<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
____________ TO ___________
Commission file number: 0-28212
SUNQUEST INFORMATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 86-0378223
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
4801 East Broadway Boulevard
Tucson, Arizona 85711
(Address of principal executive office) (Zip Code)
(520) 570-2000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address, and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [ X ] Yes [ ] No
On November 11, 1998, there were 15,388,753 shares of Common
Stock outstanding.
<PAGE>
Sunquest Information Systems, Inc.
Form 10-Q
For the Quarterly Period Ended September 30, 1998
Table of Contents
Page
----
Part I. Financial Information
Item 1. Financial Statements
(a.) Condensed consolidated balance sheets as 3
of September 30, 1998 (unaudited) and December
31, 1997
(b.) Unaudited condensed consolidated 4
statements of income and comprehensive income
for each of the three and nine month periods
ended September 30, 1998 and September 30, 1997
(c.) Unaudited condensed consolidated 5
statements of cash flows for each of the nine
month periods ended September 30, 1998 and
September 30, 1997
(d.) Notes to unaudited condensed consolidated 6
financial statements
Item 2. Management's Discussion and Analysis of 9
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 17
Market Risk
Part II. Other Information
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security 18
Holders
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
(a.) Exhibits 18
(b.) Reports on Form 8-K 18
Signatures 19
2
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
Sunquest Information Systems, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
(unaudited)
ASSETS
Cash and cash equivalents $ 3,940 $ 23,692
Short-term investments 30,976 -
Trade receivables, net 36,782 36,547
Other current assets 2,383 2,166
Deferred tax asset 1,895 1,898
-------- --------
Total current assets 75,976 64,303
Property and equipment, net 10,573 11,513
Capital leases from related party, net 3,502 4,096
Software development costs, net 11,312 12,252
Deferred tax asset 199 346
Other assets, net 1,478 1,663
-------- -------
Total assets $103,040 $94,173
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 5,218 $ 3,401
Accrued compensation and related taxes 5,118 4,523
Accrued expenses 7,365 4,957
Obligations under capital leases,
primarily from related party 899 800
Deferred revenue 12,743 11,519
Deferred income taxes 17 13
Other liabilities 1,000 1,000
-------- -------
Total current liabilities 32,360 26,213
Obligations under capital leases,
primarily from related party 4,400 5,080
Deferred income taxes 1,167 1,167
Transition costs - 891
Other liabilities - 1,000
Shareholders' equity
Common stock 50,573 50,474
Retained earnings 14,558 9,403
Accumulated other comprehensive loss (18) (55)
-------- -------
Total shareholders' equity 65,113 59,822
-------- -------
Total liabilities and
shareholders' equity $103,040 $94,173
======== =======
</TABLE>
See accompanying notes.
3
<PAGE>
Sunquest Information Systems, Inc.
Condensed Consolidated Statements of Income and Comprehensive Income
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
System sales $17,013 $12,098 $45,686 $39,351
Support and service 15,187 12,173 42,825 37,507
------- ------- ------- -------
Total revenues 32,200 24,271 88,511 76,858
------- ------- ------- -------
Operating expenses:
Cost of system sales 7,644 4,999 21,399 19,154
Client services 8,632 7,316 24,358 20,738
Research and development 3,969 3,159 11,452 9,025
Sales and marketing 4,437 3,244 12,418 10,110
General and administrative 3,416 2,656 10,699 9,128
Gain on sale of assets - - (404) -
Capitalized software
development cost adjustment - 1,529 - 1,529
Acquired, in-process technology - 1,265 - 1,265
------- ------- ------- -------
Total operating expenses 28,098 24,168 79,922 70,949
------- ------- ------- -------
Operating income 4,102 103 8,589 5,909
Other income (expense):
Interest income 378 217 997 876
Interest expense (264) (278) (834) (903)
Other (69) (25) 94 10
------- ------- ------- -------
Income before income taxes 4,147 17 8,846 5,892
Income tax provision 1,709 285 3,691 2,737
------- ------- ------- -------
Net income (loss) 2,438 (268) 5,155 3,155
Other comprehensive income (loss),
net of tax:
Foreign currency translation
adjustment 19 3 32 (112)
Unrealized gain on securities
available-for-sale 5 - 5 -
------- ------- ------- -------
Comprehensive income (loss) $ 2,462 ($265) $ 5,192 $ 3,043
======= ======= ======= =======
Net income (loss) per share:
Basic $.16 ($.02) $.34 $.21
======= ======= ======= =======
Diluted $.16 ($.02) $.33 $.20
======= ======= ======= =======
Weighted-average shares
outstanding:
Basic 15,385 15,372 15,380 15,367
======= ======= ======= =======
Diluted 15,401 15,372 15,396 15,444
======= ======= ======= =======
</TABLE>
See accompanying notes.
4
<PAGE>
Sunquest Information Systems, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,155 $ 3,155
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 6,004 5,820
Capitalized software development cost adjustment - 1,529
Acquired, in-process technology - 1,265
Bad debt expense 397 713
Deferred revenue 1,288 (1,705)
Deferred income taxes 150 1,197
Gain on sale of assets (404) -
Changes in operating assets and liabilities,
net of acquisitions:
Receivables (1,038) (11,521)
Inventory (222) 1,097
Prepaid expenses and other (122) (268)
Other assets 50 1,157
Accounts payable 1,817 436
Accrued compensation and related taxes 595 341
Other accrued expenses 3,811 (443)
-------- --------
Net cash provided by operating activities 17,481 2,773
-------- --------
Cash flows from investing activities:
Purchase of PreciseCare Pharmacy System - (1,410)
Purchase of property and equipment (1,952) (4,290)
Costs related to acquisitions (1,585) (2,051)
Capitalized software development costs (3,408) (3,853)
Purchase of investments (71,419) -
Proceeds from sale or maturity of investments 40,451 -
Proceeds from sale of assets 1,130 -
-------- --------
Net cash used in investing activities (36,783) (11,604)
-------- --------
Cash flows from financing activities:
Principal payments on debt - (289)
Principal payments on capitalized
leases, primarily from related party (581) (514)
S Corporation distribution - (3,601)
Net proceeds from employee stock purchase plan 99 136
-------- --------
Net cash used in financing activities (482) (4,268)
-------- --------
Foreign currency translation adjustment 32 (112)
-------- --------
Net decrease in cash and cash equivalents (19,752) (13,211)
Cash and cash equivalents at beginning of period 23,692 31,911
-------- --------
Cash and cash equivalents at end of period $ 3,940 $ 18,700
======== ========
</TABLE>
See accompanying notes.
5
<PAGE>
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1 - Interim Statement Presentation
The unaudited condensed consolidated financial statements of
Sunquest Information Systems, Inc. (the "Company") have been
prepared by the Company pursuant to the rules and regulations of
the Securities and Exchange Commission (the "Commission") and in
accordance with generally accepted accounting principles for the
preparation of interim financial statements. Accordingly,
certain information and footnote disclosures normally included in
annual financial statements have been omitted or condensed.
These unaudited condensed consolidated financial statements
should be read in conjunction with the consolidated financial
statements and the notes thereto incorporated by reference into
the Company's 1997 Annual Report on Form 10-K filed with the
Commission. The 1997 balance sheet amounts were derived from
audited statements.
In the opinion of management, all necessary adjustments,
consisting of normal and recurring adjustments, have been made to
provide a fair presentation to the unaudited financial
information. The operating results for the three and nine month
periods ended September 30, 1998 are not necessarily indicative
of the results that may be expected for any other interim period
or for the full year ending December 31, 1998.
Certain prior period amounts have been reclassified to conform to
the current period presentation.
Note 2 - Employee Stock Purchase Plan
In the three months ended September 30, 1998, the Company issued
4,286 shares of its Common Stock for approximately $28,000
pursuant to the Employee Stock Purchase Plan. In the nine months
ended September 30, 1998, the Company has issued a total of
12,791 shares of its Common Stock for approximately $99,000
pursuant to the Employee Stock Purchase Plan.
Note 3 - Net Income Per Share
The Company adopted the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS No.
128") effective December 31, 1997. 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.
6
<PAGE>
In accordance with the disclosure requirements of SFAS No. 128, a
reconciliation of the numerator and denominator of basic and
diluted net income per share follows.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator for basic and
diluted net income per share:
Net income (loss) $2,438,000 $ (268,000) $5,155,000 $3,155,000
========== ========== ========== ==========
Denominator:
Denominator for basic
net income per share --
weighted-average shares 15,384,514 15,371,814 15,380,382 15,366,675
Effect of diluted securities:
Stock options 16,543 - 15,806 77,392
---------- ---------- ---------- ----------
Denominator for diluted net
income per share -- adjusted
weighted-average shares 15,401,057 15,371,814 15,396,188 15,444,067
========== ========== ========== ==========
Basic net income (loss)
per share $.16 $(.02) $.34 $.21
========== ========== ========== ==========
Diluted net income (loss)
per share $.16 $(.02) $.33 $.20
========== ========== ========== ==========
</TABLE>
Note 4 - Investments
The Company accounts for its investments in Tax Exempt Municipals
and Short-term Demand Notes based on Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," ("SFAS No. 115"). SFAS No. 115
provides the accounting and reporting requirements for
investments in securities that have readily determinable fair
values and for all investments in debt securities. At September
30, 1998, all of the Company's investments in debt securities
have been classified as available-for-sale securities. Available-
for-sale securities are carried at fair value with net unrealized
gains and losses on such securities, net of tax, reported as a
component of shareholders' equity. At September 30, 1998,
unrealized gains on investments available-for-sale were
approximately $5,000, net of tax, and reflected in shareholders'
equity.
7
<PAGE>
Note 5 - Income Taxes
The reconciliation of income tax expense is set forth below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Income tax provision at the
statutory rate $1,451 $ 6 $3,096 $2,062
Increases (decreases):
State income taxes 164 (19) 345 244
Acquired, in-process technology - 357 - 357
Research and development credit - - (100) -
Foreign taxes 8 - 55 -
Other 86 (59) 295 74
------ ------ ------ ------
Total income tax expense $1,709 $ 285 $3,691 $2,737
====== ====== ====== ======
</TABLE>
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
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
laboratory information system 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 Sunquest's 1997 Annual Report on Form 10-K filed with
Securities and Exchange Commission.
General
- -------
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. Revenues are
derived from the licensing of software, the provision of value-
added services and the sale of related hardware.
During the quarter ended June 30, 1998, the Company sold the
assets comprising its Managed Care Manager Payor ("MCM") software
product line to Monument Systems, Inc. ("Monument") for
approximately $1.1 million. Monument assumed the existing
contracts and future support of customer installations. The pre-
tax gain resulting from the sale, after associated write-offs,
was approximately $404,000. The after-tax gain was approximately
$238,000, or $.02 per diluted share. The sale of the MCM product
line is consistent with the Company's strategy to focus on its
clinical suite of products.
For the three months ended September 30, 1998, the Company's
net income was $2.4 million, or $.16 per diluted share, compared
to a net loss of $268,000, or $.02 per diluted share, for the
corresponding period in 1997. The net loss for the three months
ended September 30, 1997, included reductions to net income of
$1.1 million, or $.07 per diluted share, and $917,000, or $.06
per diluted share, related to the acquired, in-process technology
in conjunction with the purchase of the PreciseCare Medication
Management System from Medintell Systems Corporation
("Medintell") and the reduction in the carrying value of
IntelliCare software development costs, respectively. For the
nine months ended September 30, 1998, net income was $5.2
million, or $.33 per diluted share, including the above mentioned
after-tax gain on the sale of the MCM product line compared to
net income of $3.2 million, or $.20 per diluted share, for the
corresponding period in 1997, including the above mentioned
charges to operations.
9
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Excluding the gain on sale of
assets and charges to operations $ 0.16 $ 0.11 $ 0.31 $ 0.33
Gain on sale of assets - - 0.02 -
Acquired, in-process technology,
net of tax - (0.07) - (0.07)
Capitalized software
development cost adjustment,
net of tax provision - (0.06) - (0.06)
------ ------ ------ ------
$ 0.16 $(0.02) $ 0.33 $ 0.20
====== ====== ====== ======
</TABLE>
The results of operations for the three and nine month
periods ended September 30, 1998 are not necessarily indicative
of the results that may be expected for any other interim period
or for the full year ending December 31, 1998.
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 current assessment, the Company believes that
virtually all of the current releases of its products are year
2000 compliant, and with respect to those that are not, the
Company anticipates releasing year 2000 compliant versions by the
first quarter of 1999. The Company believes that the costs
incurred to make its products year 2000 compliant will be
immaterial. The Company plans to have all clients converted to year 2000
compliant versions of its products by October 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. As of September 30, 1998,
approximately 87% of the Company's clients are using or
installing year 2000 compliant versions of its products.
The Company is also assessing the year 2000 readiness of its
third-party suppliers and business partners. Although the Company believes
that these third-party suppliers and business partners are taking appropriate
action to ensure that their products are, or will be, year 2000 compliant,
failure by such suppliers and business partners to adequately address their
year 2000 readiness could affect the Company's business. The Company continues
to review the year 2000 readiness of its third-party suppliers and
business partners.
Although the Company expects all of its products and systems
to be year 2000 compliant and all clients to have installed year 2000
compliant versions of its products before December 31,
10
<PAGE>
1999, it cannot predict with complete accuracy the outcome of its year
2000 program. If its year 2000 program is not successful or if the
systems of suppliers and clients material to the Company fail or
malfunction in the year 2000, the Company's business, financial condition
or results of operations may be adversely affected.
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 the second quarter of 1999. The cost of year 2000 compliant
software related to systems developed by other vendors and used
internally is included in the related software maintenance
agreements. The Company believes that consulting costs incurred
in accomplishing the installation of year 2000 compliant software
will be immaterial.
Efforts by clients to address their year 2000 issues may
absorb a significant portion of their information technology
budgets in the near term and may cause them to either delay or
accelerate the purchase and implementation of new applications
and systems. While these purchasing decisions may increase
demand for certain of the Company's products and services,
including its year 2000 offerings, it could also decrease demand
for other offerings. The outcome of these purchasing decisions
could affect the Company's revenues or change its revenue
patterns.
Results of Operations
- ---------------------
Comparison of Three Months Ended September 30, 1998 and September 30, 1997
Revenues. The Company's total revenues were $32.2 million
for the three months ended September 30, 1998 compared to $24.3
million for the three months ended September 30, 1997, an
increase of $7.9 million, or 32.7%. Revenues from system sales
were $17.0 million for the three months ended September 30, 1998
compared to $12.1 million for the three months ended September
30, 1997, an increase of $4.9 million, or 40.6%. This increase
was primarily attributable to an increase in installations of
software to existing customers and an increase in installations
of hardware to both new and existing customers. Revenues from
support and service were $15.2 million for the three months ended
September 30, 1998 compared to $12.2 million for the three months
ended September 30, 1997, an increase of $3.0 million, or 24.8%.
This increase was primarily attributable to the Company's
increased installed customer base and other services for existing
customers.
At September 30, 1998, the Company had a total contract
backlog of $113.3 million, which consisted of $53.9 million of
system sales and $59.4 million of support and service. The
Company's total contract backlog at June 30, 1998, was $109.5
million, which consisted of $51.2 million of system sales and
$58.3 million of support and service. At September 30, 1997,
total contract backlog was $86.0 million, which consisted of
$38.1 million of system sales and $47.9 million of support and
service.
11
<PAGE>
Cost of System Sales. Cost of system sales was $7.6 million
for the three months ended September 30, 1998 compared to $5.0
million for the three months ended September 30, 1997, an
increase of $2.6 million, or 52.9%. As a percentage of total
revenues, cost of system sales was 23.8% in 1998 compared to
20.6% in 1997. The dollar increase was primarily attributable to
increases in hardware and operating system deliveries.
Amortization of previously capitalized software development costs
was $817,000 for the three months ended September 30, 1998
compared to $949,000 for the three months ended September 30,
1997, a decrease of $132,000, or 13.9%. The decrease in
amortization was primarily attributable to the reduction in
carrying value of IntelliCare software in the third and fourth
quarters of 1997. During the fourth quarter of 1997, the Company
discontinued the sale of its IntelliCare suite of products as an
enterprise-wide computerized patient record solution and the
related development of a nurse clinical documentation system.
Client Services. Client services expenses were $8.6 million
for the three months ended September 30, 1998 compared to $7.3
million for the three months ended September 30, 1997, an
increase of $1.3 million, or 18.0%. As a percentage of total
revenues, client services expenses were 26.8% in 1998 compared to
30.1% in 1997. The dollar increase was primarily attributable to
additional staff and outside consultants dedicated to support and
installation of the Company's systems and to providing consulting
services to customers.
Research and Development. Research and development expenses
were $4.0 million for the three months ended September 30, 1998
compared to $3.2 million for the three months ended September 30,
1997, an increase of $810,000, or 25.6%. As a percentage of
total revenues, research and development expenses were 12.3% in
1998 compared to 13.0% in 1997. The dollar increase in research
and development expenses was primarily attributable to increased
staff dedicated to the development, enhancement and documentation
of the Company's clinical laboratory, reference laboratory and
pharmacy systems partially offset by decreased expenses and
capitalization related to the IntelliCare suite of products and
the MCM product line. The Company capitalized $723,000 of its
software development costs for the three months ended September
30, 1998 compared to $858,000 for the three months ended
September 30, 1997, a decrease of 135,000, or 15.7%. The dollar
decrease in capitalized software development was primarily
attributable to the discontinuation of development related to
IntelliCare and the MCM software product lines, partially offset
by increased capitalization for the clinical laboratory and
reference laboratory products.
Sales and Marketing. Sales and marketing expenses were $4.4
million for the three months ended September 30, 1998 compared to
$3.2 million for the three months ended September 30, 1997, an
increase of $1.2 million, or 36.8%. As a percentage of total
revenues, sales and marketing expenses were 13.8% in 1998
compared to 13.4% in 1997. The dollar increase was primarily
attributable to increases in marketing expenses, commissions
resulting from a 52.9% growth in sales bookings in 1998, travel
costs related to sales efforts, sales staff specializing in new
product offerings and sales efforts in the European market.
General and Administrative. General and administrative
expenses were $3.4 million for the three months ended September
30, 1998 compared to $2.7 million for the three months ended
12
<PAGE>
September 30, 1997, an increase of $760,000, or 28.6%. As a
percentage of total revenues, general and administrative expenses
were 10.6% in 1998 compared to 11.0% in 1997. The dollar
increase was primarily attributable to additional employees and
the addition of Sunquest Pharmacy Information Systems, Inc.
("Sunquest Pharmacy"). Increases were also experienced in
professional fees, contributions to the Company's Profit Sharing
Plan and depreciation expense resulting from additions of
property and equipment. These increases were partially offset by
a decrease in variable compensation.
Transition Costs. For the three months ended September 30,
1998, the Company paid previously accrued transition costs
established at the time of the acquisition of Antrim of $201,000
as compared to $265,000 paid during the corresponding period in
1997. These costs were primarily associated with replacing
certain Antrim software products with Sunquest products and
employee related costs. In addition, during the three months
ended September 30, 1998, the Company paid transition costs
related to the purchase of the PreciseCare Medication Management
System ("PreciseCare") of $10,000 as compared to $28,000 paid
during the corresponding period in 1997. These costs were
primarily employee-related costs.
Comparison of Nine Months Ended September 30, 1998 and September 30, 1997
Revenues. The Company's total revenues were $88.5 million
for the nine months ended September 30, 1998 compared to $76.9
million for the nine months ended September 30, 1997, an increase
of $11.7 million, or 15.2%. Revenues from system sales were
$45.7 million for the nine months ended September 30, 1998
compared to $39.4 million for the nine months ended September 30,
1997, an increase of $6.3 million, or 16.1%. This increase was
primarily attributable to increases in installations of software
and hardware to existing customers partially offset by decreases
in installations of hardware and software to new customers.
Revenues from support and service were $42.8 million for the nine
months ended September 30, 1998 compared to $37.5 million for the
nine months ended September 30, 1997, an increase of $5.3
million, or 14.2%. This increase was primarily attributable to
the Company's increased installed customer base and other
services for existing customers.
Cost of System Sales. Cost of system sales was $21.4
million for the nine months ended September 30, 1998 compared to
$19.2 million for the nine months ended September 30, 1997, an
increase of $2.2 million, or 11.7%. As a percentage of total
revenues, cost of system sales was 24.2% in 1998 compared to
24.9% in 1997. The dollar increase was primarily attributable to
increases in hardware and operating system deliveries.
Amortization of previously capitalized software development costs
was $2.5 million for the nine months ended September 30, 1998
compared to $2.8 million for the nine months ended September 30,
1997, a decrease of $298,000, or 10.8%. The decrease in
amortization was primarily attributable to the reduction in
carrying value of IntelliCare software in the third and fourth
quarters of 1997, partially offset by increased amortization of
the Company's pharmacy product.
Client Services. Client services expenses were $24.4 million
for the nine months ended September 30, 1998 compared to $20.7
million for the nine months ended September 30, 1997,
13
<PAGE>
an increase of $3.6 million, or 17.5%. As a percentage of total revenues,
client services expenses were 27.5% in 1998 compared to 27.0% in
1997. The dollar increase was primarily attributable to
additional staff and outside consultants dedicated to support and
installation of the Company's systems and to providing consulting
services to customers.
Research and Development. Research and development expenses
were $11.5 million for the nine months ended September 30, 1998
compared to $9.0 million for the nine months ended September 30,
1997, an increase of $2.4 million, or 26.9%. As a percentage of
total revenues, research and development expenses were 13.0% in
1998 compared to 11.7% in 1997. The dollar increase in research
and development expenses was primarily attributable to increased
staff dedicated to the development, enhancement and documentation
of the Company's clinical laboratory, pharmacy and reference
laboratory systems partially offset by decreased expenses and
capitalization related to the IntelliCare suite of products and
the MCM product line. The Company capitalized $2.4 million of
its software development costs for the nine months ended
September 30, 1998 compared to $2.9 million for the nine months
ended September 30, 1997, a decrease of $445,000, or 15.6%. The
dollar decrease in capitalized software development was primarily
attributable to the discontinuation of development related to
IntelliCare and the MCM software product lines, partially offset
by increased capitalization for the pharmacy and clinical
laboratory products.
Sales and Marketing. Sales and marketing expenses were
$12.4 million for the nine months ended September 30, 1998
compared to $10.1 million for the nine months ended September 30,
1997, an increase of $2.3 million, or 22.8%. As a percentage of
total revenues, sales and marketing expenses were 14.0% in 1998
compared to 13.2% in 1997. The dollar increase was primarily
attributable to increases in commissions resulting from a 36.1%
growth in sales bookings in 1998, travel costs related to sales
efforts, sales staff specializing in new product offerings, and
sales efforts in the European market.
General and Administrative. General and administrative
expenses were $10.7 million for the nine months ended September
30, 1998 compared to $9.1 million for the nine months ended
September 30, 1997, an increase of $1.6 million, or 17.2%. As a
percentage of total revenues, general and administrative expenses
were 12.1% in 1998 compared to 11.9% in 1997. The dollar
increase was primarily attributable to increases related to
depreciation expense resulting from additions of property and
equipment, the addition of Sunquest Pharmacy, contributions to
the Company's Profit Sharing Plan, professional fees and
additional employees.
Transition Costs. For the nine months ended September 30,
1998, the Company paid previously accrued transition costs
established at the time of the acquisition of Antrim of $1.2
million as compared to $1.3 million paid during the corresponding
period in 1997. These costs were primarily associated with
replacing certain Antrim software products with Sunquest products
and employee related costs. In addition, during the nine months
ended September 30, 1998, the Company paid transition costs
related to the purchase of PreciseCare of $138,000 as compared to
$28,000 paid during the corresponding period in 1997. These
costs were primarily employee- related costs and professional
services related to the purchase.
14
<PAGE>
Liquidity and Capital Resources
- -------------------------------
At September 30, 1998, the Company had cash, cash
equivalents and short-term investments of $34.9 million, which
consisted of cash of $3.9 million and short-term investments of
$31.0 million. This compares to cash and cash equivalents of
$23.7 million at December 31, 1997 and $18.7 million at September
30, 1997, increases of $11.2 million and $16.2 million,
respectively. Cash provided by operating activities was $17.5
million for the nine months ended September 30, 1998, compared to
$2.8 million for the nine months ended September 30, 1997.
As of September 30, 1998, the Company had net trade
receivables of $36.8 million, which consisted of $22.7 million in
net billed trade receivables and $14.1 million in unbilled trade
receivables. At 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. Net trade receivables have increased by $235,000
since December 31, 1997, with $5.5 million related to the
unbilled portion partially offset by collections of $5.2 million
on the billed 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 increased revenues and 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, a rolling twelve-month average, on net billed
trade receivables was 77 days at September 30, 1998 compared to
88 days at June 30, 1998 and 91 days at December 31, 1997. Days
sales outstanding ("DSO") was 103 at September 30, 1998 compared
to 110 at June 30, 1998 and 129 at December 31, 1997.
Cash used in investing activities was $36.8 million for the
nine months ended September 30, 1998. Purchases of investments
totaled $71.4 million. Proceeds from the maturity or sale of
investments totaled $40.5 million. Capitalized software
development costs totaled $3.4 million. Of this amount, $1.0
million was related to the second payment under the Value Added
Reseller ("VAR") agreement with Dynamic Healthcare Technologies,
Inc. ("Dynamic") for the license of a software program known as
CoPath Client/Server. Purchases of property and equipment
totaled $2.0 million and consisted primarily of purchases of
computers, computer-related equipment, computer software and
leasehold improvements. Costs related to acquisitions totaled
$1.6 million. Of this amount, approximately $1.2 million was
related to the payment of previously accrued transition costs
established at the time of the acquisition of Antrim and was
primarily associated with replacing certain Antrim software
products with Sunquest products and employee related costs. In
addition, the Company also paid transition costs related to the
purchase of the PreciseCare software of approximately $138,000.
These costs were primarily employee-related costs and
professional services related to the purchase. The proceeds from
the sale of assets consisted of $1.1 million from the sale of the
MCM software product line to Monument.
Cash used in financing activities was $482,000 for the nine
months ended September 30, 1998. Of this amount, $581,000 was
used for principal payments on capital leases. This amount
15
<PAGE>
was partially offset by the issuance of 12,791 shares of the
Company's Common Stock for approximately $99,000 under the
Employee Stock Purchase Plan.
At September 30, 1998, working capital was $43.6 million
compared to $38.1 million at December 31, 1997.
The Company has a revolving line of credit with a bank
allowing the Company to borrow up to $10.0 million. Any
borrowings under the line of credit will bear interest at the
bank reference rate unless the Company elects a fixed rate or
certain variable rates contemplated by the agreement. All
outstanding principal and interest under the line of credit is
due April 30, 1999 except for any amounts outstanding under stand-
by letters of credit which have a maximum maturity of 365 days.
Borrowings under the line of credit are secured by all of the
Company's assets. Approximately $440,000 of the line of credit
is used to secure a letter of credit and is not available for
immediate expenditure. There were no borrowings outstanding as
of September 30, 1998.
Other than the final payment of $1.0 million due in February
of 1999 related to the VAR agreement with Dynamic, the Company
has no significant purchase commitments at this time. However,
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, cash equivalents,
short-term investments, 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
- ------------------------
As of January 1, 1998, the Company adopted 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. The adoption of SFAS No. 130 had no
significant impact on the Company's financial statements.
As of January 1, 1998, the Company adopted Statement of
Position ("SOP") 97-2, "Software Revenue Recognition," which
revised certain aspects of SOP 91-1. The adoption of SOP 97-2
did not affect the Company's revenue recognition policies with
respect to software license fees which are recognized as part of
the Company's overall software contracts using the percentage-of-
completion method and are determined based upon actual hours
incurred related to total estimated installation hours.
16
<PAGE>
In March 1998, the American Institute of Certified Public
Accountants issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP
98-1 requires companies to capitalize qualifying computer
software costs incurred during the application development stage.
SOP 98-1 is effective for fiscal years beginning after December
15, 1998 and permits early adoption. The Company adopted SOP 98-
1 in the first quarter of 1998. The adoption had no impact on
net income, as the Company's policy was materially consistent
with the requirements of SOP 98-1.
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 at year-end.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
17
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
On July 30, 1998, the Company instituted a legal action
in the United States District Court for the Western
District of Pennsylvania against Dean Witter Reynolds,
Inc. and The Compucare Company for material
misrepresentations and omissions in connection with the
Company's purchase of all of the outstanding capital
stock of Antrim Corporation from the Compucare Company
on November 26, 1996. The Complaint seeks remedies
available to the Company including damages and/or
rescission of the acquisition.
The Company is or may be subject to legal proceedings
and claims covering a wide range of matters that arise
in the ordinary course of business. Management is of
the opinion that the potential liability with respect
to these legal proceedings and claims will not
materially affect the Company's financial position or
results of operations.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
27.1 - Financial Data Schedule for the Nine Months
Ended September 30, 1998, filed herewith.
27.2 - Financial Data Schedule for the Nine Months
Ended September 30, 1997, filed herewith.
(b.) Reports on Form 8-K
No reports on Form 8-K were filed by the Company
during the quarter ended September 30, 1998.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
SUNQUEST INFORMATION SYSTEMS, INC.
(Registrant)
Date: November 13, 1998 By: /s/ Nina M. Dmetruk
--------------------------------------------
Nina M. Dmetruk
Executive Vice President and Chief Financial
Officer
(Authorized Officer of the Registrant and
Principal Financial and Accounting Officer)
19
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