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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, 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 85711-3609
(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
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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 20, 1998, the registrant had 15,375,962 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 20, 1998 as
reported by Nasdaq, was $38,159,924 (calculated by excluding
shares owned beneficially by directors, executive officers and
other affiliates as a group from total shares outstanding
solely for the purpose of this response).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for
1997 are incorporated by reference into Parts II and IV of
this Form 10-K.
Portions of the registrant's Proxy Statement for the 1998
Annual Meeting of Shareholders are incorporated by reference
into Part III of this Form 10-K.
Except as specifically incorporated by reference herein, the
Annual Report to Shareholders for 1997 and the Proxy Statement
are not to be deemed filed as part of this Annual Report on
Form 10-K.
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SUNQUEST INFORMATION SYSTEMS, INC.
Form 10-K - 1997
TABLE OF CONTENTS
Page
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PART I
Item 1 - Business
General 1
Recent Developments 1
Products 2
Third-Party Marketing Arrangements 8
Products Under Development 9
Year 2000 Compliance 10
Client Services 11
Marketing 12
Technology 12
Research and Development 13
Competition 13
Proprietary Rights 14
System Acquisition Agreements 14
Backlog 15
Employees 15
Forward-Looking Statements 15
Executive Officers of the Registrant 22
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 25
Item 6 - Selected Financial Data 26
Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of
Operations 26
Item 7A - Quantitative and Qualitative Disclosures
about Market Risk 26
Item 8 - Financial Statements and Supplementary
Data 26
Item 9 - Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure 26
PART III
Item 10 - Directors and Executive Officers of the
Registrant 27
Item 11 - Executive Compensation 27
Item 12 - Security Ownership of Certain Beneficial
Owners and Management 27
Item 13 - Certain Relationships and Related
Transactions 27
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. 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. In 1991, the Company also began marketing FlexiRad, a
radiology information system. Sunquest became a public
company on June 10, 1996, when it closed its initial public
offering of Common Stock. With the purchase of Antrim
Corporation ("Antrim") on November 26, 1996, the Company
acquired a presence in the commercial and medical reference
laboratory market. In August 1997, Sunquest purchased certain
inpatient pharmacy software systems, and in November 1997,
entered into a software license agreement for an outpatient
pharmacy system. See "Recent Developments." As of December
31, 1997, Sunquest had an installed customer base of more than
1,060 sites, including 135 of the world's largest IDNs, in the
United States, Canada, Europe, Mexico and Saudi Arabia.
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)
patient care processes across multiple delivery sites; (ii)
the appropriateness of diagnoses, treatments and resource
utilizations; (iii) provider performance and clinical
outcomes; and (iv) commercial and medical reference laboratory
processing and business practices. Significant market
opportunities exist for HCIS vendors offering open systems
architecture that allows interoperability with legacy systems
and solutions from other leading vendors. These systems
permit IDNs to select and integrate information systems by
either retaining existing legacy systems or selecting from an
array of new and existing systems from different vendors.
Sunquest now offers four suites of health care information
systems in addition to its stand-alone product offerings.
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 in
IBM's Open Healthcare Alliance.
Recent Developments
On August 29, 1997, MSC Acquisition, Inc., a newly formed
subsidiary of the Company, purchased certain inpatient
pharmacy software systems comprising the PreciseCare
Medication Management System ("PreciseCare") from Medintell
Systems Corporation ("Medintell"), for $1.4 million in cash
and the assumption of certain obligations and transition
costs. MSC Acquisition, Inc. was subsequently renamed
"Sunquest Pharmacy Information Systems, Inc." ("Sunquest
Pharmacy") and the product was renamed "FlexiMed." The
addition of pharmacy systems is an important component in the
Company's strategy to be a
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"best-of-suite vendor" in enterprise clinical departmental systems.
In conjunction with the purchase of the PreciseCare software, the Company
charged operations $1.3 million for acquired, in-process technology.
The after-tax effect of this charge to operations was to
reduce net income by $1.1 million, or $.07 per share. In
addition, the Company and ValueRx Inc., an affiliate of
Medintell, have entered into a marketing arrangement with
respect to PreciseCare.
On November 26, 1997, Sunquest Pharmacy entered into a
Software License Agreement ("Agreement") with MEDITrust
Healthcare Services, Inc. ("Meditrust") for an outpatient
pharmacy system for $750,000 in cash. The Agreement grants
the Company a perpetual, fully paid-up, worldwide, non-
exclusive license to modify, interface, market, sublicense,
support, copy and otherwise use the software, including the
source code and object code. The Company plans to continue to
develop and to market these pharmacy systems through Sunquest
Pharmacy.
During the third quarter of 1997, the Company reduced the
carrying value of IntelliCare software development costs by
$1.5 million. The adjustment was related to certain modules
incorporated into the Company's IntelliCare suite of products
that had not generated sufficient sales to justify continued
capitalization. During the fourth quarter of 1997, the
Company decided to discontinue the sale of its IntelliCare
suite of products as an enterprise-wide computerized patient
record solution and to discontinue the development of a nurse
clinical documentation system. In connection with the
discontinuation of such products, the Company charged
operations $890,000. The Company plans to refocus its
technology and development efforts on the integration of its
suite of laboratory, radiology and pharmacy information
systems, the Clinical Event Manager rules-based alerts system
and the Laboratory Data Network system for medical laboratory
consortia. The after-tax effect of both the third and fourth
quarter charges to operations was a reduction to net income of
$1.5 million, or $.10 per share.
Products
Sunquest's business strategy is to engineer its products
for the changing health care environment, now characterized by
the emergence of IDNs and a trend to outpatient care delivery.
These large organizations are also adopting the purchasing
strategy used by large manufacturing companies and are
limiting the number of vendors with whom they deal. In
response, Sunquest has adopted a "suite" strategy for sales,
and has clustered its products into logical groupings which
are required by these delivery systems.
Sunquest now offers four suites of health care
information systems in addition to its stand-alone product
offerings: (i) the departmental clinical services suite with
systems that automate the operations of laboratories,
radiology and pharmacy departments within a clinical
environment such as a hospital; (ii) the commercial and
medical reference laboratory suite with systems that automate
the clinical, financial and information support operations of
commercial medical laboratories; (iii) the integration and
connectivity suite with systems that allow Sunquest products
to communicate with other vendors' software and hardware
products; and (iv) the clinical data management suite with
systems that integrate clinical patient care data directly to
the caregiver or clinical department.
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Departmental Clinical Services Systems
Departmental systems for the laboratory were the first
products developed by Sunquest, and were followed by the
addition of radiology and pharmacy systems. This suite of
systems now automates the information needed to manage the
workflow and information needs of laboratory, radiology and
pharmacy departments in one or more facilities. These systems
provide automation services specific to the needs of the
department and capture information for use by physicians
and other caregivers. In addition to the departmental
clinical suite, each product comprising the suite is
individually available as a specific solution.
Clinical 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.
The Clinical Laboratory module is the core of the
FlexiLab system and manages the processes of the high
volume test 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, using client server architecture,
to its Clinical 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 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 Commercial Outreach module enables the hospital
laboratory to expand beyond the traditional acute care
needs of an IDN. Automated results reporting to remote
physician offices, rapid order entry, and customer
service enhancements 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 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.
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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 which is included with Blood Bank automates the
collection procedures and management of blood product
inventories. It also manages and tracks blood donated by
patients for their own use and provides quality controls
to assure compliance with rules of good practice.
The Lab Access Results Workstation module provides easily
accessible and comprehensive on-line processing of data
through defined specimen viewing configurations that are
supported by color-coded Quality Assurance ("QA") result
failures and Quality Control ("QC") specimen groupings.
Specimens may be displayed in a spreadsheet format, with
failures indicated through color changes in the displayed
results, or individually. Individual specimens or
batches of specimen tests results may be released to the
patient file at any time. On-line results entry and
assessment allow data to be viewed for either a single
analyzer or for multiple analyzers that run similar or
dissimilar tests. A user-defined, auto-verification
process tags normal results for release and suspect
results for closer review.
The Flexi-3R module provides redundancy and high systems
availability within the LIS. Flexi-3R provides a
secondary database that allows high volume printing of
management and patient reports. Queries can be made into
this database without affecting the response time of the
primary database.
The Anatomic Pathology module is designed to manage
specimens and reports, including reports for surgical
pathology and cytology. The main features of this module
are the archiving and retrieving of patient records. For
example, the pathologist, while examining specimens, can
automatically retrieve historic specimen results
including previous tissue diagnoses, thereby improving
the timeliness and quality of patient care. The module
supports special cytology reports, such as pap smear
reports. The Company is no longer actively marketing and
selling this product but continues to support those sites
that are currently using the Anatomic Pathology module.
Radiology Information Systems
Sunquest's FlexiRad system is designed to streamline the
operations of the radiology department and facilitate
orders, intelligent scheduling of both patients and
resources, fee billing, patient tracking, film management
and reporting. Using client server architecture and a
graphical user interface, the FlexiRad product is easy to
use, reducing training time on the system.
FlexiRad offers a full suite of interfaces: admissions,
discharge and transfer ("ADT"), orders, results reporting
and billing. Additional interfaces unique to a Radiology
department and offered by FlexiRad include interfaces to
digital dictation systems (DictaPhone), speech recognition
systems (IBM MedSpeak) and top of the line mammography
products (MRS). These interfaces provide more information
to the FlexiRad system and further reduce the turnaround
time of patient reporting.
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Further integration is provided directly with FlexiLab.
When an exam is being ordered, the radiology user can view
related laboratory results on that patient, helping the
health care provider determine the appropriateness of the
order. On the results side, radiology patient reports can
be correlated with anatomic pathology reports, providing
useful information on necessity for biopsy recommendations.
All information collected by the FlexiRad system can be
viewed by using the relational ad hoc report writer. This
tool allows the user to customize reports. In addition, off-
the-shelf software, such as Microsoft Access or Seagate
Crystal Reports, can be used to write customized reports.
Pharmacy Information Systems
FlexiMed is a patient focused, integrated pharmacy
information system using state-of-the-art client server
technology. This system provides reporting of medication
use across the entire continuum of care and puts the
pharmacy in control of drug therapy and documents through
every step of the medication management process. In
addition, it addresses two of the most pressing needs in
today's health care environment: medication therapy outcomes
and pharmacy cost control.
Some key features of FlexiMed include medication profiling,
order entry and management, clinical consulting and
documentation, dispensing and inventory control, high volume
drug prescription and ad hoc reporting capability.
The acute care functionality has several operational
options: traditional cart exchange, "just-in-time" envelope
fill, automated drug distribution machines, or a hybrid
combination of these.
Outpatient functionality provides the user with high volume
prescription processing and is automated with bar-code
checking. The advanced multi-site capability supports on-
line third-party claims adjudication with billing algorithms
and financial processing that is configurable for site-
specific variations.
FlexiMed incorporates standard clinical alerts such as drug
interaction and allergy alerts, and its configurable
medication management allows the pharmacist the necessary
time to evaluate and act on this advanced clinical
information.
Commercial and Medical Reference Laboratory Systems
Antrim, a wholly owned subsidiary of Sunquest, offers
commercial, reference and outreach laboratory systems for the
medical laboratory marketplace. The Antrim clinical systems
coupled with Antrim financial products provide a complete
solution for laboratory processing, billing processes, and
business practices in the commercial, reference and outreach
laboratory industry.
Clinical Systems
The Answers: General Laboratory is an efficient,
performance-oriented management system that streamlines
and expedites the daily operations within the laboratory.
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Client specific features allow the laboratory to better
serve their client base in a competitive marketplace.
Client specific reporting conveniences, client specific
normals, criticals, and call parameters and client
specific management and statistical reports give
laboratories the tools to compete in the marketplace
while giving them information to more efficiently market
their business. Customer service features including
stat/call lists, courier tracking, client problem
tracking and streamlined inquiry options provide
convenient access to information that is needed to serve
a dynamic client base.
User defined features give the system the flexibility to
be tailored to fit the needs of the individual
laboratory.
The system offers quick and easy requisition entry to
place orders in the most efficient manner. Information
may be entered manually or electronically. Bar-coding is
supported to maximize efficiency and can be used in
conjunction with instrument interfaces. Batching is also
available to facilitate high volume processing.
Patient reports may be faxed, printed on-site, sent
electronically or printed remotely. Automatic report
scheduling with client specific features facilitate
prompt, accurate reporting.
The Answers: Microbiology product is fully integrated
with the Answers: General Laboratory product and features
user-defined workcards on which daily culture
observations and activity can be recorded. Instrument
interfaces and bar-coded plate labels are also available
to increase efficiency. Epidemiology and management
reports provide detail and summary information to be used
in statistical evaluation of the department's activities.
The Answers: Anatomic Pathology product is available for
laboratories providing pathology and cytology service.
The product uses the same flexible ordering, reporting,
and customer service features that have made the Answers:
General Laboratory product successful. Efficient storage
of historical data makes it possible to match large
volumes of patient history records with current work
quickly and efficiently, and the criteria for retention
is user-defined.
Cytology features include batching capabilities,
streamlined results entry screens, and comprehensive
statistical reporting. Pathology supports Systematized
Nomenclature of Medicine ("Snomed") coding, with
accompanying management reports for data analysis. QA
reporting is also available to correlate results and
document any discrepancies detected.
Financial Systems
The Answers: General Ledger application is the core
product of the Antrim Answers: Financial Systems. The
system is designed to provide complete management of
financial information in accordance with the Financial
Accounting Standards Board recommendations for double
entry accounting and is fully integrated with all
components of the Answers: Financial System.
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The Answers: Accounts Receivable/Billing product provides
features that allow efficient billing and collections
processing of laboratory services. This product is used
as an option for the Sunquest FlexiLab, Antrim's Answers:
General Laboratory and non-Sunquest laboratory
information systems. These features include front-end
validations, full inquiry, cash receipts entry, one step
adjustment processing and comprehensive reporting. The
system also has tools that can assist the laboratory in
meeting regulatory compliance requirements of local
carriers.
The Answers: Accounts Payable product provides tools to
efficiently manage the expenditures of the laboratory.
The system offers the ability to evaluate commitments,
print and reconcile checks and produce comprehensive
vendor related management reports.
The Answers: Materials Management product offers the
ability to manage the supplies inventory of the
laboratory. Features include the capability to order,
receive, issue, transfer and report all activity within a
multiple location and/or multiple inventory environment.
The system also allows retail sales of supplies to
laboratory clients, with this activity automatically
transferring to the Answers: Accounts Receivable/Billing
product.
The Answers: Electronic Claims/EDI services provide the
capabilities to electronically transmit and
electronically receive payment and rejection activity.
These capabilities are available for Medicare, Medicaid,
Blue Shield and prominent clearinghouses such as NEIC,
CYDATA and IMS.
Information Support Systems
The Answers: Report Writer application allows the user to
create, design and produce customized reports by
extracting data from the host system. When integrated
with the other Antrim Answers products, it allows data to
be uploaded and downloaded to host files, and is ODBC
enabled, which allows interfacing with other ODBC enabled
applications.
The Answers: Optical Disk Archiving application captures
data from the host system, stores the information on
optical media and retrieves the information on demand.
Optical storage ensures efficient and accurate retention
of data and provides protection necessary for long-term
storage. Data is organized, indexed and cross-referenced
for quick retrieval. Retrieved data can be displayed on-
line, routed to other terminals, printed or transmitted
to other electronic media. Multilevel security features
prevent unauthorized access to archived material.
The Answer: Remote Web Access application allows
physicians and clinicians to view and print patient data
remotely using Web technology on a corporate intranet.
By accessing the general laboratory system through a
standard web browser, the user can view patient results,
print reports, order tests, graph cumulative results and
review the test dictionary.
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Integration and Connectivity
Sunquest estimates that it has installed in its LIS
client base over 9,600 interfaces that were developed for
approximately 510 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, radiology information system or pharmacy
information system. The Company uses a variety of
configuration options to support multi-hospitals and
integrated delivery networks IDNs.
Instrument Interfaces facilitate the linking of clinical
laboratory instruments, utilizing the full communication
capability of each instrument.
Application Interfaces facilitate the linking of third-party
application systems, such as hospital information and
financial systems of other vendors, to Sunquest's
Departmental Clinical Systems. The ability to handle the
complexities of interacting information systems sets
Sunquest apart from other providers.
Clinical Data Management
Sunquest's Clinical Data Management products are designed
to provide integrated clinical patient care data directly to
the caregiver or clinical department either by combining
Sunquest's suite of ancillary systems or through integration
with disparate systems.
The Clinical Event Manager system monitors patient specific
data within a network and immediately alerts health care
providers to significant patient information based on
predetermined rules. Providers simply identify the clinical
rules of interest and the Clinical Event Manager module
notifies them via pager, fax or e-mail of any event
triggered by the rules. Additionally, the system can check
for reminders placed by the health care provider to order
tests at specific intervals. The system also checks for
interdisciplinary events for a given patient such as changes
in vital signs versus administration of a particular drug.
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 several 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.
Anatomic Pathology (Departmental Clinical Services Suite) In
February 1997, the Company entered into a VAR agreement with
Dynamic Healthcare Technologies, Inc. ("Dynamic") to relicense
the Dynamic anatomical pathology product. The agreement grants
the Company a non-exclusive license to modify, interface,
market, sublicense, support and otherwise use the
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Dynamic software program known as CoPath Client/Server ("CoPath")
which is a computer clinical information system used in
surgical pathology, cytology and autopsy.
Medication Expert (Clinical Data Management Suite) In
February 1997, the Company entered into a non-exclusive
license agreement with Multum Information Services, Inc.
("Multum") to market Multum's MediSource clinical information
service to be provided as an option with Sunquest's
proprietary system. Multum's MediSource product is a smart
clinical information service that helps physicians to
prescribe drugs based on the latest medical research findings.
MediSource Expert Drug Orders provides each order individually
adjusted for the patient based on the patient's clinical
characteristics. MediSource Expert Dosing provides patient-
specific dosing recommendations including both loading and
maintenance doses when appropriate. The Company plans to
incorporate the Multum advanced clinical decision support
system into FlexiMed which will provide patient specific
expert system support.
Integration Server (Clinical Data Management Suite) In March
1995, the Company entered into a VAR agreement with Century
Analysis, Inc. ("CAI") which grants Sunquest a non-exclusive
license to sublease and market CAI's Transaction Distribution
Manager ("TDM") product. TDM greatly simplifies the task of
performing inter-application data interchange and performs a
number of functions including transaction store and forward
with built-in fault recovery and management tolls to control
all data interchange processing.
Products Under Development
The following products are under development utilizing
the same client-server architecture as the Company's existing
systems. The development of new products is an uncertain
process. There can be no assurance that the following
products will be successfully developed or, if developed, that
they will be accepted in the marketplace. See "Risk Factors"
below.
FlexiMed-Outpatient (Departmental Clinical Services Systems)
FlexiMed has two major systems components: an inpatient system
and an outpatient system. The inpatient system is used in
hospitals and is a proven product installed at two major
hospital systems. The outpatient system deals with retail
pharmacy functionality and is currently under development.
Its core functionality will be derived from the Meditrust
application recently purchased by Sunquest.
Clinical Suite Integration (Departmental Clinical Services
Systems) The Clinical Suite Integration will integrate the
three primary Sunquest suite products, FlexiLab, FlexiRad and
FlexiMed. Under development are a common viewing system and
cross inquiry between systems.
Lab Data Network ("LDN")(Clinical Data Management Suite) is an
open architecture system comprised of numerous component
solutions to address the laboratory consolidation trend in the
health care industry. LDN will enable disparate lab systems
within a health care network to send orders, specimens and
results to each other and to a central lab data repository.
"Core Labs" and "Centers of Excellence" models can be
effectively automated with LDN. The outreach client base will
be provided with longitudinal results views from the lab data
repository populated by disparate lab systems.
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Departmental System Enterprise Viewer (Clinical Data
Management Suite) is an operating environment for information
management. Departmental System Enterprise Viewer will support
flexible results display, enable clinical decision-making, and
will be the medium for orders communication. Data can be
presented as spreadsheets, graphs, and/or text, as well as in
icon-based summaries. Results views can be customized for a
specific clinician or group, and can easily be defined. Views
can be presented for trending of results for one encounter or
across encounters and will allow providers to "drill down" for
more detailed results information. The system will be "web
enabled" to provide a uniform "look and feel" independent of
whether the provider is using Sunquest or other applications.
Infectious Disease Monitor (Clinical Data Management Suite)
Antibiotic resistant organisms are emerging at most hospitals
across the country. Infection control practitioners need to
be notified when these organisms have been identified so that
proper isolation procedures are implemented and appropriate
resources are notified. When the Infectious Disease Monitor
is used with Clinical Event Manager, all pertinent clinicians
can be notified when a resistant, unusual or reportable
organism is isolated in a hospital patient.
Enterprise Scheduler (Clinical Data Management Suite) 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. Enterprise Scheduler
facilitates complex scheduling of a health care enterprise's
resources and maximizes the facility's efficiency in
processing patient visits. The product's open interface will
further enable the scheduling users to interact with other
heterogeneous systems while taking advantage of a consolidated
database for resource scheduling. Enterprise Scheduler
provides user-selected record capabilities that offer focused
access to the immediate need of the clinician. These include
new patient registration forms, chart pull lists, record
outguides, record location and encounter forms.
Enterprise Master Person Index ("EMPI") (Clinical Data
Management Suite) EMPI is a generic term for a software
product required by IDNs for administration of their
membership. This product will permit the linkage of patient
information even if the information originated in disparate
information systems throughout a health care enterprise. EMPI
will allow information systems to reliably share information
without requiring a change in identification scheme. The EMPI
will accept inputs from network entities, assigns unique
identifiers, if required, and will provide positive
identification of the member. Enhanced versions of the
product will enable patient registration, physicians
registration, physicians credentialling, automated member
chart location and emergency admission data capture in
hospitals and others. A key component of the EMPI system is
an identity broker from a third-party that matches population
based on demographic information for each locality and has
been successfully used with similar data.
Year 2000 Compliance
The year 2000 issue is the result of computer programs
being written using two digits rather than four to define the
applicable year. Any of the Company's software programs,
whether sold as products of the Company or used internally,
may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in a system failure or
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miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal
business activities.
Based on a recent assessment, the Company believes that
the current releases of its products are all year 2000
compliant. The Company plans to have all clients converted to
year 2000 compliant versions of its products by September
1999. Pursuant to contract terms, clients are obligated to
cooperate with the Company in the installation of system
enhancements, including the current year 2000 compliant
versions.
In addition, the Company has determined that only a small
portion of software programs developed by other vendors and
utilized internally will require upgrades to new versions to
properly utilize dates beyond December 31, 1999. After
reviewing the plans of these vendors, the Company believes
that the upgrades to such software programs will be completed
by the end of 1998. The cost of year 2000 compliant software
related to systems developed by other vendors and used
internally is included in maintenance agreements. The Company
believes that consulting costs incurred in accomplishing the
installation of year 2000 compliant software will be
immaterial.
Client Services
At December 31, 1997, the Company's client services
section employed approximately 432 professionals who provide
implementation, application and system support, education and
consulting services to the Company's clients. The client
services section 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 uses outside consultants and self administered
surveys to tract the quality of its services. In addition,
Sunquest uses a third-party expert system to provide on-line
project status reports and on-line support. Instrument
interface, network consulting, operating system and hardware
support are provided by experts in each area.
Sunquest also provides consulting services to assist
clients in analyzing and implementing strategic organizational
changes, such as planning an IDN expansion program,
reengineering departmental processes, redesigning local or
wide-area networks, and establishing new commercial
laboratories. Additional client education services are
provided through computer-based training or formal ongoing
educational courses and seminars.
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Balanced 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 the approximately 3,500 acute care hospitals in
the United States and Canada that have more than 250 beds and
the approximately 4,000 commercial and medical reference
laboratories in the United States. The Company also markets
its systems and services to the 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's marketing department is composed of a team
of specialists in product management, marketing operations,
marketing communications and sales support. Its sales force
is organized into three divisions: (i) North American which is
divided into three areas, Western, Northern and Southern,
offering all of the Company's clinical products; (ii) European
Sales, offering the Company's systems in the United Kingdom
and Germany; and (iii) Antrim Sales, offering commercial and
medical reference laboratory systems. At December 31, 1997
the Company employed a sales and marketing force of
approximately 90 individuals.
Technology
Sunquest's clinical products operate on Intel-based PC
systems, 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. FlexiMed is offered on the IBM RS6000
platform. 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 laboratory and
radiology clinical systems. FlexiMed, the Company's pharmacy
product, is developed using Powerbuilder fourth generation
language on an Oracle database. All of the products use or
are migrating to Windows 95 for the client operating system.
Antrim has developed all its information systems in the M
language. The Answers: Remote Web Access product utilizes
both M and web standard HTML languages.
Sunquest is evaluating options to migrate its laboratory
and radiology clinical systems to new technology by developing
the object-oriented presentation layer and client-base
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
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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 over time all of its systems and modules to
object orientation using the C++ programming language, Visual
Basic and relational and/or object database technology.
Sunquest resells 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 clinical information systems 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 marketplace,
determination of users' requirements, preparation of design
specifications, and usability testing to ensure that new
systems meet clients' standards.
Sunquest's product development managers are responsible
for product architecture, improvements to existing products,
construction verification and inspection. 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 technology group, which researches industry-
standard components and develops new technologies for
integration into the Company's current and future products.
As of December 31, 1997, approximately 156 product development
engineers were assigned to improving and extending the
Company's existing systems and approximately 69 engineers were
assigned to the development of products in new product areas.
In 1997, 1996 and 1995, the Company's research and
development expenses before capitalization of software
development costs totaled approximately $16.9 million, $12.8
million and $11.8 million, respectively. See "Risk Factors"
below.
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.
The Company's principal competitors are Cerner
Corporation, HBO & Company, Medical Information Technology,
Inc., Shared Medical Systems Corporation, Soft Computer
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Consultants, Inc. and Triple G Corporation. In addition, the
Company competes with a large number of other information
system vendors. See "Risk Factors" below.
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 marks 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 marks
used by Antrim in its business, such as Answers, have also
been registered with the United States Patent and Trademark
Office. Sunquest Pharmacy has registered the mark PreciseCare
with the United States Patent and Trademark Office. In
addition, Flexi-3R, FlexiRad and Clinical Event Manager, among
other marks, are trademarks of Sunquest and FlexiMed is a
trademark of Sunquest Pharmacy. Also, certain of the
Company's products are the subject of patent protection or a
pending patent application.
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.
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Backlog
At December 31, 1997, the Company had a total contract
backlog of $99.5 million, which consisted of $49.3 million of
system sales and $50.2 million of support and service. At
December 31, 1996, total contract backlog was $87.3 million,
which consisted of $41.9 million of system sales and $45.4
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.
Employees
As of December 31, 1997, the Company had 828 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.
Forward-Looking Statements
This report contains 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.
These statements are indicated by phrases such as "the Company
will" or use of verbs such as "believes," "plans," "expects,"
"anticipates" or words of similar impact. 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.
Risk 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 continuing 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
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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,
including the recently purchased pharmacy systems. 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. An inability
to accomplish this migration or any significant delay in such
migration could have an adverse effect on the Company's
business and results of operations. The failure of the
Company to develop and introduce new HCISs, such as its
pharmacy systems or its Clinical Data Management suite of
products, 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.
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 budgeting
practices; and (v) the Company's sales commission practices.
The Company expects that these variations will continue for
the foreseeable future. Revenues from the software portion of
system sales are recognized on the percentage-of-completion
method and 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. During 1997,
the Company identified a trend toward longer sales and
installation cycles with integrated delivery network
customers. Any continuing 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, installations and training costs 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
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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.
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.
Discontinuance of the Sale of Clinical Repository
Systems. On January 28, 1998, the Company announced its plan
to discontinue the sale of the IntelliCare suite of products
as an enterprise-wide computerized patient record solution and
to discontinue the development of a nurse clinical
documentation system. At that time, the Company had three
customer sites using certain of the IntelliCare products.
Although the Company continues to support these customers,
there can be no assurance that they or others will not assert
claims with respect to the discontinued products. In addition,
the Company's decision to withdraw from the enterprise-wide computerized
patient record market could have a material adverse effect on the
Company's ability to compete successfully with vendors who offer
such products in conjunction with LISs.
Dependence on Key Personnel; Management of Changing
Business. The Company's future success depends to a
significant extent upon the executive officers, the Board of
Directors, and certain other managerial, technical and
marketing personnel. The Company has experienced turnover at
the executive level in the past, and the loss of the services
of 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.
Risks Associated with Identifying and Integrating
Acquisitions; Other Strategic Alternatives. The Company
intends to continue to grow through the acquisition of
complementary products, technologies or businesses in the HCIS
industry. The Company's
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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, including its pharmacy systems. 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
identify and 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. In addition to acquisitions,
the Company may from time to time consider other strategic
alternatives including, without limitation, mergers,
consolidations, joint ventures and recapitalizations. The
evaluation and implementation of any such alternative may
divert the time, attention and resources of the Company.
There can be no assurance that any such strategic alternative
would be implemented successfully.
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. The Company expects that the FDA is likely to become
increasingly active in regulating computer software that is
intended for use in health care settings. In March 1994, the
FDA issued a letter advising that the FDA considers medical
devices to include software products intended 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.
Sunquest was the subject of a good manufacturing
practices ("GMP") audit conducted by representatives of the
FDA that was completed on February 6, 1998. The Company was
informed that its LISs may be considered medical devices under
the Federal Food, Drug, and Cosmetic Act and regulations and
policies promulgated thereunder (the "FFDCA") and would, in
such event, be subject to regulation by the FDA. As such, the
Company would be required to, among other things, register and
list its LISs with the FDA. The Company does not believe that
its LISs are medical devices under the FFDCA and is in the
process of determining whether other LIS vendors have treated
their LISs as medical devices. Until such time as the FDA
formally notifies the Company that its LISs are medical
devices under the FFDCA, the Company does not intend to treat
its LISs as medical devices.
Antrim was the subject of a 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 discontinue the marketing and development of the Antrim
blood bank product
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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.
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
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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.
Fluctuations 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.
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
20
<PAGE>
the Company, including transactions in which shareholders might
otherwise receive a premium for their shares over the current market
prices.
Foreign Sales. Sales of its systems and services to
clients located outside the United States 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.
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.
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
that prohibits the payment of any capital distributions or
dividends.
21
<PAGE>
Executive Officers of the Registrant
Information concerning the executive officers of the
Company is set forth below.
Name Age Position
---- --- --------
Sidney A. Goldblatt 63 President, Chief Executive
Officer and Director
Richard A. Wesson 57 Chief Operating Officer
Nina M. Dmetruk 45 Executive Vice President-
Chief Financial Officer,
Secretary and Director
James F. Garliepp 46 Executive Vice President-
Chief Technology Officer
Ivan G. Boyd 43 Senior Vice President-
Sales and Marketing
Joanna S. Broder 54 Senior Vice President-
Client Services
Samuel A. Miller 59 Senior Vice President-
Technology
Bradley L. Goldblatt 34 Treasurer and Director
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 served as 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 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.
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.
Ivan G. Boyd has been Senior Vice President-Sales and
Marketing since November 1997. From October 1995 to September
1997, Mr. Boyd was employed by ADAC HealthCare Information
Systems, a division of ADAC Labs, a health care information
systems company, where he served as Executive Vice President
of Sales and Marketing. From September 1994 to July 1995, Mr.
Boyd was employed by First Data Corporation, a health
22
<PAGE>
care information systems company, where he served as Senior Vice
President of Sales. From June 1980 to September 1994, Mr.
Boyd was employed by Digital Equipment Corporation, a computer
manufacturing company, where he served as Worldwide
Healthcare Director from April 1993 to September 1994 and U.S.
Channels Marketing Director from July 1991 to April 1993.
Joanna S. Broder has been Senior Vice President-Client
Services since March 1997. 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-
Technology since February 1998. From January 1997 until
February 1998, Mr. Miller served as Senior Vice President-
Engineering of the Company. 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.
Bradley L. Goldblatt has been Treasurer and a director of
the Company since December 1992 and was employed by the
Company until February 1998. From June 1991 to February 1993,
he was a Research Laboratory Technician at the Eye and Ear
Institute of Pittsburgh. Bradley L. 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.
The Company leases the buildings from Any Travel, Inc., a
travel agency located in Tucson, Arizona, which is owned by
the Trusts. The lease for the 102,000 square foot building,
which includes an adjacent two-level parking facility,
currently requires monthly rental payments of $96,792 and
expires in September 2001. The Company occupies approximately
48,000 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 $72,700 and expires in May 2004. Sunquest
receives monthly rental payments under the subleases totaling
approximately $23,000. In addition, the Company owns a
facility containing approximately 43,620 square feet, in
Tucson, Arizona, which was purchased in February 1997 for cash
in the amount of $1.8 million. The building is being leased
to third parties but will eventually be used for customer-
related activities. Currently, Sunquest receives monthly
rental payments of approximately $24,000 from this
23
<PAGE>
facility. The Company also owns a two-story building, containing
approximately 18,000 square feet, in Johnstown, Pennsylvania,
which it may use as an office facility.
Antrim leases office space in Plano, Texas, containing
approximately 47,420 square feet. The lease currently
requires monthly rental payments of $58,287 and expires in May
2001. Antrim receives monthly rental payments under a
sublease totaling approximately $5,000.
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 National Trust and Savings Association ("Bank of
America") 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.
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.
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, 1997.
24
<PAGE>
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.
Price Range
Period High Low
- --------------------------------------------------
1997
First quarter $17.625 $ 9.750
Second quarter $15.750 $ 8.125
Third quarter $17.175 $10.500
Fourth quarter $15.000 $ 6.500
Price Range
Period High Low
- --------------------------------------------------
1996
Second quarter (from May 31) $19.750 $12.000
Third quarter $19.000 $10.125
Fourth quarter $18.625 $13.000
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
prohibits the payment of capital distributions or dividends.
At March 20, 1998, there were 36 holders of record of the
Common Stock, and the Company believes that on that date there
were in excess of 1,300 beneficial owners of the Common Stock.
25
<PAGE>
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, 1997 (the "Annual Report") and such
information 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 such information is incorporated herein by
reference.
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk.
Not applicable.
Item 8. Financial Statements and Supplementary Data.
The financial statements, together with the report
thereon of Ernst & Young LLP dated February 13, 1998, and
supplementary data required by this item are included in the
Annual Report and such financial statements and supplementary
data 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 & Young LLP, the Company had not consulted
with Ernst & Young LLP regarding accounting principles.
26
<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant.
The information set forth under the caption "Executive
Officers of the Registrant" in Part I of this Annual Report on
Form 10-K and the information set forth under the caption
"Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's Proxy
Statement for the 1998 Annual Meeting of Shareholders (the
"Proxy Statement") is incorporated herein by reference.
Item 11. Executive Compensation.
The information set forth under the caption "Executive
Compensation and Related Information" in the Proxy Statement
is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners
and Management.
The information set forth under the caption "Security
Ownership of Certain Beneficial Owners and Management" in the
Proxy Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information set forth under the caption "Certain
Transactions and Business Relationships" in the Proxy
Statement is incorporated herein by reference.
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 13, 1998
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995
27
<PAGE>
Consolidated Statements of Shareholders' Equity for
the years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995
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
--------
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)
10A.1 Profit Sharing Plan, as amended December 31, 1997. (2) (3)
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)
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)
10H Employment Agreement dated July 24, 1994 between
Richard A. Wesson and the registrant. (1) (2)
10H.1 Amendment dated May 26, 1996 to Richard A.
Wesson's Employment Agreement. (2) (4)
10I.3 Stock Incentive Plan of 1996, as amended
March 12, 1998. (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)
10N Tax Indemnification Agreement dated as of April 30,
1996, between the registrant and its shareholders of
record as of April 30, 1996. (1)
10P Employment Agreement effective May 26, 1996 between
Nina M. Dmetruk and the registrant. (1) (2)
28
<PAGE>
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. (4)
10S Form of Underwriting Agreement dated May 30, 1996,
filed as Exhibit 1A to Registration Statement No. 333-
2790 and incorporated herein by reference.
10T Business Loan Agreement dated as of December 30,
1997, among the registrant, Sunquest Europa Limited,
Antrim Corporation, Sunquest Pharmacy Information
Systems, Inc., Sunquest Germany GmbH and Bank of America
National Trust and Savings Association. (3)
10U 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.
13B Financial Information Section of Annual Report to
Shareholders for 1997. (3)
16A Letter regarding change in independent auditors,
dated May 9, 1996. (1)
21C Subsidiaries of the registrant. (3)
23I Consent of Independent Auditors, dated March 26, 1998. (3)
27F Financial Data Schedule for the year ended December 31,
1997. (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.
(4) Filed, under the same number, as an exhibit to the Form 10-K
for the year ended December 31, 1996.
29
<PAGE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the registrant during
the quarter ended December 31, 1997.
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 30, 1998.
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.
Signature Title Date
--------- ----- ----
/s/ Sidney A. Goldblatt President and Chief Executive March 30, 1998
____________________ Officer (Principal Executive
Sidney A. Goldblatt Officer) and Director
/s/ Nina M. Dmetruk Executive Vice President and March 30, 1998
___________________ Chief Financial Officer
Nina M. Dmetruk (Principal Financial and
Accounting Officer) and Director
/s/ Bradley L. Goldblatt Director March 30, 1998
________________________
Bradley L. Goldblatt
/s/ Richard W. Barker Director March 30, 1998
_____________________
Richard W. Barker
/s/ Stanley J. Lehman Director March 30, 1998
_____________________
Stanley J. Lehman
/s/ Larry R. Ferguson Director March 30, 1998
_____________________
Larry R. Ferguson
/s/ Peter P. Gombrich Director March 30, 1998
_____________________
Peter P. Gombrich
31
<PAGE>
Sunquest Information Systems, Inc.
Form 10-K For Fiscal Year Ended December 31, 1997
Commission File No. 0-28212
---------------------------
Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
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. *
10A.1 Profit Sharing Plan, as amended December 31, 1997.
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. *
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. *
10H Employment Agreement dated July 24, 1994 between
Richard A. Wesson and the registrant. *
10H.1 Amendment dated May 26, 1996 to Richard A. Wesson's
Employment Agreement. *
10I.3 Stock Incentive Plan of 1996, as amended March 12, 1998.
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. *
10N Tax Indemnification Agreement dated as of April 30,
1996, between the registrant and its shareholders
of record as of April 30, 1996. *
<PAGE>
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. *
10S Form of Underwriting Agreement dated May 30, 1996. *
10T Business Loan Agreement dated as of December 30,
1997, among the registrant, Sunquest Europa Limited,
Antrim Corporation, Sunquest Pharmacy Information
Systems, Inc., Sunquest Germany GmbH and Bank of
America National Trust and Savings Association.
10U Stock Purchase Agreement with The Compucare Company,
dated as of November 26, 1996. *
13B Financial Information Section of Annual Report to
Shareholders for 1997.
16A Letter regarding change in independent auditors,
dated May 9, 1996. *
21C Subsidiaries of the registrant.
23I Consent of Independent Auditors, dated March 26, 1998.
27F Financial Data Schedule for the year ended December
31, 1997.
___________________
* Incorporated by reference.
<PAGE>
Exhibit 10A.1
THIRD AMENDMENT
TO THE
SUNQUEST INFORMATION SYSTEMS, INC.
PROFIT SHARING PLAN
Pursuant to Section 11.1 of the Sunquest Information
Systems, Inc. Profit Sharing Plan (the "Plan"), the Plan is
hereby amended, effective as of the dates set forth below, to
read as follows:
Effective December 1, 1997:
- --------------------------
1. Section 4.4(d) is revised in its entirety to read as
follows:
"(d) Rollover Contribution Accounts shall be
distributed in accordance with Section 5.10(c) and
Article VIII."
2. The heading to Section 5.10 shall be revised in its entirety
to read "5.10 Distributions of Elective Contributions,
Rollover Contributions and Matching Contribution Accounts".
3. Section 5.10(b)(4) is modified by moving the existing text
to a new Section 5.10(c); Section 5.10(b)(4) is then stated
to read "(4) As provided in Section 5.10(c)"; and new
Section 5.10(c) is revised by modifying the introductory
sentence to read as follows:
"(c) In the event of hardship, upon application to the
Retirement Committee, a Participant may receive a
distribution of all or a portion of his Rollover
Contribution Account and Elective Contribution Account
(excluding any earnings credited to a Participant's Elective
Contribution Account after July 1, 1989), but only if all of
the following conditions are satisfied:"
4. New Section 5.10(c)(ii) is revised by adding a new sentence
at the end thereof to read as follows:
"A Participant shall not receive a distribution of any
portion of his Elective Contribution Account unless such
Participant has first received all available funds (if any)
from his Rollover Contribution Account under this subsection
5.10(c)."
1
<PAGE>
Effective January 1, 1998:
- -------------------------
5. Section 2.6 is revised for Plan Years beginning on or after
January 1, 1998 by deleting from the first sentence thereof
the words "only commissions of not more than the first
$20,000 shall be included in Compensation, and".
6. Section 2.10 is clarified by adding a new sentence at the
end thereof to read as follows:
"The term Employee shall not include a Temporary
Employee; provided, that, only with respect to
eligibility to make Salary Reduction Contributions
(but, not with respect to any Matching Contributions or
Employer Contributions) a Temporary Employee whose Date
of Employment was before January 1, 1998 and who
remains employed by the Employer after January 1, 1998
shall be included as an Employee. For this purpose, a
Temporary Employee shall be defined as an individual
who is engaged in work full-time or part-time, with the
understanding that his or her employment will be
terminated as of a specific date or upon completion of
a specific assignment."
7. Section 3.1 is amended by adding a new sentence as the first
sentence thereof to read as follows:
"The provisions of Subsections 3.1(b) and 3.1(c) shall be
effective only for Plan Years prior to January 1, 1998 and
Subsection 3.1(f) shall be effective with respect to Plan
Years on or after January 1, 1998."
8. Subsection 3.1(e) is revised to changing the second sentence
therein in its entirety to read as follows:
"If a Participant, or a former Participant, does not
have a vested interest in any of his accounts when he
incurs a Break in Service, he shall be eligible to
participate, again, (i) with respect to Salary
Reduction and Matching Contributions upon his
reemployment commencement date; and (ii) with respect
to Employer Contributions effective as of his
reemployment commencement date, upon completion of one
Year of Service (measured by the twelve (12)
consecutive month period beginning on his reemployment
commencement date and, if necessary, subsequent twelve
(12) month periods beginning on anniversaries of his
reemployment commencement date)."
9. A new subsection (f) of Section 3.1 is added to read as follows:
"(f) Eligibility Conditions _ Notwithstanding anything
in this Section 3.1 to the contrary, effective for Plan
Years commencing after December 31, 1997:
2
<PAGE>
(1) Salary Reduction and Matching Contributions. Each
-------------------------------------------
Employee of the Employer who has an election to make
Salary Reduction Contributions under the Plan on or
after December 31, 1997 shall continue to participate
in the Salary Reduction Contributions and Matching
Contributions as provided under the Plan. Any other
Employee shall be eligible to become a Participant, but
only with respect to making Salary Reduction
Contributions to the Plan and, as applicable, receiving
an allocation of Matching Contributions with respect
thereto, beginning as of the first full payroll period
beginning after the later of January 1, 1998 or the
first day of the calendar month following the Date of
Employment.
(2) Employer Contributions. Each Participant in the
----------------------
Plan on December 31, 1997 shall remain a Participant
for purposes of sharing in an allocation of Employer
Contributions. Any other Employee shall become a
Participant for purposes of sharing in an allocation of
Employer Contributions as of the Entry Date next
following the date on which he has completed 1,000 or
more Hours of Service in a twelve (12) consecutive
month period as set forth in Section 3.1(d)."
10. Section 3.3 is amended by adding a new sentence at the end
thereof to read as follows:
"For purposes of this Plan, Years of Service shall
include all years of service credited to an Employee
while employed by Antrim Corporation, including without
limitation those years of service prior to the date
Antrim Corporation was a member of the Employer's
controlled group (within the meaning of Section 2.15)."
11. Section 5.2 is revised by (i) modifying the second sentence
therein in its entirety; and (ii) adding a new sentence as
the third sentence thereof, both to read as follows:
"Salary deferral elections may be made upon eligibility
for participation, and thereafter made or changed once
per calendar quarter (or such more frequent times as
may be provided by the Retirement Committee) as to
future Compensation only. For purposes of this Section
5.2 and Section 5.3(b) (and all provisions of this Plan
relating thereto), the term "Participant" shall include
those Employees who are eligible to make a Salary
Reduction Contribution under the Plan pursuant to
Section 3.1(f)(1)."
12. Section 5.3 is revised by adding a new sentence at the end
thereof to read as follows:
"Effective for the first Plan Year after December 31,
1997, and for each Plan Year thereafter until otherwise
modified by the Employer in its discretion, the
Employer shall provide a Matching Contribution in an
amount equal to 100% of the Participant's Elective
Contributions under Section 5.1, up to a maximum
Matching Contribution of 3% of such Participant's
Compensation. The Employer Matching
3
<PAGE>
Contribution provided under this Section 5.3 shall be paid to the
Trust Fund at such time or times as may be determined
by the Employer, but no later than the due date of the
Employer's Federal income tax return (including actual
extensions thereof) for the Employer's taxable year
ending within or coincident with the Plan Year for
which the Matching Contribution is made."
13. Section 6.2 is revised with respect to Plan Years beginning
on or after January 1, 1998 to read as follows:
"Subject to Section 7.4, amounts which have been
credited to a Participant's Employer Contribution
Account or Matching Contribution Account and which are
forfeited for any reason shall be used to reduce the
total amount of the Employer Matching Contributions
required to be provided pursuant to Section 5.3 for the
Plan Year in which the forfeiture occurs or, to the
extent no so used, applied to the payment of Plan
administrative expenses as provided in Section 5.3 of
the Trust."
14. Section 7.2 is amended by revising the schedule set forth
therein to read as follows:
"Years of Service Vested Percentage
-----------------------------------------
1 33 1/3%
2 66 2/3%
3 100%"
15. Section 7.3(a) is amended by replacing the phrase "not later
than the sixty (60) days after the end of the Plan Year in
which his employment terminates." in the first sentence
thereof with the phrase "by the later of (i) sixty (60) days
after the end of the Plan Year in which his employment
terminates or (ii) the date on which the valuation of
accounts for such Plan Year and all other necessary actions
for processing such distribution have been completed."
16. Section 7.3(d) is amended by replacing the phrase "is not
greater than $3,500" in the first sentence therein with the
phrase "is not greater than $3,500 (or, for Plan Years
starting on and after January 1, 1998, $5,000)".
17. Section 7.4 is amended by adding a new sentence as the third
sentence thereof to read as follows:
"Amounts restored under this Section shall be made from
forfeitures occurring during the Plan Year under Article
VII."
4
<PAGE>
18. Section 10.4 is amended by revising the second sentence
therein to read in its entirety as follows:
"The Retirement Committee shall, on a uniform and
nondiscriminatory basis, adopt a procedure to permit
Participants to exercise control over the assets in their
Elective Contribution Account, Matching Contribution Account
and Rollover Account."
19. Section 10.4 is amended by adding a new sentence at the end
thereof to read as follows:
"In accordance with Section 5.3 of the Trust, the
administrative expenses for the Plan shall be charged
against the Participants' Accounts as determined by the
Retirement Committee."
20. Section 13.5 is deleted in its entirety and Sections 13.6,
13.7 and 13.8 are hereby renumbered as 13.5, 13.6 and 13.7,
respectively.
21. Other provisions of the Plan not specifically mentioned here
shall remain unchanged.
Executed on this 31st day of December, 1997.
Sunquest Information Systems, Inc.
By: /s/ Nina M. Dmetruk
-------------------
Title: Exec. VP & CFO
5
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Exhibit 10I.3
SUNQUEST INFORMATION SYSTEMS, INC.
STOCK INCENTIVE PLAN OF 1996, AS AMENDED
1. Purpose of the Plan.
-------------------
The purpose of the Sunquest Information Systems, Inc. Stock
Incentive Plan of 1996, as amended, 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,
(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
1
<PAGE>
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. 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
<PAGE>
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.
-------------------------
3.1 The maximum number of shares of Common Stock for which
Awards may be granted under the Plan shall not exceed in
the aggregate three million eight hundred thousand
(3,800,000) 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
3
<PAGE>
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 employment or service (or
otherwise), based on such factors as the Committee
shall determine in its sole discretion.
4.3 Notwithstanding Section 4.2(b) above, the maximum number of
shares of Common Stock for which Options and SARs may be
granted to any Employee under the Plan shall not exceed, in
the aggregate, one million five hundred thousand
(1,500,000) shares of Common Stock during any one calendar
year period.
4.4 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,
4
<PAGE>
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.
4.5 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.
(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.
5
<PAGE>
(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 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
6
<PAGE>
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 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.
7
<PAGE>
(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 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.
8
<PAGE>
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. The power to amend
the terms of any Award shall include, without limitation,
the power to reduce the Option Price of any Award, provided
that the reduced Option Price shall not be less than the
Fair Market Value per share of the Common Stock on the date
of the amendment of the Award.
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.
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
9
<PAGE>
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.
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.
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12. Effective Date and Term of the Plan.
-----------------------------------
The Plan became effective upon approval of the Plan by the
Company's shareholders on March 25, 1996. No Awards shall
be granted pursuant to the Plan on or after March 25, 2006,
but Awards granted prior to such date may extend beyond
that date.
Date originally approved by the
Board of Directors and Stockholders: March 25, 1996
Dates amended by the Board of Directors:
November 8, 1996, April 3, 1997 and March 12, 1998
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Exhibit 10T
Bank of America Business Loan Agreement
=======================================================================
This Agreement dated as of December 30, 1997 is among Bank of America
National Trust and Savings Association (the "Bank") Sunquest
Information Systems, Inc. ("Borrower 1"), Sunquest Europa Limited
("Borrower 2"), Antrim Corporation ("Borrower 3"), Sunquest Pharmacy
Information Systems, Inc. ("Borrower 4") and Sunquest Germany GmbH
("Borrower 5") (Borrower 1, Borrower 2, Borrower 3, Borrower 4 and
Borrower 5 are sometimes referred to collectively as the "Borrowers"
and individually as the "Borrower").
1. LINE OF CREDIT AMOUNT AND TERMS
1.1 Line of Credit Amount.
(a) During the availability period described below, the Bank will
provide a line of credit to the Borrowers. The amount of the line
of credit (the "Commitment") is Ten Million and no/100 Dollars
($10,000,000.00).
(b) This is a revolving line of credit with a within line facility for
letters of credit. During the availability period, the Borrowers
may repay principal amounts and reborrow them.
(c) The Borrowers agree not to permit the outstanding principal
balance of the line of credit plus the outstanding amounts of any
letters of credit, including amounts drawn on letters of credit
and not yet reimbursed, to exceed the Commitment.
1.2 Availability Period. The line of credit is available between the
date of this Agreement and April 30, 1999 (the "Expiration Date")
unless any Borrower is in default.
1.3 Interest Rate.
(a) Unless the Borrowers elect an Optional interest rate as described
below, the interest rate is the Reference Rate.
(b) The Reference Rate is the rate of interest publicly announced from
time to time by the Bank in San Francisco, California, as its
Reference Rate. The Reference Rate is set by the Bank based on
various factors, including the Bank's costs and desired return,
general economic conditions and other factors, and is used as a
reference point for pricing some loans. The Bank may price loans
to its customers at, above or below the Reference Rate. Any
change in the Reference Rate shall take effect at the opening of
business on the day specified in the public announcement of a
change in the Bank's Reference Rate.
1.4 Repayment Terms.
(a) The Borrowers will pay interest on January 31, 1998 and on the
last day of each month thereafter until payment in full of any
principal outstanding under this line of credit.
(b) The Borrowers will repay in full all principal and any unpaid
interest or other charges outstanding under this line of credit no
later than the Expiration Date.
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(c) Any amount bearing interest at an optional interest rate (as
described below) may be repaid at the end of the applicable
interest period, which shall be no later than the Expiration Date.
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).
(d) The following letters of credit are outstanding from the Bank for
the account of the Borrowers:
Letter of Credit Number Amount
----------------------- -----------
3006798 135,790.00
3006781 67,895.00
As of the date of this Agreement, these letters of credit shall be
deemed to be outstanding under this Agreement, and shall be
subject to all the terms and conditions stated in this Agreement.
Each 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.
(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
Borrowers will be charged for issuing and processing letters of
credit for the Borrowers.
(f) to allow the Bank to automatically charge its checking account for
applicable fees, discounts, and other charges.
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1.6 Optional Interest Rates. Instead of the interest rate based on
the Reference Rate, the Borrowers may elect to have all or portions of
the line of credit (during the availability period) bear interest at
the rate(s) described below during an interest period agreed to by the
Bank and the Borrowers. Each interest rate is a rate per year.
Interest will be paid on the last day of each month during the interest
period. At the end of any interest period, the interest rate will
revert to the rate based on the Reference Rate, unless the Borrowers
have designated another optional interest rate for the portion.
1.7 Fixed Rate. The Borrowers may elect to have all or portions of
the principal balance of the line of credit bear interest at the Fixed
Rate, subject to the following requirements:
(a) The "Fixed Rate" means the fixed interest rate the Bank and the
Borrowers agree will apply to the portion during the applicable
interest period.
(b) The interest period during which the Fixed Rate will be in effect
will be no shorter than 2 weeks and no longer than one year.
(c) Each Fixed Rate portion will be for an amount not less than Five
Hundred Thousand Dollars ($500,000).
(d) The Borrowers may not elect a Fixed Rate with respect to any
portion of the principal balance of the line of credit which is
scheduled to be repaid before the last day of the applicable
interest period.
(e) Any portion of the principal balance of the line of credit already
bearing interest at the Fixed Rate will not be converted to a
different rate during its interest period.
(f) Each prepayment of a Fixed Rate portion, whether voluntary, by
reason of acceleration or otherwise, will be accompanied by the
amount of accrued interest on the amount prepaid, and a prepayment
fee equal to the amount (if any) by which:
(i) the additional interest which would have been payable on
the amount prepaid had it not been paid until the last day of
the interest period, exceeds
(ii) the interest which would have been recoverable by the
Bank by placing the amount prepaid on deposit in the
certificate of deposit market for a period starting on the
date on which it was prepaid and ending on the last day of
the interest period for such portion.
1.8 Offshore Rate. The Borrowers may elect to have all or portions
of the principal balance of the line of credit bear interest at the
Offshore Rate plus 1.15 percentage points.
Designation of an Offshore Rate portion is subject to the following
requirements:
(a) The interest period during which the Offshore Rate will be in
effect will be 1 week, 2 weeks, 3 weeks, 1 month, 2 months, 3
months, 6 months, 9 months or 12 months. The last day of the
interest period will be determined by the Bank using the practices
of the offshore dollar inter-bank market.
(b) Each Offshore Rate portion will be for an amount not less than
Five Hundred Thousand Dollars ($500,000) for interest periods of
30 days or longer. For shorter maturities, each Offshore Rate
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portion will be for an amount which, when multiplied by the number
of days in the applicable interest period, is not less than
fifteen million (15,000,000) dollar-days.
(c) The "Offshore Rate" means the interest rate determined by the
following formula, rounded upward to the nearest 1/100 of one
percent. (All amounts in the calculation will be determined by
the Bank as of the first day of the interest period.)
Offshore Rate = Grand Cayman Rate
---------------------------
(1.00 - Reserve Percentage)
Where,
(i) "Grand Cayman Rate" means the interest rate (rounded
upward to the nearest 1/16th of one percent) at which the
Bank's Grand Cayman Branch, Grand Cayman, British West
Indies, would offer U.S. dollar deposits for the applicable
interest period to other major banks in the offshore dollar
inter-bank markets.
(ii) "Reserve Percentages" means the total of the maximum
reserve percentages for determining the reserves to be
maintained by member banks of the Federal Reserve System for
Eurocurrency Liabilities, as defined in Federal Reserve Board
Regulation D, rounded upward to the nearest 1/100 of one
percent. The percentage will be expressed as a decimal, and
will include, but not be limited to, marginal, emergency,
supplemental, special, and other reserve percentages.
(d) The Borrowers may not elect an Offshore Rate with respect to any
portion of the principal balance of the line of credit which is
scheduled to be repaid before the last day of the applicable
interest period.
(e) Any portion of the principal balance of the line of credit already
bearing interest at the Offshore Rate will not be converted to a
different rate during its interest period.
(f) Each prepayment of an Offshore Rate portion, whether voluntary, by
reason of acceleration or otherwise, will be accompanied by the
amount of accrued interest on the amount prepaid; and a prepayment
fee equal to the amount (if any) by which:
(i) the additional interest which would have been payable on
the amount prepaid had it not been paid until the last day of
the interest period, exceeds
(ii) the interest which would have been recoverable by the
Bank by placing the amount prepaid on deposit in the offshore
dollar market for a period starting on the date on which it
was prepaid and ending on the last day of the interest period
for such portion.
(g) The Bank will have no obligation to accept an election for an
Offshore Rate portion if any of the following described events has
occurred and is continuing:
(i) Dollar deposits in the principal amount, and for periods
equal to the interest period, of an Offshore Rate portion are
not available in the offshore Dollar inter-bank markets; or
(ii) the Offshore Rate does not accurately reflect the cost
of an Offshore Rate portion.
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<PAGE>
1.9 LIBOR Rate. The Borrower may elect to have all or portions of
the principal balance of the line of credit bear interest at the LIBOR
Rate plus 1.15 percentage points.
Designation of a LIBOR Rate portion is subject to the following
requirements:
(a) The interest period during which the LIBOR Rate will be in effect
will be 1 week, 2 weeks, 3 weeks, 1 month, 2 months, 3 months, 6
months, 9 months, or 12 months. The last day of the interest
period will be determined by the Bank using the practices of the
London inter-bank market.
(b) Each LIBOR Rate portion will be for an amount not less than Five
Hundred Thousand Dollars ($500,000).
(c) The "LIBOR Rate" means the interest rate determined by the
following formula, rounded upward to the nearest 1/100 of one
percent. (All amounts in the calculation will be determined by
the Bank as of the first day of the interest period.)
LIBOR Rate = London Inter-Bank Offered Rate
------------------------------
(1.00 - Reserve Percentage)
Where,
(i) "London Inter-Bank Offered Rate" means the interest rate
at which the Bank's London Branch, London, Great Britain,
would offer U.S. dollar deposits for the applicable interest
period to other major banks in the London inter-bank market
at approximately 11:00 a.m. London time two (2) London
Banking Days before the commencement of the interest period.
A "London Banking Day" is a day on which the Bank's London
Branch is open for business and dealing in offshore dollars.
(ii) "Reserve Percentage" means the total of the maximum
reserve percentages for determining the reserves to be
maintained by member banks of the Federal Reserve System for
Eurocurrency Liabilities, as defined in the Federal Reserve
Board Regulation D, rounded upward to the nearest 1/100 of
one percent. The percentage will be expressed as a decimal,
and will include, but not be limited to, marginal, emergency,
supplemental, special, and other reserve percentages.
(d) The Borrower shall irrevocably request a LIBOR Rate portion no
later than 9:00 a.m. Phoenix time three (3) banking days before
the commencement of the interest period.
(e) The Borrower may not elect a LIBOR Rate with respect to any
portion of the principal balance of the line of credit which is
scheduled to be repaid before the last day of the applicable
interest period.
(f) Any portion of the principal balance of the line of credit already
bearing interest at the LIBOR Rate will not be converted to a
different rate during its interest period.
(g) Each prepayment of a LIBOR Rate portion, whether voluntary, by
reason of acceleration or otherwise, will be accompanied by the
amount of accrued interest on the amount prepaid and a prepayment
fee as described below. A "prepayment", for the purposes of this
paragraph, is a
5
<PAGE>
payment of an amount on a date earlier than the
scheduled payment date for such amount as required by this
Agreement. The prepayment fee shall be equal to the amount (if
any) by which:
(i) the additional interest which would have been payable
during the interest period on the amount prepaid had it not
been prepaid, exceeds
(ii) the interest which would have been recoverable by the
Bank by placing the amount prepaid on deposit in the domestic
certificate of deposit market, the eurodollar deposit market,
or other appropriate money market selected by the Bank, for a
period starting on the date on which it was prepaid and
ending on the last day of the interest period for such
portion (or the scheduled payment date for the amount
prepaid, if earlier).
(h) The Bank will have no obligation to accept an election for a LIBOR
Rate portion if any of the following described events has occurred
and is continuing:
(i) Dollar deposits in the principal amount, and for periods
equal to the interest period, of a LIBOR Rate portion are not
available in the London inter-bank market; or
(ii) the LIBOR Rate does not accurately reflect the cost of a
LIBOR Rate portion.
2. EXPENSES
2.1 Expenses. The Borrowers agree to immediately repay the Bank for
expenses that include, but are not limited to, filing, recording and
search fees, appraisal fees, title report fees, and documentation fees.
2.2 Reimbursement Costs.
(a) The Borrowers agree to reimburse the Bank for any expenses it
incurs in the preparation of this Agreement and any agreement or
instrument required by this Agreement. Expenses include, but are
not limited to, reasonable attorneys' fees, including any
allocated costs of the Bank's in-house counsel.
(b) The Borrowers agree to reimburse the Bank for the cost of periodic
audits and appraisals of the personal property collateral securing
this Agreement, at such intervals as the Bank may reasonably
require. The audits and appraisals may be performed by employees
of the Bank or by independent appraisers.
3. COLLATERAL
3.1 Personal Property. The Borrowers' obligations to the Bank under
this Agreement will be secured by personal property the Borrowers now
own or will own in the future as listed below. The collateral is
further defined in security agreement(s) executed by the Borrowers.
(a) Machinery, equipment.
(b) Inventory.
(c) Receivables.
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<PAGE>
(d) Patents, trademarks and other general intangibles.
In addition, all personal property collateral securing this Agreement
shall also secure all other present and future obligations of the
Borrowers or any one of them to the Bank (excluding any consumer credit
covered by the federal Truth in Lending law, unless the Borrowers have
otherwise agreed in writing). All personal property collateral
securing any other present or future obligations of the Borrowers or
any one of them to the Bank shall also secure this Agreement.
4. DISBURSEMENTS, PAYMENTS AND COSTS
4.1 Requests for Credit. Each request for an extension of credit
will be made in writing in a manner acceptable to the Bank, or by
another means acceptable to the Bank.
4.2 Disbursements and Payments. Each disbursement by the Bank and
each payment by the Borrowers will be:
(a) made at the Bank's branch (or other location) selected by the Bank
from time to time;
(b) made for the account of the Bank's branch selected by the Bank
from time to time;
(c) made in immediately available funds, or such other type of funds
selected by the Bank;
(d) evidenced by records kept by the Bank. In addition, the Bank may,
at its discretion, require the Borrowers to sign one or more
promissory notes.
4.3 Telephone and Telefax Authorization.
(a) The Bank may honor telephone or telefax instructions for advances
or repayments or for the designation of optional interest rates or
the issuance of letters of credit given by any one of the
individual signer(s) of this Agreement or a person or persons
authorized in writing by any one of the signer(s) of this
Agreement.
(b) Advances will be deposited in and repayments will be withdrawn
from accounts with the Bank as designated in writing by the
Borrowers.
(c) The Borrowers indemnify and excuse the Bank (including its
officers, employees, and agents) from all liability, loss, and
costs in connection with any act resulting from telephone or
telefax instructions it reasonably believes are made by any
individual authorized by the Borrowers to give such instructions.
This indemnity and excuse will survive this Agreement's
termination.
4.4 Banking Days. Unless otherwise provided in this Agreement, a
banking day is a day other than a Saturday or a Sunday on which the
Bank is open for business in Arizona. For amounts bearing interest at
an offshore rate (if any), a banking day is a day other than a Saturday
or a Sunday on which the Bank is open for business in California and is
dealing in offshore dollars. All payments and disbursements which
would be due on a day which is not a banking day will be due on the
next banking day. All payments received on a day which is not a
banking day will be applied to the credit on the next banking day.
4.5 Taxes. The Borrowers will not deduct any taxes from any payments
they make to the Bank. If
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<PAGE>
any government authority imposes any taxes on any payments made by the
Borrowers, the Borrowers will pay the taxes and will also pay to the Bank, at
the time interest is paid, any additional amount which the Bank specifies as
necessary to preserve the after-tax yield the Bank would have received if such
taxes had not been imposed. Upon request by the Bank, the Borrowers will
confirm that they have paid the taxes by giving the Bank official tax receipts
(or notarized copies) within 30 days after the due date. However, the
Borrowers will not pay and are not responsible for any of the Bank's
net income taxes.
4.6 Interest Calculation. Except as otherwise stated in this
Agreement, all interest and fees, if any, will be computed on the basis
of a 360 day year and the actual number of days elapsed. This results
in more interest or a higher fee than if a 365-day year is used.
4.7 Interest on Late Payments. At the Bank's sole option in each
instance, any amount not paid within 10 days after the date due under
this Agreement (including interest) shall bear interest from the due
date at the Reference Rate plus 1.00 percentage points. This may
result in compounding of interest.
4.8 Default Rate. Upon the occurrence and during the continuation of
any default under this Agreement, advances under this Agreement will at
the option of the Bank bear interest at a rate per annum which is 2.00
percentage point(s) higher than the rate of interest otherwise provided
under this Agreement. This will not constitute a waiver of any default.
5. CONDITIONS The Bank must receive the following items, in form
and content acceptable to the Bank, before it is required to extend any
credit to the Borrowers under this Agreement:
5.1 Authorizations. Evidence that the execution, delivery and
performance by each Borrower of this Agreement and any instrument or
agreement required under this Agreement have been duly authorized.
5.2 Governing Documents. A copy of each Borrower's articles of
incorporation.
5.3 Security Agreements. Signed original security agreements,
assignments, financing statements (together with collateral in which
the Bank requires a possessory security interest), which the Bank
requires.
5.4 Evidence of Priority. Evidence that security interests and liens
in favor of the Bank are valid, enforceable, and prior to all others'
rights and interests, except those the Bank consents to in writing.
5.5 Insurance. Evidence of insurance coverage, as required in the
"Covenants" section of this Agreement.
5.6 Business Interruption Insurance. Evidence of a business
interruption insurance policy for at least Twenty Million and no/100
Dollars($20,000,000.00) with an insurer acceptable to the Bank.
5.7 Legal Opinion. A written opinion from the Borrowers' legal
counsel, covering such matters as the Bank may require. The legal
counsel and the terms of the opinion must be acceptable to the Bank.
5.8 Good Standing. Certificates of good standing for Borrower 1,
Borrower 3 and Borrower 4 from their state of incorporation and from
any other state in which Borrower 1, Borrower 3 and Borrower 4 are
required to qualify to conduct their business.
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<PAGE>
5.9 Other Items. Any other items that the Bank reasonably requires.
6. REPRESENTATIONS AND WARRANTIES When the Borrowers sign this
Agreement, and until the Bank is repaid in full, each Borrower makes
the following representations and warranties. Each request for an
extension of credit constitutes a renewed representation.
6.1 Organization of Borrowers. Each Borrower is a corporation duly
formed and existing under the laws of the state where organized.
6.2 Authorization. This Agreement, and any instrument or agreement
required hereunder, are within each Borrower's powers, have been duly
authorized, and do not conflict with any of its organizational papers.
6.3 Enforceable Agreement. This Agreement, and each other agreement
or document executed and delivered to the Bank in connection with this
Agreement, is a legal, valid and binding agreement of each Borrower,
enforceable against each Borrower in accordance with its terms, and any
instrument or agreement required hereunder, when executed and
delivered, will be similarly legal, valid, binding and enforceable.
6.4 Good Standing. Each of the Borrowers is duly qualified to do
business as a foreign corporation and is in good standing in all
jurisdictions in which the ownership of its properties, the nature of
its activities or both makes such qualification necessary except for
such jurisdictions where the failure to be so qualified will not
materially adversely affect the financial condition, business or
operations of such Borrower, or prevent the enforcement of contracts
entered into.
6.5 No Conflicts. This Agreement does not conflict with any law,
agreement, or obligation by which any Borrower is bound.
6.6 Financial Information. All financial and other information that
has been or will be supplied to the Bank is:
(a) sufficiently complete to give the Bank accurate knowledge of the
Borrowers' financial condition.
(b) in form and content required by the Bank.
(c) in compliance with all government regulations that apply.
6.7 Lawsuits. There is no lawsuit, tax claim or other dispute
pending or threatened against any Borrower, which, if lost, would
impair the Borrowers' or any Borrower's financial condition or ability
to repay the loan, except as have been disclosed in writing to the Bank
prior to the date of this Agreement.
6.8 Collateral. All collateral required in this Agreement is owned
by the grantor of the security interest free of any title defects or
any liens or interests of others, other than liens or interests
consented to by Bank.
6.9 Permits, Franchises. Each Borrower possesses all permits,
memberships, franchises, contracts and licenses required and all
trademark rights, trade name rights, patent rights and fictitious name
rights necessary to enable it to conduct the business in which it is
now engaged, in all material respects.
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6.10 Other Obligations. No Borrower is in default on any obligation
for borrowed money, any purchase money obligation or any other material
lease, commitment, contract, instrument or obligation, which default
could have a material adverse effect on the business, operations, or
financial condition of the Borrower.
6.11 Income Tax Returns. No Borrower has knowledge of any pending
assessments or adjustments of its income tax for any year.
6.12 No Event of Default. There is no event which is, or with notice
or lapse of time or both would be, a default under this Agreement.
6.13 ERISA Plans.
(a) Each Borrower has fulfilled its obligations, if any, under the
minimum funding standards of ERISA and the Code with respect to
each Plan and is in compliance in all material respects with the
presently applicable provisions of ERISA and the Code, and has not
incurred any liability with respect to any Plan under Title IV of
ERISA.
(b) No reportable event has occurred under Section 4043(b) of ERISA
for which the PBGC requires 30 day notice.
(c) No action by any Borrower to terminate or withdraw from any Plan
has been taken and no notice of intent to terminate a Plan has
been filed under Section 4041 of ERISA.
(d) No proceeding has been commenced with respect to a Plan under
Section 4042 of ERISA, and no event has occurred or condition
exists which might constitute grounds for the commencement of such
a proceeding.
(e) The following terms have the meanings indicated for purposes of
this Agreement:
(i) "Code" means the Internal Revenue Code of 1986, as
amended from time to time.
(ii) "ERISA" means the Employee Retirement Security Income
Act of 1974, as amended from time to time.
(iii) "PBGC" means the Pension Benefit Guaranty
Corporation established pursuant to Subtitle A of Title IV of
ERISA.
(iv) "Plan" means any employee pension benefit plan
maintained or contributed to by any Borrower and insured by
the Pension Benefit Guaranty Corporation under Title IV of
ERISA.
6.14 Location of Borrowers. Each Borrower's place of business (or, if
any Borrower has more than one place of business, its chief executive
office) is located at the address listed under the Borrowers' signature
on this Agreement.
7. COVENANTS Each Borrower agrees that so long as credit is
available under this Agreement and until the Bank is repaid in full:
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7.1 Use of Proceeds. To use the proceeds of the credit only for
general corporate purposes, including the financing of accounts
receivable, capital expenditures, and business acquisitions, along with
the issuance of commercial and standby letters of credit.
7.2 Financial Information. To provide the following financial
information and statements and such additional information as requested
by the Bank from time to time:
(a) Within 90 days of the Borrowers' fiscal year end, the Borrowers'
annual financial statements and Borrowers' Form 10-K Annual
Report, including a compliance certificate (defined as a written
statement, including covenant calculations, signed by a corporate
officer certifying compliance with all required financial
covenants contained herein). These financial statements must be
audited (with an unqualified opinion) by a Certified Public
Accountant ("CPA") acceptable to the Bank. The statements shall be
prepared on a consolidated basis.
(b) Within 45 days of the period's end, the Borrowers' quarterly 10-Q
report or financial statements, including a compliance certificate
(defined as a written statement, including covenant calculations,
signed by a corporate officer certifying compliance with all
required financial covenants contained herein). The statements
shall be prepared on a consolidated basis.
(c) Annual one year projections within 90 days of each fiscal year
end.
7.3 Quick Ratio. To maintain on a consolidated basis a ratio of
quick assets to current liabilities of at least 2.00:1.0, measured
quarterly.
"Quick assets" means cash, short-term cash investments, net trade
receivables and marketable securities not classified as long-term
investments.
7.4 Minimum Tangible Net Worth. To maintain on a consolidated basis
minimum tangible net worth equal to at least the sum of the following
(measured quarterly):
(a) Thirty Five Million and no/100 Dollars ($35,000,000.00); plus
(b) the sum of 50% of net profit after income taxes (without
subtracting for losses) earned in each quarterly accounting period
commencing after December 31, 1997.
"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.
7.5 Total Liabilities to Tangible Net Worth Ratio. To maintain on a
consolidated basis a ratio of Total Liabilities to Tangible Net Worth
not exceeding 1.00:1.0, measured quarterly.
"Total Liabilities" means the sum of current liabilities plus long term
liabilities.
7.6 Cash Flow Ratio. To maintain on a consolidated basis a cash flow
ratio of at least 2.00:1.0.
"Cash flow ratio" means the ratio of cash flow to the sum of debt
service. "Debt Service" is defined as the
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current portion of long term debt, interest expense and 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 (excluding permitted dividends
of up to $19,500,000.00 in distributions relating to the final S
Corporation distributions declared during fiscal year-end 12/31/96 and
paid during the second quarter of fiscal year-end 1997), and
capitalized software costs.
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
fiscal quarters. The current portion of long term debt will be
measured as of the last day of the preceding fiscal year.
7.7 Other Debts. Not to have outstanding or incur any direct or
contingent debts (including capitalized leases) or lease obligations
(other than those to the Bank), or become liable for the debts of
others without the Bank's written consent. This does not prohibit:
(a) Acquiring goods, supplies, or merchandise on normal trade credit.
(b) Endorsing negotiable instruments received in the usual course of
business.
(c) Obtaining surety bonds in the usual course of business.
(d) Debts and lines of credit and leases in existence on the date of
this Agreement disclosed in writing to the Bank in the Borrowers'
annual report dated December 31, 1996.
(e) Additional debts and lease obligations for the acquisition of
fixed or capital assets or other business purposes which do not
exceed a total principal amount of Five Hundred Thousand and
no/100 Dollars ($500,000.00) outstanding at any one time
(excluding permitted acquisitions as defined in Paragraph 7.23
(e)).
7.8 Other Liens. Not to create, assume, or allow any security
interest or lien (including judicial liens) on property any Borrower
now or later owns, except:
(a) Deeds of trust and security agreements in favor of the Bank.
(b) Liens for taxes not yet due.
(c) Liens outstanding on the date of this Agreement disclosed in
writing to the Bank.
(d) Additional liens against the property of the Borrowers or any one
of them which secure obligations in a total principal amount not
exceeding Five Hundred Thousand and no/100 Dollars ($500,000.00).
7.9 Capital Expenditures. Not to spend or incur obligations
(including the total amount of any capital leases) for more than Eight
Million and no/100 Dollars ($8,000,000.000) in any single fiscal year
to acquire fixed or capital assets, exclusive of any acquisitions as
defined in paragraph 7.23 (e).
7.10 Dividends. Not to declare or pay any dividends or distributions
on any of the Borrowers' shares.
7.11 Loans to Related Entities. Not to make any loans, advances
(other than in the ordinary course of
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<PAGE>
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 the
foregoing, LabFusion, Inc., and Any Travel Inc.
7.12 Change of Ownership. Not to cause, permit, or suffer any change,
direct or indirect, in Borrower 1's capital ownership that would reduce
the ownership of Dr. Sidney Goldblatt, The Bradley Goldblatt Trust, The
Curtis Goldblatt Trust and The Jodi Goldblatt Trust, below 50.1%.
7.13 Out of Debt Period. To repay any advances in full, and not to
draw any additional advances on the Borrowers' revolving line of
credit, for a period of at least 30 consecutive days in each line-year.
"Line-year" means the period between the date of this Agreement and
April 30, 1999, and each subsequent one-year period (if any).
7.14 Notices to Bank. To promptly notify the Bank in writing of:
(a) any lawsuit over Five Hundred Thousand and no/100 Dollars
($500,000.00) against any one or more of the Borrowers.
(b) any substantial dispute between any Borrower or any guarantor and
any government authority.
(c) any failure to comply with this Agreement.
(d) any material adverse change in any Borrower's or any guarantor's
financial condition or operations.
(e) any change in any Borrower's name, legal structure, place of
business, or chief executive office if such Borrower has more than
one place of business.
7.15 Books and Records. To maintain adequate books and records.
7.16 Audits. To allow the Bank and its agents to inspect the
Borrowers' properties and examine, audit, and make copies of books and
records at any reasonable time after reasonable notice. If any of the
Borrowers' properties, books or records are in the possession of a
third party, the Borrowers authorize that third party to permit the
Bank or its agents to have access to perform inspections or audits and
to respond to the Bank's requests for information concerning such
properties, books and records.
7.17 Compliance with Laws. To comply in all material respects with
the laws, (including any fictitious name statute), regulations, and
orders of any government body with authority over each Borrower's
business.
7.18 Preservation of Rights. To maintain and preserve all rights,
privileges, and franchises each Borrower now has.
7.19 Maintenance of Properties. To make any repairs, renewals, or
replacements to keep each Borrower's properties in good working
condition.
7.20 Perfection of Liens. To help the Bank perfect and protect its
security interests and liens, and reimburse it for related costs it
incurs to protect its security interests and liens.
7.21 Cooperation. To take any action requested by the Bank to carry
out the intent of this Agreement.
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7.22 Insurance.
(a) Insurance Covering Collateral. To maintain all risk property
damage insurance policies covering the tangible property
comprising the collateral. Each insurance policy must be in an
amount acceptable to the Bank. The insurance must be issued by an
insurance company acceptable to the Bank and must include a
lender's loss payable endorsement in favor of the Bank in a form
acceptable to the Bank.
(b) General Business Insurance. To maintain insurance satisfactory
to the Bank as to amount, nature and carrier covering property
damage (including loss of use and occupancy) to any of the
Borrowers' properties, public liability insurance including
coverage for contractual liability, product liability and workers'
compensation, and any other insurance which is usual for the
Borrowers' business.
(c) Evidence of Insurance. Upon the request of the Bank, to deliver
to the Bank a copy of each insurance policy or, if permitted by
the Bank, a certificate of insurance listing all insurance in
force.
7.23 Additional Negative Covenants. Not to, without the Bank's
written consent:
(a) permit any Borrower to engage in any business activities
substantially different from such Borrower's present business.
(b) liquidate or dissolve the Borrowers' business.
(c) enter into any consolidation, merger, pool, syndicate, or other
combination, provided, however, that contractual arrangements with
other entities (not including the formation of a new entity) in
the ordinary course of business shall not be deemed to be a joint
venture for the purposes of this paragraph.
(d) lease, or dispose of all or a substantial part of the Borrowers'
or any Borrower's business or the Borrowers' or any Borrower's
assets except in the ordinary course of the business.
(e) (i) acquire a business through a stock or cash acquisition which
is not approved by the acquiree's board of directors or which is
otherwise a "hostile" or "unfriendly" acquisition.
(ii) for permitted acquisitions greater than Two Million and
No/100 Dollars ($2,000,000.00), Borrower to provide Bank with pro-
forma financial statements to confirm covenant compliance after
completion of proposed acquisition.
(f) sell or otherwise dispose of any assets for less than fair market
value or enter into any sale and leaseback agreement covering any
of the Borrowers' or any Borrower's fixed or capital assets.
(g) voluntarily suspend the Borrowers' or any Borrower's business for
more than 5 days in any 365 day period.
7.24 ERISA Plans. To give prompt written notice to the Bank of:
(a) The occurrence of any reportable event under Section 4043(b) of
ERISA for which the PBGC requires 30 day notice.
(b) Any action by any Borrower to terminate or withdraw from a Plan or
the filing of any notice of intent to terminate under Section 4041
of ERISA.
14
<PAGE>
(c) Any notice of noncompliance made with respect to a Plan under
Section 4041(b) of ERISA.
(d) The commencement of any proceeding with respect to a Plan under
Section 4042 of ERISA.
8. DEFAULT If any of the following events occur, the Bank may do
one or more of the following: declare the Borrowers in default, stop
making any additional credit available to the Borrowers, and require
the Borrowers to repay its entire debt immediately and without prior
notice. If an event of default occurs under the paragraph entitled
"Bankruptcy" below with respect to any Borrower, the entire debt
outstanding under this Agreement will automatically be due immediately.
8.1 Failure to Pay. Any Borrower fails to make a payment under this
Agreement within 10 days after the date when due.
8.2 Lien Priority. The Bank fails to have an enforceable first lien
(except for any prior liens to which the Bank has consented in writing)
on or security interest in any property given as security for the
extensions of credit under this Agreement.
8.3 False Information. Any Borrower has knowingly given the Bank
false or misleading information or representations.
8.4 Bankruptcy. Any Borrower files a bankruptcy petition, a
bankruptcy petition is filed against any Borrower, or any Borrower
makes a general assignment for the benefit of creditors. The default
will be deemed cured if any bankruptcy petition filed against any
Borrower is dismissed within a period of 30 days after the filing;
provided, however, that the Bank will not be obligated to extend any
additional credit to any Borrower during that period.
8.5 Receivers. A receiver or similar official is appointed for any
Borrower's business, or the business is terminated.
8.6 Judgments. Any judgments or arbitration awards are entered
against any one or more of Borrowers, or any one or more of Borrowers
enters into any settlement agreements with respect to any litigation or
arbitration, in an aggregate amount of Five Hundred Thousand and no/100
Dollars ($500,000.00) or more in excess of any insurance coverage.
8.7 Government Action. Any government authority takes action that
the Bank believes materially adversely affects any Borrower's financial
condition or ability to repay.
8.8 Material Adverse Change. A material adverse change occurs in any
Borrower's financial condition, properties or prospects, or ability to
repay the extensions of credit under this Agreement.
8.9 Cross-default. Any default occurs under any agreement in
connection with any credit any Borrower or any of the Borrowers'
related entities or affiliates has obtained from anyone else or which
any Borrower or any of the Borrowers' related entities or affiliates
has guaranteed, if the default consists of failing to make a payment
when due or gives the other lender the right to accelerate the
obligation or obligations.
8.10 Default under Related Documents. Any guaranty, subordination
agreement, security agreement,
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deed of trust, or other document required by this Agreement is violated or no
longer in effect.
8.11 Other Bank Agreements. Any Borrower fails to meet the conditions
of, or fails to perform any obligation under any other agreement any
Borrower has with the Bank or any affiliate of the Bank.
8.12 ERISA Plans. The occurrence of any one or more of the following
events with respect to any Borrower, provided such event or events
could reasonably be expected, in the judgment of the Bank, to subject
such Borrower to any tax, penalty or liability (or any combination of
the foregoing) which, in the aggregate, could have a material adverse
effect on the financial condition of such Borrower with respect to a
Plan:
(a) A reportable event shall occur with respect to a Plan which is, in
the reasonable judgment of the Bank, likely to result in the
termination of such Plan for purposes of Title IV of ERISA.
(b) Any Plan termination (or commencement of proceedings to terminate
a Plan) or such Borrower's full or partial withdrawal from a Plan.
8.13 Other Breach Under Agreement. Any Borrower fails to meet the
conditions of, or fails to perform any obligation under, any term of
this Agreement not specifically referred to in this Article. If, in
the Bank's opinion, the breach is capable of being remedied, then the
breach will not be considered an event of default under this Agreement
for a period of 10 days after the date on which the Bank gives written
notice of the breach to such Borrower; provided, however, that the Bank
will not be obligated to extend any additional credit to the Borrowers
during that period.
9. ENFORCING THIS AGREEMENT; MISCELLANEOUS
9.1 GAAP. Except as otherwise stated in this Agreement, all
financial information provided to the Bank and all financial covenants
will be made under generally accepted accounting principles,
consistently applied.
9.2 Arizona Law. This Agreement is governed by Arizona law.
9.3 Successors and Assigns. This Agreement is binding on the
Borrowers' and the Bank's successors and assignees. The Borrowers
agree that they may not assign this Agreement without the Bank's prior
consent.
9.4 Arbitration.
(a) This paragraph concerns the resolution of any controversies or
claims between any one or more of Borrowers and the Bank,
including but not limited to those that arise from:
(i) This Agreement (including any renewals, extensions or
modifications of this Agreement);
(ii) Any document, agreement or procedure related to or
delivered in connection with this Agreement;
(iii) Any violation of this Agreement; or
(iv) Any claims for damages resulting from any business
conducted between any one or more
16
<PAGE>
Borrowers and the Bank, including claims for injury to persons,
property or business interests (torts).
(b) At the request of any Borrower or the Bank, any such controversies
or claims will be settled by arbitration in accordance with the
United States Arbitration Act. The United States Arbitration Act
will apply even though this Agreement provides that it is governed
by Arizona law.
(c) Arbitration proceedings will be administered by the American
Arbitration Association and will be subject to its commercial
rules of arbitration.
(d) For purposes of the application of the statute of limitations, the
filing of an arbitration pursuant to this paragraph is the
equivalent of the filing of a lawsuit, and any claim or
controversy which may be arbitrated under this paragraph is
subject to any applicable statute of limitations. The arbitrators
will have the authority to decide whether any such claim or
controversy is barred by the statute of limitations and, if so, to
dismiss the arbitration on that basis.
(e) If there is a dispute as to whether an issue is arbitrable, the
arbitrators will have the authority to resolve any such dispute.
(f) The decision that results from an arbitration proceeding may be
submitted to any authorized court of law to be confirmed and
enforced.
(g) This provision does not limit the right of the Borrowers or the
Bank to:
(i) exercise self-help remedies such as setoff;
(ii) foreclose against or sell any real or personal property
collateral; or
(iii) act in a court of law, before, during or after the
arbitration proceeding to obtain:
(A) an interim remedy; and/or
(B) additional or supplementary remedies.
(h) The pursuit of or a successful action for interim, additional or
supplementary remedies, or the filing of a court action, does not
constitute a waiver of the right of the Borrowers or the Bank,
including the suing party, to submit the controversy or claim to
arbitration if the other party contests the lawsuit.
(i) If the Bank forecloses against any real property securing this
Agreement, the Bank has the option to exercise the power of sale
under the deed of trust or mortgage, or to proceed by judicial
foreclosure.
9.5 Severability; Waivers. If any part of this Agreement is not
enforceable, the rest of the Agreement may be enforced. The Bank
retains all rights, even if it makes a loan after default. If the Bank
waives a default, it may enforce a later default. Any consent or
waiver under this Agreement must be in writing.
9.6 Administration Costs. The Borrowers shall pay the Bank for all
reasonable costs incurred by the
17
<PAGE>
Bank in connection with administering this Agreement.
9.7 Attorneys' Fees. The Borrowers shall reimburse the Bank for any
reasonable costs and attorneys' fees incurred by the Bank in connection
with the enforcement or preservation of any rights or remedies under
this Agreement and any other documents executed in connection with this
Agreement, and including any amendment, waiver, "workout" or
restructuring under this Agreement. In the event of a lawsuit or
arbitration proceeding, the prevailing party is entitled to recover
costs and reasonable attorneys' fees incurred in connection with the
lawsuit or arbitration proceeding, as determined by the court or
arbitrator. As used in this paragraph, "attorneys' fees" includes the
allocated costs of in-house counsel.
9.8 Joint and Several Liability.
(a) Each Borrower agrees that it is jointly and severally liable to
the Bank for the payment of all obligations arising under this
Agreement, and that such liability is independent of the
obligations of the other Borrower(s). The Bank may bring an action
against any Borrower, whether an action is brought against the
other Borrower(s).
(b) Each Borrower agrees that any release which may be given by the
Bank to the other Borrower(s) or any guarantor will not release
such Borrower from its obligations under this Agreement.
(c) Each Borrower waives any right to assert against the Bank any
defense, setoff, counterclaim, or claims which such Borrower may
have against the other Borrower(s) or any other party liable to
the Bank for the obligations of the Borrowers under this
Agreement.
(d) Each Borrower agrees that it is solely responsible for keeping
itself informed as to the financial condition of the other
Borrower(s) and of all circumstances which bear upon the risk of
nonpayment. Each Borrower waives any right it may have to require
the Bank to disclose to such Borrower any information which the
Bank may now or hereafter acquire concerning the financial
condition of the other Borrower(s).
(e) Each Borrower waives all rights to notices of default or
nonperformance by any other Borrower under this Agreement. Each
Borrower further waives all rights to notices of the existence or
the creation of new indebtedness by any other Borrower.
(f) The Borrowers represent and warrant to the Bank that each will
derive benefit, directly and indirectly, from the collective
administration and availability of credit under this Agreement.
The Borrowers agree that the Bank will not be required to inquire
as to the disposition by any Borrower of funds disbursed in
accordance with the terms of this Agreement.
(g) Each Borrower waives any right of subrogation, reimbursement,
indemnification and contribution (contractual, statutory or
otherwise), including without limitation, any claim or right of
subrogation under the Bankruptcy Code (Title 11 of the U.S. Code)
or any successor statute, which such Borrower may now or hereafter
have against any other Borrower with respect to the indebtedness
incurred under this Agreement. Each Borrower waives any right to
enforce any remedy which the Bank now has or may hereafter have
against any other Borrower, and waives any benefit of, and any
right to participate in, any security now or hereafter held by the
Bank.
9.9 One Agreement. This Agreement and any related security or other
agreements required by this Agreement, collectively:
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<PAGE>
(a) represent the sum of the understandings and agreements between the
Bank and the Borrowers concerning this credit; and
(b) replace any prior oral or written agreements between the Bank and
the Borrowers concerning this credit; and
(c) are intended by the Bank and the Borrowers as the final, complete
and exclusive statement of the terms agreed to by them.
In the event of any conflict between this Agreement and any other
agreements required by this Agreement, this Agreement will prevail.
9.10 Exchange of Information. The Borrowers agree that the Bank may
exchange financial information about the Borrowers with BankAmerica
Corporation affiliates and other related entities.
9.11 Usury Laws. This paragraph covers the transactions described in
this Agreement and any other agreements with the Bank or its affiliates
executed in connection with this Agreement, to the extent they are
subject to the Arizona usury laws (the "Transactions"). The Borrowers
understand and believe that the Transactions comply with the Arizona
usury laws. However, if any interest or other charges paid or payable
in connection with the Transactions are ever determined to exceed the
maximum amount permitted by law, the Borrowers agree that:
(a) the amount of interest or other charges payable by the Borrowers
pursuant to the Transactions shall be reduced to the maximum
amount permitted by law; and
(b) any excess amount previously collected from the Borrowers in
connection with the Transactions which exceeded the maximum amount
permitted by law will be credited against the then outstanding
principal balance. If the outstanding principal balance has been
repaid in full, the excess amount paid will be refunded to the
Borrowers.
All fees, charges, goods, things in action or any other sums or things
of value, other than interest at the interest rate described in this
Agreement, paid or payable by the Borrowers (collectively the
"Additional Sums"), that may be deemed to be interest with respect to
the Transactions, shall, for the purpose of any laws of the State of
Arizona that may limit the maximum amount of interest to be charged
with respect to the Transactions, be payable by Borrowers as, and shall
be deemed to be, additional interest. For such purposes only, the
agreed upon and "contracted for rate of interest" of the Transactions
shall be deemed to be increased by the rate of interest resulting from
the Additional Sums.
9.12 Notices. All notices required under this Agreement shall be
personally delivered or sent by first class mail, postage prepaid, to
the addresses on the signature page of this Agreement, or to such other
addresses as the Bank and the Borrowers may specify from time to time
in writing.
9.13 Headings. Article and paragraph headings are for reference only
and shall not affect the interpretation or meaning of any provisions of
this Agreement.
9.14 Counterparts. This Agreement may be executed in as many
counterparts as necessary or convenient, and by the different parties
on separate counterparts each of which, when so executed, shall be
deemed an original but all such counterparts shall constitute but one
and the same agreement.
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9.15 Prior Agreement Superseded. This Agreement supersedes the
Business Loan Agreement entered into as of March 8, 1996, between the
Bank and the Borrowers, as such agreement has been amended from time to
time prior to the date hereof, and any credit outstanding thereunder
shall be deemed to be outstanding under this Agreement.
This Agreement is executed as of the date stated at the top of the
first page.
Bank of America National Trust Sunquest Information Systems, Inc.
and Savings Association
By: /s/ Nina M. Dmetruk
-------------------
By: /s/ Sean Dickes Nina M. Dmetruk, Chief Financial Officer
---------------
Sean Dickes, Vice President
Sunquest Europa Limited
Address where notices to the Bank By: /s/ Nina M. Dmetruk
are to be sent: -------------------
Nina M. Dmetruk, Director
Tucson Commercial Loans, #2322
P.O. Box 26936
Tucson, Arizona 85726 Antrim Corporation
By: /s/ Nina M. Dmetruk
-------------------
Nina M. Dmetruk, Secretary
Sunquest Pharmacy Information
Systems, Inc.
By: /s/ Nina M. Dmetruk
-------------------
Nina M. Dmetruk, Secretary
Sunquest Germany GmbH
By: /s/ Nina M. Dmetruk
-------------------
Nina M. Dmetruk, Secretary
Address where notices to the Borrowers
are to be sent:
1407 Eisenhower, Suite 200
Johnstown, PA 15904-3217
with a copy to:
Stanley J. Lehman, Esq.
Klett Lieber Rooney & Schorling
40th Floor, One Oxford Centre
Pittsburgh, PA 15219
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Exhibit 13B
SUNQUEST INFORMATION SYSTEMS, INC.
Table of Contents for Financial Section of 1997 Annual Report
Management's Discussion and Analysis 2
Report of Independent Auditors 13
Consolidated Financial Statements and Notes 14
Selected Consolidated Financial Data 37
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MANAGEMENT'S DISCUSSION AND ANALYSIS
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 a public company on
June 10, 1996, when it closed its initial offering to the public
of Common Stock.
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 basic 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.
On August 29, 1997, MSC Acquisition, Inc., a newly formed
subsidiary of the Company, purchased certain inpatient pharmacy
software systems comprising the PreciseCare Medication Management
System ("PreciseCare") from Medintell Systems Corporation
("Medintell"), for $1.4 million in cash and the assumption of
certain obligations and transition costs. MSC Acquisition, Inc.
was subsequently renamed "Sunquest Pharmacy Information Systems,
Inc." ("Sunquest Pharmacy") and the product was renamed
"FlexiMed." The addition of pharmacy systems is an important
component in the Company's strategy to be a "best-of-suite
vendor" in enterprise clinical departmental systems. In
conjunction with the purchase of the PreciseCare software, the
Company charged operations $1.3 million for acquired, in-process
technology. The after-tax effect of this charge to operations
was to reduce net income by $1.1 million, or $.07 per share. In
addition, the Company and ValueRx Inc., an affiliate of
Medintell, have entered into a marketing arrangement with respect
to PreciseCare.
On November 26, 1997, Sunquest Pharmacy entered into a
Software License Agreement ("Agreement") with MEDITrust
Healthcare Services, Inc. ("Meditrust") for an outpatient
pharmacy system for $750,000 in cash. The Agreement grants the
Company a perpetual, fully paid-up, worldwide, non-exclusive
license to modify, interface, market, sublicense, support, copy
and otherwise use the software, including the source code and
object code. The Company plans to continue to develop and to
market these pharmacy systems through Sunquest Pharmacy.
At December 31, 1997, the Company had an installed
customer base of more than 1,060 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
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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.
During the third quarter of 1997, the Company reduced the
carrying value of IntelliCare software development costs by $1.5
million. The adjustment was related to certain modules
incorporated into the Company's IntelliCare suite of products
that had not generated sufficient sales to justify continued
capitalization. During the fourth quarter of 1997, the Company
decided to discontinue the sale of its IntelliCare suite of
products as an enterprise-wide computerized patient record
solution and to discontinue the development of a nurse clinical
documentation system. In connection with the discontinuation of
such products, the Company charged operations $890,000. The
Company plans to refocus its technology and development efforts
on the integration of its suite of laboratory, radiology and
pharmacy information systems, the Clinical Event Manager rules-
based alerts system and the Laboratory Data Network system for
medical laboratory consortia. The after-tax effect of both the
third and fourth quarter charges to operations was a reduction to
net income of $1.5 million, or $.10 per share.
Net income for 1997 and pro forma net income for 1996 and
1995 was $2.8 million, $4.0 million and $2.2 million,
respectively. Basic earnings per share were $.18 in 1997. Pro
forma basic earnings per share were $.29 in 1996, and $.18 in
1995. The after-tax effect of the previously described charges
to operations on basic earnings per share was:
Year Ended December 31,
------------------------------
1997 1996 1995
-------- -------- --------
Income and pro forma income per
share excluding charges to
operations $ .35 $ .52 $ .18
Acquired, in-process technology,
net of tax (.07) (.23) -
Capitalized software development
cost adjustments, net of tax
provision (.10) - -
------ ------ ------
$ .18 $ .29 $ .18
====== ====== ======
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,
consulting revenues, custom programming revenues and revenues
associated with maintenance and support services.
The sales cycle for the Company's LISs 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
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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 and are determined based upon actual hours incurred
related to total estimated installation hours in accordance with
Statement of Position ("SOP") 91-1, "Software Revenue
Recognition." 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, 1997, the Company had a total contract
backlog of $99.5 million, which consisted of $49.3 million of
system sales and $50.2 million of support and service. At
December 31, 1996, total contract backlog was $87.3 million,
which consisted of $41.9 million of system sales and $45.4
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.
Year 2000 Compliance
- --------------------
The year 2000 issue is the result of computer programs being
written using two digits rather than four to define the
applicable year. Any of the Company's software programs, whether
sold as products of the Company or used internally, may recognize
a date using "00" as the year 1900 rather than the year 2000.
This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a
temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Based on a recent assessment, the Company believes that the
current releases of its products are all year 2000 compliant.
The Company plans to have all clients converted to year 2000
compliant versions of its products by September 1999. Pursuant
to contract terms, clients are obligated to cooperate with the
Company in the installation of system enhancements, including the
current year 2000 compliant versions.
4
<PAGE>
In addition, the Company has determined that only a small
portion of software programs developed by other vendors and
utilized internally will require upgrades to new versions to
properly utilize dates beyond December 31, 1999. After reviewing
the plans of these vendors, the Company believes that the
upgrades to such software programs will be completed by the end
of 1998. The cost of year 2000 compliant software related to
systems developed by other vendors and used internally is
included in maintenance agreements. The Company believes that
consulting costs incurred in accomplishing the installation of
year 2000 compliant software will be immaterial.
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.
Year Ended December 31,
---------------------------
1997 1996 1995
------- ------- -------
Revenues:
System sales 51.6 % 55.6 % 52.4 %
Support and service 48.4 44.4 47.6
----- ----- -----
Total revenues 100.0 100.0 100.0
----- ----- -----
Operating expenses:
Cost of system sales 25.4 24.8 22.9
Client services 26.8 22.7 28.8
Research and development 12.9 12.3 14.7
Sales and marketing 13.7 13.5 14.2
General and administrative 12.1 12.0 11.5
Capitalized software
development cost
adjustments 2.4 - -
Acquired, in-process
technology 1.2 4.0 -
----- ----- -----
Total operating expenses 94.5 89.3 92.1
----- ----- -----
Operating income 5.5 10.7 7.9
Other income (expense):
Interest income 1.1 1.6 0.7
Interest expense (1.2) (1.7) (2.4)
Other (0.3) (0.1) 0.1
----- ----- -----
Income before income taxes 5.1 10.5 6.3
Income tax provision:
Current year operations 2.4 3.4 0.1
Change in tax status - 1.4 -
----- ----- -----
Net income 2.7 % 5.7 % 6.2 %
===== ===== =====
Pro forma data (unaudited):
Historical income
before income taxes - % 10.5 % 6.3 %
Pro forma income tax
provision - 5.5 2.7
----- ----- -----
Pro forma net income - % 5.0 % 3.6 %
===== ===== =====
5
<PAGE>
Comparison of Years Ended December 31, 1997 and December 31, 1996
Revenues. The Company's total revenues were $102.3 million
in 1997 compared to $81.0 million in 1996, an increase of $21.3
million, or 26.3%. Revenues from system sales were $52.8 million
in 1997 compared to $45.1 million in 1996, an increase of $7.7
million, or 17.1%. This increase was primarily attributable to
the addition of Antrim, increases in installations of hardware
for existing customers and increases in installations of software
for existing and new customers. Revenues from support and service
were $49.6 million in 1997 compared to $35.9 million in 1996, an
increase of $13.6 million, or 38.0%. This increase was primarily
attributable to the addition of Antrim, the Company's increased
installed customer base, and increases in consulting and custom
services.
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 $26.0 million in 1997 compared to $20.1 million
in 1996, an increase of $6.0 million, or 29.7%. As a percentage
of total revenues, cost of system sales was 25.4% in 1997
compared to 24.8% in 1996. The dollar increase was primarily
attributable to the addition of Antrim and increases in hardware
and operating system deliveries. Amortization of previously
capitalized software development costs was $3.6 million for 1997
compared to $2.2 million for 1996, an increase of $1.4 million,
or 65.4%. This increase in amortization was primarily
attributable to the addition of Antrim and to the licensing of
third-party software.
Client Services. Client services expenses include salaries
and expenses of product installation and support. Client
services expenses were $27.4 million in 1997 compared to $18.4
million in 1996, an increase of $9.0 million, or 49.1%. As a
percentage of total revenues, client services expenses were 26.8%
in 1997 compared to 22.7% in 1996. The dollar increase in client
services expenses was primarily attributable to the addition of
Antrim, additional staff dedicated to the support and
installation of the Company's systems and additional staff
dedicated to providing consulting services to customers.
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 $13.2
million in 1997 compared to $10.0 million in 1996, an increase of
$3.3 million, or 32.6%. As a percentage of total revenues,
research and development expenses were 12.9% in 1997 compared to
12.3% in 1996. The dollar increase in research and development
expenses was attributable to additional staff dedicated to the
development of new releases of the LIS systems, the addition of
Antrim, development costs related to the new pharmacy products
and to additional staff dedicated to the evaluation and
development of new technologies. The Company capitalized $3.7
million of its software development costs in 1997 compared to
$2.8 million in 1996, an increase of $877,000, or 31.5%. This
increase in capitalized software development costs was primarily
attributable to the addition of Antrim's product lines.
6
<PAGE>
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 $14.0 million in 1997
compared to $10.9 million in 1996, an increase of $3.1 million,
or 28.6%. As a percentage of total revenues, sales and marketing
expenses were 13.7% in 1997 compared to 13.5% in 1996. The
dollar increase was primarily attributable to the addition of
Antrim, increased sales and marketing staff, increased
commissions resulting from a 28.6% growth in sales bookings in
1997 and increased advertising and promotional allowances.
General and Administrative. General and administrative
expenses include salaries and expenses for the corporate
administration, finance, legal, human resources, corporate
education, facilities administration, internal systems and
internal purchasing departments as well as depreciation, profit
sharing, variable executive compensation, insurance and capital
lease amortization net of rental credit. General and
administrative expenses were $12.3 million in 1997 compared to
$9.8 million in 1996, an increase of $2.6 million, or 26.5%. As
a percentage of total revenues, general and administrative
expenses were 12.1% in 1997 compared to 12.0% in 1996. The
dollar increase was primarily attributable to the addition of
Antrim, increased depreciation expense resulting from additions
of property and equipment, the addition of Sunquest Pharmacy and
additional employees and increased professional service costs
related to the Company's public status. These increases were
partially offset by decreased variable compensation relating to
operating income below expectations and increased rental income
received from leasing a portion of the building the Company
purchased in February 1997.
Transition Costs. For the year ended December 31, 1997, the
Company paid previously accrued transition costs established at
the time of the acquisition of Antrim of $1.9 million as compared
to $109,000 paid in 1996. These costs were primarily associated
with replacing certain Antrim software products with Sunquest
products and employee costs and professional services related to
the acquisition. In 1997, the Company also paid transition costs
related to the purchase of the PreciseCare pharmacy software
systems of $217,000. These costs were also primarily associated
with employee costs and professional services related to the
purchase.
Income Taxes. Income taxes were $2.5 million in 1997
compared to $3.9 million in 1996, a decrease of $1.4 million, or
35.7%. This decrease was primarily attributable to lower taxable
income in 1997 compared to 1996. At December 31, 1997, the
Company had an operating loss for tax purposes of approximately
$4.0 million that was generated by Antrim. Of this amount,
approximately $440,000 can be carried back to Antrim's separate
company tax return for 1994 and approximately $3.3 million can be
carried forward and used to offset Antrim's future taxable
income. The remaining balance can be carried forward and used to
offset future consolidated 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 $1.4 million. The Company anticipates that future
taxable income will be sufficient to realize the net operating
loss carryforward. See Note 1 and Note 11 of Notes to
Consolidated Financial Statements.
7
<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 growth in the Company's installed customer base. Total
revenues for Antrim, subsequent to the date of acquisition, were
$2.2 million.
Cost of System Sales. 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%. As a percentage of total revenues, cost of
system sales was 24.8% in 1996 compared to 22.9% in 1995. The
dollar 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 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.
The 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
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. The 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 were $10.9
million in 1996 compared to $8.7 million in 1995, an increase of
$2.2 million, or 24.8%. As a percentage of total revenues, sales
and marketing expenses were 13.5% in 1996 compared to 14.2% in
1995. The dollar 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.
General and Administrative. 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. The dollar increase in general
and administrative expenses was primarily attributable to
increased variable compensation and employee benefits resulting
from increased levels of operating income, accruals for sales tax
liabilities, depreciation, the addition of Antrim, increased
8
<PAGE>
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.
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 during the second quarter
ended June 30, 1996 for deferred taxes associated with previously
untaxed temporary differences. At December 31, 1996, the Company
had net operating losses of approximately $5.3 million that were
generated by Antrim. This loss carryforward is subject to
limitations as to the amount and timing of its use. Accordingly,
a valuation allowance of $950,000 was provided.
Liquidity and Capital Resources
- -------------------------------
At December 31, 1997, the Company had cash and cash
equivalents of $23.7 million compared to $31.9 million at
December 31, 1996, a decrease of $8.2 million. Cash provided by
operating activities was $11.2 million, $6.6 million and $5.4
million in 1997, 1996 and 1995, respectively.
As of December 31, 1997, the Company had net trade
receivables of $36.5 million which consisted of $27.9 million in
net billed trade receivables and $8.6 million in unbilled trade
receivables. See Note 7 of Notes to Consolidated Financial
Statements. 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 $6.3
million since December 31, 1996, with $3.4 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 under contractual milestone billings. The Company
believes that this increase in unbilled receivables is primarily
a result of the timing of system sales and installations in the
year. 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
91 days at December 31, 1997 and 77 days at December 31, 1996.
The increase in average collection period, a rolling twelve-month
average, is primarily the result of resource constraints in
collections staffing which was corrected during the fourth quarter. Days
sales outstanding ("DSO") was 129 at December 31, 1997 compared
to 152 at September 30, 1997 and 109 at December 31, 1996.
9
<PAGE>
Cash used in investing activities was $14.8 million, $7.7
million and $4.5 million in 1997, 1996 and 1995, respectively.
Purchases of software, property and equipment during 1997 totaled
$6.3 million. Of this amount, $1.4 million was used to purchase
the PreciseCare software and $1.8 million was used on February
21, 1997 to purchase land and a building located in Tucson,
Arizona, which is currently being leased to third parties but
will eventually be used for customer-related activities. The
remaining $3.1 million was used primarily for computers and
computer-related equipment and office equipment. Capitalized
software development costs totaled $5.4 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 due to be
paid by February 1999. In addition, on November 26, 1997
Sunquest Pharmacy entered into a software license agreement with
Meditrust for an outpatient pharmacy system for $750,000 in cash.
The agreement grants the Company a perpetual, fully paid-up,
worldwide, non-exclusive license to modify, interface, market,
sublicense, support, copy and otherwise use the software,
including the source code and object code. Costs related to
acquisitions totaled $3.1 million. Of this amount, $2.9 million
was related to Antrim and was primarily associated with sales
taxes, replacing certain Antrim software products with Sunquest
products and employee costs and professional services related to
the acquisition. In addition, the Company also paid transition
costs related to the purchase of the PreciseCare software of
$217,000. These costs were also primarily associated with
employee costs and professional services related to the purchase.
Cash (used in) provided by financing activities was ($4.5)
million, $32.5 million and ($1.7) million in 1997, 1996 and 1995,
respectively. During 1997, the Company paid the "Second S
Corporation Distribution," of $3.6 million which was based on the
Company's actual undistributed cumulative S corporation taxable
earnings from January 1, 1996 through May 29, 1996. In addition,
the Company made principal payments on long-term debt and capital
leases of $289,000 and $694,000, respectively. Also during 1997,
the Company issued 13,375 shares of Common Stock with net
proceeds of approximately $134,000 in connection with the
Employee Stock Purchase Plan.
At December 31, 1997, working capital was $38.1 million, a
decrease of $975,000 from December 31, 1996.
At December 31, 1997, 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 April 30, 1999 except for any amounts
outstanding under standby 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
10
<PAGE>
credit and is not available for immediate expenditure. There
were no borrowings outstanding as of December 31, 1997. See Note
10 of Notes to Consolidated Financial Statements.
Other than the $2.0 million related to the VAR agreement
with Dynamic, the Company currently has no significant
commitments for capital expenditures. Of the $2.0 million
payable to Dynamic, $1.0 million was due in February 1998 and
$1.0 million is a long-term obligation. The $1.0 million payment
due in February 1998 is currently being withheld pending
satisfaction of obligations under the contract. The Company
anticipates that this payment will be made during the first
quarter of 1998. The Company continues to be actively involved
in identifying and evaluating potential acquisitions which may
result in the future expenditure of funds.
Management believes that existing cash and cash equivalents,
cash available under its revolving line of credit and funds
generated from operations will be sufficient to meet operating
requirements for at least the next twelve months.
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.
New Accounting Standards
- ------------------------
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS No. 128"). Under the new provisions
for calculating earnings per share, the dilutive effect of stock
options has been excluded in the determination of "basic"
earnings per share and only included in "diluted" earnings per
share. All net income or pro forma net income per share amounts
for all periods have been presented, and where appropriate,
restated to conform to SFAS No. 128 requirements. See Note 3 of
Notes to Consolidated Financial Statements.
In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS No. 130"), which requires
businesses to disclose comprehensive income and its components in
general purpose financial statements with reclassification of
prior period financial statements. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997 and its adoption
is not expected to have a material impact on the Company's
disclosures.
In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"), which redefines how operating
segments are determined and requires disclosure of certain
financial and descriptive information about a company's operating
segments. SFAS No. 131 is effective for fiscal years beginning
after December 15, 1997. The Company is currently evaluating the
effects, if any, the adoption of this pronouncement will have on
the disclosure of its historical data.
In October 1997, the American Institute of Certified Public
Accountants issued SOP 97-2, "Software Revenue Recognition,"
revising certain aspects of SOP 91-1. SOP 97-2 will become
11
<PAGE>
effective for transactions occurring in years beginning after
December 15, 1997. The Company does not expect that SOP 97-2
will materially affect its revenue recognition policies with
respect to software license fees which are recognized as part of
the Company's overall software contracts and are determined based
upon actual hours incurred related to total estimated
installation hours in accordance with SOP No. 91-1.
Forward-Looking Statements
- --------------------------
This report, and other reports and communications to
shareholders, contains forward-looking statements, including
statements which contain words such as "will," "expects,"
"believes," "plans," "anticipates" and words of similar impact.
Certain risk factors, including but not limited to dependence on
LIS products, competition in the marketplace, purchase and
installation decisions of customers, pricing decisions of
competitors and development risks and uncertainties could cause
actual results to differ materially from such forward-looking
statements. These and other risks are detailed in the Company's
Securities and Exchange Commission filings.
12
<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, 1997 and 1996 and the related consolidated
statements of income, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the
Company's 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, 1997 and 1996 and the consolidated
results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
February 13, 1998
13
<PAGE>
SUNQUEST INFORMATION SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1996
-------- --------
(in thousands, except share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $23,692 $31,911
Receivables, less allowance for
doubtful accounts of $1,952
in 1997 and $3,443 in 1996 36,547 30,283
Other receivables 392 829
Inventory 665 1,843
Prepaid expenses and other 1,109 1,006
Deferred tax assets 1,898 3,940
------- -------
Total current assets 64,303 69,812
Property and equipment, net of
accumulated depreciation 11,513 9,371
Capital leases from related party, net
of accumulated depreciation 4,096 4,888
Software development costs, net of
accumulated amortization 12,252 9,936
Other receivables 195 1,076
Deferred tax assets 346 -
Intangibles, net of accumulated
amortization 1,392 1,707
Other assets 76 121
------- -------
Total assets $94,173 $96,911
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,401 $ 2,833
Current portion of long-term debt - 289
Obligations under capital leases,
primarily from related party 800 653
Accrued compensation and related
taxes 4,523 4,669
Accrued expenses 4,957 6,817
Deferred revenue 11,519 11,586
Deferred income taxes 13 -
Dividend payable - 3,900
Other liabilities 1,000 -
------- -------
Total current liabilities 26,213 30,747
Obligations under capital leases,
primarily from related party 5,080 5,921
Deferred income taxes 1,167 2,076
Transition costs 891 1,400
Other liabilities 1,000 -
Commitments and contingencies (Note 13) - -
Shareholders' equity:
Preferred stock, 15,000,000 shares
authorized, no shares issued - -
Common stock, no par value,
35,000,000 shares authorized,
15,375,962 and 15,362,587 shares
issued and outstanding 50,474 50,340
Retained earnings 9,403 6,334
Foreign currency translation
adjustment (55) 93
------- -------
Total shareholders' equity 59,822 56,767
------- -------
Total liabilities and
shareholders' equity $94,173 $96,911
======= =======
</TABLE>
See accompanying notes.
14
<PAGE>
SUNQUEST INFORMATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C>
Revenues:
System sales $ 52,761 $45,059 $32,262
Support and service 49,576 35,937 29,270
-------- ------- -------
Total revenues 102,337 80,996 61,532
-------- ------- -------
Operating expenses:
Cost of system sales 26,015 20,056 14,085
Client services 27,438 18,401 17,764
Research and development 13,244 9,988 9,040
Sales and marketing 14,007 10,896 8,734
General and administrative 12,343 9,758 7,068
Capitalized software
development cost adjustments 2,419 - -
Acquired, in-process technology 1,211 3,252 -
-------- ------- -------
Total operating expenses 96,677 72,351 56,691
-------- ------- -------
Operating income 5,660 8,645 4,841
Other income (expense):
Interest income 1,154 1,345 408
Interest expense (1,237) (1,395) (1,465)
Other (316) (98) 78
-------- ------- -------
Income before income taxes 5,261 8,497 3,862
Income tax provision:
Current year operations 2,491 2,755 73
Change in tax status - 1,122 -
-------- ------- -------
Net income $ 2,770 $ 4,620 $ 3,789
======== ======= =======
Pro forma data (unaudited):
Historical income
before income taxes $ - $ 8,497 $ 3,862
Pro forma income tax provision - 4,459 1,661
-------- ------- -------
Pro forma net income $ - $ 4,038 $ 2,201
======== ======= =======
Net income per common share:
Basic and diluted $ .18 $ .29 $ .18
======== ======= =======
Weighted-average number
of common shares outstanding:
Basic 15,369 13,919 11,904
======== ======= =======
Diluted 15,428 13,919 11,904
======== ======= =======
</TABLE>
See accompanying notes.
15
<PAGE>
SUNQUEST INFORMATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Foreign
Total Currency Total
Common Stock Common Stock Share Retained Translation Shareholders'
Shares Amount Shares Amount Capital Earnings Adjustment Equity
---------- -------- -------- -------- --------- ---------- ------------ ---------------
(in thousands, except share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
S corporation distribution
adjustment - - - - - 299 - 299
Issuance of common stock
through Employee Stock
Purchase Plan, net 13,375 134 - - - - - 134
Foreign currency
translation adjustment - - - - - - (148) (148)
Net income - - - - - 2,770 - 2,770
---------- ------- --- ----- --- ------- ---- -------
Balance at December 31, 1997 15,375,962 $50,474 - $ - $ - $ 9,403 ($55) $59,822
========== ======= === ===== === ======= ==== =======
</TABLE>
See accompanying notes.
16
<PAGE>
SUNQUEST INFORMATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1997 1996 1995
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,770 $ 4,620 $ 3,789
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 7,773 5,077 4,339
Capitalized software development
cost adjustments 2,419 - -
Acquired, in-process technology 1,211 3,252 -
Loss (gain) on disposition of equipment 10 102 (1)
Bad debt expense 1,125 506 495
Deferred revenue (395) 1,627 2,809
Deferred income taxes 1,087 347 -
Increase in cash surrender value
of life insurance - - (194)
Changes in operating assets and
liabilities, net of acquisitions:
Receivables (6,822) (9,860) (3,914)
Inventory 1,178 (107) 481
Prepaid expenses and other (118) (48) (112)
Other assets 1,347 (107) (280)
Accounts payable 568 (245) (1,625)
Accrued compensation and related taxes (160) 1,007 (32)
Other accrued expenses (771) 463 (350)
-------- -------- --------
Net cash provided by operating activities 11,222 6,634 5,405
-------- -------- --------
Cash flows from investing activities:
Acquisition of Antrim Corporation,
net of cash acquired 13 (4,493) -
Purchase of PreciseCare Pharmacy System (1,410) - -
Repayment of notes receivable to related party - 3,271 940
Purchase of property and equipment (4,931) (3,701) (2,671)
Costs related to acquisitions (3,103) - -
Capitalized software development costs (5,412) (2,785) (2,806)
-------- -------- --------
Net cash used in investing activities (14,843) (7,708) (4,537)
-------- -------- --------
Cash flows from financing activities:
Net (repayments) borrowings on line of credit - (1,900) 1,900
Principal payments on debt (289) (297) (300)
Principal payments on capitalized
leases, primarily from related party (694) (516) (426)
Net proceeds from issuance of stock 134 50,266 17
S corporation distribution (3,601) (15,031) (2,877)
-------- -------- --------
Net cash (used in) provided
by financing activities (4,450) 32,522 (1,686)
-------- -------- --------
Foreign currency translation adjustment (148) 111 (19)
-------- -------- --------
Net (decrease) increase in
cash and cash equivalents (8,219) 31,559 (837)
Cash and cash equivalents at beginning of year 31,911 352 1,189
-------- -------- --------
Cash and cash equivalents at end of year $ 23,692 $ 31,911 $ 352
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 2,325 $ 3,306 $ 12
======== ======== ========
Cash paid for interest $ 53 $ 92 $ 82
======== ======== ========
Supplemental disclosure of non cash investing
and financing activities:
Disposal of property and equipment $ 2,543 $ 1,206 $ 4,420
======== ======== ========
Debt related to Dynamic Agreement $ 2,000 $ - $ -
======== ======== ========
Capitalized software development
cost adjustments $ 3,542 $ - $ -
======== ======== ========
Dividend declared but not paid $ - $ 3,900 $ -
======== ======== ========
Distribution of cash surrender
value of insurance $ - $ - $ 1,460
======== ======== ========
Debt related to acquisition of facility $ - $ - $ 380
======== ======== ========
</TABLE>
See accompanying notes.
17
<PAGE>
SUNQUEST INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
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. On August 29, 1997,
the Company purchased the PreciseCare Medication
Management System ("PreciseCare") and formed a wholly
owned subsidiary, Sunquest Pharmacy Information
Systems, Inc. ("Sunquest Pharmacy"). All transactions
between the Company and Sunquest Europa, Sunquest
Germany, Antrim and Sunquest Pharmacy 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 the percentage-of-completion method and are
determined based upon actual hours incurred related to
total estimated installation hours in accordance with
Statement of Position ("SOP") No. 91-1, "Software
18
<PAGE>
Revenue Recognition." Anticipated losses are recorded
in the earliest period in which such losses become
evident.
Revenues for the hardware portion of system sales
are recognized upon shipment. Support and maintenance
fees are recognized ratably over the contract period as
the related costs are incurred. Revenues for other
services are recognized as the services are rendered.
Customer payment terms vary and are typically
different from the revenues recognized. Revenues
recognized in advance of billings are classified with
current assets as unbilled receivables and are included
in the balance sheet as receivables. Billings
recognized in advance of revenues are classified with
current liabilities as deferred revenue.
Software Development Costs
Software development costs incurred internally are
expensed as research and development until the
technological feasibility of the newly designed product
is established. Thereafter, all software development
costs are capitalized until the product is ready for
general release to the public. Capitalized software
development costs are stated at the lower of
unamortized cost or net realizable value. Net
realizable value relating to a particular software
product is assessed based on anticipated gross margins
applicable to sales of the product in future periods.
Amortization of capitalized software development costs
begins when the related product is available for
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
19
<PAGE>
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 year
ended December 31, 1995 and the 1996 financial
statements prior to the initial public offering
effective date do not include a provision for federal
or certain state income taxes. The unaudited pro forma
income tax provision for 1996 and 1995 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."
Intangibles
Certain intangible assets were acquired in
connection with the purchase of the PreciseCare
software and the acquisition of Antrim. These assets
include in-process technology related to the purchase
of the PreciseCare software and the Antrim acquisition,
and assembled work force, trademark and trade names and
customer-related intangibles related to the Antrim
acquisition. The in-process technology acquired of
$1,265,000 related to the purchase of the PreciseCare
software in 1997 and the in-process technology acquired
of $3,252,000 related to the Antrim acquisition in 1996
were charged to operations as the underlying products
had not reached technological feasibility. The
remaining intangible assets related to the Antrim
acquisition are being amortized over their remaining
useful lives of five and seven years. Amortization
expense related to these intangibles for the years
ended December 31, 1997 and 1996 was $266,000 and
$29,000, respectively, and accumulated amortization was
$295,000 and $29,000, respectively.
20
<PAGE>
Stock-Based Compensation
In 1996, the Company adopted the disclosure
provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 123 permits
the Company to continue accounting for stock-based
compensation as set forth in Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB Opinion No. 25"), provided the Company
discloses the pro forma effect on net income and
earnings per share of adopting the full provisions of
SFAS No. 123. Accordingly, the Company continues to
account for stock-based compensation under APB Opinion
No. 25 and has provided the required pro forma
disclosures.
Impact of Recently Issued Accounting Standards
In February 1997, the Financial Accounting
Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128"). Under the new provisions for
calculating earnings per share, the dilutive effect of
stock options has been excluded in the determination of
"basic" earnings per share and only included in
"diluted" earnings per share. All net income or pro
forma net income per share amounts for all periods have
been presented, and where appropriate, restated to
conform to SFAS No. 128 requirements. See Note 3 of
Notes to Consolidated Financial Statements.
In June 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"), which requires businesses to disclose
comprehensive income and its components in general
purpose financial statements with reclassification of
prior period financial statements. SFAS No. 130 is
effective for fiscal years beginning after December 15,
1997 and its adoption is not expected to have a
material impact on the Company's disclosures.
In June 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"),
which redefines how operating segments are determined
and requires disclosure of certain financial and
descriptive information about a company's operating
segments. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997. The Company is
currently evaluating the effects, if any, the adoption
of this pronouncement will have on the disclosure of
its historical data.
In October 1997, the American Institute of Certified
Public Accountants issued SOP 97-2, "Software Revenue
Recognition," revising certain aspects of SOP 91-1. SOP
97-2 will become effective for transactions occurring in years
21
<PAGE>
beginning after December 15, 1997. The Company does
not expect that SOP 97-2 will materially affect its
revenue recognition policies with respect to software
license fees which are recognized as part of the
Company's overall software contracts and are determined
based upon actual hours incurred related to total
estimated installation hours in accordance with SOP No.
91-1.
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 estimated "Second S
Corporation Distribution" was reduced by approximately
$299,000 when the actual calculations of S corporation
distributions were finalized. The Company paid the
adjusted "Second S Corporation Distribution" of
$3,601,000 in full on May 14, 1997.
22
<PAGE>
3. Net Income Per Share
- -------------------------
The following table sets forth the computation of
basic and diluted net income per share:
1997 1996 1995
---------- ---------- ----------
Numerator for basic and
diluted net income per share:
Net income and pro forma net income $2,770,000 $4,038,000 $2,201,000
========== ========== ==========
Denominator:
Denominator for basic net
income and pro forma net income
per share -- weighted-average
shares 15,368,771 13,918,693 11,904,000
Effect of diluted securities:
Stock options 59,553 116 -
---------- ---------- ----------
Denominator for diluted
net income and pro forma net
income per share -- adjusted
weighted-average shares 15,428,324 13,918,809 11,904,000
========== ========== ==========
Basic net income and pro forma
net income per share $.18 $.29 $.18
========== ========== ==========
Diluted net income and pro forma
net income per share $.18 $.29 $.18
========== ========== ==========
4. Unaudited Pro Forma Information
- ------------------------------------
Pro Forma Net Income
The unaudited pro forma net income for the years
ended December 31, 1996 and 1995, 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%.
5. Purchase of Inpatient Pharmacy System
- ------------------------------------------
On August 29, 1997, MSC Acquisition, Inc., a newly
formed subsidiary of the Company, purchased certain
inpatient pharmacy software systems comprising the
PreciseCare Medication Management System
("PreciseCare") from Medintell Systems Corporation
("Medintell"). MSC Acquisition, Inc. was subsequently
renamed "Sunquest Pharmacy Information Systems, Inc."
The Company plans to continue development, add
outpatient functionality and market the PreciseCare
software (now called "FlexiMed") through this wholly
owned subsidiary.
23
<PAGE>
Total consideration for the purchase of the
PreciseCare software consisted of $1,410,000 in cash
and $1,167,000 of assumed obligations and transition
costs. The acquired, in-process technology of
$1,265,000 was immediately charged to operations
reducing after-tax income for the twelve months ended
December 31, 1997 by $1,113,000, or $.07 per share.
The allocation of the purchase price is based upon
the most current information available.
(in thousands)
---------------------
Tangible assets $ 297
Developed technology 1,015
In-process technology 1,265
Liabilities assumed (1,041)
Deferred revenue (126)
-------
Cash paid $ 1,410
=======
6. Acquisition
- ---------------
During the fourth quarter of 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 and certain assumed liabilities
and transition obligations. 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. The intangible
assets had estimated remaining lives of four to seven
years.
24
<PAGE>
The allocation of the purchase price was revised
during the fourth quarter of 1997 based upon more
current information. The impact of these revisions on
the Company's financial position and results of
operations were insignificant.
(in thousands)
---------------------------
Current and tangible assets $ 7,045
Developed technology 2,487
In-process technology 3,197
Assembled work force 404
Trademarks and trade names 628
Customer-related intangibles 654
Deferred tax asset 3,057
Liabilities assumed (7,157)
Transition costs (5,315)
--------
Cash paid $ 5,000
========
Transition costs are primarily composed of
replacing certain Antrim software products with
Sunquest products and employee costs and professional
services related to the acquisition. Approximately
$1,945,000 of the total transition costs of $5,315,000
were incurred during 1997. At December 31, 1997, the
Company had approximately $3,261,000 of transition
costs remaining on its balance sheet, primarily related
to replacing certain Antrim software products with
Sunquest products. Of this amount, approximately
$2,662,000 is expected to be incurred within the next
year and has been included in accrued expenses. The
long-term portion is included in transition costs.
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.
1996 1995
-------- --------
(in thousands)
Total revenues $96,152 $82,802
Net income 1,799 943
Pro forma net income (loss) 1,217 (645)
Pro forma basic and diluted net
income (loss) per share .09 (.05)
25
<PAGE>
7. Receivables
- ----------------
Receivables consist of the following:
December 31,
--------------------
1997 1996
-------- --------
(in thousands)
Billed receivables $29,900 $28,546
Unbilled receivables 8,599 5,180
------- -------
38,499 33,726
Allowance for doubtful accounts (1,952) (3,443)
------- -------
Total receivables $36,547 $30,283
======= =======
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, 1997 and 1996 are amounts due from foreign
health care providers of approximately $1,586,000 and
$652,000, respectively. Total revenues include foreign
sales revenues of $1,612,000 and $1,049,000 for the
years ended December 31, 1997 and 1996, respectively.
Credit is extended based on an evaluation of the
customer's financial condition and generally collateral
is not required. The provision for bad debt expense
recognized in 1997, 1996 and 1995 was $1,125,000,
$506,000 and $495,000, respectively. During 1997, 1996
and 1995, $2,616,000, $185,000 and $373,000,
respectively, of receivables were charged against the
allowance.
This substantial charge against the allowance in
1997 was primarily due to writing off Antrim's
receivables that had been recorded as a valuation
reserve at the time of the acquisition.
26
<PAGE>
8. Property and Equipment
- --------------------------
Property and equipment consist of the following:
December 31,
--------------------
1997 1996
-------- --------
(in thousands)
Building $ 2,000 $ 371
Land 257 38
Computers and software 10,536 9,977
Furniture and fixtures 1,815 2,100
Leasehold improvements 3,610 3,043
Other equipment and vehicles 286 273
------- -------
18,504 15,802
Accumulated depreciation (6,991) (6,431)
------- -------
Total property and equipment, net $11,513 $ 9,371
======= =======
Depreciation expense for the years ended December
31, 1997, 1996 and 1995 was approximately $3,005,000,
$2,059,000 and $1,819,000, respectively.
9. Capitalized Software Development Costs
- ------------------------------------------
During the years ended December 31, 1997, 1996 and
1995, the Company capitalized $3,662,000, $2,785,000
and $2,806,000, respectively, of total software
development costs of $16,906,000, $12,773,000 and
$11,846,000, respectively. Amortization expense
related to capitalized software development costs for
the years ended December 31, 1997, 1996 and 1995 was
$3,619,000, $2,188,000 and $1,728,000, respectively,
and accumulated amortization was $13,105,000,
$10,609,000 and $8,421,000, respectively.
Additionally, $5,812,000 of capitalized software
development costs were acquired as part of the Antrim
acquisition in 1996, of which $3,252,000 of in-process
technology was immediately charged to operations and
$2,280,000 of capitalized software development costs
were acquired as part of the purchase of the
PreciseCare software in 1997, of which $1,265,000 of in-
process technology was immediately charged to
operations. On November 26, 1997, Sunquest Pharmacy
entered into a Software License Agreement ("Agreement")
with MEDITrust Healthcare Services, Inc. ("Meditrust")
for an outpatient pharmacy system for $750,000 in cash,
which was also included in capitalized software
development costs. The Agreement grants the Company a
perpetual, fully paid-up, worldwide, non-exclusive
license to modify, interface, market, sublicense,
support, copy and otherwise use the software, including
the source code and object code.
27
<PAGE>
Also, during the third and fourth quarters of
1997, the Company reduced the carrying value of
IntelliCare software development costs by $1,529,000
and $890,000, respectively. The third quarter
adjustment was related to certain modules incorporated
into the Company's IntelliCare suite of products that
had not generated sufficient sales to justify continued
capitalization. The fourth quarter adjustment was
related to the Company's decision to discontinue the
sale of the IntelliCare suite of products as an
enterprise-wide computerized patient record solution
and to discontinue the development of a nurse clinical
documentation system. The Company plans to refocus its
technology and development efforts on the integration
of its suite of laboratory, radiology and pharmacy
information systems, the Clinical Event Manager rules-
based alerts system and the Laboratory Data Network
system for medical laboratory consortia.
Pursuant to the February 1997 Value Added Reseller
agreement with Dynamic Healthcare Technologies, Inc.
("Dynamic"), the Company's payment and obligation to
Dynamic of $3.0 million, which is included in
capitalized software development costs, gives the
Company the right to sublicense CoPath to all of the
customers of the Company as of February 7, 1997, except
those Dynamic customers listed in the agreement. The
Company may also sublicense CoPath to new customers for
an additional fee payable to Dynamic.
10. Line of Credit
- -------------------
Line of Credit
On December 30, 1997, the Company entered into a
$10,000,000 line of credit agreement with the Bank of
America National Trust and Savings Association ("Bank
of America"). 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 (the "Bank of
America Rate").
At December 31, 1997, the Optional Rates and the
Bank of America Rate ranged from 6.8% to 8.5%. All
outstanding principal and interest under the line of
credit are due April 30, 1999 except for any amounts
under the line of credit outstanding under financing
standby letters of credit which have a maximum maturity
of 365 days. Amounts borrowed under the line of credit
are secured by all of the Company's assets. 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 line of credit contains requirements as to
minimum levels of working capital, net worth and cash
flow and places certain restrictions on new debt,
28
<PAGE>
acquisitions, capital expenditures and loans to related
parties. The agreement prohibits the payment of any
capital distributions or dividends.
There were no borrowings outstanding as of
December 31, 1997 and 1996 under the line of credit in
effect at those dates.
11. 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
1997 1996
-------- --------
(in thousands)
Current tax expense:
Federal $1,107 $1,928
State 297 480
------ ------
Total current tax
expense 1,404 2,408
------ ------
Deferred tax expense:
Federal 1,057 211
State 30 136
Change in tax status - 1,122
------ ------
Total deferred tax
expense 1,087 1,469
------ ------
Total income tax
expense $2,491 $3,877
====== ======
Reconciliation of Income Tax Expense
1997 1996 1995
-------- -------- --------
(in thousands)
Income tax provision at
the statutory rate $ 1,871 $ 2,974 $ 1,352
Increases (decreases):
State income taxes 185 680 351
Deferred taxes
attributable to
conversion from S
corporation - 1,122 -
Acquired, in-process
technology 500 1,138 -
Taxes absorbed by the
shareholders of the
Company prior to
conversion from S
corporation - (1,725) (1,630)
Other (65) (312) -
------- ------- -------
Total income tax
expense $ 2,491 $ 3,877 $ 73
======= ======= =======
29
<PAGE>
Components of Deferred Tax Assets and Liabilities
December 31,
--------------------
1997 1996
-------- --------
(in thousands)
Deferred tax assets:
Net operating loss $ 1,389 $ 1,988
carryforwards acquired
Transition costs accruals 1,238 1,176
Capital leases 867 807
Vacation and compensation
accruals 754 1,073
Bad debt allowance 737 1,319
Sales tax reserves 562 370
Deferred revenue 437 699
Accrued expenses 29 116
Other 20 -
------- -------
Total deferred tax
assets 6,033 7,548
------- -------
Deferred tax liabilities:
Book basis in excess
of tax basis:
Software development 3,308 2,977
Acquired intangibles 527 1,587
Fixed assets 184 139
Other - 31
------- -------
Total deferred tax
liabilities 4,019 4,734
------- -------
Less: valuation allowance (950) (950)
------- -------
Net deferred tax assets $ 1,064 $ 1,864
======= =======
The Company has net operating losses of
approximately $4,000,000 that were generated by Antrim.
Of this amount, approximately $440,000 can be carried
back to Antrim's separate company tax return for 1994.
Approximately $3,300,000 can be carried forward and
used to offset Antrim's future taxable income. The
remaining $260,000 can be carried forward and used to
offset future consolidated 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 $1,389,000. The valuation allowance will be
treated as a reduction to goodwill and other Antrim
intangibles 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.
30
<PAGE>
12. 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.
Amortization of leased assets of $883,000 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, 1997:
Capital Operating
Leases Leases
--------- ---------
(in thousands)
1998 $ 1,876 $ 1,059
1999 1,842 820
2000 1,809 825
2001 1,809 355
2002 1,214 -
Thereafter 1,052 -
------- -------
Total minimum lease payments 9,602 $ 3,059
=======
Amounts representing interest 3,722
-------
Present value of net minimum
lease payments (including
current portion of $800) $ 5,880
=======
At December 31, 1997, aggregate future minimum
rental payments to be received under noncancelable
leases and subleases were approximately $1,363,000.
Rental expense for the years ended December 31,
1997, 1996 and 1995 was approximately $1,158,000,
$474,000 and $318,000, respectively.
13. Commitments and Contingencies
- ----------------------------------
The Company has granted liens on all of its assets
to a vendor to secure amounts due for purchases of
hardware and other equipment.
31
<PAGE>
14. Related Party Transactions
- -------------------------------
During 1996 and 1995, the Company received
management fees from an affiliate of $240,000 per year.
In December 1996, the affiliate sold its assets and
discontinued business. The Company did not receive any
management fees from this affiliate during 1997.
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.
15. Employee Benefit Plans
- ---------------------------
Profit Sharing Plan
The Company has a Profit Sharing Plan covering
substantially all of its employees. 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.
Effective January 1, 1998, the Company will match 100%
of up to the first 3% of employee contributions and the
vesting period was reduced from five years to three
years. The Company incurred expenses of approximately
$704,000, $729,000 and $337,000 for the years ended
December 31, 1997, 1996 and 1995, respectively, related
to this plan.
Employee Stock Purchase Plan
The Employee Stock Purchase Plan authorizes the
sale of up to 450,000 shares of Common Stock to
substantially all employees of the Company and its
subsidiaries. Offerings under the plan commence on the
first day of each calendar quarter and end on the last
day of the same calendar quarter at a purchase price
that is equal to 90% of the last sale price of the
Common Stock, as reported on the National Association
of Security Dealers, Inc. Automated Quotation System
("Nasdaq"), on the commencement date of the offering.
During 1997 and 1996, 13,375 and 8,587 shares,
respectively, of Common Stock were issued under the
plan for net proceeds to the Company of $134,000 and
$120,000, respectively. The weighted-average fair
value of shares sold under the Employee Stock Purchase
Plan was $2.79 in 1997 and $4.03 in 1996. These fair
values were estimated using the Black-Scholes option
pricing model with the following weighted-average
assumptions for 1997 and 1996, respectively: risk-free
interest rate of 5.00%; dividend yield of 0%;
volatility factor of the expected market price of the
Company's Common Stock of .62 and .79; and a weighted-
average expected life of the options of .25 years.
32
<PAGE>
Stock Incentive Plan
The Stock Incentive Plan of 1996 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 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.
The Company has complied with the pro forma
requirements of SFAS No. 123 for those companies which
choose not to account for the effects of stock- based
compensation in the financial statements under SFAS No.
123. The fair value of these options was estimated at
the dates of grant using the Black-Scholes option
pricing model with the following weighted-average
assumptions for 1997 and 1996, respectively: risk-free
interest rate of 6.54% and 6.52%; dividend yield of 0%;
volatility factor of the expected market price of the
Company's Common Stock of .61 and .62; and a weighted-
average expected life of the options of 4.1 and 4.9
years.
The Black-Scholes option valuation model was
developed for use in estimating the fair value of
traded options which have no vesting restrictions and
are fully transferable. In addition, option valuation
models require the input of highly subjective
assumptions including the expected stock price
volatility. Because the Company's options under the
Employee Stock Purchase Plan and the Stock Incentive
Plan 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 Black-
Scholes option valuation model does not necessarily
provide a reliable measure of the fair value of its
employee stock options.
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) 1997 1996
-------- --------
Net income - as reported $2,770 $4,038
Pro forma net income 1,393 3,469
Net income per share - as reported:
Basic and diluted .18 .29
Pro forma net income per share:
Basic and diluted .09 .25
33
<PAGE>
A summary of the Company's stock option activity
and related information for the years ended December
31, 1997 and 1996 follows:
Weighted-Average
Options Exercise Price
----------- ------------------
Balance -- December 31, 1995 - $ -
Granted 821,217 $ 15.95
Exercised - $ -
Forfeited (77,656) $ 16.00
---------
Balance -- December 31, 1996 743,561 $ 15.95
Granted 1,409,593 $ 10.85
Exercised - $ -
Forfeited (985,550) $ 15.11
---------
Balance -- December 31, 1997 1,167,604 $ 10.50
=========
Exercisable at December 31, 1997 51,240 $ 10.50
=========
Exercisable at December 31, 1996 - $ -
=========
Reserved for Future Options 1,332,396
=========
The weighted-average fair value of options granted
during 1997 and 1996 was $5.72 and $9.28, respectively.
Exercise prices for options outstanding as of
December 31, 1997 ranged from $7.8750 to $15.1875. The
weighted-average remaining contractual life of those
options is 8.92 years.
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 of 1996. 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.
16. Fair Value of Financial Instruments
- ----------------------------------------
The carrying amounts of the Company's financial
instruments approximate the fair values at December 31,
1997 and 1996.
17. 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
34
<PAGE>
Incorporation also authorize the issuance of up to
15,000,000 shares of Preferred Stock.
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.
35
<PAGE>
18. Quarterly Financial Data (Unaudited)
- -----------------------------------------
Summarized quarterly financial data for the years ended December 31, 1997 and
1996, appear below:
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Total
--------- --------- --------- --------- ---------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
1997
Total revenues $24,607 $27,980 $24,271 $25,479 $102,337
Operating expenses <F1> 22,415 24,366 24,168 25,728 96,677
Operating income (loss) <F1> 2,192 3,614 103 (249) 5,660
Net income (loss) <F1> 1,303 2,120 (268) (385) 2,770
Net income (loss) per
common share <F1>, <F2>, <F3>
Basic and diluted $.08 $.14 ($.02) ($.03) $.18
Weighted-average number of
common shares outstanding:
Basic 15,364 15,365 15,372 15,375 15,369
Diluted 15,364 15,432 15,372 15,375 15,428
1996
Total revenues $16,717 $19,922 $19,302 $25,055 $80,996
Operating expenses <F4> 15,040 16,419 16,649 24,243 72,351
Operating income <F4> 1,677 3,503 2,653 812 8,645
Net income (loss) <F4> 1,535 1,939 1,741 (595) 4,620
Pro forma net income
(loss) <F2>, <F4>, <F5>, <F6> 893 1,999 1,741 (595) 4,038
Pro forma net income (loss) per
common share <F2>, <F3>,
<F4>, <F5>, <F6>
Basic and diluted $.08 $.15 $.11 ($.04) $.29
Weighted-average number of
common shares outstanding:
Basic 11,904 13,054 15,356 15,361 13,919
Diluted 11,904 13,054 15,356 15,361 13,919
<FN>
<F1> Third quarter results of operations include a charge of $1,265,000
($1,113,000 after-tax) related to the purchase of the PreciseCare
software and a charge of $1,529,000 ($917,000 after-tax) related to the
reduction in the carrying value of IntelliCare software development
costs. Fourth quarter results of operations include a charge of
$890,000 ($534,000 after-tax) related to the reduction in the carrying
value of IntelliCare software development costs.
<F2> Individual quarterly net income (loss) and pro forma net income (loss)
per common share may not equal the year-end amount due to changes in
the number of common shares outstanding during the year.
<F3> The 1996 and first three quarters of 1997 pro forma net income (loss)
and net income (loss) per share amounts have been restated to comply
with SFAS No. 128, "Earnings Per Share."
<F4> Fourth quarter results of operations include a $3,252,000 charge related
to the Antrim acquisition.
<F5> 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.
<F6> Actual for the third and fourth quarters.
</FN>
</TABLE>
36
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the five years
ended December 31, 1997, should be read in conjunction with "Management's
Discussion and Analysis" and the Consolidated Financial Statements and
Notes thereto included herein. The balance sheet data as of December 31,
1997, 1996, 1995 and 1994 and the statement of income data for each of the
five years in the period ended December 31, 1997 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 has been derived from
unaudited financial statements. The pro forma net income per share amounts
prior to 1997 have been restated as required to comply with SFAS No. 128,
"Earnings Per Share." For further discussion of net income per share and
the impact of SFAS No. 128, see Note 1 of Notes to Consolidated Financial
Statements.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Revenues:
System sales $ 52,761 $45,059 $32,262 $38,416 $43,142
Support and service 49,576 35,937 29,270 24,202 20,317
-------- ------- ------- ------- -------
Total revenues 102,337 80,996 61,532 62,618 63,459
-------- ------- ------- ------- -------
Operating expenses:
Cost of system sales 26,015 20,056 14,085 16,711 21,820
Client services 27,438 18,401 17,764 17,116 16,349
Research and development 13,244 9,988 9,040 7,734 6,958
Sales and marketing 14,007 10,896 8,734 6,957 6,554
General and administrative 12,343 9,758 7,068 6,847 6,909
Capitalized software development
cost adjustments <F1> 2,419 - - - -
Acquired, in-process
technology <F2> 1,211 3,252 - - -
-------- ------- ------- ------- -------
Total operating expenses 96,677 72,351 56,691 55,365 58,590
-------- ------- ------- ------- -------
Operating income 5,660 8,645 4,841 7,253 4,869
Other income (expense):
Interest income 1,154 1,345 408 317 163
Interest expense (1,237) (1,395) (1,465) (1,288) (881)
Other (316) (98) 78 23 767
-------- ------- ------- ------- -------
Income before income taxes 5,261 8,497 3,862 6,305 4,918
Income tax provision:
Current year operations 2,491 2,755 73 91 76
Change in tax status - 1,122 - - -
-------- ------- ------- ------- -------
Net income $ 2,770 $ 4,620 $ 3,789 $ 6,214 $ 4,842
======== ======= ======= ======= =======
Pro forma data (unaudited): <F3>
Historical income before
income taxes $ - $ 8,497 $ 3,862 $ 6,305 $ 4,918
Pro forma income tax provision - 4,459 1,661 2,711 2,115
-------- ------- ------- ------- -------
Pro forma net income $ - $ 4,038 $ 2,201 $ 3,594 $ 2,803
======== ======= ======= ======= =======
Net income per common share: <F3>
Basic and diluted $.18 $.29 $.18 $.30 $.24
======== ======= ======= ======= =======
Weighted-average number of
common shares outstanding:
Basic 15,369 13,919 11,904 11,904 11,904
======== ======= ======= ======= =======
Diluted 15,428 13,919 11,904 11,904 11,904
======== ======= ======= ======= =======
Balance Sheet Data (at end of period):
Cash and cash equivalents $23,692 $31,911 $ 352 $ 1,189 $ 1,725
Working capital 38,090 39,065 3,963 5,078 6,223
Total assets 94,173 96,911 43,874 42,068 36,992
Long-term debt and obligations under
capital leases, primarily from
related party, net of current portion 6,080 5,921 6,396 7,107 4,832
Total shareholders' equity 59,822 56,767 20,701 21,251 18,658
<FN>
<F1> In 1997, the Company charged operations $2,419,000 related to the
reduction in the carrying value of IntelliCare software development
costs.
<F2> In 1997, the Company charged operations $1,265,000 for acquired, in-
process technology in conjunction with the purchase of the PreciseCare
software. In 1996, the Company charged operations $3,252,000 for
acquired, in-process technology in conjunction with the Antrim
acquisition.
<F3> Pro form data for the years prior to 1997 has been computed as if the
Company had been subject to federal and all applicable state income taxes.
</FN>
</TABLE>
37
<PAGE>
Exhibit 21C
SUBSIDIARIES OF THE REGISTRANT
Jurisdiction of
Incorporation
Name and Name Under Which Doing Business or Organization
- ------------------------------------------- ---------------
Sunquest Europa Limited United Kingdom
Sunquest Germany GmbH Germany
Antrim Corporation Texas
Sunquest Pharmacy Information Systems, Inc. Pennsylvania
<PAGE>
Exhibit 23I
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 13, 1998, included in the 1997 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 and the Registration Statement
(Form S-8, No. 333-40541) pertaining to the Stock Incentive Plan of 1996
of Sunquest Information Systems, Inc. of our report dated February 13, 1998
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, 1997.
/s/ ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 23692
<SECURITIES> 0
<RECEIVABLES> 38499
<ALLOWANCES> 1952
<INVENTORY> 665
<CURRENT-ASSETS> 64303
<PP&E> 18504
<DEPRECIATION> 6991
<TOTAL-ASSETS> 94173
<CURRENT-LIABILITIES> 26213
<BONDS> 0
0
0
<COMMON> 50474
<OTHER-SE> 9348
<TOTAL-LIABILITY-AND-EQUITY> 94173
<SALES> 102337
<TOTAL-REVENUES> 102337
<CGS> 28434
<TOTAL-COSTS> 55872
<OTHER-EXPENSES> 13244
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1237
<INCOME-PRETAX> 5261
<INCOME-TAX> 2491
<INCOME-CONTINUING> 2770
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2770
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
</TABLE>