel, the Company's need
to allocate system installation resources to other installations
or to research and development activities, availability of client
personnel and other resources, and complexity of the clients'
needs and delays imposed by clients. Any trend of delays in
progress toward completing a material system installation or a
number of smaller installations could reduce the revenues
recognized in any given period and could have a material adverse
effect on the Company's business and results of operations.
Because a significant percentage of the Company's expenses,
particularly employee compensation, is relatively fixed,
variations in the timing of system sales and installations can
cause significant variations in operating results from quarter to
quarter. If total revenues are below expectations in any period,
the Company's inability to adjust spending to compensate fully
for the lower revenues may magnify the adverse effect of such a
shortfall on the Company's results of operations. Accordingly,
the Company believes that period-to-period comparisons of revenue
and results of operations are not necessarily meaningful and
should not be relied upon as indicators of future performance.
Risks Associated with Identifying and Integrating
Acquisitions. The Company intends to continue to grow through
the acquisition of complementary products, technologies or
businesses in the HCIS industry. The Company's management has
limited experience in identifying appropriate acquisitions and in
integrating products, technologies and businesses into its
operations. The evaluation, negotiation and integration of any
such acquisition may divert the time, attention and resources of
the Company, particularly its management. There can be no
assurance that the Company will be able to integrate successfully
any acquired products, technologies or businesses into its
operations. In addition, there is significant competition for
acquisition opportunities in the HCIS industry. Consolidation in
the industry may intensify such competition and thereby increase
the costs of such acquisition opportunities. The failure to
compete successfully for strategic acquisition opportunities or
to integrate successfully any acquired products, technologies or
businesses could have a material adverse effect on the Company.
Dependence on Key Personnel; Management of Changing
Business. The Company's future success depends to a significant
extent upon Dr. Sidney A. Goldblatt, the President and Chief
Executive Officer of the Company, the Company's other executive
officers, and certain other managerial, technical and marketing
personnel. Dr. Goldblatt, 62, is a co-founder of the Company and
has served as the principal executive officer of the Company
since 1986. The loss of the services of Dr. Goldblatt or other
key personnel could have a material adverse effect on the
Company's business and results of operations. The Company's
ability to manage growth will require it to continue to attract,
motivate and retain highly skilled managerial, technical and
marketing personnel. Competition for such personnel is intense,
and there can be no assurance that the Company will be successful
in attracting, motivating and retaining the personnel required to
maintain and improve its business and results of operations.
16
<PAGE>
Regulation. The Company expects that the United States Food
and Drug Administration ("FDA") is likely to become increasingly
active in regulating computer software that is intended for use
in health care settings. In March 1994, the FDA issued a letter
advising that the FDA considers medical devices to include
software products intended 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. The FDA can impose
extensive requirements governing pre- and post market conditions
such as device investigation, approval, labeling and
manufacturing. Compliance with these new requirements and any
future requirements imposed by the FDA could be costly and could
delay or preclude the introduction of certain new products. The
Company is unable to determine at this time the effect, if any,
that these requirements may have on its business.
Antrim, a wholly owned subsidiary of the Company located in
Plano, Texas, 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. The
Company, working through the FDA's Dallas District Office, has
proposed to sunset the Antrim blood bank product and to replace
it with the Company's blood bank software in lieu of expending
time and resources to bring the Antrim product into substantial
GMP compliance. The Company is currently awaiting a decision by
the Center for Biologics, Evaluation, and Research in Washington,
D.C. as to the acceptability of this proposal. In addition, the
Department of Health of the State of Texas (the "DOH") imposes
certain licensing requirements and other standards on certain
distributors and manufacturers of certain medical devices located
within Texas, such as Antrim. Antrim has filed the required
license application with the DOH. The DOH is authorized to
impose substantial penalties for non-compliance with its
regulations.
The health care industry is subject to changing political,
economic and regulatory influences that may affect 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. This 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.
Such regulatory changes, if adopted, and the reaction of health
care providers to such changes may have a material adverse
effect on the Company's business and results of operations.
17
<PAGE>
Dependence on Proprietary Rights. The Company's future
success depends in large part upon its ability to protect its
technology and proprietary rights. The Company relies on a
combination of patent, copyright, trade secret and trademark laws
and contractual restrictions to establish and protect its
proprietary rights, although the laws of certain foreign
countries in which the Company licenses or may license its
products may not protect the Company's proprietary rights to the
same extent as do laws in the United States. It 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. There can be no assurance that others will not
assert claims or commence litigation with respect to the
Company's current or future HCISs. In any such event, the
Company may be required to engage in protracted and costly
litigation, regardless of the merits of such claims; discontinue
the use of certain software codes, processes or trademarks;
cease to manufacture, use and license infringing products;
develop non-infringing technology; or enter into license
arrangements with respect to the disputed intellectual property.
There can be no assurance that the Company would be able to
develop alternative technology or that any necessary licenses
would be available or that, if available, such licenses could be
obtained on commercially reasonable terms. Responding to and
defending any of these claims could distract the attention of
management and have a material adverse effect on the Company's
business and results of operations.
Product Liability. The Company's systems include
applications that may relate to confidential patient medical
histories and treatment plans. Improper disclosure of this
information or any failure by the Company's systems to provide
accurate and timely information could result in claims against
the Company by its clients or their patients. A successful claim
brought against the Company in excess of its insurance coverage
could have a material adverse effect on the Company's business or
results of operations, and even unsuccessful claims could result
in the expenditure of substantial funds in litigation and the
diversion of management time and resources. There can be no
assurance that the Company will not be subject to such claims in
the future, that such claims will not result in liability in
excess of any insurance coverage maintained by the Company with
respect to such claims, that insurance will cover such claims or
that appropriate insurance will continue to be available to the
Company at commercially reasonable rates.
Volatility of Stock Price. In recent years, the stock
market in general, and the shares of software technology
companies in particular, have experienced extreme price
fluctuations that are often unrelated to the operating
performance of such companies. The Company has experienced
fluctuations in its stock price related to these general market
fluctuations and to such operating factors as quarterly
fluctuations in its revenues or results of operations, general
conditions in the information technology services industry and
announcements of new products or services by the Company or its
competitors. These fluctuations may adversely affect the future
market price of the Company's Common Stock.
18
<PAGE>
Control by Current Shareholders; Payments upon Change in
Control. As of the date of this Report, Dr. Sidney A. Goldblatt;
Bradley L. Goldblatt, Dr. Goldblatt and Nina M. Dmetruk, the
Executive Vice President, Chief Financial Officer and Secretary
of the Company, as trustees for the benefit of Bradley L.
Goldblatt; Bradley L. Goldblatt, Dr. Goldblatt and Ms. Dmetruk,
as trustees for the benefit of Curtis S. Goldblatt; and Jodi Beth
Gottlieb, Dr. Goldblatt and Ms. Dmetruk, as trustees for the
benefit of Jodi Beth Gottlieb (such trusts being collectively
referred to herein as the "Trusts") own approximately 77.4% of
the outstanding Common Stock. As a result, these shareholders,
if acting in concert, will be able to elect or remove the entire
Board of Directors and control the outcomes of all other issues
submitted to the Company's shareholders for approval. This
concentration of ownership may enable Dr. Goldblatt and the
Trusts to cause or prevent change in control of the Company
without the approval of other shareholders. There can be no
assurance that this concentration of ownership will not have a
material adverse effect on the market price of the Common Stock.
In the event that Dr. Goldblatt, his three children and trusts
created in their benefit (including the Trusts) cease to own,
directly or indirectly, fifty percent or more of the outstanding
stock of the Company, Ms. Dmetruk will be entitled to elect,
during the ninety days following such event, to terminate her
employment with the Company and receive $1.2 million in severance
pay.
Effect of Certain Statutory Anti-Takeover Provisions. The
Company is subject to certain anti-takeover provisions of the
Pennsylvania Business Corporation Law. Under these provisions,
certain transactions with an "interested shareholder" must be
approved by a majority of votes that all shareholders, other than
the interested shareholder, are entitled to cast, and if any
person or group acquires 20% or more of the voting power of the
Company, with certain exceptions, the remaining shareholders may
elect to sell their shares to such person or group for the fair
value of the shares, including a proportionate amount of any
control premium. In addition, there are special requirements for
business combinations between the Company and interested
shareholders, certain restrictions on the voting of shares by
persons who acquire 20% or more of the voting power of the
Company, and requirements for the disgorgement of profits in
certain circumstances. These provisions may have the effect of
deterring hostile takeovers or delaying or preventing changes in
control or management of the Company, including transactions in
which shareholders might otherwise receive a premium for their
shares over the current market prices.
Transactions with Affiliates. The Company has historically
engaged in transactions with affiliates, including Dr. Sidney A.
Goldblatt, the President and Chief Executive Officer of the
Company, the Trusts and certain affiliates of the Trusts.
Although the Company took precautions to achieve results which
the Company believes were equivalent to arm's-length
transactions, there can be no assurance that actual results will
be as favorable to the Company as arm's-length transactions. In
May 1996, the Company adopted a policy that all future
transactions between the Company and its officers, directors,
principal shareholders and their affiliates shall be on terms no
less favorable to the Company than could be obtained by the
Company from unrelated third parties, and shall be approved by a
majority of the outside independent and disinterested directors.
This policy does not apply to transactions entered into before
the adoption of the policy or to renewals of existing
transactions on similar terms.
19
<PAGE>
Foreign Sales. Although the Company intends to increase
sales of its systems and services to clients located outside the
United States, such sales have historically accounted for less
than ten percent of the Company's total revenues. The Company's
operations outside the United States are subject to the risks
that agreements may be more difficult to enforce and receivables
more difficult to collect through a foreign country's legal
system; foreign customers often have longer payment cycles;
foreign countries could make unexpected changes in regulatory
requirements or be the subject of significant political and
economic instability; foreign subsidiaries, distributors and
sales representatives may be difficult to manage; foreign
countries could impose additional withholding taxes or otherwise
tax the Company's foreign income, impose tariffs or adopt other
restrictions on foreign trade; and intellectual property rights
may be more difficult to enforce in foreign countries. There can
be no assurance that any of these factors will not have a
material adverse effect on the Company's future international
sales and, consequently, on the Company's business, financial
condition and results of operations. In addition, exchange rate
fluctuations may render the Company's products less competitive
relative to local product offerings, or could result in foreign
exchange losses, depending upon the currency in which the Company
sells its products. To date, the Company has not engaged in
exchange rate hedging activities to minimize the risks of such
fluctuations. The Company may seek to implement hedging
techniques in the future with respect to its foreign currency
transactions. There can be no assurance, however, that the
Company will be successful in such hedging activities.
No Dividends Contemplated. The Company does not anticipate
that it will pay any dividends on its Common Stock in the
foreseeable future. The Company currently intends to retain
earnings, if any, to fund the development and growth of its
business. The Company has a bank line of credit agreement and a
mortgage guarantee that prohibit the payment of any capital
distributions or dividends.
20
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
Not Applicable.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
(a.) The Company held its Annual Meeting of
Shareholders on May 14, 1997. Of the 15,362,587
shares of Common Stock entitled to vote, 14,901,600
shares were represented in person or by proxy at the
meeting. There were no broker non-votes.
(b.) Not applicable, pursuant to Instruction 3 to Item
4 of this Form 10-Q.
(c.) A description of the matters voted upon at the
meeting along with an indication of the results of
the votes on such matters are set forth below:
1. Directors who were elected at the Annual
Meeting of Shareholders to serve for a term of one
year and until their respective successors are
elected and qualified:
For Withheld
---------- --------
Sidney A. Goldblatt 14,899,352 2,248
Nina M. Dmetruk 14,899,382 2,218
Bradley L. Goldblatt 14,899,265 2,335
Stanley J. Lehman 14,899,500 2,100
Richard W. Barker 14,899,500 2,100
2. The ratification of the appointment of Ernst &
Young LLP as the Company's independent auditors
for the year 1997. There were 14,898,735 votes in
favor, 2,723 votes against and 142 shares
abstaining. Accordingly, the appointment of Ernst
& Young LLP was ratified.
Item 5. Other Information
None.
21
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
27D - Financial Data Schedule, filed herewith.
99A - Condensed Consolidated Statements of Income
for the Twelve Month Periods Ended June 30,
1997 and 1996, filed herewith.
(b.) Reports on Form 8-K
No reports on Form 8-K were filed by the Company
during the quarter ended June 30, 1997.
22
<PAGE>
SIGNATURES
Pursuant to the requirement 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.
SUNQUEST INFORMATION SYSTEMS, INC.
(Registrant)
Date: August 13, 1997 By: /s/ Nina M. Dmetruk
____________________________________________
Nina M. Dmetruk
Executive Vice President and Chief Financial
Officer
(Principal Financial and Accounting Officer)
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 17133
<SECURITIES> 0
<RECEIVABLES> 43756
<ALLOWANCES> 1965
<INVENTORY> 491
<CURRENT-ASSETS> 64968
<PP&E> 19312
<DEPRECIATION> 7943
<TOTAL-ASSETS> 96092
<CURRENT-LIABILITIES> 24626
<BONDS> 0
0
0
<COMMON> 50432
<OTHER-SE> 10034
<TOTAL-LIABILITY-AND-EQUITY> 96092
<SALES> 52587
<TOTAL-REVENUES> 52587
<CGS> 14155
<TOTAL-COSTS> 27577
<OTHER-EXPENSES> 5866
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 625
<INCOME-PRETAX> 5875
<INCOME-TAX> 2452
<INCOME-CONTINUING> 3423
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3423
<EPS-PRIMARY> .22
<EPS-DILUTED> .22
</TABLE>
<PAGE>
Exhibit 99A
Sunquest Information Systems, Inc.
Condensed Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Twelve Months Ended
June 30,
-------------------
1997 1996
--------- ---------
<S> <C> <C>
Revenues:
System sales $52,334 $37,646
Support and service 44,610 31,805
------- -------
Total revenues 96,944 69,451
------- -------
Operating expenses:
Cost of system sales 25,681 16,084
Client services 22,833 17,748
Research and development 11,112 9,342
Sales and marketing 12,618 9,660
General and administrative 12,177 7,488
Write-off of acquired,
in-process technology <F1> 3,252 -
------- -------
Total operating expenses 87,673 60,322
------- -------
Operating income 9,271 9,129
Other income (expense):
Interest income 1,654 532
Interest expense (1,281) (1,480)
Other (345) 390
------- -------
Income before income taxes 9,299 8,571
Income tax provision:
Current year operations 4,730 543
Change in tax status - 1,122
------- -------
Net income $4,569 $6,906
======= =======
Earnings per share determination:
Historical income before income
taxes $9,299 $8,571
Income tax provision:
Actual 4,730 -
Pro forma - 3,685
------- -------
Applicable net income $4,569 $4,886
======= =======
Weighted-average shares outstanding 15,361 12,192
======= =======
Net income per share:
Actual $0.30 -
======= =======
Pro forma - $0.40
======= =======
<FN>
<F1> In conjunction with the Antrim Corporation acquisition, the
Company charged operations $3.3 million for acquired, in-process
technology, which reduced net income per common share for the
twelve months ended June 30, 1997 by $.21.
</FN>
</TABLE>
