<PAGE>
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, 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 85711-3609
(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
<PAGE>
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 19, 1999, the registrant had 15,394,460 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 19, 1999 as
reported by Nasdaq, was $41,850,984 (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
1998 are incorporated by reference into Parts II and IV of
this Form 10-K.
Portions of the registrant's Proxy Statement for the 1999
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 1998 and the Proxy Statement
are not to be deemed filed as part of this Annual Report on
Form 10-K.
<PAGE>
SUNQUEST INFORMATION SYSTEMS, INC.
Form 10-K - 1998
TABLE OF CONTENTS
Page
----
PART I
Item 1 - Business
General 1
Products 1
Third-Party Marketing Arrangements 7
Products Under Development 8
Recent Developments 9
Year 2000 Compliance 9
Client Services 10
Marketing 11
Technology 12
Research and Development 12
Competition 13
Proprietary Rights 14
System Acquisition Agreements 14
Backlog 14
Employees 15
Forward-Looking Statements 15
Executive Officers of the Registrant 21
Item 2 - Properties 22
Item 3 - Legal Proceedings 23
Item 4 - Submission of Matters to a Vote of Security Holders 23
PART II
Item 5 - Market for Registrant's Common Equity and Related
Stockholder Matters 24
Item 6 - Selected Financial Data 24
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 24
Item 7A- Quantitative and Qualitative Disclosures about Market Risk 25
Item 8 - Financial Statements and Supplementary Data 25
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 25
PART III
Item 10 - Directors and Executive Officers of the Registrant 25
Item 11 - Executive Compensation 25
Item 12 - Security Ownership of Certain Beneficial Owners and
Management 25
Item 13 - Certain Relationships and Related Transactions 26
PART IV
Item 14 - Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 26
Signatures 29
i
<PAGE>
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 the FlexiRad
product, 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. As of December 31, 1998, Sunquest had an
installed customer base of more than 1,140 sites, including
155 of the world's largest IDNs, in the United States, Canada,
United Kingdom, Mexico, Saudi Arabia, Ireland and Denmark.
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 five suites of health care information
systems and services 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.
PRODUCTS
Sunquest's business strategy is to engineer its products
for the changing health care environment, now characterized by
the emergence of IDNs and an increasing 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.
1
<PAGE>
Sunquest now offers five suites of health care
information systems and services in addition to its stand-
alone product offerings: (i) the departmental clinical 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; (iv) the clinical data management suite with systems
that integrate clinical patient care data directly to the
caregiver or clinical department; and (v) customer support and
services.
Departmental Clinical 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, microbiology,
hematology, 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. The Clinical Laboratory module released in
1997 features a new database schema, episodal management
and outpatient tracking capabilities and is moving
towards full Windows-based functionality and client
server architecture. 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.
2
<PAGE>
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 the FlexiLab system provides a
comprehensive, paperless environment that enhances the
communication of microbiology and epidemiological
results. User definable, automated rules assist the
microbiologist in measuring the effectiveness of
medications on specific organisms in order to predict
effects on a patient's outcome.
The Blood Bank module automates a hospital's complete
transfusion service, including inventory and distribution
of blood products to the patient. This module, which
uses rules-based logic, is designed to prevent the
distribution of inappropriate blood products. For
example, the Blood Bank module automatically provides
notice if the blood product has not been appropriately
matched to the patient at the time of issue. The donor
module, which is included with the Blood Bank module,
automates the collection procedures and management of
blood product inventories. It also manages and tracks
blood donated by patients for their own use and provides
quality controls to assure compliance with rules of good
practice. Currently, due to restrictions imposed by the
United States Food and Drug Administration (the "FDA"),
the Company is not actively marketing and selling its own
version of this product but continues to support those
sites that are currently using the Blood Bank module. If
and when the Company's 510(k) notification for the Blood
Bank module is cleared by the FDA, the Company
anticipates that marketing of the Blood Bank module will
resume. See "Risk Factors - Regulation". The Company is
marketing and installing the Hemocare product from
Mediware Information Systems, Inc. The Hemocare system
is interfaced with the FlexiLab product.
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. The Flexi-3R module
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.
3
<PAGE>
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.
Sunquest is marketing and selling CoPathPlus ("CoPath")
developed by Dynamic Healthcare Technologies, Inc.
CoPath is interfaced with the FlexiLab system.
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.
The FlexiRad system 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 the FlexiRad system
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.
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.
Further integration is provided directly with the FlexiLab
system. 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.
Pharmacy Information Systems
The FlexiMed system 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 each
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.
4
<PAGE>
Some key features of the FlexiMed system 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.
The FlexiMed system 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
laboratory information systems for the commercial laboratory
marketplace. Antrim's primary product suites, Answers
Laboratory and Answers Finance, combine to provide total
solutions for customers ranging from small hospital outreach
programs to large commercial reference laboratories.
Antrim Clinical Systems
Antrim's General Laboratory product suite is an
efficient, performance-oriented management system that
streamlines daily operations and increases customer
efficiency. Client specific features such as reporting
conventions, call parameters and management and
statistical reporting tools give customers a competitive
edge in an aggressive marketplace. 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.
The system offers quick and simple requisition entry
allowing orders to be placed more efficiently. Bar-
coding maximizes workflow and can be used in conjunction
with instrument interfaces. Batching is also available
to facilitate high volume processing.
Additionally, patient reports may be faxed, printed on-
site, sent electronically or printed remotely. Automatic
report scheduling with client specific features provides
for prompt and accurate reporting.
The Antrim Paperless Microbiology product is fully
integrated with the 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.
Antrim's 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 distinguishes Antrim's
other products.
5
<PAGE>
The system compiles and compares required elements of test data,
facilitating regulatory compliance. Efficient storage of
historical data makes it possible to link large volumes of
patient history records with current data for quick retrieval.
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.
Antrim Financial Systems
The Answers Finance product suite provides the tools
needed to manage the laboratory business including
General Ledger, Accounts Receivable/Billing, Accounts
Payable, Materials Management and Electronic Claims/EDI.
The General Ledger application is the core product of
the Antrim Financial product suite. The system is
designed to provide complete management of financial
information and is fully integrated with all components
of the Antrim Financial product suite.
The Accounts Receivable/Billing product provides
features that allow efficient billing and collections
processing of laboratory services. 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. This product can be sold as an option
for the Sunquest FlexiLab system and General Laboratory,
as well as the laboratory information systems of other
companies.
The Accounts Payable product provides tools to
efficiently manage the expenditures of the laboratory.
The system evaluates commitments, prints and reconciles
checks and produces comprehensive vendor related
management reports.
The 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 multiple
locations and/or multiple inventory environments. The
system also allows retail sales of supplies to laboratory
clients, with this activity automatically transferring to
the Accounts Receivable/Billing product.
The 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.
In addition, Antrim has repackaged its Answers Finance
systems as a Small Business Solution ("SBS") for the broader,
small- to medium-sized laboratory market. SBS incorporates
standardized code and many of the same Antrim features that enable large
6
<PAGE>
commercial laboratories to process and manage hundreds of thousands of
orders per day, but is sized to meet smaller operators' requirements.
Integration and Connectivity
Sunquest estimates that it has installed in its LIS
client base over 11,000 interfaces that were developed for
nearly 700 separate instruments and 1,000 HCISs of other
vendors. This interface library allows the Company to
seamlessly integrate virtually any lab instrument or HCIS into
Sunquest's LIS, radiology information system or pharmacy
information system. The Company uses a variety of
configuration options to support multiple hospitals and 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. Sunquest's proven ability to
handle the complexities of interacting information systems
provides customers with more flexible configuration options.
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 can also check 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
7
<PAGE>
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 Suite) In February
1997, the Company entered into a VAR agreement with Dynamic
Healthcare Technologies, Inc. ("Dynamic") to relicense the
Dynamic anatomic pathology product. The agreement grants the
Company a non-exclusive license to modify, interface, market,
sublicense, support and otherwise use the Dynamic software
program known as CoPathPlus ("CoPath") which is a computer
clinical information system used in surgical pathology,
cytology and autopsy.
Blood Bank (Departmental Clinical Suite) In February 1999, the
Company entered into a Marketing Reseller agreement with
Mediware Information Systems, Inc. ("Mediware") to relicense
the Hemocare blood bank management system. The agreement
grants the Company a non-exclusive license to market the
Mediware software program known as Hemocare, which is a
computer clinical information system, used in hospital and IDN
blood banks.
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. The agreement was subsequently
assigned to New Era of Networks, Inc. ("NEON"), successor in
interest to CAI. 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 tools 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 Suite) The
FlexiMed system 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 is derived from the Meditrust
application licensed by Sunquest in November of 1997.
Outpatient functionality will provide the user with high
volume prescription processing and will be automated with bar-
code checking. The advanced multi-site capability will
support on-line, third-party claims adjudication with billing
algorithms and financial processing that will be configurable
for site-specific variations.
Clinical Suite Integration (Departmental Clinical Suite) The
Clinical Suite Integration will integrate the three primary
Sunquest suite products, FlexiLab, FlexiRad and FlexiMed.
8
<PAGE>
Under development is a web based common viewing system. This
system will allow users the ability to seamlessly view
clinical data from one web-based viewer.
Lab Data Network ("LDN")(Clinical Data Management Suite) is an
open architecture system comprised of numerous component
solutions to address the laboratory alliance and consolidation
trends in the health care industry. The LDN system 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 the LDN
system. The outreach client base can also be provided with
results views from the lab data repository populated by
disparate lab systems.
Departmental System Enterprise Viewer (Clinical Data
Management Suite) will be an operating environment for
information management. The Departmental System Enterprise
Viewer product 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. 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".
RECENT DEVELOPMENTS
On March 29, 1999, the Company entered into a software
asset purchase and sales agreement with New Era of Networks,
Inc. ("NEON") whereby NEON purchased all right, title and
interest in the software known as version 1.0 of the
Enterprise Master Patient Index ("EMPI"). The EMPI product
permits the linkage of patient information even if the
information originated in disparate information systems
throughout an enterprise.
Simultaneously, the companies amended a previous
agreement which will give Sunquest a non-exclusive right and
license to embed NEON's Transaction Distribution Manager
product ("TDM"). TDM is a product that greatly simplifies the
task of performing inter-application data interchange. In
addition, Sunquest received reseller rights to sublicense and
market the EMPI product when used in conjunction with one or
more other software products or services proprietary to
Sunquest or its subsidiaries. Sunquest plans to resell EMPI
and future enhanced versions developed by NEON when providing
its clinical suite systems or its Lab Data Network product
offering.
Sunquest anticipates that related to these transactions
it will record a pre-tax gain on the sale of assets of
approximately $680,000 in the quarter ending March 31, 1999.
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.
9
<PAGE>
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 end of the first quarter of 1999. The Company plans to
release a Year 2000 compliant version of its IntelliCare
software in October of 1999 for the one customer using the
IntelliCare system. 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 December 31, 1998, approximately 94% of the
Company's clients were 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, 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 a 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 fourth 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.
CLIENT SERVICES
At December 31, 1998, the Company's client services
section employed approximately 482 professionals who provide
implementation, application and system support, education and
consulting services to the Company's clients. The client services
10
<PAGE>
section primarily employs medical technologists and
other health care professionals in supporting and implementing
clinical information systems. Computer professionals to
support complex IDNs complement these personnel. 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 Company and
client sites. Additional client education services are
provided through computer-based training or formal ongoing
educational courses and regional seminars.
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. Experts in each
area provide instrument and application interfaces, devices,
operating system and hardware support. The Company uses
outside consultants and self-administered surveys to
continually assess the quality of its services. In addition,
Sunquest uses a call tracking system to provide on-line
project status reports and on-line support, and facilitate
shift-to-shift continuity.
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, and establishing new
commercial laboratories. Upon request, the Company also
provides custom programming services to customers on a fee-for-
service basis.
Balanced View Consulting is a division of Sunquest that
performs consulting and other services, primarily to the
Company's installed base. The services range from training in
the improved use of Sunquest's products to total reengineering
projects. Balanced View Consulting can also provide System
Managers on a monthly or yearly basis, implementation
assistance and specific project work on an 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, Scandinavia and throughout Europe that
have more than 200 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.
11
<PAGE>
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 two areas, Western and Eastern, offering all of
the Company's clinical products; (ii) European Sales, offering
the Company's systems in the United Kingdom and Europe; and
(iii) Antrim Sales, offering commercial and medical reference
laboratory systems. At December 31, 1998, the Company
employed a sales and marketing force of approximately 104
individuals.
TECHNOLOGY
Sunquest's clinical products operate on terminals, 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. The FlexiLab and FlexiRad products are offered on
both IBM and DEC platforms. The FlexiMed product is offered
on the IBM RS6000 platform. Antrim's suite of products is
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 as well as Microsoft's Visual C++,
Visual Basic and SQL-Server database for its newer modules.
FlexiRad is a completely client-server system while the
FlexiLab system uses both client-server and terminal based
modules. 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.
Sunquest is migrating 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 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.
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,
12
<PAGE>
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, 1998, approximately 198 product development
engineers were assigned to improving and extending the
Company's existing systems and approximately 26 engineers were
assigned to the development of products in new product areas.
In 1998, 1997 and 1996, the Company's research and
development expenses before capitalization of software
development costs totaled approximately $18.5 million, $16.9
million and $12.8 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 divided into two
categories: Hospital Information Systems ("HIS") vendors and
stand-alone Clinical Information Systems ("CIS") vendors. The
Company's HIS competitive vendors are: McKesson HBOC, Inc.,
Medical Information Technology, Inc., Shared Medical Systems
Corp. and IDX Systems Corp. The primary CIS competitors are:
Cerner Corporation, Mediware Information Systems, Inc., ADAC
Healthcare Information Systems, Inc., Soft Computer
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,
13
<PAGE>
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, have been registered in the
United States Patent and Trademark Office. The trade name
Sunquest has also been registered by Sunquest in the United
Kingdom and Germany. The trade name Antrim and other marks
used by Antrim in its business, such as Answers, have also
been registered with the United States Patent and Trademark
Office. In addition, FlexiRad and FlexiMed, among other
marks, are trademarks of Sunquest and Sunquest Pharmacy,
respectively. 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.
BACKLOG
At December 31, 1998, the Company had a total contract
backlog of $122.0 million, which consisted of $61.1 million of
system sales and $60.9 million of support and services. At
December 31, 1997, total contract backlog was $99.5 million,
which consisted of $49.3 million of system sales and $50.2
million of support and services. 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 15 months to
complete.
14
<PAGE>
EMPLOYEES
As of December 31, 1998, the Company had 899 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,
including statements which contain words such as "will,"
"expects," "believes," "plans," "anticipates" and 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.
Other Factors Affecting Future Performance
Dependence on Single Product. To date, the Company has
derived the majority of its revenues from sales of laboratory
information systems ("LISs") and related implementation
support services in the United States. 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 to purchasing single vendor,
hospital-wide systems may have a material adverse effect on
the Company's ability to attract new customers. Competitive
pressures or other factors, including the Company's efforts to
expand its LIS offerings to new markets, may result in
significant price decreases that could have a material adverse
effect on the Company's business and results of operations.
There can be no assurance that the Company will be able to
sustain or increase the level of revenues from sales of its
LISs on an annual or quarterly basis.
Rapid Technological Change and Dependence on New Product
Development, Enhancement and Acceptance. The HCIS market is
characterized by rapid technological advances, frequent new
product introductions and evolving industry standards that are
outside the control of the Company. The development and sale
of additional applications is a principal means of competition
in the HCIS market. Advances in both hardware and software
technology, including the introduction of new hardware
platforms, new programming languages and new software
applications, will require the Company to make significant
ongoing expenditures for research and development in order to
adapt the Company's existing and subsequently introduced HCISs
to such new technologies and to take advantage of the benefits
they offer. For the foreseeable future, the Company intends to
15
<PAGE>
continue to devote substantial financial, managerial and
personnel resources to its product development efforts. The
development of new and enhanced HCISs is a complex and
uncertain process requiring high levels of innovation and the
accurate anticipation of technological and market trends, and
from time to time the Company has experienced delays in
introducing new HCISs and HCIS enhancements. The Company
intends to complete its migration of products and clients to
Windows-based and Year 2000 compliant software. 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.
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.
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,
16
<PAGE>
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 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.
Regulation. The United States Food and Drug
Administration (the "FDA") is authorized to regulate medical
"devices" under the Federal Food, Drug and Cosmetic Act, as
amended (the "Act"). The FDA has interpreted the term
"device" to include software intended for use in the
diagnosis, cure, mitigation, treatment, or prevention of
disease. A software product that meets this definition is
subject to the Act's regulatory requirements applicable to
devices, unless the software product is exempted from one or
more of those requirements. The FDA's interpretation is that
hospital information systems, laboratory information
management systems, expert medical decision software systems,
and blood bank information management systems are medical
devices. Software products intended only for general
accounting, communications, or education are not subject to
regulation as devices.
Under an FDA policy for the regulation of computer
products, dated November 13, 1989, health information
management products that have not been classified by the FDA
are deemed medical devices but are exempt from active
regulation by the FDA if they involve competent human
intervention before any impact on human health occurs (e.g.,
clinical judgment and experience can be used to check and
interpret a system's data output). Active regulation would
include established registration, device listing, premarket
notification or approval, good manufacturing practices
("GMP"), and postmarket reporting. The FDA includes in the
category of software products that are exempt from active
regulation hospital information systems and pharmacy ordering
systems. The Company believes that the laboratory information
systems are likewise exempt. However, the FDA has suggested
that laboratory information systems may be considered Class I
devices under 21 C.F.R. 862.2100, which are exempted by that
regulation from premarket notification under Section 510(k) of
the Act but are not exempt from other device regulatory
requirements, such as GMP and reporting.
During a GMP inspection that was conducted by the FDA and
completed in February 1998, the FDA representatives informed
the Company that its LISs might be subject to regulation,
although the agency made no formal determination to this
effect. The Company believes its LISs are not subject to
active regulation but instead are exempt under the principles
announced in the FDA's 1989 draft policy in the same manner as
its HISs and pharmacy information management systems. If the
FDA should issue a formal determination, to the industry
generally or the Company specifically, that the Company's LISs
are subject to active device regulation, the Company will be
required to comply with the applicable device regulatory
requirements.
In March 1994, the FDA notified blood bank software
manufacturers that blood bank software products would be
subject to active device regulation, including premarket
notification or approval. Manufacturers were notified to
submit a premarket notification by March 31, 1995, although
this deadline was later extended to March 31, 1996.
Accordingly, the Company submitted a 510(k) notification to
the FDA on March 27, 1996 with respect to its Blood Bank
software. Following periodic discussions between the FDA and the
17
<PAGE>
Company, on December 28, 1998, the FDA notified the
Company that the 510(k) notification was incomplete, the Blood
Bank product was deemed not substantially equivalent to a
predicate device, and a premarket approval application ("PMA")
would be required unless additional information was submitted
in a new, revised 510(k) notification for the Blood Bank
product. The Company submitted a new 510(k) notification on
January 29, 1999, which is pending FDA review. The Company's
ability to sell, promote, and install its Blood Bank product
is contingent upon FDA clearance of the 510(k) notification.
There can be no assurance as to when, if at all, such FDA
clearance will be obtained. Compliance with the premarket
notification and other device regulatory requirements could be
costly and could delay or preclude the introduction of certain
new products.
Based on the FDA's December 1998 letter and pending
completion of current discussions with the FDA, sales,
promotion, and new installations of the Company's Blood Bank
product were suspended, although the Company has continued to
support and service its existing Blood Bank product customers.
On March 23, 1999, the FDA notified the Company that it could
resume installation of the Blood Bank product for customers
with currently signed contracts and customers with
installations in progress. The Company is unable to determine
at this time the effect, if any, that the marketing
restrictions on the Blood Bank product may have on its
business. To provide an alternative to the Blood Bank
product, the Company has entered into a reseller agreement to
offer the Hemocare blood bank information system product,
which is manufactured by Mediware Information Systems, Inc. A
510(k) notification for Hemocare has been cleared by the FDA.
In August and October 1998, the Company effected two
corrections in its Blood Bank software which were reported to
the FDA under regulations requiring notice of corrections and
removals of medical devices (21 C.F.R. Part 806). The FDA
classified these corrections as Class II voluntary recalls (21
C.F.R. Part 7). Implementation of the corrections at customer
sites is still ongoing.
Antrim has discontinued marketing and support for its
Answers Blood Bank product, and has withdrawn its 1996 FDA
510(k) notification.
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.
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, Secretary and Treasurer of the Company, as trustees
for the benefit of Bradley L. Goldblatt; Bradley L. Goldblatt, Dr.
18
<PAGE>
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 77.3% 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.
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 may
grow through the acquisition of complementary products,
technologies or businesses in the HCIS industry. The
Company's management has limited experience in identifying
appropriate acquisitions and in integrating products,
technologies and businesses into its operations. The
evaluation, negotiation and integration of any such
acquisition may divert the time, attention and resources of
the Company, particularly its management. There can be no
assurance that the Company will be able to integrate
successfully any acquired products, technologies or businesses
into its operations. In addition, there is significant
competition for acquisition opportunities in the HCIS
industry. Consolidation in the industry may intensify such
competition and thereby increase the costs of such acquisition
opportunities. The failure to 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.
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
19
<PAGE>
which the Company licenses or may license its products may not protect
the Company's proprietary rights to the same extent as do laws in
the United States. It may nonetheless be possible for third parties
to misappropriate the Company's technology and proprietary information
or to develop independently similar or superior technology. There
can be no assurance that the legal protections afforded to the
Company and the measures taken by the Company will be adequate
to protect its intellectual property. Any misappropriation of
the Company's technology or proprietary information could have
a material adverse effect on the Company's business and
results of operations. Moreover, the Company is subject to
the risk that others will assert adverse claims and commence
litigation alleging infringement or misappropriation of their
intellectual property rights. There can be no assurance that
others will not assert claims or commence litigation with
respect to the Company's current or future HCISs. In any such
event, the Company may be required to engage in protracted and
costly litigation, regardless of the merits of such claims;
discontinue the use of certain software codes, processes or
trademarks; cease to manufacture, use and license infringing
products; develop non-infringing technology; or enter into
license arrangements with respect to the disputed intellectual
property. There can be no assurance that the Company would be
able to develop alternative technology or that any necessary
licenses would be available or that, if available, such
licenses could be obtained on commercially reasonable terms.
Responding to and defending any of these claims could distract
the attention of management and have a material adverse effect
on the Company's business and results of operations.
Product Liability. The Company's systems include
applications that may relate to confidential patient medical
histories and treatment plans. Improper disclosure of this
information or any failure by the Company's systems to provide
accurate and timely information could result in claims against
the Company by its clients or their patients. A successful
claim brought against the Company in excess of its insurance
coverage could have a material adverse effect on the Company's
business or results of operations, and even unsuccessful
claims could result in the expenditure of substantial funds in
litigation and the diversion of management time and resources.
There can be no assurance that the Company will not be subject
to such claims in the future, that such claims will not result
in liability in excess of any insurance coverage maintained by
the Company with respect to such claims, that insurance will
cover such claims or that appropriate insurance will continue
to be available to the Company at commercially reasonable
rates.
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.
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
20
<PAGE>
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.
EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the executive officers of the
Company, as of March 26, 1999, is set forth below.
Name Age Position
---- --- --------
Sidney A. Goldblatt 64 President, Chief Executive
Officer and Chairman of
the Board
Mark J. Emkjer 43 Chief Operating Officer
Nina M. Dmetruk 46 Executive Vice President-
Chief Financial Officer,
Secretary, Treasurer and
Director
James F. Garliepp 47 Executive Vice President-
Chief Technology Officer
Ivan G. Boyd 44 Senior Vice President-
Sales and Marketing
Joanna S. Broder 55 Senior Vice President-
Client Services
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 and Chairman of the Board since
1987. 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.
Mark J. Emkjer has been Chief Operating Officer since
January 1999. From April 1996 to December 1998, Mr. Emkjer
was employed by Pace, a company that develops clinical
decision support software for IDNs, where he served as
President and Chief Executive Officer. From January 1991 to
March 1996, Mr. Emkjer was employed by Hospital Cost
Consultants, a provider of clinical and financial software
solutions to the health care industry, where he served as
President and Chief Executive Officer.
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 and
Treasurer of the Company since April 1998. 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.
21
<PAGE>
James F. Garliepp has been Executive Vice President-Chief
Technology Officer since September 1991. Mr. Garliepp
previously served as Senior Vice President-Technology from
1989 to September 1991 and served in various other positions
from 1982 to 1989.
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, Inc., 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 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.
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 $98,437 and
expires in September 2001. The Company occupies approximately
59,000 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 $73,718 and expires in May 2004. Sunquest
receives monthly rental payments under the subleases totaling
approximately $18,618. 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 office
expansion. Currently, Sunquest receives monthly rental
payments of approximately $27,525 from this 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 $61,206 and expires in May
22
<PAGE>
2001. Antrim receives monthly rental payments under a
sublease totaling approximately $6,000.
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.
On July 30, 1998, the Company instituted a civil 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 damages
substantially in excess of $75,000.
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 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, 1998.
23
<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." 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
- -------------------------------------------
1998
First quarter $12.375 $ 7.875
Second quarter $11.000 $ 6.750
Third quarter $12.375 $ 7.250
Fourth quarter $15.000 $ 6.875
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
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 19, 1999, there were 36 holders of record of the
Common Stock, and the Company believes that on that date there
were in excess of 900 beneficial owners of the Common Stock.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this item is included in the
Company's Annual Report to Shareholders for the fiscal year
ended December 31, 1998 (the "Annual Report") and such
information is incorporated herein by reference.
ITEM 7. MANAGEMENTS'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.
24
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risk from changes in
interest rates. The Company's primary interest rate risk
relates to its short-term investments in Tax-exempt Municipals
and Short-term Demand Notes all of which are classified as
available-for-sale. At December 31, 1998, the Company had
total short-term investments of $27.3 million. Assuming a 10%
increase in interest rates on the Company's short-term
investments (i.e., an increase from the December 31, 1998
weighted-average interest rate of 4.09% to a weighted-average
interest rate of 4.50%), the fair value of these investments
would decrease by approximately $761,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements, together with the report
thereon of Ernst & Young LLP dated February 5, 1999, 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.
None
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 1999 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.
25
<PAGE>
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 5, 1999
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Income and Comprehensive
Income for the years ended December 31, 1998, 1997 and
1996
Consolidated Statements of Shareholders' Equity for
the years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996
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) (4)
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)
26
<PAGE>
10E Triple Net Lease Agreement dated as of May 2, 1994
between the registrant, as lessee, and Any Travel, Inc.,
as lessor, with respect to the premises located at 1121-
1161 North El Dorado Place in Tucson, Arizona. (1)
10I.3 Stock Incentive Plan of 1996, as amended March 12, 1998. (2) (4)
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)
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. (5)
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. (4)
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.
10.1 Employment Agreement effective December 14, 1998
between Mark J. Emkjer and the registrant. (2) (3)
13.1 Financial Information Section of Annual Report to
Shareholders for 1998. (3)
21.1 Subsidiaries of the registrant. (3)
27
<PAGE>
23.1 Consent of Independent Auditors, dated March 26, 1999. (3)
27.1 Financial Data Schedule for the year ended December 31, 1998. (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, 1997.
(5) Filed, under the same number, as an exhibit to the
Form 10-K for the year ended December 31, 1996.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the registrant during
the quarter ended December 31, 1998.
28
<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 29, 1999.
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 29, 1999
________________________ Officer (Principal Executive
Sidney A. Goldblatt Officer) and Director
/s/ Nina M. Dmetruk Executive Vice President and March 29, 1999
____________________ Chief Financial Officer
Nina M. Dmetruk (Principal Financial and
Accounting Officer) and Director
/s/ Richard W. Barker Director March 29, 1999
______________________
Richard W. Barker
/s/ Larry R. Ferguson Director March 29, 1999
______________________
Larry R. Ferguson
/s/ Peter P. Gombrich Director March 29, 1999
______________________
Peter P. Gombrich
/s/ Curtis S. Goldblatt Director March 29, 1999
________________________
Curtis S. Goldblatt
/s/ Stanley J. Lehman Director March 29, 1999
______________________
Stanley J. Lehman
29
<PAGE>
Sunquest Information Systems, Inc.
Form 10-K For Fiscal Year Ended December 31, 1998
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. *
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. *
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. *
<PAGE>
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. *
10.1 Employment Agreement effective December 14, 1998
between Mark J. Emkjer and the registrant.
13.1 Financial Information Section of Annual Report to
Shareholders for 1998.
21.1 Subsidiaries of the registrant.
23.1 Consent of Independent Auditors, dated March 26, 1999.
27.1 Financial Data Schedule for the year ended December 31, 1998.
___________________
* Incorporated by reference.
<PAGE>
Exhibit 10.1
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT, is made and entered into as
of the 14th day of December, 1998, by and between SUNQUEST
INFORMATION SYSTEMS, INC. ("Employer"), a Pennsylvania
corporation, with offices located at 1407 Eisenhower Boulevard,
Suite 200, Johnstown, Pennsylvania 15904-3217, and MARK J. EMKJER
("Employee"), an individual residing at 18801 Windy Point Drive,
Cornelius, NC 28031.
W I T N E S S E T H:
WHEREAS, Employer and its subsidiaries specialize in
the design, sale and installation of information systems; and
WHEREAS, Employer desires to employ Employee and
Employee desires to be employed by Employer subject to the terms
and provisions of this Agreement; and
WHEREAS, Employee shall have access to the various
trade secrets, confidential information, methods and manner of
operations of the business of Employer and its subsidiaries.
NOW, THEREFORE, for and in consideration of the mutual
covenants and conditions contained herein, including, but not
limited to, Employee=s assent to be bound by the Covenant Not to
Compete and the Covenant Not to Disclose Proprietary Information
contained herein, the receipt and sufficiency of which are hereby
acknowledged by the parties hereto, each intending to be legally
bound, hereby covenant and agree as follows:
1. Employment. Employer hereby agrees to employ Employee,
and Employee hereby agrees to be employed by Employer, in the
position of Chief Operating Officer (ACOO@) of Employer.
2. Management of Employer.
(a) Employee shall report directly to the President
and Chief Executive Officer ("CEO") of Employer.
(b) Employee understands that Employer will be managed
by, in addition to the CEO, Employee and Employer's Executive
Vice President-Chief Financial Officer ("CFO"), each being
equally important in authority and responsibility in and to the
CEO and Employer. Employee also understands that reporting
directly to Employee will be (i) several Executive Vice
Presidents and Senior Vice Presidents, each such officer being
<PAGE>
equally important in authority and responsibility to Employee and
Employer, and (ii) officers of Employer's subsidiaries. Employee
shall interact and work with the CFO, Executive Vice Presidents,
Senior Vice Presidents, Vice Presidents and the remainder of
Employer's and its subsidiaries' officers and employees, in a
manner which demonstrates and encourages support of, and empathy
and respect for, the other individuals and their needs, skills
and talents.
(c) Employee understands that the Board of Directors
(the "Board") of Employer may create any other management
position that it determines in its sole discretion to be
necessary.
3. Scope of Duties. Employee's duties and obligations as
COO shall include, but not be limited to, the following:
(a) Devoting his full working time to rendering services on
behalf of Employer and to render such services with competence,
efficiency and fidelity;
(b) Complying with Employer's policies, procedures,
standards and regulations;
(c) Performing all of those duties and discharging all of
the responsibilities with which Employee has been charged in his
capacity as COO, from time to time, by the Board and the CEO; and
(d) Performing all of the duties stated in this Section 3
generally from Tucson, Arizona and from such other locations as
Employer may require.
4. Exclusive Service. During the term of this Agreement,
Employee shall devote his full time and best efforts to the
performance of his employment and duties under this Agreement.
During the term of this Agreement, Employee shall not, at any
time or place, either directly or indirectly, become engaged in
any fashion whatsoever by, for or on behalf of any entity which
is involved in the design, sale or installation of: (i)
hospital, laboratory, radiology or pharmacy information systems;
(ii) critical data management systems; (iii) any computer
systems, the design, sale or installation of which, or
significant efforts related thereto, are commenced by Employer or
its subsidiaries while Employee is employed by Employer; or (iv)
any modules or components of the above listed computer systems.
This provision is in addition to, and not in lieu of, that
contained in Section 9 hereof.
5. Compensation and Benefits. During the term of this
Agreement, as compensation for all services rendered during the
term of this Agreement as well as consideration for Employee's
agreement to be legally bound by the covenants set forth in
2
<PAGE>
Sections 8 and 9 herein, Employee shall be entitled to the
following compensation and benefits:
(a) an annual salary of TWO HUNDRED FIFTY THOUSAND DOLLARS
($250,000), payable in equal bi-weekly installments, as the same
may be increased from time to time by the Compensation Committee
of the Board (the "Base Compensation"); and
(b) participation in the benefit plans of Employer which
are in effect or which may be adopted from time to time during
the term of this Agreement, and for which Employee satisfies all
applicable eligibility requirements; and
(c) three (3) weeks paid vacation in accordance with the
general policy of Employer relating thereto; and
(d) simultaneously with the execution of this Agreement,
Employee and Employer will execute and deliver a Relocation
Expenses Agreement in the form attached hereto as Exhibit D, and
Employee shall receive a relocation allowance in accordance with
such agreement.
6. Bonus. In addition to the Base Compensation, Employee
shall be entitled to receive the following bonuses (such bonuses
are hereinafter collectively referred to as the "Bonuses") upon
the terms and conditions hereinafter set forth:
(a) Officer Bonus Plan. Employee shall participate in
Employer's Officer Bonus Plan (the "Bonus Plan"), as such may be
amended from time to time in the Employer's sole discretion. The
Bonus Plan currently provides that any bonus which may be payable
to Employee pursuant to the Bonus Plan for 1998 shall be prorated
based on the number of months Employee is employed by Employer
during 1998.
(b) Nonqualified Stock Options.
(i) Upon the effective start date of Employee=s
employment with Employer, Employee shall be awarded nonqualified
stock options (as that term is used in the Nonqualified Stock
Option Agreement attached hereto as Exhibit A) to purchase ONE
HUNDRED TWENTY FIVE THOUSAND (125,000) shares of Employer's
Common Stock, exercisable at the fair market value (as more
specifically defined in the Nonqualified Stock Option Agreement
attached hereto as Exhibit A) of Employer's Common Stock on the
effective start date of Employee's employment with Employer, and
subject to the terms and conditions of the Nonqualified Stock
Option Agreement attached hereto as Exhibit A. Employer and
Employee agree to execute the Nonqualified Stock Option Agreement
in substantially the form as attached hereto as Exhibit A, to be
provided to Employee by Employer within five (5) business days of
his effective start date.
3
<PAGE>
(ii) If Employee meets or exceeds the July 1, 1999
written performance goals (to be established by Employer prior to
execution of this Agreement), then Employee shall be awarded
nonqualified stock options to purchase an additional FIFTY
THOUSAND (50,000) shares of Employer's Common Stock, exercisable
at the fair market value of Employer's Common Stock on July 1,
1999, and subject to the terms and conditions of a Nonqualified
Stock Option Agreement to be entered into between Employee and
Employer, such terms and conditions to be substantially similar
to those set forth in the Nonqualified Stock Option Agreement
attached hereto as Exhibit B.
(iii) If Employee meets or exceeds the written December
31, 1999 performance goals (to be established by Employer prior
to execution of this Agreement), then Employee shall be awarded
nonqualified stock options to purchase an additional ONE HUNDRED
TWENTY FIVE THOUSAND (125,000) shares of Employer's Common Stock,
exercisable at the fair market value of Employer's Common Stock
on December 31, 1999, and subject to the terms and conditions of
a Nonqualified Stock Option Agreement to be entered into between
Employee and Employer, such terms and conditions to be
substantially similar to those set forth in the Nonqualified
Stock Option Agreement attached hereto as Exhibit C.
(c) Sign-Up Bonus. In addition to all other compensation
provided for herein, Employee shall be entitled to a one-time
sign-up bonus of TWENTY FIVE THOUSAND DOLLARS ($25,000) upon
execution of this Agreement.
7. Term/Termination. (a) The term of this Agreement shall
begin on January 4, 1999 and shall continue until terminated in
accordance with any of the following:
(i) Mutual Consent. This Agreement may be terminated
at any time by mutual consent of Employee and Employer.
(ii) Unilateral Termination. This Agreement may be
unilaterally terminated by either party at any time, with or
without reason, upon ninety (90) days written notice to the other
party. In the event that this Agreement is terminated by
Employer pursuant to this Section 7(a)(ii) other than for Cause
(as defined in Section 7(a)(iii)), then Employee shall be
entitled to a severance payment in an amount equal to Employee=s
Base Compensation as set forth in Section 5(a) hereof.
(iii) Termination For Cause. This Agreement may be
terminated immediately by Employer if "Cause" exists to terminate
Employee. "Cause" shall mean gross neglect of duty, the
acceptance by Employee of a position with another employer
without consent, directly or indirectly competing with Employer
or its subsidiaries while employed under this Agreement,
intentionally engaging in any activity which is in conflict with
4
<PAGE>
or adverse to the interests of Employer or its subsidiaries,
willful misconduct on the part of Employee, misfeasance or
malfeasance of duty causing a violation of any law which is
determined to be detrimental to Employer or its subsidiaries,
breach of a fiduciary duty owed to Employer or its subsidiaries
or any shareholder of Employer or any material breach of this
Agreement which has not been corrected by Employee within ten
(10) days after his receipt of written notice of such breach from
Employer.
(iv) Death of Employee. This Agreement will
automatically terminate immediately upon the death of Employee.
(v) Disability. This Agreement will automatically
terminate after Employee has been disabled ("Disabled") for a
period in excess of sixty (60) days, unless Employer elects to
continue this Agreement with the consent of Employee. "Disabled"
shall be defined in the same manner as in the long term
disability insurance policy provided by Employer and covering
Employee.
(b) Obligations Upon Termination. In the event of
termination or expiration of Employee's employment prior to the
end of the Term under any of the circumstances described in this
Section 7, the parties shall carry out any provisions hereof
which contemplate performance by them subsequent to such
termination or expiration of employment, and such termination or
expiration of employment shall not affect any covenant, warranty,
liability or other obligation which shall have arisen or accrued
prior to such termination or expiration of employment.
8. Covenant Not to Disclose Proprietary Information.
(a) Employee recognizes that Employer and its subsidiaries
have developed at great expense and are the owners of a body of
technical and business information that provides Employer and its
subsidiaries with an advantage over its competitors and that
Employer and its subsidiaries possess and will continue to
possess information that has been created, discovered, developed
or otherwise has become known to the Employer and its
subsidiaries, including, without limitation, laboratory,
radiology and pharmacy information computer software systems,
network laboratory outreach (including management support and
medical expertise), and other computer software, designs,
processes, materials, inventions, improvements, writings,
memoranda, reports, price information, marketing information,
customer information, drawings, plans, sketches, art work,
documents, equipment and the like relating to the business of
Employer and its subsidiaries (collectively referred to
throughout this Agreement as "Proprietary Information").
5
<PAGE>
(b) Employee understands and agrees that his employment
creates a relationship of confidence and trust between Employee
and Employer with respect to any Proprietary Information.
(c) In consideration of Employee's employment by Employer,
the Base Compensation and benefits received hereunder, and the
potential Bonuses set forth hereunder, Employee hereby agrees as
follows:
(i) Employee agrees that all Proprietary Information
is the confidential and exclusive property of Employer and its
subsidiaries. Further, Employee will not convert Proprietary
Information for his own or a third party's use without the prior
written consent of Employer and will not make any use of
Proprietary Information except in the discharge of Employee's
duties as an employee of Employer. Employee will not at any
time, whether during or after the termination of his employment,
disclose to any person or entity any Proprietary Information.
Further, Employee will not permit any person or entity to examine
and/or make copies of any documents which contain or are derived
from any Proprietary Information, whether prepared by Employee or
otherwise coming into Employee's possession or control, without
the prior written consent of Employer, other than employees of
Employer in furtherance of Employer's and its subsidiaries=
businesses;
(ii) All documents, records, apparatus, equipment and
other physical property, whether or not pertaining to the
Proprietary Information, furnished to Employee by Employer or its
subsidiaries or another employee of Employer or its subsidiaries
or produced by Employee, either individually or jointly, in
connection with his employment shall be and remain the sole
property of Employer and shall be returned to Employer
immediately as and when requested by Employer and immediately
upon termination or expiration of this Agreement for any reason.
Employee will not take with him any such property or any
reproduction of such property upon such termination or expiration
of this Agreement; and
(iii) Employee will promptly disclose to Employer or
any persons designated by it, all improvements, formulas, ideas,
processes, techniques, know-how, data, computer software,
documentation, proposals, writings, whether or not patentable or
registrable under copyright or similar statutes or subject to
analogous protection, made or conceived or reduced to practice or
learned by Employee, either alone or jointly with others, during
the term of employment (all such improvements, formulas, ideas,
processes, techniques, know-how, data, computer software,
documentation, proposals and writings are hereinafter
collectively referred to as "Developments" and individually as a
"Development").
6
<PAGE>
Employee agrees that all Developments which Employee
develops (in whole or in part), either alone or jointly with
others, and (i) uses equipment, supplies, facilities or
Proprietary Information of Employer, or (ii) uses the hours for
which Employee is to be compensated by Employer, or (iii) which
relate to the business of Employer or its subsidiaries or to its
actual or demonstrably anticipated research or development, or
(iv) which result, in whole or in part, from work performed by
Employee for Employer or its subsidiaries, shall immediately
become the sole and absolute property of Employer and its
assigns, and Employee hereby assigns any rights Employee may have
or acquire in the Developments and benefits and/or rights
resulting therefrom to Employer and its assigns without further
compensation and Employee agrees to communicate, without cost or
delay, and without publishing the same, all available information
relating thereto (with necessary plans and models) to Employer.
Upon disclosure of each Development to Employer, Employee will,
during the term of this Agreement and at any time thereafter, at
the request and cost of Employer, sign, execute, make and do all
such deeds, documents, acts and things as Employer and its duly
authorized agents may require: (i) to apply for, obtain and vest
in the name of Employer alone (unless Employer otherwise directs)
letters patent, copyrights or other analogous protection in any
country throughout the world and when so obtained or vested to
renew and restore the same; and (ii) to defend any opposition
proceedings in respect of such applications and any opposition
proceedings or petitions or applications for revocation of
letters patent, copyright or analogous protection.
In the event that Employer is unable, for any reason
whatsoever, to secure Employee's signature on any letters patent,
copyright or analogous protection relating to any Development
(including applications, renewals, extensions, continuations and
divisions), Employee hereby irrevocably designates and appoints
Employer and its duly authorized officers and agents as
Employee's agent and attorney-in-fact, to act for and in behalf
of and stead to execute and file any such application (or
otherwise) and to do all other lawfully permitted acts to further
the prosecution and issuance of letters patent, copyright or
other analogous protection thereon with the same legal force and
effect as if executed by Employee.
9. Covenant Not to Compete. Employee understands and
agrees that much of Employer's and its subsidiaries= success, on
a national and international level, has been due to their ability
to create, commercially exploit and maintain the secrecy of
significant trade secrets, proprietary and confidential
information, all of which are recognized as and agreed to be
valuable assets of Employer and its subsidiaries. It is further
recognized that Employer's and its subsidiaries' continued
success and competitive advantage in the marketplace is dependent
upon their ability to prohibit access to any and all of these
7
<PAGE>
valuable assets, both as they currently exist and as they are
subsequently expanded, added to, varied and/or modified, by any
person not in the employ of Employer or its subsidiaries.
Accordingly, in consideration of Employee's employment by
Employer, the Base Compensation and benefits received hereunder,
and the potential Bonuses set forth hereunder, Employee hereby
agrees to the following:
(a) During the term of Employee's employment hereunder and
for a period of twelve (12) months after the termination of
employment for any reason, Employee shall not become, directly or
indirectly, involved, whether alone or as a partner, joint
venturer, franchisee, franchisor, officer, director, employee,
independent contractor, employer, agent, shareholder or other
owner in any of the competitors of the Employer or its
subsidiaries named on Exhibit E attached hereto and made a part
hereof;
(b) During the term of employment hereunder and for a
period of twelve (12) months after the termination of Employee's
employment for any reason, Employee shall not, directly or
indirectly, solicit or induce or attempt to solicit or induce,
any employee of Employer or its subsidiaries to leave Employer or
its subsidiaries for any reason whatsoever or hire any employee
of Employer or its subsidiaries;
(c) During the term of employment hereunder and for a
period of twelve (12) months after the termination of Employee's
employment for any reason, Employee shall not, directly or
indirectly, solicit the trade of or trade with, or otherwise do
business with any client of Employer or its subsidiaries so as to
offer or sell any product or services which would be competitive
with any products or services sold by Employer or its
subsidiaries during the term of this Agreement or any products or
services which Employee knows are being developed by Employer or
its subsidiaries during the term of this Agreement; and
(d) During the term of employment hereunder, Employee shall
not take any action which might divert from Employer or its
subsidiaries any opportunity which would be within the scope of
any present or contemplated future business of Employer or its
subsidiaries.
10. Prior Employment. Employee represents that his
performance of all of the terms of this Agreement and as an
employee of Employer does not and will not breach any agreement
to keep in confidence proprietary information acquired by
Employee in confidence or trust which was obtained prior to
employment by Employer. Employee has not entered into, and
agrees that he will not enter into, any agreement either written
or oral in conflict herewith.
8
<PAGE>
11. Restrictive Covenants.
(a) Employee agrees that the restrictions upon Employee's
activities contained in this Agreement are fair, reasonable and
will not be onerous or unduly burdensome to Employee. Employee
further agrees that the Base Compensation and benefits, and the
potential bonuses adequately compensate Employee for his
agreement to enter into the restrictive covenants contained in
this Agreement and acknowledges that his experience and
capabilities are such that the provisions of this Agreement will
not prevent him from earning a livelihood, particularly with
respect to potential employers which are not listed on Exhibit E.
(b) It is understood and agreed that an actual or
threatened breach by Employee of any of the provisions of
Sections 8 or 9 hereof may immediately result in a significant
and substantial impairment of Employer's and its subsidiaries=
competitive advantage and position in the marketplace and the
continued viability or success of Employer and its subsidiaries
and will cause irreparable damage to Employer and its
subsidiaries. It is further agreed that Employer and its
subsidiaries may have no adequate remedy at law. Accordingly, in
the event of a reasonably perceived actual or threatened breach
of any provisions of Sections 8 or 9, Employer and its
subsidiaries shall be entitled to obtain an injunction
restraining Employee from violating any of said provisions,
specific performance or other equitable relief to prevent the
violation of Employee's obligations hereunder. These remedies
shall be in addition to, and not in lieu of, any other remedy
available at law to Employer and its subsidiaries.
12. Miscellaneous.
(a) Severability. If any clause or provision herein shall
be held to be invalid, void or unenforceable, the remaining
provisions shall in no way be affected or impaired and such
provisions shall remain in full force and effect.
(b) Governing Law. This Agreement shall be governed in all
respects, whether as to validity, construction, capacity,
performance or otherwise, by the laws of the Commonwealth of
Pennsylvania.
(c) Notices. All notices required or permitted to be given
under this Agreement shall be given by certified United States
mail, return receipt requested, to the parties at the following
addresses or to such other addresses as either party may
designate in writing to the other party:
9
<PAGE>
If to Employer:
Sidney A. Goldblatt, President
& Chief Executive Officer
Sunquest Information Systems, Inc.
1407 Eisenhower Boulevard, Suite 200
Johnstown, PA 15904-3217
If to Employee:
Mark J. Emkjer
18801 Windy Point Drive
Cornelius, NC 28031
(d) Non-Waiver. The failure of either Employee or Employer
at any time to require the performance of the other of any of the
provisions herein shall in no way affect the respective rights of
Employee or Employer to enforce the same nor shall the waiver by
Employee or Employer of any breach of any provisions hereof be
construed to be a waiver of any succeeding breach or as a waiver
or modification of the provisions of the Agreement itself.
(e) Binding Effect. The provisions of this Agreement shall
be binding upon and inure to the benefit of both parties hereto
and their respective successors and assigns.
(f) Section Headings. The section headings used in this
Agreement are included solely for convenience and shall not
affect, or be used in connection with, the interpretation of this
Agreement.
(g) Assignment. This Agreement is personal to Employee,
and he may neither assign nor delegate any of his rights or
obligations hereunder without first obtaining the written consent
of Employer.
(h) Complete Agreement. This Agreement supersedes all
prior agreements and understandings between the parties and may
not be modified or terminated orally. No modification,
termination or attempted waiver shall be valid unless it is in
10
<PAGE>
writing and signed by the party against whom the same is sought
to be enforced.
IN WITNESS WHEREOF, the parties hereto, intending to be
legally bound hereby, have set their respective hands and seals
as of the date first written above.
ATTEST: EMPLOYER:
SUNQUEST INFORMATION SYSTEMS, INC.
_________________________ By:/s/ Sidney A. Goldblatt
WITNESS: EMPLOYEE:
__________________________ /s/ Mark J. Emkjer
11
<PAGE>
Exhibit 13.1
SUNQUEST INFORMATION SYSTEMS, INC.
Table of Contents for Financial Section of 1998 Annual Report
Management's Discussion and Analysis 1
Report of Independent Auditors 13
Consolidated Financial Statements and Notes 14
Selected Consolidated Financial Data 34
<PAGE>
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.
At December 31, 1998, the Company had an installed customer
base of more than 1,140 sites in the United States, Canada,
United Kingdom, Mexico, Saudi Arabia, Ireland and Denmark. Total
revenues are derived from the licensing of software, the
provision of value-added services and the sale of related
hardware. To date, the majority of the Company's revenues have
been derived from the sale of its laboratory information systems
("LISs") and related hardware, support and services.
On November 26, 1996, the Company purchased all of the
outstanding stock of Antrim Corporation ("Antrim") from Antrim's
parent corporation, The Compucare Company, for $5.0 million in
cash in a transaction accounted for under the purchase method of
accounting. The results of operations of Antrim have been
included in the Company's financial statements since the date of
acquisition. See Note 1 of Notes to Consolidated Financial
Statements.
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. See Note 1
of Notes to Consolidated Financial Statements.
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 1997, the Company decided to refocus its technology
and development efforts on the integration of its suite of
laboratory, radiology and pharmacy systems, the Clinical Event
Manager rules-based alerts system and the Laboratory Data Network
system for medical laboratory consortia. The Company reduced the
carrying value of IntelliCare software
1
<PAGE>
development costs by $2.4 million. The after-tax effect was a reduction
to net income of $1.5 million, or $.10 per diluted share. See Note 7 of
Notes to Consolidated Financial Statements.
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.
Net income for 1998 and 1997 and pro forma net income for
1996 was $8.3 million, $2.8 million and $4.0 million,
respectively. Diluted net income per share was $.54 in 1998 and
$.18 in 1997, and pro forma diluted net income per share was $.29
in 1996. The effect of the previously described charges to
operations and gain on sale of assets on diluted net income per
share follows:
Year Ended December 31,
--------------------------
1998 1997 1996
-------- -------- --------
Diluted net income and pro forma net
income per share excluding gain on
sale of assets and charges to
operations $.52 $ .35 $ .52
Gain on sale of assets .02 - -
Acquired, in-process technology, net - (.07) (.23)
of tax
Capitalized software development
cost adjustments, net of tax
provision - (.10) -
---- ------ ------
$.54 $ .18 $ .29
==== ====== ======
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 15 months. The sales cycle for the Company's
commercial and medical reference laboratory systems is typically
six to 12 months, and an installation typically takes from nine
to 12 months. Revenues from the software portion of system sales
are recognized on the percentage-of-completion method and are
2
<PAGE>
determined based upon actual hours incurred related to total
estimated installation hours in accordance with Statement of
Position ("SOP") 97-2, "Software Revenue Recognition," and SOP 81-
1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts," as amended. Anticipated losses are
recorded in the earliest period in which such losses become
evident. Revenues from the hardware portion of system 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, 1998, the Company had a total contract
backlog of $122.0 million, which consisted of $61.1 million of
system sales and $60.9 million of support and services. At
December 31, 1997, total contract backlog was $99.5 million,
which consisted of $49.3 million of system sales and $50.2
million of support and services. 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
15 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 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
end of the first quarter of 1999. The Company plans to release a
Year 2000 compliant version of its IntelliCare software in
October of 1999 for the one customer using the IntelliCare
system. 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
3
<PAGE>
installation of system enhancements, including the current Year
2000 compliant versions. As of December 31, 1998, approximately
94% of the Company's clients were 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, 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 a 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 fourth 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.
4
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated,
certain items from the Company's consolidated statements of
income expressed as a percentage of total revenues.
Year Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
Revenues:
System sales 50.1 % 51.6 % 55.6 %
Support and service 49.9 48.4 44.4
----- ----- -----
Total revenues 100.0 100.0 100.0
----- ----- -----
Operating expenses:
Cost of system sales 22.7 25.4 24.8
Client services 27.3 26.8 22.7
Research and development 12.7 12.9 12.3
Sales and marketing 14.5 13.7 13.5
General and administrative 11.7 12.1 12.0
Gain on sale of assets (0.3) - -
Capitalized software
development cost
adjustments - 2.4 -
Acquired, in-process
technology - 1.2 4.0
----- ----- -----
Total operating expenses 88.6 94.5 89.3
----- ----- -----
Operating income 11.4 5.5 10.7
Other income (expense):
Interest income 1.1 1.1 1.6
Interest expense (0.9) (1.2) (1.7)
Other - (0.3) (0.1)
----- ----- -----
Income before income taxes 11.6 5.1 10.5
Income tax provision:
Current year operations 4.7 2.4 3.4
Change in tax status - - 1.4
----- ----- -----
Net income 6.9 % 2.7 % 5.7 %
===== ===== =====
Pro forma data (unaudited):
Historical income
before income taxes - % - % 10.5 %
Pro forma income tax
provision - - 5.5
----- ----- -----
Pro forma net income - % - % 5.0 %
===== ===== =====
5
<PAGE>
Comparison of Years Ended December 31, 1998 and December 31, 1997
Revenues. The Company's total revenues were $120.8 million
in 1998 compared to $102.3 million in 1997, an increase of $18.4
million, or 18.0%. Revenues from system sales were $60.6 million
in 1998 compared to $52.8 million in 1997, an increase of $7.8
million, or 14.8%. This increase was attributable to an increase
in installations of software and hardware to existing customers.
Revenues from support and service were $60.2 million in 1998
compared to $49.6 million in 1997, an increase of $10.7 million,
or 21.5%. 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 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 $27.4 million in 1998 compared to $26.0 million
in 1997, an increase of $1.4 million, or 5.4%. As a percentage
of total revenues, cost of system sales was 22.7% in 1998
compared to 25.4% in 1997. The dollar increase was primarily
attributable to an increase in deliveries of resold operating
systems. Amortization of previously capitalized software
development costs was $3.4 million for 1998 compared to $3.6
million for 1997, a decrease of $255,000, or 7.0%. The decrease
in amortization was primarily attributable to the reduction in
carrying value of IntelliCare software in 1997 and decreased
amortization related to the clinical laboratory product,
partially offset by increased amortization of the Company's
pharmacy and reference laboratory products.
Client Services. Client services expenses include salaries
and expenses of product installation, support and consulting.
Client services expenses were $32.9 million in 1998 compared to
$27.4 million in 1997, an increase of $5.5 million, or 20.1%. As
a percentage of total revenues, client services expenses were
27.3% in 1998 compared to 26.8% in 1997. The dollar increase in
client services expenses 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
include salaries and expenses related to development and
documentation of software systems reduced by capitalized software
development costs. Research and development expenses were $15.3
million in 1998 compared to $13.2 million in 1997, an increase of
$2.1 million, or 15.6%. As a percentage of total revenues,
research and development expenses were 12.7% in 1998 compared to
12.9% 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 $3.1 million of its software
development costs in 1998 compared to $3.7 million in 1997, a
decrease of $514,000, or 14.0%. The decrease in capitalized
software development costs 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 pharmacy products.
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 $17.6 million in 1998
compared to $14.0 million in 1997, an increase of $3.5 million,
or 25.3%. As a percentage of total revenues, sales and marketing
expenses were 14.5% in 1998 compared to 13.7% in 1997. The
dollar increase was primarily attributable to increases in
commissions resulting from a 21.5% growth in sales bookings in
1998, additional sales staff and related travel costs for new
products and the European market.
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 $14.2 million in 1998 compared to
$12.3 million in 1997, an increase of $1.9 million, or 15.0%. As
a percentage of total revenues, general and administrative
expenses were 11.7% in 1998 compared to 12.1% in 1997. The
dollar increase was primarily attributable to increases related
to depreciation expense resulting from additions of property and
equipment, additional employees, variable compensation, the
addition of Sunquest Pharmacy and contributions to the Company's
Profit Sharing Plan partially offset by decreased sales tax
accruals.
Transition Costs. For the year ended December 31, 1998, the
Company paid previously accrued transition costs established at
the time of the acquisition of Antrim of $1.5 million as compared
to $1.9 million paid in 1997. These costs were primarily
associated with replacing certain Antrim software products with
Sunquest products and employee-related costs. At December 31,
1998, $1.8 million remains accrued for these costs which will
substantially cover the remaining transition and be paid during
the next operating period. In 1998, the Company also paid
transition costs related to the purchase of the PreciseCare
pharmacy software systems of $163,000 compared to $217,000 paid
in 1997. These costs were primarily employee-related costs and
professional services related to the purchase.
Income Taxes. Income taxes were $5.7 million in 1998
compared to $2.5 million in 1997, an increase of $3.2 million, or
129.6%. This increase was primarily attributable to higher
taxable income in 1998 compared to 1997 partially offset by a
6.5% decrease in the Company's effective tax rate. The decrease
in the effective tax rate is primarily the result of no acquired,
in-process technology being charged to operations during 1998.
At December 31, 1998, the Company had an operating loss for tax
purposes of approximately $3.3 million that was generated by
Antrim. This amount can be carried forward and used to offset
Antrim's future taxable income. This loss carry forward 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 loss carry forward of $3.3
million, tax-effected at $1.3 million and net of the $950,000
valuation allowance, would be approximately $840,000. The
Company anticipates that future taxable
7
<PAGE>
income will be sufficient to realize the net operating loss carry forward.
See Note 9 of Notes to Consolidated Financial Statements.
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 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 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
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 laboratory
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.
Sales and Marketing. 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
8
<PAGE>
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 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.
Liquidity and Capital Resources
At December 31, 1998, the Company had cash, cash equivalents
and short-term investments of $34.3 million, which consisted of
cash of $7.0 million and short-term investments of $27.3 million.
This compares to cash and cash equivalents of $23.7 million at
December 31, 1997, an increase of $10.6 million. Cash provided
by operating activities was $18.8 million, $11.2 million and $6.6
million in 1998, 1997 and 1996, respectively.
As of December 31, 1998, the Company had net trade
receivables of $40.3 million which consisted of $25.0 million in
net billed trade receivables and $15.3 million in unbilled trade
receivables. See Note 5 of Notes to Consolidated Financial
Statements. 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 $3.8
million since December 31, 1997, with $6.7 million related to the
unbilled portion partially offset by a decrease in net billed
trade receivables of $2.9 million. 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
9
<PAGE>
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. Generally, the
unbilled amounts will be billed and collected within the
following twelve months. 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 69 days at
December 31, 1998 compared to 91 days at December 31, 1997. Days
sales outstanding ("DSO") was 112 at December 31, 1998 compared
to 103 at September 30, 1998 and 129 at December 31, 1997.
Cash used in investing activities was $34.7 million, $14.8
million and $7.7 million in 1998, 1997 and 1996, respectively.
During 1998, purchases of investments totaled $89.6 million and
proceeds from the maturity or sale of investments totaled $62.3
million. Capitalized software development costs totaled $4.1
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 Plus ("CoPath"). CoPath is
a computer clinical information system used in surgical
pathology, cytology and autopsy. Purchases of property and
equipment totaled $2.6 million and consisted primarily of
purchases of computers, computer-related equipment, computer
software, office equipment and leasehold improvements. Costs
related to acquisitions totaled $1.9 million. Of this amount,
approximately $1.5 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 $163,000. 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 $658,000 in 1998 and
$4.5 million in 1997. Cash provided by financing activities was
$32.5 million in 1996. During 1998, the Company made principal
payments on capital leases of $800,000. In addition, the Company
issued 18,498 shares of Common Stock with net proceeds of
approximately $142,000 in connection with the Employee Stock
Purchase Plan.
At December 31, 1998, working capital was $48.5 million, an
increase of $10.4 million from December 31, 1997.
At December 31, 1998, 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 $440,000
of the line of credit is used to secure letters of credit and is
not available for immediate expenditure. There were no
borrowings outstanding as of December 31, 1998. See Note 8 of
Notes to Consolidated Financial Statements.
10
<PAGE>
Other than the final payment of $1.0 million due in the
first quarter of 1999 related to the VAR agreement with Dynamic,
the Company has no significant purchase commitments at this time.
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
In October 1997, the Accounting Standards Executive
Committee ("AcSEC") of the American Institute of Certified Public
Accountants ("AICPA") issued SOP 97-2, "Software Revenue
Recognition." The AcSEC amended this Statement of Position twice
during 1998. The Company's revenue recognition policy is in
compliance with SOP 97-2, as subsequently amended.
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.
In March 1998, the AICPA 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.
As of December 31, 1998, the Company adopted 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. The adoption
of SFAS No. 131 had no impact on the Company's disclosure of its
historical data.
Statements of Financial Accounting Standards No. 132,
"Employers' Disclosures about Pensions and Other Postretirement
Benefits," and No. 133, "Accounting for Derivative Instruments
and Hedging Activities," currently have no impact on the
Company's financial statements.
11
<PAGE>
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, year 2000 readiness
of the Company's products and of other vendors' products utilized
by the Company, purchase and installation decisions of customers,
pricing decisions of competitors, changes in regulatory
requirements, and product status 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, 1998 and 1997 and the related consolidated
statements of income and comprehensive income, shareholders'
equity, and cash flows for each of the three years in the period
ended December 31, 1998. 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, 1998 and 1997 and the consolidated
results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998 in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
---------------------
Pittsburgh, Pennsylvania
February 5, 1999
13
<PAGE>
Sunquest Information Systems, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
-------- --------
(in thousands, except share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $7,057 $23,692
Short-term investments 27,283 -
Receivables, less allowance for
doubtful accounts of
$2,045 in 1998 and $1,952 in 1997 40,302 36,547
Other receivables 314 392
Inventory 566 665
Prepaid expenses and other 1,227 1,109
Deferred tax assets 1,473 1,898
-------- -------
Total current assets 78,222 64,303
Property and equipment, net of
accumulated depreciation 10,246 11,513
Capital leases from related party, net
of accumulated amortization 3,304 4,096
Software development costs, net of
accumulated amortization 11,146 12,252
Other receivables 114 195
Deferred tax assets - 346
Intangibles, net of accumulated
amortization 1,136 1,392
Other assets 76 76
-------- -------
Total assets $104,244 $94,173
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $3,721 $3,401
Obligations under capital leases,
primarily from related party 917 800
Accrued compensation and related
taxes 4,599 4,523
Accrued expenses 6,141 4,957
Deferred revenue 13,266 11,519
Deferred income taxes 115 13
Other liabilities 1,000 1,000
-------- -------
Total current liabilities 29,759 26,213
Obligations under capital leases,
primarily from related party 4,163 5,080
Deferred income taxes 2,128 1,167
Transition costs - 891
Other liabilities - 1,000
Commitments and contingencies (Note 11) - -
Shareholders' equity:
Preferred stock, 15,000,000 shares
authorized, no shares issued - -
Common stock, no par value,
35,000,000 shares authorized,
15,394,460 and 15,375,962 shares
issued and outstanding 50,616 50,474
Retained earnings 17,692 9,403
Accumulated other comprehensive loss (114) (55)
-------- -------
Total shareholders' equity 68,194 59,822
-------- -------
Total liabilities and
shareholders' equity $104,244 $94,173
======== =======
</TABLE>
See accompanying notes.
14
<PAGE>
Sunquest Information Systems, Inc.
Consolidated Statements of Income and Comprehensive Income
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C>
Revenues:
System sales $60,549 $52,761 $45,059
Support and service 60,226 49,576 35,937
-------- -------- -------
Total revenues 120,775 102,337 80,996
-------- -------- -------
Operating expenses:
Cost of system sales 27,424 26,015 20,056
Client services 32,945 27,438 18,401
Research and development 15,309 13,244 9,988
Sales and marketing 17,556 14,007 10,896
General and administrative 14,196 12,343 9,758
Gain on sale of assets (404) - -
Capitalized software
development cost adjustments - 2,419 -
Acquired, in-process technology - 1,211 3,252
-------- -------- -------
Total operating expenses 107,026 96,677 72,351
-------- -------- -------
Operating income 13,749 5,660 8,645
Other income (expense):
Interest income 1,348 1,154 1,345
Interest expense (1,090) (1,237) (1,395)
Other 2 (316) (98)
-------- -------- -------
Income before income taxes 14,009 5,261 8,497
Income tax provision:
Current year operations 5,720 2,491 2,755
Change in tax status - - 1,122
-------- -------- -------
Net income 8,289 2,770 4,620
Other comprehensive (loss)
income, net of tax:
Foreign currency translation (64) (148) 111
adjustment
Unrealized gain on
securities available-for-sale 5 - -
-------- -------- -------
Comprehensive income $8,230 $2,622 $4,731
======== ======== =======
Pro forma data (unaudited):
Historical income before
income taxes $ - $ - $8,497
Pro forma income tax
provision - - 4,459
-------- -------- -------
Pro forma net income $ - $ - $4,038
======== ======== =======
Net income per common share:
Basic and diluted $.54 $.18 $.29
======== ======== =======
Weighted-average number of
common shares outstanding:
Basic 15,383 15,369 13,919
======== ======== =======
Diluted 15,404 15,428 13,919
======== ======== =======
</TABLE>
See accompanying notes.
15
<PAGE>
Sunquest Information Systems, Inc.
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Stock Common Stock Total Share Retained Comprehensive Shareholders'
Shares Amount Shares Amount Capital Earnings (Loss) Income Equity
---------- ---------- ---------- ---------- ----------- -------- ------------- -------------
(in thousands, except share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
Issuance of common stock
through Employee Stock
Purchase Plan, net 18,498 142 - - - - - 142
Foreign currency
translation adjustment - - - - - - (64) (64)
Net change in unrealized
gain on securities
available-for-sale - - - - - - 5 5
Net income - - - - - 8,289 - 8,289
---------- -------- ------- ------ ----- -------- ------ --------
Balance at
December 31, 1998 15,394,460 $ 50,616 - $ - $ - $ 17,692 $(114) $ 68,194
========== ======== ======= ====== ===== ======== ====== ========
</TABLE>
See accompanying notes.
16
<PAGE>
Sunquest Information Systems, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $8,289 $2,770 $4,620
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 8,108 7,773 5,077
Capitalized software development
cost adjustments - 2,419 -
Acquired, in-process technology - 1,211 3,252
Loss on disposition of equipment - 10 102
Bad debt expense 670 1,125 506
Deferred revenue 1,811 (395) 1,627
Deferred income taxes 1,830 1,087 347
Gain on sale of assets (404) - -
Changes in operating assets and
liabilities, net of acquisitions:
Receivables (4,831) (6,822) (9,860)
Inventory 27 1,178 (107)
Prepaid expenses and other (118) (118) (48)
Other assets 159 1,347 (107)
Accounts payable 320 568 (245)
Accrued compensation and related taxes 76 (160) 1,007
Other accrued expenses 2,896 (771) 463
------- ------- -------
Net cash provided by operating activities 18,833 11,222 6,634
------- ------- -------
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
Purchase of property and equipment (2,559) (4,931) (3,701)
Costs related to acquisitions (1,894) (3,103) -
Capitalized software development costs (4,148) (5,412) (2,785)
Purchase of investments (89,594) - -
Proceeds from sale or maturity of investments 62,319 - -
Proceeds from sale of assets 1,130 - -
------- ------- -------
Net cash used in investing activities (34,746) (14,843) (7,708)
------- ------- -------
Cash flows from financing activities:
Net repayments on line of credit - - (1,900)
Principal payments on debt - (289) (297)
Principal payments on capitalized leases,
primarily from related party (800) (694) (516)
Net proceeds from issuance of stock 142 134 50,266
S corporation distribution - (3,601) (15,031)
------- ------- -------
Net cash (used in) provided
by financing activities (658) (4,450) 32,522
------- ------- -------
Foreign currency translation adjustment (64) (148) 111
------- ------- -------
Net (decrease) increase in
cash and cash equivalents (16,635) (8,219) 31,559
Cash and cash equivalents at beginning of year 23,692 31,911 352
------- ------- -------
Cash and cash equivalents at end of year $7,057 $23,692 $31,911
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid for income taxes $2,550 $2,325 $3,306
Cash paid for interest $ 15 $ 53 $ 92
Supplemental disclosure of non cash investing and
financing activities:
Disposal of property and equipment $3,768 $2,543 $1,206
Debt related to Dynamic Agreement $ - $2,000 $ -
Capitalized software development cost adjustments $ - $3,542 $ -
Dividend declared but not paid $ - $ - $3,900
</TABLE>
See accompanying notes.
17
<PAGE>
SUNQUEST INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
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, United
Kingdom, Mexico, Saudi Arabia, Ireland and Denmark. Total
revenues are derived from the licensing of software, the
provision of value-added services and the sale of related
hardware. To date, the Company has derived the majority of its
revenues from sales of laboratory information systems ("LISs")
and related implementation and support services in the United
States. 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.
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
18
<PAGE>
hours incurred related to total estimated installation
hours in accordance with Statement of Position ("SOP") 97-2,
"Software Revenue Recognition," and SOP 81-1, "Accounting for
Performance of Construction-Type and Certain Production-Type
Contracts," as amended. 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.
Investment Securities
The Company accounts for investment securities 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 December 31, 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 and associated changes as an element of comprehensive
income. See Note 3 of Notes to Consolidated Financial
Statements.
19
<PAGE>
Inventory
Inventory consists primarily of computer hardware held for
resale and is recorded at the lower of cost (first-in, first-out)
or market.
Property and Equipment
Property and equipment are recorded at cost. Depreciation
is provided principally on the straight-line basis over estimated
useful lives of three or five years for equipment and software
and five or seven years for furniture and fixtures. Leasehold
improvements are depreciated over the estimated useful life of
the asset or the term of the lease, whichever is less.
Income Taxes
The Company elected on January 1, 1990 to be taxed under
Subchapter S of the Internal Revenue Code of 1986, as amended,
and was treated as an S corporation in states where Sunquest was
qualified to do business. 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 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 represents federal and the
additional state income tax expense that would have been required
had the Company not made the S corporation election at an
estimated 43% tax rate. 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.
Intangibles/Acquisitions
Certain intangible assets were acquired in connection with
the purchase of the PreciseCare software and the acquisition of
Antrim. These acquisitions were accounted for as purchases.
Total consideration for PreciseCare and Antrim was $1,410,000 and
$5,000,000, respectively, plus assumed obligations in both
acquisitions. 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,
or $.07 per diluted share, related to the purchase of the
PreciseCare software in the third quarter of 1997 and the in-
process technology acquired of $3,252,000, or $.23 per diluted
share, related to the Antrim acquisition in the fourth quarter of
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, 1998, 1997 and 1996 was $256,000, $266,000 and
$29,000, respectively, and accumulated amortization was $551,000,
$295,000 and $29,000, respectively.
20
<PAGE>
The following unaudited pro forma data presents the results
of operations as if the Antrim acquisition had occurred on
January 1, 1996. 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 on that
date or of results that may occur in the future.
1996
--------------
(in thousands)
Total revenues $96,152
Net income 1,799
Pro forma net income 1,217
Pro forma basic and diluted net .09
income per share
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. See Note 13 of
Notes to Consolidated Financial Statements.
Impact of Recently Issued Accounting Standards
In October 1997, the Accounting Standards Executive
Committee ("AcSEC") of the American Institute of Certified Public
Accountants issued SOP 97-2, "Software Revenue Recognition." The
AcSEC amended this Statement of Position twice during 1998. The
Company's revenue recognition policy is in compliance with SOP 97-
2, as subsequently amended.
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.
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
21
<PAGE>
1998. The adoption had no impact on net income, as the Company's policy
was materially consistent with the requirements of SOP 98-1.
As of December 31, 1998, the Company adopted 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. The adoption
of SFAS No. 131 had no impact on the Company's disclosure of its
historical data.
Statements of Financial Accounting Standards No. 132,
"Employers' Disclosures about Pensions and Other Postretirement
Benefits," and No. 133, "Accounting for Derivative Instruments
and Hedging Activities," currently have no impact on the
Company's financial statements.
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. Distributions of
previously taxed S corporation earnings of $15,031,000 and
$3,601,000 were made in 1996 and 1997, respectively, in
connection with going public.
3. Investments
- ----------------
The following is a summary of securities available-for-sale
at December 31, 1998:
Gross
Unrealized Estimated
Cost Gain Fair Value
--------- -------------- ----------
(in thousands)
Tax-exempt Municipals $20,269 $ 8 $20,277
Short-term Demand Notes 7,006 - 7,006
------- ------ -------
Total $27,275 $ 8 $27,283
======= ====== =======
At December 31, 1998, unrealized gains totaled $8,413 and
are reflected, net of tax, in shareholders' equity and
comprehensive income.
22
<PAGE>
The amortized cost and estimated fair value of debt
securities at December 31, 1998, by contractual maturity, are
shown below.
Estimated
Cost Fair Value
-------- ----------
(in thousands)
Within one year $ 9,175 $ 9,183
One to five years 2,400 2,400
Five to ten years 4,000 4,000
Over ten years 11,700 11,700
------- -------
Total $27,275 $27,283
======= =======
4. Net Income Per Share
- -------------------------
The following table sets forth the computation of basic and
diluted net income per share:
Year Ended December 31,
---------------------------------------
1998 1997 1996
Numerator for basic and ---------- ---------- ----------
diluted net income per share:
Net income and pro
forma net income $8,289,000 $2,770,000 $4,038,000
========== ========== ==========
Denominator:
Denominator for basic net
income and pro forma net
income per share --
weighted-average shares 15,382,508 15,368,771 13,918,693
Effect of diluted securities:
Stock options 21,950 59,553 116
---------- ---------- ----------
Denominator for diluted
net income and pro forma
net income per share --
adjusted weighted-
average shares 15,404,458 15,428,324 13,918,809
========== ========== ==========
Basic net income and pro
forma net income per share $.54 $.18 $.29
==== ==== ====
Diluted net income and pro
forma net income per share $.54 $.18 $.29
==== ==== ====
Options to purchase 920,473, 22,775 and 707,454 shares of
common stock were outstanding at December 31, 1998, 1997 and
1996, respectively, but were not included in the computation of
diluted earnings per share because the options' exercise price
was greater than the average market price of the common shares
and, therefore, the effect would be antidilutive.
23
<PAGE>
5. Receivables
- ----------------
Receivables consist of the following:
December 31,
------------------
1998 1997
-------- --------
(in thousands)
Billed receivables $27,062 $29,900
Unbilled receivables 15,285 8,599
------- -------
42,347 38,499
Allowance for doubtful accounts (2,045) (1,952)
------- -------
Total receivables $40,302 $36,547
======= =======
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, 1998 and 1997 are amounts due from
European health care providers of approximately $1,478,000 and
$1,586,000, respectively. Total revenues include European
revenues of $1,312,000 and $1,612,000 for the years ended
December 31, 1998 and 1997, 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 1998, 1997 and
1996 was $670,000, $1,125,000 and $506,000, respectively. During
1998, 1997 and 1996, $577,000, $2,616,000 and $185,000,
respectively, of receivables were charged against the allowance.
The substantial charge against the allowance in 1997 was
primarily due to writing off Antrim's receivables that had been
reduced by a valuation reserve at the time of the acquisition.
24
<PAGE>
6. Property and Equipment
- --------------------------
Property and equipment consist of the following:
December 31,
-------------------
1998 1997
-------- --------
(in thousands)
Building $ 2,000 $ 2,000
Land 257 257
Computers and software 9,355 10,536
Furniture and fixtures 1,379 1,815
Leasehold improvements 3,865 3,610
Other equipment and vehicles 262 286
------- -------
17,118 18,504
Accumulated depreciation (6,872) (6,991)
------- -------
Total property and equipment, net $10,246 $11,513
======= =======
Depreciation expense for the years ended December 31, 1998,
1997 and 1996 was approximately $3,605,000, $3,005,000 and
$2,059,000, respectively.
7. Capitalized Software Development Costs
- ------------------------------------------
During the years ended December 31, 1998, 1997 and 1996, the
Company capitalized $3,148,000, $3,662,000 and $2,785,000,
respectively, of total software development costs of $18,457,000,
$16,906,000 and $12,773,000, respectively. Amortization expense
related to capitalized software development costs for the years
ended December 31, 1998, 1997 and 1996 was $3,364,000, $3,619,000
and $2,188,000, respectively, and accumulated amortization was
$16,350,000, $13,105,000 and $10,609,000, respectively.
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 after-tax effect of both the third and fourth
quarter charges to operations was a reduction to net income of
$1,451,000, or $.10 per diluted share.
25
<PAGE>
8. 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, 1998, the Optional Rates and the Bank of
America Rate ranged from 6.213% to 7.750%. 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
$440,000 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, 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, 1998
and 1997 under the line of credit.
9. Income Taxes
- ----------------
The provision for income taxes, reconciliation of income tax
expense and components of deferred tax assets and liabilities are
set forth below.
Provision for Income Taxes
Year Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
(in thousands)
Current tax expense:
Federal $3,223 $1,107 $1,928
State 813 297 480
------ ------ ------
Total current tax expense 4,036 1,404 2,408
------ ------ ------
Deferred tax expense:
Federal 1,449 1,057 211
State 235 30 136
Change in tax status - - 1,122
------ ------ ------
Total deferred tax expense 1,684 1,087 1,469
------ ------ ------
Total income tax expense $5,720 $2,491 $3,877
====== ====== ======
26
<PAGE>
Reconciliation of Income Tax Expense
Year Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
(in thousands)
Income tax provision at the
statutory rate $4,763 $1,871 $2,974
Increases (decreases):
State income taxes 647 185 680
Foreign taxes 105 - -
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)
Other 205 (65) (312)
------ ------ ------
Total income tax expense $5,720 $2,491 $3,877
====== ====== ======
Components of Deferred Tax Assets and Liabilities
December 31,
--------------------
1998 1997
-------- --------
(in thousands)
Deferred tax assets:
Net operating loss carry forwards acquired $1,282 $1,389
Transition costs accruals 840 1,238
Capital leases 673 867
Vacation and compensation accruals 570 754
Bad debt allowance 663 737
Deferred revenue 195 437
Accrued expenses 25 29
Other 693 582
------ ------
Total deferred tax assets 4,941 6,033
------ ------
Deferred tax liabilities:
Book basis in excess of tax basis:
Software development 3,732 3,308
Acquired intangibles 438 527
Fixed assets 493 184
Other 98 -
------ ------
Total deferred tax liabilities 4,761 4,019
------ ------
Less: valuation allowance (950) (950)
------ ------
Net deferred tax (liabilities) assets ($770) $1,064
====== ======
27
<PAGE>
The Company has net operating losses of approximately
$3,300,000 that were generated by Antrim. This amount can be
carried forward and used to offset Antrim's future taxable
income. The loss carry forward 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 loss carry forward of $3,300,000, tax-effected at
$1,282,000 and net of the $950,000 valuation allowance, would be
approximately $840,000. 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 carry forward will expire in the years 2010
and 2011.
10. Leases
- -----------
The Company leases two buildings from Any Travel, Inc. ("Any
Travel"), an affiliated entity, under capital leases. The
affiliation is through common ownership of the Company and Any
Travel. The Company also leases certain buildings and equipment
from third parties under noncancelable lease arrangements that
may be adjusted for increases in maintenance and insurance costs
and the consumer price index. These capital and operating leases
expire in various years through May 2004 and may be renewed for
periods ranging from one to five years.
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, 1998:
Capital Operating
Leases Leases
----------- -------------
(in thousands)
1999 $2,099 $1,144
2000 2,066 902
2001 2,066 435
2002 1,378 100
2003 885 108
Thereafter 295 -
------ ------
Total minimum lease payments 8,789 $2,689
======
Amounts representing interest 3,709
------
Present value of net minimum
lease payments (including
current portion of $917) $5,080
======
At December 31, 1998, aggregate future minimum rental
payments to be received under noncancelable leases and subleases
were approximately $1,210,000.
28
<PAGE>
Rental expense for the years ended December 31, 1998, 1997
and 1996 was approximately $1,227,000, $1,158,000 and $474,000,
respectively.
11. 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.
12. Related Party Transactions
- -------------------------------
During 1996, the Company received management fees from an
affiliate of $240,000. In December 1996, the affiliate sold its
assets and discontinued business. The Company did not receive
any management fees from this affiliate during 1998 and 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.
13. 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 began matching 100%
of up to the first 3% of employee contributions and the vesting
period was reduced from five years to three years. Matching
contributions were $912,000 in 1998. The Company incurred
expenses of approximately $704,000 and $729,000 for the years
ended December 31, 1997 and 1996, 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 1998, 1997 and 1996, 18,498, 13,375 and
8,587 shares, respectively, of Common Stock were issued under the
plan for net proceeds to the Company of $142,000, $134,000 and
$120,000, respectively. The weighted-average fair value of
shares sold under the Employee Stock Purchase Plan was
29
<PAGE>
$2.08 in 1998, $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 1998, 1997 and 1996,
respectively: risk-free interest rate of 5.06%, 5.00% and 5.00%;
dividend yield of 0%; volatility factor of the expected market
price of the Company's Common Stock of .62, .62 and .79; and a
weighted-average expected life of the options of .25 years.
Stock Incentive Plan
The Stock Incentive Plan of 1996, as amended, authorizes the
issuance of up to 3,800,000 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 1998, 1997 and 1996, respectively: risk-free
interest rate of 5.24%, 6.54% and 6.52%; dividend yield of 0%;
volatility factor of the expected market price of the Company's
Common Stock of .64, .61 and .62; and a weighted-average expected
life of the options of 4.3, 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 of 1996, as amended, 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.
30
<PAGE>
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:
Year Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
(in thousands, except per share data)
Net income - as reported $8,289 $2,770 $4,038
Pro forma net income 7,105 1,393 3,469
Net income per share - as reported:
Basic and diluted .54 .18 .29
Pro forma net income per share:
Basic and diluted .46 .09 .25
A summary of the Company's stock option activity and related
information for the years ended December 31, 1998, 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
Granted 303,760 $ 10.42
Exercised - $ -
Forfeited (320,731) $ 10.71
----------
Balance - December 31, 1998 1,150,633 $ 10.42
==========
Exercisable at December 31, 1998 284,201 $ 10.12
==========
Exercisable at December 31, 1997 51,240 $ 10.50
==========
Exercisable at December 31, 1996 - $ -
==========
Reserved for Future Options 2,649,367
==========
The weighted-average fair value of options granted during
1998, 1997 and 1996 was $5.67, $5.72 and $9.28, respectively.
Exercise prices for options outstanding as of December 31,
1998 ranged from $7.1875 to $15.1875. The weighted-average
remaining contractual life of those options is 8.25 years.
31
<PAGE>
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.
14. Fair Value of Financial Instruments
- ----------------------------------------
The carrying amounts of the Company's financial instruments
approximate the fair values at December 31, 1998 and 1997.
32
<PAGE>
15. Quarterly Financial Data (Unaudited)
- ------------------------------------------
Summarized quarterly financial data for the years ended December 31, 1998
and 1997, 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>
1998
Total revenues $28,614 $27,697 $32,200 $32,264 $120,775
Operating expenses <F1> 26,936 24,888 28,098 27,104 107,026
Operating income <F1> 1,678 2,809 4,102 5,160 13,749
Net income <F1> 927 1,790 2,438 3,134 8,289
Net income per common share <F1>
Basic and diluted $.06 $.12 $.16 $.20 $.54
Weighted-average number of
common shares outstanding:
Basic 15,376 15,381 15,385 15,389 15,383
Diluted 15,394 15,393 15,401 15,429 15,404
1997
Total revenues $24,607 $27,980 $24,271 $25,479 $102,337
Operating expenses <F2> 22,415 24,366 24,168 25,728 96,677
Operating income (loss) <F2> 2,192 3,614 103 (249) 5,660
Net income (loss) <F2> 1,303 2,120 (268) (385) 2,770
Net income (loss) per common
share <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
</TABLE>
[FN]
<F1> During the second quarter, the Company sold the assets comprising its
Managed Care Manager Payor software product line to Monument Systems,
Inc. for approximately $1.1 million. 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.
<F2> Third quarter results of operations include a charge of $1,265,000
($1,113,000 after-tax, or $.07 per diluted share) related to the
purchase of the PreciseCare software and a charge of $1,529,000
($917,000 after-tax, or $.06 per diluted share) 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, or $.04 per diluted share) related to the reduction in the
carrying value of IntelliCare software development costs.
<F3> Individual quarterly 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.
</FN>
33
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the five years
ended December 31, 1998, 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,
1998, 1997, 1996, 1995 and 1994 and the statement of income data for each
of the five years in the period ended December 31, 1998 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.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Revenues:
System sales $60,549 $52,761 $45,059 $32,262 $38,416
Support and service 60,226 49,576 35,937 29,270 24,202
------- ------- ------- ------- -------
Total revenues 120,775 102,337 80,996 61,532 62,618
------- ------- ------- ------- -------
Operating expenses:
Cost of system sales 27,424 26,015 20,056 14,085 16,711
Client services 32,945 27,438 18,401 17,764 17,116
Research and development 15,309 13,244 9,988 9,040 7,734
Sales and marketing 17,556 14,007 10,896 8,734 6,957
General and administrative 14,196 12,343 9,758 7,068 6,847
Gain on sale of assets <F1> (404) - - - -
Capitalized software development
cost adjustments <F2> - 2,419 - - -
Acquired, in-process
technology <F3> - 1,211 3,252 - -
------- ------- ------- ------- -------
Total operating expenses 107,026 96,677 72,351 56,691 55,365
------- ------- ------- ------- -------
Operating income 13,749 5,660 8,645 4,841 7,253
Other income (expense):
Interest income 1,348 1,154 1,345 408 317
Interest expense (1,090) (1,237) (1,395) (1,465) (1,288)
Other 2 (316) (98) 78 23
------- ------- ------- ------- -------
Income before income taxes 14,009 5,261 8,497 3,862 6,305
Income tax provision:
Current year operations 5,720 2,491 2,755 73 91
Change in tax status - - 1,122 - -
------- ------- ------- ------- -------
Net income $8,289 $2,770 $4,620 $3,789 $6,214
======= ======= ======= ======= =======
Pro forma data (unaudited): <F4>
Historical income before income taxes $ - $ - $8,497 $3,862 $6,305
Pro forma income tax provision - - 4,459 1,661 2,711
------- ------- ------- ------- -------
Pro forma net income $ - $ - $4,038 $2,201 $3,594
======= ======= ======= ======= =======
Net income per common share: <F4>
Basic and diluted $.54 $.18 $.29 $.18 $.30
======= ======= ======= ======= =======
Weighted-average number of common
shares outstanding:
Basic 15,383 15,369 13,919 11,904 11,904
======= ======= ======= ======= =======
Diluted 15,404 15,428 13,919 11,904 11,904
======= ======= ======= ======= =======
Balance Sheet Data (at end of period):
Cash and cash equivalents $7,057 $23,692 $31,911 $352 $1,189
Short-term investments 27,283 - - - -
Working capital 48,463 38,090 39,065 3,963 5,078
Total assets 104,244 94,173 96,911 43,874 42,068
Long-term debt and obligations under
capital leases, primarily from
related party, net of current portion 4,163 6,080 5,921 6,396 7,107
Total shareholders' equity 68,194 59,822 56,767 20,701 21,251
</TABLE>
34
<PAGE>
[FN]
<F1> In 1998, the Company sold the assets comprising its Managed Care
Manager Payor software product line to Monument Systems, Inc. for
approximately $1.1 million. 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.
<F2> In 1997, the Company charged operations $2,419,000 ($1,451,000 after-
tax, or $.10 per diluted share) related to the reduction in the carrying
value of IntelliCare software development costs.
<F3> In 1997, the Company charged operations $1,265,000 ($1,113,000 after-
tax, or $.07 per diluted share) for acquired, in-process technology in
conjunction with the purchase of the PreciseCare software. In 1996, the
Company charged operations $3,252,000, or $.23 per diluted share, for
acquired, in-process technology in conjunction with the Antrim
acquisition.
<F4> Pro forma 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>
35
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
Jurisdiction of
Incorporation or
Name and Name Under Which Doing Business Organization
- ---------------------------------------- ----------------
Sunquest Europa Limited United Kingdom
Sunquest Germany GmbH Germany
Antrim Corporation Texas
Sunquest Pharmacy Information Systems, Inc. Pennsylvania
<PAGE>
Exhibit 23.1
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 5, 1999, included in the 1998 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 Statements
(Form S-8, No. 333-40541) and (Form S-8, No. 333-56713) pertaining
to the Stock Incentive Plan of 1996 of Sunquest Information
Systems, Inc. of our report dated February 5, 1999 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, 1998.
/s/ ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 7057
<SECURITIES> 27283
<RECEIVABLES> 42347
<ALLOWANCES> 2045
<INVENTORY> 566
<CURRENT-ASSETS> 78222
<PP&E> 17118
<DEPRECIATION> 6872
<TOTAL-ASSETS> 104244
<CURRENT-LIABILITIES> 29759
<BONDS> 0
0
0
<COMMON> 50616
<OTHER-SE> 17578
<TOTAL-LIABILITY-AND-EQUITY> 104244
<SALES> 120775
<TOTAL-REVENUES> 120775
<CGS> 27424
<TOTAL-COSTS> 60369
<OTHER-EXPENSES> 15309
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1090
<INCOME-PRETAX> 14009
<INCOME-TAX> 5720
<INCOME-CONTINUING> 8289
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8289
<EPS-PRIMARY> .54
<EPS-DILUTED> .54
</TABLE>
