<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
____________ TO ___________
Commission file number: 0-28212
SUNQUEST INFORMATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 86-0378223
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
4801 East Broadway Boulevard
Tucson, Arizona 85711
(Address of principal executive office) (Zip Code)
(520) 570-2000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address, and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [ X ] Yes [ ] No
On November 5, 1999, there were 15,541,339 shares of Common Stock outstanding.
<PAGE>
Sunquest Information Systems, Inc.
Form 10-Q
For the Quarterly Period Ended September 30, 1999
Table of Contents
Page
----
Part I. Financial Information
Item 1. Financial Statements
(a.) Condensed consolidated balance sheets as 3
of September 30, 1999 (unaudited) and December
31, 1998
(b.) Unaudited condensed consolidated 4
statements of income and comprehensive income
for each of the three and nine month periods
ended September 30, 1999 and September 30, 1998
(c.) Unaudited condensed consolidated 5
statements of cash flows for each of the nine
month periods ended September 30, 1999 and
September 30, 1998
(d.) Notes to unaudited condensed consolidated 6
financial statements
Item 2. Management's Discussion and Analysis of 8
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 15
Market Risk
Part II. Other Information
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security 17
Holders
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
(a.) Exhibits 17
(b.) Reports on Form 8-K 17
Signatures 18
2
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Part I. Financial Information
Item 1. Financial Statements
Sunquest Information Systems, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 7,785 $ 7,057
Short-term investments 37,779 27,283
Trade receivables, net 40,508 40,302
Other current assets 2,890 2,107
Deferred tax assets 1,473 1,473
-------- --------
Total current assets 90,435 78,222
Property and equipment, net 10,072 10,246
Capital leases from related party, net 2,710 3,304
Software development costs, net 10,792 11,146
Other assets, net 1,124 1,326
-------- --------
Total assets $115,133 $104,244
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 2,625 $ 3,721
Accrued compensation and related taxes 6,818 4,599
Accrued expenses 6,398 6,141
Obligations under capital leases,
primarily from related party 1,016 917
Deferred revenue 11,653 13,266
Deferred income taxes 112 115
Other liabilities - 1,000
-------- --------
Total current liabilities 28,622 29,759
Obligations under capital leases from
related party 3,384 4,163
Deferred income taxes 2,128 2,128
Shareholders' equity
Common stock 52,386 50,616
Retained earnings 28,930 17,692
Accumulated other comprehensive loss (317) (114)
-------- --------
Total shareholders' equity 80,999 68,194
-------- --------
Total liabilities and shareholders' equity $115,133 $104,244
======== ========
</TABLE>
See accompanying notes.
3
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Sunquest Information Systems, Inc.
Condensed Consolidated Statements of Income and Comprehensive Income
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
System sales $12,171 $17,013 $40,875 $45,686
Support and service 20,861 15,187 58,642 42,825
------- ------- ------- -------
Total revenues 33,032 32,200 99,517 88,511
------- ------- ------- -------
Operating expenses:
Cost of system sales 4,330 7,644 17,041 21,399
Client services 9,140 8,632 27,874 24,358
Research and development 3,869 3,969 11,887 11,452
Sales and marketing 4,250 4,437 12,637 12,418
General and administrative 4,009 3,416 12,580 10,699
Gain on sale of assets - - (681) (404)
------- ------- ------- -------
Total operating expenses 25,598 28,098 81,338 79,922
------- ------- ------- -------
Operating income 7,434 4,102 18,179 8,589
Other income (expense):
Interest income 466 378 1,176 997
Interest expense (310) (264) (936) (834)
Other (604) (69) (658) 94
------- ------- ------- -------
Income before income taxes 6,986 4,147 17,761 8,846
Income tax provision 2,586 1,709 6,523 3,691
------- ------- ------- -------
Net income 4,400 2,438 11,238 5,155
Other comprehensive income (loss),
net of tax:
Foreign currency translation
adjustment 104 19 (198) 32
Unrealized gain on securities
available-for-sale - 5 (5) 5
------- ------- ------- -------
Comprehensive income $ 4,504 $ 2,462 $11,035 $ 5,192
======= ======= ======= =======
Net income per share:
Basic $.28 $.16 $.73 $.34
==== ==== ==== ====
Diluted $.28 $.16 $.72 $.33
==== ==== ==== ====
Weighted-average shares outstanding:
Basic 15,441 15,385 15,412 15,380
====== ====== ====== ======
Diluted 15,698 15,401 15,587 15,396
====== ====== ====== ======
</TABLE>
See accompanying notes.
4
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Sunquest Information Systems, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $11,238 $5,155
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 5,968 6,004
Bad debt expense 1,178 397
Deferred revenue (1,613) 1,288
Deferred income taxes (1) 150
Gain on sale of assets (681) (404)
Changes in operating assets and liabilities:
Receivables (1,384) (1,038)
Inventory (611) (222)
Prepaid expenses and other (170) (122)
Other assets 2 50
Accounts payable (1,096) 1,817
Accrued compensation and related taxes 2,219 595
Other accrued expenses 1,833 3,811
------- -------
Net cash provided by operating activities 16,882 17,481
------- -------
Cash flows from investing activities:
Purchase of property and equipment (2,332) (1,952)
Costs related to acquisitions (1,360) (1,585)
Capitalized software development costs (3,385) (3,408)
Purchase of investments (38,214) (71,419)
Proceeds from sale or maturity of investments 27,711 40,451
Proceeds from sale of assets 750 1,130
------- -------
Net cash used in investing activities (16,830) (36,783)
------- -------
Cash flows from financing activities:
Principal payments on capitalized leases,
primarily from related party (680) (581)
Net proceeds from issuance of stock 1,554 99
------- -------
Net cash provided by (used in)
financing activities 874 (482)
------- -------
Foreign currency translation adjustment (198) 32
------- -------
Net increase (decrease) in cash and cash equivalents 728 (19,752)
Cash and cash equivalents at beginning of period 7,057 23,692
------- -------
Cash and cash equivalents at end of period $ 7,785 $ 3,940
======= =======
</TABLE>
See accompanying notes.
5
<PAGE>
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1 - Interim Statement Presentation
The unaudited condensed consolidated financial statements of
Sunquest Information Systems, Inc. (the "Company") have been
prepared by the Company pursuant to the rules and regulations of
the Securities and Exchange Commission (the "Commission") and in
accordance with generally accepted accounting principles for the
preparation of interim financial statements. Accordingly,
certain information and footnote disclosures normally included in
annual financial statements have been omitted or condensed.
These unaudited condensed consolidated financial statements
should be read in conjunction with the consolidated financial
statements and the notes thereto incorporated by reference into
the Company's 1998 Annual Report on Form 10-K filed with the
Commission. The 1998 balance sheet amounts were derived from
audited statements.
In the opinion of management, all necessary adjustments,
consisting of normal and recurring adjustments, have been made to
provide a fair presentation to the unaudited financial
information. The operating results for the three and nine month
periods ended September 30, 1999 are not necessarily indicative
of the results that may be expected for any other interim period
or for the full year ending December 31, 1999.
Note 2 - Employee Stock Purchase Plan
In the three months ended September 30, 1999, the Company issued
2,708 shares of its Common Stock for approximately $37,320
pursuant to the Employee Stock Purchase Plan. In the nine months
ended September 30, 1999, the Company has issued a total of 9,057
shares of its Common Stock for approximately $106,324 pursuant to
the Employee Stock Purchase Plan.
Note 3 - Taxes
The effective income tax rates are based upon the relationship of
annual forecasted income and income taxes. To the extent that
these rates differ from the federal statutory rates, the cause is
primarily related to tax exempt investment earnings and state
income taxes.
6
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Note 4 - Net Income Per Share
The following table sets forth the computation of basic and
diluted net income per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Numerator for basic and
diluted net income per share:
Net income $4,400,000 $2,438,000 $11,238,000 $5,155,000
========== ========== =========== ==========
Denominator:
Denominator for basic
net income per share -
weighted-average shares 15,440,564 15,384,514 15,412,407 15,380,382
Effect of diluted securities:
Stock options 257,112 16,543 174,220 15,806
---------- ---------- ----------- ----------
Denominator for diluted
net income per share -
adjusted weighted-
average shares 15,697,676 15,401,057 15,586,627 15,396,188
========== ========== ========== ==========
Basic net income per share $.28 $.16 $.73 $.34
========== ========== ========== ==========
Diluted net income per share $.28 $.16 $.72 $.33
========== ========== ========== ==========
</TABLE>
Note 5 - Investments
At September 30, 1999, 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 other
comprehensive income. At September 30, 1999, the amortized cost
of the Company's investment in debt securities approximated the
fair value and as such, there was no adjustment to shareholders'
equity.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Forward-Looking Statements
- --------------------------
This report, and other reports and communications to
shareholders, contains forward-looking statements, including
statements which contain words such as "will," "expects,"
"believes," "plans," "anticipates" and words of similar impact.
Certain risk factors, including but not limited to dependence on
laboratory information system products, competition in the
marketplace, 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
1998 Annual Report on Form 10-K filed with Securities and
Exchange Commission.
General
- -------
Sunquest Information Systems, Inc. (the "Company") designs,
develops, markets, installs and supports health care information
systems for large and mid-sized hospitals, clinics and other
facilities, including integrated delivery networks. Revenues are
derived from the licensing of software, the provision of value-
added services and the sale of related hardware.
During the quarter ended March 31, 1999, the Company sold
its Enterprise Master Person Index ("EMPI") product to New Era of
Networks, Inc. ("NEON") for net proceeds of approximately
$750,000. The pre-tax gain resulting from the sale was
approximately $681,000. The after-tax gain was approximately
$429,000, or $.03 per basic and diluted share.
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 basic and diluted share.
The sales of the EMPI and the MCM products are consistent with
the Company's strategy and focus on its clinical suite of products.
8
<PAGE>
The effect of the previously described gains on sales of
assets on diluted net income per share follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
Diluted net income per
share excluding gains
on sales of assets $.28 $.16 $.69 $.31
Gains on sales of assets - - .03 .02
---- ---- ---- ----
$.28 $.16 $.72 $.33
==== ==== ==== ====
The results of operations for the three and nine months ended
September 30, 1999 are not necessarily indicative of the results that
may be expected for any other interim period or for the full year ending
December 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.
Based on a current assessment, the Company believes that all
of the current releases of its products are Year 2000 compliant.
The Company released a Year 2000 compliant version of its
IntelliCare software in October of 1999 for the one customer
using the IntelliCare system. The Company plans to have all
clients converted to Year 2000 compliant versions of its products
by the end of the year. Pursuant to contract terms, clients are
obligated to cooperate with the Company in the installation of
system enhancements, including the current Year 2000 compliant
versions. As of September 30, 1999, all but two of the Company's
clients were using or installing Year 2000 compliant versions of
its products. Of the two remaining clients, one will be
installing the Company's FlexiRad product and the other the
FlexiMed product. Both clients are expected to have the products
installed in their test area in November and go live in early
December.
The Company has also assessed 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.
9
<PAGE>
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 end of the year. The cost of Year 2000
compliant software related to systems developed by other vendors
and used internally is included in the related software
maintenance agreements. The Company believes that consulting
costs incurred in accomplishing the installation of Year 2000
compliant software will be immaterial.
Efforts by clients to address their Year 2000 issues may
absorb a significant portion of their information technology
budgets in the near term and may cause them to either delay or
accelerate the purchase and implementation of new applications
and systems. While these purchasing decisions may increase
demand for certain of the Company's products and services,
including its Year 2000 offerings, it could also decrease demand
for other offerings. The outcome of these purchasing decisions
could affect the Company's revenues or change its revenue
patterns.
Results of Operations
- ---------------------
Comparison of Three Months Ended September 30, 1999 and September 30, 1998
Revenues. The Company's total revenues were $33.0 million
for the three months ended September 30, 1999 compared to $32.2
million for the three months ended September 30, 1998, an
increase of $832,000, or 2.6%. Revenues from system sales were
$12.2 million for the three months ended September 30, 1999
compared to $17.0 million for the three months ended September
30, 1998, a decrease of $4.8 million, or 28.5%. This decrease
was primarily attributable to decreases in hardware and operating
system deliveries partially offset by increases in installations
of software. Revenues from support and service were $20.9
million for the three months ended September 30, 1999 compared to
$15.2 million for the three months ended September 30, 1998, an
increase of $5.7 million, or 37.4%. This increase was primarily
attributable to increased installation and fee-for-service
activities and growth in support services to the Company's
installed customer base.
Over the last few years, the Company has been experiencing a
favorable trend in revenue mix. As a percentage of total revenues,
software license fee and services revenues have been increasing and
hardware revenues have been decreasing. Although the Company cannot
10
<PAGE>
determine with certainty what the trend will be going forward, it
does not anticipate that the proportion of hardware revenues to total
revenues will continue to decrease.
At September 30, 1999, the Company had a total contract
backlog of $119.4 million, which consisted of $52.8 million of
system sales and services and $66.6 million of support. The
Company's total contract backlog at June 30, 1999, was $123.4
million, which consisted of $59.2 million of system sales and
services and $64.2 million of support. At September 30, 1998,
total contract backlog was $113.3 million, which consisted of
$53.9 million of system sales and services and $59.4 million of
support.
During the third quarter, the Company experienced a delay in
sales signings although the pipeline of potential sales
increased. Customers have indicated that the delay is the result
of the effects of Year 2000 issues and the Balanced Budget Act.
It is uncertain whether this delay in sales signings constitutes a
trend and will continue into future periods. Nevertheless, the
Company anticipates that the sales signings for the fourth quarter
of 1999 will increase over those of the third quarter of 1999,
followed by slower sales signings during the first quarter of 2000,
with increased sales signings during the second quarter of 2000.
Cost of System Sales. Cost of system sales was $4.3 million
for the three months ended September 30, 1999 compared to $7.6
million for the three months ended September 30, 1998, a decrease
of $3.3 million, or 43.4%. As a percentage of total revenues,
cost of system sales was 13.1% in 1999 compared to 23.8% in 1998.
The dollar decrease was primarily attributable to decreases in
hardware and operating system deliveries. Amortization of
previously capitalized software development costs was $893,000
for the three months ended September 30, 1999 compared to
$817,000 for the three months ended September 30, 1998, an
increase of $76,000, or 9.3%. The increase in amortization was
primarily attributable to increased amortization of the Company's
pharmacy product.
Client Services. Client services expenses were $9.1 million
for the three months ended September 30, 1999 compared to $8.6
million for the three months ended September 30, 1998, an
increase of $508,000, or 5.9%. As a percentage of total
revenues, client services expenses were 27.7% in 1999 compared to
26.8% in 1998. The dollar increase was primarily attributable to
additional staff dedicated to support and installation of the
Company's systems and to providing consulting services to
customers.
Research and Development. Research and development expenses
were $3.9 million for the three months ended September 30, 1999
compared to $4.0 million for the three months ended September 30,
1998, a decrease of $100,000, or 2.5%. As a percentage of total
revenues, research and development expenses were 11.7% in 1999
compared to 12.3% in 1998. The dollar decrease in research and
development expenses was primarily attributable to decreased
development costs partially offset by legal and professional fees
associated with the United States Food and Drug Administration
("FDA") registration of the Company's Blood Bank product. The
Company capitalized $661,000 of its software development costs
for the three months ended September 30, 1999 compared to
$723,000 for the three months ended September 30, 1998, a
decrease of $62,000, or 8.6%. The decrease in capitalized
software development
11
<PAGE>
costs was primarily attributable to decreased capitalization for
the Company's reference laboratory and IntelliCare products partially
offset by increased capitalization for the pharmacy product.
Sales and Marketing. Sales and marketing expenses were $4.3
million for the three months ended September 30, 1999 compared to
$4.4 million for the three months ended September 30, 1998, a
decrease of $187,000, or 4.2%. As a percentage of total
revenues, sales and marketing expenses were 12.9% in 1999 compared to
13.8% in 1998. The dollar decrease was primarily attributable to decreased
commissions, resulting from a decline of 43.6% in sales bookings during
the third quarter of 1999 as compared to the corresponding period in 1998
and marketing expense partially offset by additional sales staff for the
Company's reference laboratory products.
General and Administrative. General and administrative
expenses were $4.0 million for the three months ended September
30, 1999 compared to $3.4 million for the three months ended
September 30, 1998, an increase of $593,000, or 17.4%. As a
percentage of total revenues, general and administrative expenses
were 12.1% in 1999 compared to 10.6% in 1998. The dollar
increase was primarily attributable to increased variable
compensation relating to employee incentives. Employee incentive
goals required for variable compensation were not achieved in the
prior year. The increases for the three months ended September
30, 1999 were partially offset by decreased legal fees and
depreciation expense.
Transition Costs. For the three months ended September 30,
1999, the Company paid previously accrued transition costs
established at the time of the acquisition of Antrim of $80,000
as compared to $201,000 paid during the corresponding period in
1998. These costs were primarily associated with replacing
certain Antrim software products with Sunquest products. In
addition, during the three months ended September 30, 1998, the
Company paid transition costs related to the purchase of the
PreciseCare Medication Management System ("PreciseCare") of
$10,000.
Comparison of Nine Months Ended September 30, 1999 and September 30, 1998
Revenues. The Company's total revenues were $99.5 million
for the nine months ended September 30, 1999 compared to $88.5
million for the nine months ended September 30, 1998, an increase
of $11.0 million, or 12.4%. Revenues from system sales were
$40.9 million for the nine months ended September 30, 1999
compared to $45.7 million for the nine months ended September 30,
1998, a decrease of $4.8 million, or 10.5%. This decrease was
primarily attributable to decreases in hardware and operating
system deliveries partially offset by increases in installations
of software. Revenues from support and service were $58.6
million for the nine months ended September 30, 1999 compared to
$42.8 million for the nine months ended September 30, 1998, an
increase of $15.8 million, or 36.9%. This increase was primarily
attributable to increased installation and fee-for-service
activities and growth in support services to the Company's
installed customer base.
12
<PAGE>
Cost of System Sales. Cost of system sales was $17.0
million for the nine months ended September 30, 1999 compared to
$21.4 million for the nine months ended September 30, 1998, a
decrease of $4.4 million, or 20.4%. As a percentage of total
revenues, cost of system sales was 17.1% in 1999 compared to
24.2% in 1998. The dollar decrease was primarily attributable to
decreases in hardware and operating system deliveries partially
offset by increased costs related to additional hardware
maintenance contracts and reduced margins on hardware and
operating systems. Amortization of previously capitalized
software development costs was $2.7 million for the nine months
ended September 30, 1999 compared to $2.5 million for the nine months
ended September 30, 1998, an increase of $212,000, or 8.6%.
The increase in amortization was primarily attributable to
increased amortization of the Company's reference laboratory
product, partially offset by decreased amortization due to the
sale of the MCM software product line.
Client Services. Client services expenses were $27.9 million
for the nine months ended September 30, 1999 compared to $24.4
million for the nine months ended September 30, 1998, an increase
of $3.5 million, or 14.4%. As a percentage of total revenues,
client services expenses were 28.0% in 1999 compared to 27.5% in
1998. The dollar increase was primarily attributable to
additional staff and outside consultants dedicated to support and
installation of the Company's systems and to providing consulting
services to customers.
Research and Development. Research and development expenses
were $11.9 million for the nine months ended September 30, 1999
compared to $11.5 million for the nine months ended September 30,
1998, an increase of $435,000, or 3.8%. As a percentage of total
revenues, research and development expenses were 11.9% in 1999
compared to 13.0% in 1998. The dollar increase in research and
development expenses was primarily attributable to increased
efforts related to the development, enhancement and documentation
of the Company's clinical laboratory systems, legal and
professional fees associated with the FDA registration of the
Company's Blood Bank product and increased efforts related to the
development, enhancement and documentation of the Company's
Clinical Event Manager system. The increases were partially
offset by decreased expenses related to non-laboratory products
and the discontinuance of the MCM, EMPI and IntelliCare products.
The Company capitalized approximately $2.4 million of its
software development costs for both the nine months ended
September 30, 1999 and September 30, 1998.
Sales and Marketing. Sales and marketing expenses were
$12.6 million for the nine months ended September 30, 1999
compared to $12.4 million for the nine months ended September 30,
1998, an increase of $219,000, or 1.8%. As a percentage of total
revenues, sales and marketing expenses were 12.7% in 1999
compared to 14.0% in 1998. The dollar increase was primarily
attributable to additional sales staff for the Company's
reference laboratory products and the European market and
increased advertising and marketing expense partially offset by a
decrease in commissions resulting from a decline of 9.2% in sales
bookings during the first nine months of 1999 as compared to the
corresponding period in 1998.
General and Administrative. General and administrative
expenses were $12.6 million for the nine months ended September
30, 1999 compared to $10.7 million for the nine months ended
September 30, 1998, an increase of $1.9 million, or 17.6%. As a
percentage of total revenues,
13
<PAGE>
general and administrative expenses were 12.7% in 1999 compared to
12.1% in 1998. The dollar increase was primarily attributable to
increased variable compensation relating to employee incentives and
additional employees and related hiring expenses. Employee incentive goals
required for variable compensation were not achieved in the prior
year. The increases for the nine months ended September 30, 1999
were partially offset by decreased depreciation expense.
Transition Costs. For the nine months ended September 30,
1999, the Company paid previously accrued transition costs
established at the time of the acquisition of Antrim of $1.4
million as compared to $1.2 million paid during the corresponding
period in 1998. These costs were primarily associated with
replacing certain Antrim software products with Sunquest
products. In addition, during the nine months ended September
30, 1998, the Company paid transition costs related to the
purchase of PreciseCare of $138,000. These costs were primarily
employee-related costs and professional services related to the
purchase.
Liquidity and Capital Resources
- -------------------------------
At September 30, 1999, the Company had cash and short-term
investments of $45.6 million, which consisted of cash of $7.8
million and short-term investments of $37.8 million. This
compares to cash and short-term investments of $34.3 million at
December 31, 1998 and cash and short-term investments of $34.9
million at September 30, 1998, increases of $11.2 million and
$10.6 million, respectively. Cash provided by operating
activities was $16.9 million for the nine months ended September
30, 1999 compared to $17.5 million for the nine months ended
September 30, 1998.
As of September 30, 1999, the Company had net trade
receivables of $40.5 million which consisted of $23.8 million in
net billed trade receivables and $16.7 million in unbilled trade
receivables. At 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. Net trade receivables have increased by $206,000
since December 31, 1998, with $1.4 million related to the
unbilled receivables partially offset by a decrease in net billed
trade receivables of $1.2 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 milestone billings.
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
71 days at September 30, 1999 compared to 69 days at June 30,
1999; 69 days at December 31, 1998 and 77 days at September 30,
1998. Days sales outstanding ("DSO") was 110 at September 30,
1999 compared to 113 at June 30, 1999; 112 at December 31, 1998
and 103 at September 30, 1998.
Cash used in investing activities was $16.8 million for the
nine months ended September 30, 1999. Purchases of investments
totaled $38.2 million and proceeds from the maturity or sale of
investments totaled $27.7 million. Capitalized software
development costs totaled $3.4
14
<PAGE>
million. Of this amount, $1.0 million was related to the final payment under
the Value Added Reseller agreement with Dynamic Healthcare Technologies,
Inc. for the license of a software program known as CoPathPlus. Purchases
of property and equipment totaled $2.3 million and consisted
primarily of purchases of computers, computer-related equipment,
computer software and leasehold improvements. Costs related to
acquisitions totaled $1.4 million and were primarily associated
with replacing certain Antrim software products with Sunquest
products. In addition, the proceeds from the sale of assets
consisted of $750,000 from the sale of the EMPI product to NEON
in the first quarter of 1999.
Cash provided by financing activities was $874,000 for the
nine months ended September 30, 1999. The Company issued 137,822
shares of Common Stock for approximately $1.4 million under the
Stock Incentive Plan of 1996, as amended, and 9,057 shares of
Common Stock for approximately $106,324 under the Employee Stock
Purchase Plan. Cash used by financing activities was $680,000
related to principal payments on capital leases.
At September 30, 1999, working capital was $61.8 million
compared to $48.5 million at December 31, 1998.
The Company has a revolving line of credit with a bank
allowing the Company to borrow up to $10.0 million. Any
borrowings under the line of credit will bear interest at the
bank reference rate unless the Company elects a fixed rate or
certain variable rates contemplated by the agreement. All
outstanding principal and interest under the line of credit is
due April 28, 2000 except for any amounts outstanding under stand-
by letters of credit which have a maximum maturity of 365 days.
Borrowings under the line of credit are secured by all of the
Company's assets. Approximately $792,000 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 September 30, 1999.
The Company has no significant purchase commitments at this
time. However, the Company continues to be actively involved in
identifying and evaluating potential acquisitions, which may
result in the future expenditure of funds.
Management believes that existing cash, cash equivalents,
short-term investments, cash available under its revolving line
of credit and funds generated from operations will be sufficient
to meet operating requirements for at least the next twelve
months.
To date, inflation has not had a material impact on the
Company's revenues or income, and the Company does not expect
inflation to have a material impact in the foreseeable future.
Item 3. 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 September 30,
15
<PAGE>
1999, the Company had total short-term investments of $37.8 million.
Assuming a 10% increase in interest rates on the Company's short-term
investments (i.e., an increase from the September 30, 1999 weighted-average
interest rate of 3.82% to a weighted-average interest rate of 4.20%), the
fair value of these investments would decrease by approximately
$510,000.
16
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
Not Applicable.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
27.1 - Financial Data Schedule for the Nine Months
Ended September 30, 1999, filed herewith.
(b.) Reports on Form 8-K
No reports on Form 8-K were filed by the Company
during the quarter ended September 30, 1999.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
SUNQUEST INFORMATION SYSTEMS, INC.
(Registrant)
Date: November 10, 1999 By: /s/ Nina M. Dmetruk
____________________________________________
Nina M. Dmetruk
Executive Vice President and Chief Financial
Officer
(Authorized Officer of the Registrant and
Principal Financial and Accounting Officer)
18
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