<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, 2000
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 6, 2000, there were 15,561,498 shares of Common Stock outstanding.
<PAGE>
Sunquest Information Systems, Inc.
Form 10-Q
For the Quarterly Period Ended September 30, 2000
Table of Contents
Page
----
Part I. Financial Information
Item 1. Financial Statements
(a.) Condensed consolidated balance sheets as 3
of September 30, 2000 (unaudited) and December
31, 1999
(b.) Unaudited condensed consolidated 4
statements of income and comprehensive income
for each of the three and nine month periods
ended September 30, 2000 and September 30, 1999
(c.) Unaudited condensed consolidated 5
statements of cash flows for each of the nine
month periods ended September 30, 2000 and
September 30, 1999
(d.) Notes to unaudited condensed consolidated 6
financial statements
Item 2. Management's Discussion and Analysis of 10
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 17
Market Risk
Part II. Other Information
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security 18
Holders
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
(a.) Exhibits 18
(b.) Reports on Form 8-K 19
Signatures 20
2
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
Sunquest Information Systems, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 7,482 $ 9,660
Short-term investments 56,294 37,218
Trade receivables, net 34,652 43,079
Other current assets 2,559 2,393
Deferred tax assets 1,888 1,888
-------- --------
Total current assets 102,875 94,238
Property and equipment, net 10,950 10,100
Capital leases from related party, net 1,918 2,512
Software development costs, net 10,235 9,493
Deferred tax assets 479 479
Other assets, net 362 441
-------- --------
Total assets $126,819 $117,263
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 3,285 $ 2,485
Accrued compensation and related taxes 3,859 5,646
Accrued expenses 5,213 5,468
Obligations under capital leases from
related party 1,222 1,064
Deferred revenue 15,168 11,919
-------- --------
Total current liabilities 28,747 26,582
Obligations under capital leases from
related party 2,162 3,099
Deferred income taxes 1,959 1,959
Shareholders' equity
Common stock 52,629 52,460
Retained earnings 42,402 33,490
Accumulated other comprehensive loss (1,080) (327)
-------- --------
Total shareholders' equity 93,951 85,623
-------- --------
Total liabilities and shareholders' equity $126,819 $117,263
======== ========
</TABLE>
See accompanying notes.
3
<PAGE>
Sunquest Information Systems, Inc.
Condensed Consolidated Statements of Income and Comprehensive Income
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
System sales $10,933 $12,171 $32,334 $40,875
Support and service 18,146 20,861 55,976 58,642
------- ------- ------- -------
Total revenues 29,079 33,032 88,310 99,517
------- ------- ------- -------
Operating expenses:
Cost of system sales 5,019 4,330 15,189 17,041
Client services 7,272 9,140 22,551 27,874
Research and development 5,517 3,869 14,175 11,887
Sales and marketing 3,667 4,250 12,952 12,637
General and administrative 3,496 4,009 11,120 12,580
Gain on sale of assets - - - (681)
------- ------- ------- -------
Total operating expenses 24,971 25,598 75,987 81,338
------- ------- ------- -------
Operating income 4,108 7,434 12,323 18,179
Other income (expense):
Interest income 864 466 2,219 1,176
Interest expense (273) (310) (823) (936)
Other 193 (604) 443 (658)
------- ------- ------- -------
Income before income taxes 4,892 6,986 14,162 17,761
Income tax provision 1,791 2,586 5,250 6,523
------- ------- ------- -------
Net income 3,101 4,400 8,912 11,238
Other comprehensive loss, net of tax:
Foreign currency translation
adjustment (217) 104 (753) (198)
Unrealized loss on securities
available-for-sale - - - (5)
------- ------- ------- -------
Comprehensive income $ 2,884 $ 4,504 $ 8,159 $11,035
======= ======= ======= =======
Net income per share:
Basic $.20 $.28 $.57 $.73
==== ==== ==== ====
Diluted $.20 $.28 $.57 $.72
==== ==== ==== ====
Weighted-average shares outstanding:
Basic 15,553 15,441 15,550 15,412
====== ====== ====== ======
Diluted 15,735 15,698 15,653 15,587
====== ====== ====== ======
</TABLE>
See accompanying notes.
4
<PAGE>
Sunquest Information Systems, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 8,912 $ 11,238
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 5,919 5,968
Employee stock compensation expense 23 -
Bad debt expense 743 1,178
Deferred revenue 3,249 (1,613)
Deferred income taxes - (1)
Gain on sale of assets - (681)
Changes in operating assets and liabilities:
Receivables 7,684 (1,384)
Inventory (376) (611)
Prepaid expenses and other 347 (170)
Other assets (133) 2
Accounts payable 800 (1,096)
Accrued compensation and related taxes (1,787) 2,219
Other accrued expenses (106) 1,833
-------- --------
Net cash provided by operating activities 25,275 16,882
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (3,424) (2,332)
Costs related to acquisitions (142) (1,360)
Capitalized software development costs (3,418) (3,385)
Purchase of investments (32,315) (38,214)
Proceeds from sale of investments 13,239 25,546
Proceeds from maturity of investments - 2,165
Proceeds from sale of assets - 750
-------- --------
Net cash used in investing activities (26,060) (16,830)
-------- --------
Cash flows from financing activities:
Principal payments on capitalized
leases, primarily from related party (779) (680)
Net proceeds from issuance of stock 139 1,554
-------- --------
Net cash (used in) provided by financing activities (640) 874
-------- --------
Foreign currency translation adjustment (753) (198)
-------- --------
Net (decrease) increase in cash and cash equivalents (2,178) 728
Cash and cash equivalents at beginning of period 9,660 7,057
-------- --------
Cash and cash equivalents at end of period $ 7,482 $ 7,785
======== ========
</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 1999 Annual Report on Form 10-K filed with the
Commission. The 1999 balance sheet amounts were derived from
audited statements.
The consolidated financial statements for the three and nine
month periods ended September 30, 2000 include the accounts of
the Company, Sunquest Europa Limited, Sunquest Germany GmbH,
Antrim Corporation, Sunquest Pharmacy Information Systems, Inc.,
e-Suite, Inc. ("e-Suite"), Sunquest Information Systems (India)
Private Limited ("Sunquest India") and Diagnostix.com, Inc.
("Diagnostix.com"). Sunquest India and e-Suite are wholly owned
subsidiaries that were formed during the first quarter of 2000.
Diagnostix.com, a wholly owned subsidiary, was formed during the
third quarter of 2000. All transactions between the Company and
its consolidated subsidiaries have been eliminated in preparing
the consolidated financial 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, 2000 are not necessarily indicative
of the results that may be expected for any other interim period
or for the full year ending December 31, 2000.
Note 2 - Employee Stock Purchase Plan
In the three months ended September 30, 2000, the Company issued
4,386 shares of its Common Stock for approximately $41,000
pursuant to the Employee Stock Purchase Plan. In the nine months
ended September 30, 2000, the Company has issued a total of 8,051
shares of its Common Stock for approximately $82,000 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 state income taxes and tax credits.
6
<PAGE>
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,
---------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Numerator for basic and
diluted net income per
share:
Net income $3,101,000 $4,400,000 $8,912,000 $11,238,000
========== ========== ========== ===========
Denominator:
Denominator for basic
net income per
share - weighted-
average shares 15,552,684 15,440,564 15,550,124 15,412,407
Dilutive effect of
stock options 182,707 257,112 102,384 174,220
---------- ---------- ---------- ----------
Denominator for diluted
net income per share -
adjusted weighted-
average shares 15,735,391 15,697,676 15,652,508 15,586,627
========== ========== ========== ==========
Basic net income per share $.20 $.28 $.57 $.73
==== ==== ==== ====
Diluted net income per share $.20 $.28 $.57 $.72
==== ==== ==== ====
</TABLE>
Note 5 - Investments
At September 30, 2000, 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, 2000, 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.
Note 6 - Segment Information
Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS
No. 131"), redefined how operating segments are determined and
requires disclosure of certain financial and descriptive
information about a company's operating segments. In addition,
SFAS No. 131 establishes standards for related disclosures about
major customers, products and services and geographic areas.
Operating segments are defined as a component of a business
enterprise that discrete financial information is available for
review by the chief operating decision maker, or decision making
group, in making decisions about resources to be allocated and to
access performance. Since it is management's intent to expand
operations related to e-Commerce, a segment which has not been
material in prior periods, it is believed that the financial
statement user would benefit from a separate presentation of
selected financial information attributable to this operating
segment.
7
<PAGE>
Currently, the Company manages its operations through two
business segments: Core Business and e-Commerce.
Core Business: This reportable segment consists of the
Company's health care information systems that include
software licenses, related hardware, relicensed software,
resold software and value-added services. The principal
markets for this segment include large and mid-sized
hospitals, clinics and other facilities, including
integrated delivery networks.
e-Commerce: This reportable segment consists of the
Company's Internet-based initiatives. Currently, the Company
offers two products, e-Commercial Lab and e-Financial, which
are Internet-based application service provider ("ASP")
products hosted and maintained at the Company's offices and
accessed by customers over the Internet for a monthly fee.
By hosting and maintaining applications at a central site
and providing user access over the Internet, these products
eliminate the customer's need for capital investment in
information systems and internal staff, while providing
access to state-of-the-art clinical systems. In addition, e-
CEM (Clinical Event Manager) is in beta testing and e-
Hospital Lab, is ready for Beta testing. The principal
markets for the products currently available are the smaller
hospital and commercial laboratories. In August 2000, the
Company announced the formation of a new business,
Diagnostix.com. Diagnostix.com plans phased development of
Web-based products designed to streamline communication
between the many constituents of health care - integrated
delivery networks, laboratories, pharmacies, physicians and
patients. The Company's strategic initiatives include
development of future releases of ASP product offerings as
well as introducing additional Internet ventures and
products, which will target expanded markets.
The Company evaluates performance based on several factors, of
which the primary financial measure is net income for the Core
Business segment and net income potential for the e-Commerce
segment. In arriving at each reportable segment's net income,
the Company is allocating department overhead expenses, sales and
marketing expenses, general and administrative expenses and other
income/expense. These items are being allocated as follows: (1)
department overhead and general and administrative expenses on
direct labor; (2) sales and marketing based on total sales
dollars and (3) other income/expense based on revenue dollars.
During the three and nine month periods ended September 30, 2000,
three customers accounted for 100% of the revenues for the e-
Commerce segment.
8
<PAGE>
Summarized financial information concerning the Company's operating
segments is shown below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended September 30, 2000 Three Months Ended September 30, 1999
------------------------------------- -------------------------------------
Core Core
Business e-Commerce Total Business e-Commerce Total
------------ -------------- --------- ------------ -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 29,036 $ 43 $ 29,079 $ 33,032 $ - $ 33,032
Operating income
(loss) 7,464 (3,356) 4,108 7,434 - 7,434
Net income (loss) 5,215 (2,114) 3,101 4,400 - 4,400
Net income (loss)
per diluted
share <F1> .33 (.13) .20 .28 - .28
Nine Months Ended September 30, 2000 Nine Months Ended September 30, 1999
------------------------------------- -------------------------------------
Core Core
Business e-Commerce Total Business e-Commerce Total
------------ -------------- --------- ------------ -------------- ---------
Revenues $ 88,244 $ 66 $ 88,310 $ 99,517 $ - $ 99,517
Operating income
(loss) <F2> 17,170 (4,847) 12,323 18,179 - 18,179
Net income 11,961 (3,049) 8,912 11,238 - 11,238
(loss) <F2>
Net income (loss)
per diluted
share <F1> <F2> .76 (.19) .57 .72 - .72
Total assets 119,844 6,975 126,819 115,133 - 115,133
</TABLE>
[FN]
<F1> Diluted net income (loss) per share is determined for each
operating segment assuming diluted shares outstanding for the Company
are attributable to each segment.
<F2> Includes a gain on the sale of the Company's Enterprise Master
Person Index product of approximately $681,000 ($429,000 after-tax).
The tax effected impact on net income per share is $.03 for the nine
months ended September 30, 1999.
</FN>
9
<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 other factors affecting future performance, 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, product status and development risks and
uncertainties concerning the commercial use of the Internet,
could cause actual results to differ materially from such forward-
looking statements. These and other factors affecting future
performance are detailed in the Company's 1999 Annual Report on
Form 10-K filed with the Securities and Exchange Commission. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements.
Core Business Segment
---------------------
In its Core Business segment, Sunquest Information Systems,
Inc. 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 from the Company's Core Business segment are
derived from the licensing of software, the provision of value-
added services and the sale of related hardware.
e-Commerce Segment
------------------
The Company's e-Commerce segment currently provides Internet-
based application service provider ("ASP") products targeted at
commercial laboratories and hospitals with less than 250 beds.
At September 30, 2000, the Company had two ASP products, e-
Financial and e-Commercial Lab, in general release and live at
two sites. In addition, e-CEM (Clinical Event Manager) is in
beta testing and e-Hospital Lab is ready for beta testing.
In August 2000, the Company announced the formation of a new
business, Diagnostix.com. Diagnostix.com plans phased
development of Web-based products designed to streamline
communication between the many constituents of health care -
integrated delivery networks, laboratories, pharmacies,
physicians and patients. Diagnostix.com is currently in the
start up phase, and no revenues are anticipated in the current
year.
Revenues from the ASP products currently included in the e-
Commerce segment are derived from monthly subscription fees and
related installation services. Expenses included in the e-
Commerce segment relate to the design, development, marketing,
installation and support
10
<PAGE>
of both the existing ASP products and the products under development
as well as the development of Diagnostix.com's Web-based products.
General
-------
During the quarter ended March 31, 1999, the Company sold
its Enterprise Master Person Index ("EMPI") product to New Era of
Networks, Inc. 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 effect of the previously described gain on sale of
assets on diluted net income per share follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
Diluted net income per
share excluding
gain on sale of assets $.20 $.28 $.57 $.69
Gain on sale of assets - - - .03
---- ---- ---- ----
$.20 $.28 $.57 $.72
==== ==== ==== ====
The results of operations for the three and nine months
ended September 30, 2000 are not necessarily indicative of the
results that may be expected for any other interim period or for
the full year ending December 31, 2000.
Results of Operations
---------------------
Comparison of Three Months Ended September 30, 2000 and September 30, 1999
Revenues. The Company's total revenues were $29.1 million
for the three months ended September 30, 2000 compared to $33.0
million for the three months ended September 30, 1999, a decrease
of $4.0 million, or 12.0%. Revenues from system sales were $10.9
million for the three months ended September 30, 2000 compared to
$12.2 million for the three months ended September 30, 1999, a
decrease of $1.2 million, or 10.2%. This decrease was primarily
attributable to decreases in installations of software partially
offset by increases in operating system and hardware deliveries.
Revenues from support and service were $18.1 million for the
three months ended September 30, 2000 compared to $20.9 million
for the three months ended September 30, 1999, a decrease of $2.7
million, or 13.0%. This decrease was primarily attributable to
decreased service fees in 2000 compared to 1999 related to Year
2000 installations of the Company's commercial laboratory
products partially offset by growth in support services to the
Company's installed customer base.
11
<PAGE>
At September 30, 2000, the Company had a total contract
backlog of $125.0 million, which consisted of $53.8 million of
system sales and services and $71.2 million of support and
subscription fees. The Company's total contract backlog at June
30, 2000, was $119.4 million, which consisted of $49.9 million of
system sales and services and $69.5 million of support and
subscription fees. At September 30, 1999, total contract backlog
was $119.4 million, which consisted of $52.8 million of system
sales and services and $66.6 million of support.
During the first half of 2000, the Company experienced a
delay in sales signings. The Company believes that the delay was
the result of carryover issues related to the Year 2000, the
Balanced Budget Amendment of 1997 and historical buying cycles.
As anticipated, sales signings accelerated during the third
quarter, increasing 44.4% compared to the second quarter of 2000.
The Company anticipates that the improved sales signings trend
will continue during the remainder of 2000.
Cost of System Sales. Cost of system sales was $5.0 million
for the three months ended September 30, 2000 compared to $4.3
million for the three months ended September 30, 1999, an
increase of $689,000, or 15.9%. As a percentage of total
revenues, cost of system sales was 17.3% in 2000 compared to
13.1% in 1999. The dollar increase was primarily attributable to
increases in operating system and hardware deliveries.
Amortization of previously capitalized software development costs
was $892,000 for the three months ended September 30, 2000
compared to $893,000 for the three months ended September 30,
1999.
Client Services. Client services expenses were $7.3 million
for the three months ended September 30, 2000 compared to $9.1
million for the three months ended September 30, 1999, a decrease
of $1.9 million, or 20.4%. As a percentage of total revenues,
client services expenses were 25.0% in 2000 compared to 27.7% in
1999. The dollar decrease was primarily attributable to
reductions in staff and outside consultants which were dedicated
to Year 2000 installations in 1999.
Research and Development. Research and development expenses
were $5.5 million for the three months ended September 30, 2000
compared to $3.9 million for the three months ended September 30,
1999, an increase of $1.6 million, or 42.6%. As a percentage of
total revenues, research and development expenses were 19.0% in
2000 compared to 11.7% in 1999. 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 e-Commerce and clinical laboratory systems
partially offset by decreased expenses related to the Company's
non-clinical laboratory systems. The Company capitalized $855,000
of its software development costs for the three months ended
September 30, 2000 compared to $661,000 for the three months
ended September 30, 1999, an increase of $194,000, or 29.3%. The
increase in capitalized software development costs was primarily
attributable to increased capitalization for the Company's
clinical laboratory, e-Commerce and pharmacy systems.
Sales and Marketing. Sales and marketing expenses were $3.7
million for the three months ended September 30, 2000 compared to
$4.3 million for the three months ended
12
<PAGE>
September 30, 1999, a decrease of $583,000, or 13.7%. As a percentage
of total revenues, sales and marketing expenses were 12.6% in 2000
compared to 12.9% in 1999. The dollar decrease was primarily
attributable to a reduction in sales staff and related travel
costs for the Company's commercial laboratory products partially
offset by an increase in commissions resulting from a 38.6%
increase in sales bookings during the third quarter of 2000
compared to the corresponding period in 1999.
General and Administrative. General and administrative
expenses were $3.5 million for the three months ended September
30, 2000 compared to $4.0 million for the three months ended
September 30, 1999, a decrease of $513,000, or 12.8%. As a
percentage of total revenues, general and administrative expenses
were 12.0% in 2000 compared to 12.1% in 1999. The dollar
decrease was primarily attributable to decreases in variable
compensation relating to employee incentives and a decrease in
sales tax accruals partially offset by an increase in legal fees.
Comparison of Nine Months Ended September 30, 2000 and September 30, 1999
Revenues. The Company's total revenues were $88.3 million
for the nine months ended September 30, 2000 compared to $99.5
million for the nine months ended September 30, 1999, a decrease
of $11.2 million, or 11.3%. Revenues from system sales were
$32.3 million for the nine months ended September 30, 2000
compared to $40.9 million for the nine months ended September 30,
1999, a decrease of $8.5 million, or 20.9%. This decrease was
primarily attributable to a decrease in installations of software
and decreases in hardware and operating system deliveries.
Revenues from support and service were $56.0 million for the nine
months ended September 30, 2000 compared to $58.6 million for the
nine months ended September 30, 1999, a decrease of $2.7 million,
or 4.5%. This decrease was primarily attributable to decreased
service fees in 2000 compared to 1999 related to Year 2000
installations of the Company's commercial laboratory products
partially offset by growth in support services to the Company's
installed customer base.
Cost of System Sales. Cost of system sales was $15.2
million for the nine months ended September 30, 2000 compared to
$17.0 million for the nine months ended September 30, 1999, a
decrease of $1.9 million, or 10.9%. As a percentage of total
revenues, cost of system sales was 17.2% in 2000 compared to
17.1% in 1999. The dollar decrease was primarily attributable to
decreases in hardware and operating system deliveries.
Amortization of previously capitalized software development costs
was $2.7 million for both the nine months ended September 30,
2000 and 1999.
Client Services. Client services expenses were $22.6 million
for the nine months ended September 30, 2000 compared to $27.9
million for the nine months ended September 30, 1999, a decrease
of $5.3 million, or 19.1%. As a percentage of total revenues,
client services expenses were 25.5% in 2000 compared to 28.0% in
1999. The dollar decrease was primarily attributable to
reductions in staff and outside consultants which were dedicated
to Year 2000 installations in 1999.
13
<PAGE>
Research and Development. Research and development expenses
were $14.2 million for the nine months ended September 30, 2000
compared to $11.9 million for the nine months ended September 30,
1999, an increase of $2.3 million, or 19.2%. As a percentage of
total revenues, research and development expenses were 16.1% in
2000 compared to 11.9% in 1999. 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 e-Commerce and clinical laboratory systems. The
increases were partially offset by decreased expenses related to
the Company's commercial laboratory and non-clinical laboratory
systems and the 1999 legal and professional fees associated with
the United States Food and Drug Administration registration of
the Company's Blood Bank product. The Company capitalized $3.3
million of its software development costs for the nine months
ended September 30, 2000 compared to $2.4 million for the nine
months ended September 30, 1999, an increase of $918,000, or
38.5%. The increase in capitalized software development costs
was primarily attributable to increased capitalization for the
Company's clinical laboratory, e-Commerce and radiology systems.
Sales and Marketing. Sales and marketing expenses were
$13.0 million for the nine months ended September 30, 2000
compared to $12.6 million for the nine months ended September 30,
1999, an increase of $315,000, or 2.5%. As a percentage of total
revenues, sales and marketing expenses were 14.7% in 2000
compared to 12.7% in 1999. The dollar increase was primarily
attributable to additional sales staff and related travel costs
for the Company's clinical laboratory and e-Commerce products
partially offset by a decrease in commissions resulting from a
decline in sales bookings of 19.2% during the first nine months
of 2000 compared to the corresponding period in 1999.
General and Administrative. General and administrative
expenses were $11.1 million for the nine months ended September
30, 2000 compared to $12.6 million for the nine months ended
September 30, 1999, a decrease of $1.5 million, or 11.6%. As a
percentage of total revenues, general and administrative expenses
were 12.6% in 2000 compared to 12.7% in 1999. The dollar decrease
was primarily attributable to decreases in variable compensation
relating to employee incentives and sales tax accruals partially
offset by increases in salaries and benefits related to the
Company's e-Commerce initiatives and its wholly owned subsidiary,
Sunquest India, and legal fees.
Liquidity and Capital Resources
-------------------------------
At September 30, 2000, the Company had cash and short-term
investments of $63.8 million, which consisted of cash of $7.5
million and short-term investments of $56.3 million. This
compares to cash and short-term investments of $46.9 million at
December 31, 1999 and cash and short-term investments of $45.6
million at September 30, 1999, increases of $16.9 million and
$18.2 million, respectively. Cash provided by operating
activities was $25.3 million for the nine months ended September
30, 2000 compared to $16.9 million for the nine months ended
September 30, 1999.
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As of September 30, 2000, the Company had net trade
receivables of $34.7 million, which consisted of $21.0 million in
net billed trade receivables and $13.7 million in unbilled trade
receivables. At December 31, 1999, the Company had net trade
receivables of $43.1 million, which consisted of $31.0 million in
net billed trade receivables and $12.1 million in unbilled trade
receivables. Net trade receivables have decreased by $8.4
million since December 31, 1999, with $10.0 million related to
the net billed trade receivables partially offset by an increase
in the unbilled receivables of $1.6 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 80 days at September 30, 2000
compared to 81 days at June 30, 2000; 76 days at December 31,
1999 and 71 days at September 30, 1999. The Company has
responded to the increase in average collection period with
intensified collection efforts. Days sales outstanding ("DSO")
was 107 at September 30, 2000 compared to 117 at June 30, 2000;
120 at December 31, 1999 and 110 at September 30, 1999.
Cash used in investing activities was $26.1 million for the
nine months ended September 30, 2000. Purchases of investments
totaled $32.3 million and proceeds from the sale of investments
totaled $13.2 million. Purchases of property and equipment
totaled $3.4 million and consisted primarily of purchases of
computer software, computers and computer-related equipment, and
leasehold improvements. Capitalized software development costs
totaled $3.4 million. Costs related to acquisitions totaled
$142,000 and were primarily associated with sales tax payments
and replacing certain Antrim Corporation software products with
Sunquest products.
Cash used in financing activities was $640,000 for the nine
months ended September 30, 2000. Of this amount, $779,000 was
used for principal payments on capital leases. This amount was
partially offset by the issuance of 8,051 shares of the Company's
Common Stock for approximately $82,000 under the Employee Stock
Purchase Plan and the issuance of 5,747 shares of the Company's
Common Stock for approximately $57,000 under the Stock Incentive
Plan of 1996, as amended.
At September 30, 2000, working capital was $74.1 million
compared to $67.7 million at December 31, 1999.
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, 2001 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 $573,000 of the line of credit
is used to secure a letter of credit and is not
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available for immediate expenditure. There were no borrowings
outstanding as of September 30, 2000.
The Company has no significant purchase commitments at this
time. However, the Company continues to be actively involved in
identifying and evaluating potential acquisitions, which may
result in the future expenditure of funds.
Management believes that existing cash, cash equivalents,
short-term investments, cash available under its revolving line
of credit and funds generated from operations will be sufficient
to meet operating requirements for at least the next twelve
months.
To date, inflation has not had a material impact on the
Company's revenues or income, and the Company does not expect
inflation to have a material impact in the foreseeable future.
New Accounting Standards
------------------------
In June 1998, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and for Hedging
Activities" ("SFAS No. 133"). SFAS No. 133 provides a
comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. SFAS No. 133
is effective for years beginning after June 15, 2000. Presently,
management does not believe that SFAS No. 133 will have a material
impact on the Company's financial statements.
During the fourth quarter of 1999, the Securities and
Exchange Commission issued Staff Accounting Bulletin ("SAB") No.
101, "Revenue Recognition in Financial Statements." The
provisions of SAB No. 101 are required to be adopted no later
than the fourth quarter of the fiscal year beginning after
December 15, 1999. Based upon current interpretations,
management does not believe that SAB No. 101 will have a material
impact on the Company's financial position and results of
operations.
On March 31, 2000, FASB issued Interpretation No. 44 ("FIN
44"), "Accounting for Certain Transactions Involving Stock
Compensation," which provides guidance on several implementation
issues related to Accounting Principles Board Opinion No. 25
("APB Opinion No. 25") and is effective July 1, 2000. FIN 44
clarifies the definition of employee and the accounting for stock
options that have been repriced. The Company adopted FIN 44
during the second quarter of 2000. The adoption of FIN 44 did
not have a material impact on the Company's financial position
and results of operations.
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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, 2000, the Company had total short-term
investments of $56.3 million. Assuming a 10% increase in
interest rates on the Company's short-term investments (i.e., an
increase from the September 30, 2000 weighted-average interest
rate of 5.648% to a weighted-average interest rate of 6.212%),
the fair value of these investments would decrease by
approximately $504,000.
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Part II. Other Information
Item 1. Legal Proceedings
On September 26, 2000, the United States District Court for
the Western District of Pennsylvania granted Dynamic Healthcare
Technologies, Inc.'s ("Dynamic") motion to dismiss the civil
action initiated by the Company in the Western District of
Pennsylvania against Dynamic on the basis of the prior pending
civil actions between the parties in the United States District
Court for the Southern District of Florida. On October 3, 2000,
the United States District Court for the Southern District of
Florida denied as moot the Company's motion to transfer the civil
action to the Western District Court of Pennsylvania, or in the
alternate stay the civil action pending resolution of the
Pennsylvania action, as a result of the district court of
Pennsylvania's ruling. All of the claims asserted by the Company
against Dynamic in the Western District of Pennsylvania civil
action have also been asserted by the Company against Dynamic in
the Southern District of Florida civil action and will continue
to be vigorously pursued by the Company.
The Company is also subject to legal proceedings and claims
covering a wide range of matters that arose in the ordinary
course of business. Management is of the opinion that the
potential liability with respect to these legal proceedings and
claims will not materially affect the Company's financial
position or results of operations.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
27.1 - Financial Data Schedule for the Nine Months
Ended September 30, 2000, filed herewith.
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(b.) Reports on Form 8-K
No reports on Form 8-K were filed by the Company
during the quarter ended September 30, 2000.
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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 8, 2000 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)
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