UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
JUNE 30, 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 August 5, 1999, there were 15,409,925 shares of Common Stock
outstanding.
<PAGE>
Sunquest Information Systems, Inc.
Form 10-Q
For the Quarterly Period Ended June 30, 1999
Table of Contents
Page
----
Part I. Financial Information
Item 1. Financial Statements
(a.) Condensed consolidated balance sheets as 3
of June 30, 1999 (unaudited) and December 31,
1998
(b.) Unaudited condensed consolidated 4
statements of income and comprehensive income
for each of the three and six month periods
ended June 30, 1999 and June 30, 1998
(c.) Unaudited condensed consolidated 5
statements of cash flows for each of the six
month periods ended June 30, 1999 and June 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 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security 16
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
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
Sunquest Information Systems, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
[CAPTION]
<TABLE>
June 30, December 31,
1999 1998
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 6,979 $ 7,057
Short-term investments 32,876 27,283
Trade receivables, net 42,289 40,302
Other current assets 1,861 2,107
Deferred tax assets 1,473 1,473
-------- --------
Total current assets 85,478 78,222
Property and equipment, net 9,835 10,246
Capital leases from related party, net 2,908 3,304
Software development costs, net 11,024 11,146
Other assets, net 1,188 1,326
-------- --------
Total assets $110,433 $104,244
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 3,120 $ 3,721
Accrued compensation and related taxes 5,299 4,599
Accrued expenses 5,538 6,141
Obligations under capital leases,
primarily from related party 970 917
Deferred revenue 14,722 13,266
Deferred income taxes 112 115
Other liabilities - 1,000
-------- --------
Total current liabilities 29,761 29,759
Obligations under capital leases
from related party 3,656 4,163
Deferred income taxes 2,128 2,128
Shareholders' equity
Common stock 50,779 50,616
Retained earnings 24,530 17,692
Accumulated other comprehensive loss (421) (114)
-------- --------
Total shareholders' equity 74,888 68,194
-------- --------
Total liabilities and
shareholders' equity $110,433 $104,244
======== ========
</TABLE>
See accompanying notes.
3
<PAGE>
Sunquest Information Systems, Inc.
Condensed Consolidated Statements of Income and Comprehensive Income
(In thousands, except per share amounts)
(Unaudited)
[CAPTION]
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
System sales $14,162 $12,967 $28,704 $28,673
Support and service 19,603 14,730 37,781 27,638
------- ------- ------- -------
Total revenues 33,765 27,697 66,485 56,311
------- ------- ------- -------
Operating expenses:
Cost of system sales 6,248 5,863 12,711 13,755
Client services 9,306 7,863 18,734 15,726
Research and development 3,919 3,600 8,018 7,483
Sales and marketing 3,997 4,184 8,387 7,981
General and administrative 4,261 3,782 8,571 7,283
Gain on sale of assets - (404) (681) (404)
------- ------- ------- -------
Total operating expenses 27,731 24,888 55,740 51,824
------- ------- ------- -------
Operating income 6,034 2,809 10,745 4,487
Other income (expense):
Interest income 389 344 710 619
Interest expense (308) (274) (626) (570)
Other 55 213 (54) 163
------- ------- ------- -------
Income before income taxes 6,170 3,092 10,775 4,699
Income tax provision 2,222 1,302 3,937 1,982
------- ------- ------- -------
Net income 3,948 1,790 6,838 2,717
Other comprehensive (loss)
income, net of tax:
Foreign currency translation
adjustment (149) (25) (302) 13
Unrealized gain on securities
available-for-sale (2) - (5) -
------- ------- ------- -------
Comprehensive income $ 3,797 $ 1,765 $ 6,531 $ 2,730
======= ======= ======= =======
Net income per share:
Basic $.26 $.12 $.44 $.18
======= ======= ======= =======
Diluted $.25 $.12 $.44 $.18
======= ======= ======= =======
Weighted-average shares outstanding:
Basic 15,402 15,381 15,398 15,378
======= ======= ======= =======
Diluted 15,550 15,393 15,531 15,394
======= ======= ======= =======
</TABLE>
See accompanying notes.
4
<PAGE>
Sunquest Information Systems, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
[CAPTION]
<TABLE>
Six Months Ended
June 30,
------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,838 $ 2,717
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 4,019 4,034
Bad debt expense 401 149
Deferred revenue 1,456 (640)
Deferred income taxes (1) 150
Gain on sale of assets (681) (404)
Changes in operating assets and liabilities:
Receivables (2,388) 2,364
Inventory 118 213
Prepaid expenses and other 81 (475)
Other assets 53 (42)
Accounts payable (601) 29
Accrued compensation and related taxes 700 88
Other accrued expenses 677 1,830
-------- --------
Net cash provided by operating activities 10,672 10,013
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (1,303) (1,381)
Costs related to acquisitions (1,280) (1,170)
Capitalized software development costs (2,724) (2,685)
Purchase of investments (24,744) (53,977)
Proceeds from sale or maturity of investments 19,144 27,294
Proceeds from sale of assets 750 1,130
-------- --------
Net cash used in investing activities (10,157) (30,789)
-------- --------
Cash flows from financing activities:
Principal payments on capitalized leases,
primarily from related party (454) (383)
Net proceeds from issuance of stock 163 71
-------- --------
Net cash used in financing activities (291) (312)
-------- --------
Foreign currency translation adjustment (302) 13
-------- --------
Net decrease in cash and cash equivalents (78) (21,075)
Cash and cash equivalents at beginning of period 7,057 23,692
-------- --------
Cash and cash equivalents at end of period $ 6,979 $ 2,617
======== ========
</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 six month
periods ended June 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 June 30, 1999, the Company issued 4,262
shares of its Common Stock for approximately $44,000 pursuant to
the Employee Stock Purchase Plan. In the six months ended June
30, 1999, the Company has issued a total of 6,349 shares of its
Common Stock for approximately $69,000 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
<PAGE>
Note 4 - Net Income Per Share
The following table sets forth the computation of basic and
diluted net income per share:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Numerator for basic and
diluted net income per share:
Net income $3,948,000 $1,790,000 $6,838,000 $2,717,000
========== ========== ========== ==========
Denominator:
Denominator for basic
net income per
share -- weighted-
average shares 15,401,667 15,380,526 15,398,095 15,378,282
Effect of diluted securities:
Stock options 148,339 12,621 132,774 15,438
---------- ---------- ---------- ----------
Denominator for diluted
net income per share --
adjusted weighted-
average shares 15,550,006 15,393,147 15,530,869 15,393,720
========== ========== ========== ==========
Basic net income per share $.26 $.12 $.44 $.18
==== ==== ==== ====
Diluted net income per share $.25 $.12 $.44 $.18
==== ==== ==== ====
Note 5 - Investments
At June 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 June 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. The sale of the
EMPI product is consistent with the Company's strategy and focus
on its clinical suite of products.
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.
8
<PAGE>
The effect of the previously described gains on sales of
assets on diluted net income per share follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
Diluted net income per
share excluding
gains on sales of assets $.25 $.10 $.41 $.16
Gains on sales of assets - .02 .03 .02
---- ---- ---- ----
$.25 $.12 $.44 $.18
==== ==== ==== ====
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 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 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 June 30, 1999, approximately 97% of the
Company's clients were using or installing Year 2000 compliant
versions of its products.
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.
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.
9
<PAGE>
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.
The results of operations for the three and six months ended
June 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.
Results of Operations
- ---------------------
Comparison of Three Months Ended June 30, 1999 and June 30, 1998
Revenues. The Company's total revenues were $33.8 million
for the three months ended June 30, 1999 compared to $27.7
million for the three months ended June 30, 1998, an increase of
$6.1 million, or 21.9%. Revenues from system sales were $14.2
million for the three months ended June 30, 1999 compared to
$13.0 million for the three months ended June 30, 1998, an
increase of $1.2 million, or 9.2%. This increase was primarily
attributable to increases in installations of software partially
offset by decreases in hardware and operating system deliveries.
Revenues from support and service were $19.6 million for the
three months ended June 30, 1999 compared to $14.7 million for
the three months ended June 30, 1998, an increase of $4.9
million, or 33.1%. 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.
At June 30, 1999, the Company had a total contract backlog
of $123.4 million, which consisted of $59.2 million of system
sales and services and $64.2 million of support. The Company's
total contract backlog at March 31, 1999, was $125.4 million,
which consisted of $62.4 million of system sales and services and
$63.0 million of support. At June 30, 1998, total contract
backlog was $109.5 million, which consisted of $51.2 million of
system sales and services and $58.3 million of support.
10
<PAGE>
Cost of System Sales. Cost of system sales was $6.2 million
for the three months ended June 30, 1999 compared to $5.9 million
for the three months ended June 30, 1998, an increase of
$385,000, or 6.6%. As a percentage of total revenues, cost of
system sales was 18.5% in 1999 compared to 21.1% in 1998. The
dollar increase was primarily attributable to lower margins on
hardware and operating systems, increased third party software
costs due to higher license fee revenue and additional hardware
maintenance contracts partially offset by decreases in hardware
and operating system deliveries. Amortization of previously
capitalized software development costs was $893,000 for the three
months ended June 30, 1999 compared to $814,000 for the three
months ended June 30, 1998, an increase of $79,000, or 9.7%. 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 in the second quarter of 1998.
Client Services. Client services expenses were $9.3 million
for the three months ended June 30, 1999 compared to $7.9 million
for the three months ended June 30, 1998, an increase of $1.4
million, or 18.4%. As a percentage of total revenues, client
services expenses were 27.6% in 1999 compared to 28.4% 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 $3.9 million for the three months ended June 30, 1999
compared to $3.6 million for the three months ended June 30,
1998, an increase of $319,000, or 8.9%. As a percentage of total
revenues, research and development expenses were 11.6% 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 system and legal and
professional fees associated with the United States Food and Drug
Administration ("FDA") registration of the Company's Blood Bank
product partially offset by decreased expenses related to the
pharmacy and MCM product lines. The Company capitalized $814,000
of its software development costs for the three months ended June
30, 1999 compared to $946,000 million for the three months ended
June 30, 1998, a decrease of $132,000, or 14.0%. The decrease in
capitalized software development costs was primarily attributable
to decreased capitalization for the Company's pharmacy,
IntelliCare and reference laboratory products partially offset by
increased capitalization for the clinical laboratory product.
Sales and Marketing. Sales and marketing expenses were $4.0
million for the three months ended June 30, 1999 compared to $4.2
million for the three months ended June 30, 1998, a decrease of
$187,000, or 4.5%. As a percentage of total revenues, sales and
marketing expenses were 11.8% in 1999 compared to 15.1% in 1998.
The dollar decrease was primarily attributable to decreased
advertising and marketing expense.
General and Administrative. General and administrative
expenses were $4.3 million in the three months ended June 30,
1999 compared to $3.8 million in the three months ended June 30,
1998, an increase of $479,000, or 12.7%. As a percentage of
total revenues, general and administrative expenses were 12.6% in
1999 compared to 13.7% in 1998. The dollar increase
11
<PAGE>
was primarily attributable to additional employees and increased variable
compensation relating to employee incentives partially offset by
decreased depreciation expense.
Transition Costs. For the three months ended June 30, 1999,
the Company paid previously accrued transition costs established
at the time of the acquisition of the Antrim Corporation
("Antrim") of $183,000 as compared to $546,000 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
June 30, 1998, the Company paid transition costs related to the
purchase of the PreciseCare Medication Management System
("PreciseCare") of $11,000.
Comparison of Six Months Ended June 30, 1999 and June 30, 1998
Revenues. The Company's total revenues were $66.5 million
for the six months ended June 30, 1999 compared to $56.3 million
for the six months ended June 30, 1998, an increase of $10.2
million, or 18.1%. Revenues from system sales were $28.7 million
for the six months ended June 30, 1999 compared to $28.7 million
for the six months ended June 30, 1998, an increase of $31,000,
or .1%. This increase was primarily attributable to increases in
installations of software partially offset by decreases in
hardware and operating system deliveries. Revenues from support
and service were $37.8 million for the six months ended June 30,
1999 compared to $27.6 million for the six months ended June 30,
1998, an increase of $10.1 million, or 36.7%. 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.
Cost of System Sales. Cost of system sales was $12.7
million for the six months ended June 30, 1999 compared to $13.8
million for the six months ended June 30, 1998, a decrease of
$1.0 million, or 7.6%. As a percentage of total revenues, cost
of system sales was 19.1% in 1999 compared to 24.4% in 1998. The
dollar decrease was primarily attributable to decreases in
hardware and operating system deliveries. Amortization of
previously capitalized software development costs was $1.8
million for the six months ended June 30, 1999 compared to $1.6
million for the six months ended June 30, 1998, an increase of
$136,000, or 8.3%. 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 $18.7
million for the six months ended June 30, 1999 compared to $15.7
million for the six months ended June 30, 1998, an increase of
$3.0 million, or 19.1%. As a percentage of total revenues,
client services expenses were 28.2% in 1999 compared to 27.9% 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 $8.0 million for the six months ended June 30, 1999 compared
to $7.5 million for the six months ended June 30,
12
<PAGE>
1998, an increase of $535,000, or 7.1%. As a percentage of total
revenues, research and development expenses were 12.0% in 1999
compared to 13.3% 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 the MCM, EMPI, pharmacy
and IntelliCare products. The Company capitalized $1.7 million
of its software development costs for both the six months ended
June 30, 1999 and June 30, 1998.
Sales and Marketing. Sales and marketing expenses were $8.4
million for the six months ended June 30, 1999 compared to $8.0
million for the six months ended June 30, 1998, an increase of
$406,000, or 5.1%. As a percentage of total revenues, sales and
marketing expenses were 12.6% in 1999 compared to 14.2% in 1998.
The dollar increase was primarily attributable to additional
sales staff for the Company's reference laboratory products and
the European market, increased advertising and marketing expense
and commissions resulting from sales bookings growth of 13.3%
during the first six months of 1999 as compared to the
corresponding period in 1998.
General and Administrative. General and administrative
expenses were $8.6 million in the six months ended June 30, 1999
compared to $7.3 million in the six months ended June 30, 1998,
an increase of $1.3 million, or 17.7%. As a percentage of total
revenues, general and administrative expenses were 12.9% in both
1999 and 1998. The dollar increase was primarily attributable to
additional employees and related hiring expenses, increased
variable compensation relating to employee incentives, legal
fees, contributions to the Company's Profit Sharing Plan and
sales tax expense partially offset by decreased depreciation
expense.
Transition Costs. For the six months ended June 30, 1999,
the Company paid previously accrued transition costs established
at the time of the acquisition of Antrim of $1.3 million as
compared to $1.0 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 six months ended June 30, 1998, the Company
paid transition costs related to the purchase of PreciseCare of
$128,000. These costs were primarily associated with employee
costs and professional services related to the purchase.
Liquidity and Capital Resources
- -------------------------------
At June 30, 1999, the Company had cash and short-term
investments of $39.9 million, which consisted of cash of $7.0
million and short-term investments of $32.9 million. This
compares to cash and short-term investments of $34.3 million at
December 31, 1998 and cash and short-term investments of $29.3
million at June 30, 1998, increases of $5.5 million and $10.6
million, respectively. Cash provided by operating activities was
$10.7 million for the six months ended June 30, 1999 compared to
$10.0 million for the six months ended June 30, 1998.
13
<PAGE>
As of June 30, 1999, the Company had net trade receivables
of $42.3 million which consisted of $28.2 million in net billed
trade receivables and $14.1 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 $2.0
million since December 31, 1998, with $3.2 million related to the
net billed trade receivables partially offset by a decrease in
the unbilled 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 69 days at June 30, 1999 compared to
68 days at March 31, 1999; 69 days at December 31, 1998 and 88
days at June 30, 1998. Days sales outstanding ("DSO") was 113 at
June 30, 1999 compared to 108 at March 31, 1999; 112 at December
31, 1998 and 110 at June 30, 1998.
Cash used in investing activities was $10.2 million for the
six months ended June 30, 1999. Purchases of investments totaled
$24.7 million and proceeds from the maturity or sale of
investments totaled $19.1 million. Capitalized software
development costs totaled $2.7 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 $1.3 million and consisted
primarily of purchases of computers, computer-related equipment,
computer software and leasehold improvements. Costs related to
acquisitions totaled $1.3 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 used in financing activities was $291,000 for the six
months ended June 30, 1999. Of this amount, $454,000 was used
for principal payments on capital leases. This amount was
partially offset by the issuance of 6,349 shares of the Company's
Common Stock for approximately $69,000 under the Employee Stock
Purchase Plan and the issuance of 8,883 shares of the Company's
Common Stock for approximately $94,000 under the Stock Incentive
Plan of 1996, as amended.
At June 30, 1999, working capital was $55.7 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
14
<PAGE>
assets. Approximately $440,000 of the line of credit
is used to secure a letter of credit and is not available for
immediate expenditure. There were no borrowings outstanding as
of June 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 June 30, 1999, the Company had total short-term
investments of $32.9 million. Assuming a 10% increase in
interest rates on the Company's short-term investments (i.e., an
increase from the June 30, 1999 weighted-average interest rate of
3.14% to a weighted-average interest rate of 3.45%), the fair
value of these investments would decrease by approximately
$500,000.
15
<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
(a.) The Company held its Annual Meeting of
Shareholders on April 29, 1999. Of the 15,394,460
shares of Common Stock entitled to vote, 15,104,780
shares were represented in person or by proxy at the
meeting.
(b.) Not applicable, pursuant to Instruction 3 to Item 4
of this Form 10-Q.
(c.) A description of the matters voted upon at the
meeting along with an indication of the results of
the votes on such matters are set forth below:
1. Directors who were elected at the Annual
Meeting of Shareholders to serve for a term of one
year and until their respective successors are
elected and qualified:
For Withheld
---------- --------
Sidney A. Goldblatt 15,082,237 22,543
Nina M. Dmetruk 15,081,947 22,833
Richard W. Barker 15,081,987 22,793
Larry R. Ferguson 15,082,737 22,043
Curtis S. Goldblatt 15,082,082 22,698
Peter P. Gombrich 15,082,337 22,443
Stanley J. Lehman 15,081,702 23,078
2. The ratification of the selection of Ernst &
Young LLP to audit the books and accounts of the
Company for the year ending December 31, 1999.
There were 15,096,431 votes in favor, 1,608 votes
against and 6,741 shares abstaining. Accordingly,
the selection of Ernst & Young LLP was ratified.
16
<PAGE>
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
10.1 - Second Amendment to Business Loan Agreement
dated 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
Associations, filed herewith.
27.1 - Financial Data Schedule, filed herewith.
(b.) Reports on Form 8-K
No reports on Form 8-K were filed by the Company
during the quarter ended June 30, 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: August 10, 1999 By: /s/ Nina M. Dmetruk
__________________________________
Nina M. Dmetruk
Executive Vice President and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
18
<PAGE>
Exhibit 10.1
SECOND AMENDMENT TO BUSINESS LOAN
AGREEMENT
This Second Amendment to Business Loan Agreement (the
"Amendment") is entered into as of May 31, 1999, among Bank of
America National Trust and Savings Association (the "Bank"),
Sunquest Information Systems, Inc. ("Borrower 1"), Sunquest
Europa Limited ("Borrower 2"), Antrim Corporation ("Borrower 3"),
Sunquest Pharmacy Information Systems, Inc. ("Borrower 4") and
Sunquest Germany GmbH ("Borrower 5") (Borrower 1, Borrower 2,
Borrower 3, Borrower 4 and Borrower 5 are sometimes referred to
collectively as the "Borrowers" and individually as the
"Borrower").
RECITALS
A. The Bank and the Borrowers entered into a certain
Business Loan Agreement dated as of December 30, 1997, as amended
by a First Amendment to Business Loan Agreement dated as of April
30, 1999 (the "Agreement").
B. The Bank and the Borrowers desire to amend the
Agreement.
AGREEMENT
1. Definitions. Capitalized terms used but not defined in
this Amendment shall have the meaning given to them in the
Agreement.
2. Amendments. The Agreement is hereby amended as follows:
(a) Paragraph 1.2 of the Agreement is hereby amended
by deleting the date "May 31, 1999" and inserting the date
"April 28, 2000" in place thereof.
(b) The text of Paragraph 1.8 of the Agreement is
hereby deleted in its entirety and the words "Intentionally
Omitted" are inserted in place thereof. All references in
the Agreement to the "Offshore Rate" shall be deleted or, as
the context may require, shall be deemed to refer to the
"LIBOR Rate."
(c) Paragraph 1.9(c) of the Agreement is hereby
amended and restated in its entirety so as to read as
follows:
"(c) The "LIBOR Rate" means the interest rate
determined by the following formula:
LIBOR Rate = LIBOR Base Rate
------------------------------------
1.00 - Eurodollar Reserve Percentage
Where,
"LIBOR Base Rate" means, for such interest period:
(i) the rate per annum (carried out to the fifth
decimal place) equal to the
<PAGE>
rate determined by Bank to be the offered rate that appears
on the page of the Telerate Screen that displays an
average British Bankers Association Interest
Settlement Rate (such page currently being page
number 3750) for deposits in U.S. dollars (for
delivery on the first day of such interest period)
with a term equivalent to such interest period,
determined as of approximately 11:00 a.m. (London
time) two Business Days prior to the first day of
such interest period, or
(ii) in the event the rate referenced in the preceding
clause (i) does not appear on such page or service
or such page or service shall cease to be
available, the rate per annum (carried to the
fifth decimal place) equal to the rate determined
by Bank to be the offered rate on such other page
or other service that displays an average British
Bankers Association Interest Settlement Rate for
deposits in U.S. dollars (for delivery on the
first day of such interest period) with a term
equivalent to such interest period, determined as
of approximately 11:00 a.m. (London time) two
Business Days prior to the first day of such
interest period, or
(iii) in the event the rates referenced in the
preceding clauses (i) and (ii) are not available,
the rate per annum determined by Bank as the rate
of interest at which U.S. dollar deposits (for
delivery on the first day of such interest period)
in same day funds in the approximate amount of the
applicable LIBOR Rate portion and with a term
equivalent to such interest period would be
offered by Bank's London Branch to major banks in
the offshore U.S. dollar market at their request
at approximately 11:00 a.m. (London time) two
Business Days prior to the first day of such
interest period.
"Eurodollar Reserve Percentage" means, for any day
during any interest period, the reserve percentage
(expressed as a decimal, rounded upward to the
next 1/100th of 1%) in effect on such day
applicable to Bank under regulations issued from
time to time by the Board of Governors of the
Federal Reserve System for determining the maximum
reserve requirement (including any emergency,
supplemental or other marginal reserve
requirement) with respect to Eurocurrency funding
(currently referred to as "Eurocurrency
liabilities"). The LIBOR Rate for each
outstanding LIBOR Rate portion shall be adjusted
automatically as of the effective date of any
change in the Eurodollar Reserve Percentage."
(c) (i) Paragraph 4.4 of the Agreement is hereby
amended and restated in its entirety so as to read as
follows:
"4.4 Business Days. Unless otherwise provided in this
Agreement, a business day is a day other than a
Saturday, Sunday, or other day on which
-2-
<PAGE>
commercial banks are authorized to close under the laws of,
or are in fact closed in, the state where the Bank's lending
office is located and, if such day, relates to any
amount bearing interest at the LIBOR Rate (if any), is
any such day on which dealings in U.S. dollar deposits
are conducted by and between banks in the offshore U.S.
dollar interbank market. All payments and
disbursements which would be due on a day which is not
a business day will be due on the next business day.
All payments received on a day which is not a business
day will be applied to the credit on the next business
day."
(ii) The phrases "banking day" or "banking days"
in each case where they appear in the Agreement are
hereby amended to read "business day" or "business
days," respectively.
(d) A new Paragraph 6.15 to the Agreement is hereby
inserted directly following Paragraph 6.14 to read in its
entirety as follows:
"6.15 Year 2000. Each Borrower has (a) initiated a
review and assessment of all areas within its business
and operations (including those affected by customers
and vendors) that could be adversely affected by the
"Year 2000 Problem" (that is, the risk that computer
applications and devices containing imbedded computer
chips used by such Borrower (or its respective
customers and vendors) may be unable to recognize and
perform properly date-sensitive functions involving
certain dates prior to and any date after December 31,
1999), (b) developed a plan and timeline for addressing
the Year 2000 Problem on a timely basis, and (c) to
date, implemented that plan in accordance with that
timetable. Based on the foregoing, such Borrower
believes that all computer applications and devices
containing imbedded computer chips (including those of
its customers and vendors) that are material to its
business and operations are reasonably expected on a
timely basis to be able to perform properly date-
sensitive functions for all dates before and after
January 1, 2000, except to the extent that a failure to
do so could not reasonably be expected to have a
material adverse change."
(e) A new Paragraph 4.9 of the Agreement is hereby
inserted directly following Paragraph 4.8 to read in its
entirety as follows:
"4.8 Unused Commitment Fee. Commencing on May 31,
1999, Borrowers shall pay to Bank an unused commitment
fee of .25% per annum on the actual daily unused
portion of the Commitment, computed on a quarterly
basis in arrears on the last business day of each
calendar quarter based on the daily utilization for
that quarter. The unused commitment fee shall accrue
from such date and shall be payable quarterly in
arrears on the last business day of each calendar
quarter, beginning with the first calendar quarter end
to occur after the above-mentioned commencement date
and continuing through the Expiration Date, with the
final payment to be made on the Expiration Date. The
unused commitment fee provided in this
-3-
<PAGE>
paragraph shall accrue at all times after the above-mentioned
commencement date, including at any time during which
one or more conditions in paragraph 5 are not met."
3. Representations and Warranties. When the Borrowers
sign this Amendment, each Borrower represents and warrants to the
Bank that: (a) there is no event which is, or with notice or
lapse of time or both would be, a default under the Agreement,
(b) the representations and warranties in the Agreement are true
as of the date of this Amendment as if made on the date of this
Amendment, (c) this Amendment is within such Borrower's powers,
has been duly authorized, and does not conflict with any of such
Borrower's organizational papers, and (d) this Amendment does not
conflict with any law, agreement, or obligation by which such
Borrower is bound.
4. Conditions. This Amendment will become effective on
May 31, 1999 (the "Effective Date"), provided that each of the
following conditions precedent have been satisfied:
(a) Bank has received from each Borrower a duly executed original
(or, if elected by the Bank an executed facsimile copy) of this
Amendment; and
(b) Bank has received from each Borrower a copy of a
resolution passed by the board of directors of such
Borrower's corporation, certified by the Secretary or an
Assistant Secretary of such corporation as being in full
force and effect on the date hereof, authorizing the
execution, delivery and performance of this Amendment.
5. Governing Law. This Amendment shall be governed by and
construed in accordance with the law of the State of Arizona.
6. Effect of Amendment. Except as provided in this
Amendment, all of the terms and conditions of the Agreement shall
remain in full force and effect.
This Amendment is executed as of the date stated at the
beginning of this Amendment. The Agreement, as amended hereby,
shall hereinafter constitute the Agreement between the parties.
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By:____________________________________
Name:_________________________________
Title:___________________________________
-4-
<PAGE>
SUNQUEST INFORMATION SYSTEMS, INC.
By:____________________________________
Name: Nina M. Dmetruk
Title: Chief Financial Officer
SUNQUEST EUROPA LIMITED
By:____________________________________
Name: Nina M. Dmetruk
Title: Director
ANTRIM CORPORATION
By:____________________________________
Name: Nina M. Dmetruk
Title: Secretary
SUNQUEST PHARMACY INFORMATION SYSTEMS, INC.
By:____________________________________
Name: Nina M. Dmetruk
Title: Secretary
SUNQUEST GERMANY GMBH
By:____________________________________
Name: Nina M. Dmetruk
Title: Managing Director
-5-
<PAGE>
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