<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 1996
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 ____________
SUMMIT MEDICAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1545493
(State or other jurisdiction of (IRS Employer ID No.)
incorporation or organization)
ONE CARLSON PARKWAY
SUITE 120
MINNEAPOLIS, MN 55447
612-473-3250
(Address including zip code, of Registrant's
principal executive offices and telephone
number, including area code)
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 has been subject to such filing requirements
for the past 90 days. X Yes No
--- ---
The number of shares outstanding of the Registrant's Common Stock on September
30, 1996 was
9,335,638 shares $.01 Par
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated statements of financial position--September 30, 1996 and
December 31, 1995
Consolidated statements of operations--Nine months ended September 30,
1996 and 1995
Consolidated statements of cash flows--Nine months ended September 30,
1996 and 1995
Notes to consolidated financial statements--September 30, 1996
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(11.1) Computation of Earnings per Share
(27) Financial Data Schedule
SIGNATURES
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Quarterly Report on Form 10-Q may contain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended and Section
21E of the Securities Exchange Act of 1934, as amended. These forward-looking
statements involve risks and uncertainties that may cause the Company's actual
results to differ materially from the results discussed in the forward-looking
statements. Factors that might cause such differences include, but are not
limited to, failure of the Company's joint marketing partners to market
successfully the Company's Database software; termination of any of the
Company's joint marketing arrangements; failure of new products from the Company
or its joint venture to achieve market acceptance or significant delays in the
introduction of these new products; termination of one or more of the Company's
agreements with national medical societies; lack of continued market acceptance
of the Company's clinical outcomes database software; failure of the Company to
integrate the businesses of its recently acquired subsidiaries and its joint
venture into the Company's operations; changes in government regulation; loss of
key management personnel; increased competition; and inability of the Company to
obtain adequate protection for the Company's proprietary technology. The
forward-looking statements herein are qualified in their entirety by the
cautions and risk factors set forth in Exhibit 99, under the caption "Cautionary
Statement," to the Company's Annual Report on Form 10-K, dated March 29, 1996. A
copy of the Form 10-K may be obtained from the Public Reference Branch of the
SEC at 450 Fifth Street NW, Washington, DC at prescribed rates.
<PAGE>
SUMMIT MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30 DECEMBER 31
1996 1995
------------ ------------
<S> <C> <C>
Current assets
Cash and cash equivalents $14,241,380 $ 2,035,399
Short-term investments 35,100,753 20,718,674
Accounts receivable (net of allowance of $132,642
and $101,397 respectively) 7,113,659 6,309,745
Note receivable -- officer 28,272 59,632
Other current assets 1,613,955 659,303
----------- -----------
Total current assets 58,098,019 29,782,753
Equipment and fixtures, net 2,096,070 1,385,663
Other assets, net 208,359 213,269
----------- -----------
Total assets $60,402,448 $31,381,685
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 999,420 $ 728,940
Accrued compensation 1,143,700 923,845
Accrued royalties 305,391 332,773
Deferred revenue 7,648 110,062
Income taxes payable 1,362,814 1,334,967
Note payable -- officer -- 17,991
Notes payable and convertible debentures -- 15,000
Current portion of long-term debt 16,246 13,278
----------- -----------
Total current liabilities 3,835,219 3,476,856
Long-term debt
Shareholders' equity: 30,878 20,580
Common stock, $.01 par value:
Authorized shares -- 38,933,333
Issued and outstanding shares -- 9,335,638
at September 30, 1996; 7,515,565 at
December 31, 1995 93,356 75,156
Additional paid-in capital 65,752,361 36,197,523
Unrealized loss on investments (50,422) 0
Accumulated deficit (9,258,944) (8,388,430)
----------- -----------
Total shareholders' equity 56,536,351 27,884,249
----------- -----------
Total liabilities and shareholders' equity $60,402,448 $31,381,685
=========== ===========
</TABLE>
See accompanying notes
Page 1
<PAGE>
SUMMIT MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------- -------------------------
1996 1995 1996 1995
------------------------- -------------------------
<S> <C> <C> <C> <C>
Revenue:
Software licenses $ 1,817,382 $2,208,113 $ 6,840,679 $ 5,400,756
Support and service 2,281,092 1,568,662 6,287,237 3,929,589
------------------------ ------------------------
Total revenue 4,098,474 3,776,775 13,127,916 9,330,345
Cost of Sales:
Software licenses 224,122 385,173 854,625 786,097
Support and service 1,203,280 811,363 3,225,262 2,253,296
------------------------ ------------------------
Total cost of sales 1,427,402 1,196,536 4,079,887 3,039,393
Gross Profit 2,671,072 2,580,239 9,048,029 6,290,952
Operating expenses:
Selling and marketing 1,898,982 1,481,886 5,974,036 4,180,836
Research and development 950,684 281,838 1,969,639 889,113
General and
administrative 1,288,092 1,023,217 3,187,506 2,478,624
------------------------ ------------------------
Total operating
expenses 4,137,758 2,786,941 11,131,181 7,548,573
------------------------ ------------------------
Loss from operations (1,466,686) (206,702) (2,083,152) (1,257,621)
Interest income, net 630,008 206,989 1,230,440 270,685
------------------------ ------------------------
Income (loss) before
income taxes (836,678) 287 (852,712) (986,936)
Income tax expense 500 6,413 17,802 6,413
------------------------ ------------------------
Net loss $ (837,178) $ (6,126) $ (870,514) $ (993,349)
======================== ========================
Net loss per share:
Primary $ (0.09) $ (0.00) $ (0.11) $ (0.30)
======================== ========================
Fully Diluted $ (0.09) $ (0.00) $ (0.11) $ (0.24)
======================== ========================
Weighted average shares
outstanding:
Primary 9,250,403 5,801,001 8,111,590 3,347,718
======================== ========================
Fully Diluted 9,250,403 6,195,200 8,111,590 4,187,758
======================== ========================
</TABLE>
See accompanying notes
Page 2
<PAGE>
SUMMARY MEDICAL SYSTEM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (870,514) $ (993,349)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 575,128 385,507
Changes in operating assets and liabilities:
Accounts receivable (803,914) (1,557,071)
Other current assets (355,639) (447,531)
Accounts payable and accrued expenses (257,722) 328,020
Accrued compensation and royalties 618,261 797,995
Deferred revenue 27,847 241,212
------------ ------------
Net cash used in operating activities (1,066,553) (1,245,217)
INVESTING ACTIVITIES:
Purchase of short-term investments (52,891,425) (23,199,427)
Sales and maturities of short-term investments 37,891,271 4,021,519
Purchases of equipment and fixtures (1,307,672) (835,267)
Disposal of equipment and fixtures 60,343 --
Capitalized Software Cost (33,297) --
------------ ------------
Net cash used in investing activities (16,280,780) (20,013,175)
FINANCING ACTIVITIES:
Proceeds from long-term debt 51,431 89,282
Principal payments on long-term debt (38,164) (3,170)
Principal payments on note payable - officer (17,991) (7,031)
Principal payments on convertible debentures (15,000) --
Issuance of Common Stock 29,450,282 23,721,021
Net proceeds from exercise of common stock
options 122,756 17,498
------------ ------------
Net cash provided by financing activities 29,553,314 23,817,600
Increase in cash and cash equivalents 12,205,981 2,559,208
Cash and cash equivalents at beginning of period 2,035,399 168,211
------------ ------------
Cash and cash equivalents at end of period $ 14,241,380 $ 2,727,419
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 4,429 $ 3,746
============ ============
</TABLE>
See accompanying notes
Page 3
<PAGE>
SUMMIT MEDICAL SYSTEMS, INC.
Notes to Consolidated Financial Statements
September 30, 1996
(Unaudited)
NOTE A-BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instruction to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods ended
September 30, 1996, are not necessarily indicative of the results that may be
expected for the year ended December 31, 1996. For further information, refer to
the consolidated financial statements and footnotes thereto for the year ended
December 31, 1995 included in the Annual Report of the Company.
NOTE B-CASH, CASH EQUIVALENTS AND INVESTMENTS
Cash in excess of current operating needs is invested in highly liquid money
market and/or marketable debt securities in accordance with the Company's
investment policy. Cash equivalents are highly liquid investments with remaining
maturities of 90 days or less at the time of purchase. Other highly liquid
investments with remaining maturities of one year or less at the time of
purchase are considered short-term investments.
Page 4
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Summit Medical is a leading provider of clinical outcomes database software
and related products and services for selected medical specialties in the
healthcare industry. The Company's database software enables healthcare
providers to monitor, manage and report detailed clinical information on medical
procedures, diseases and patient outcomes.
RESULTS OF OPERATIONS
REVENUE:
TOTAL REVENUE was $4,098,000 for the third quarter of 1996, an increase of
$321,000 or 8% over the third quarter of 1995. For the nine months ended
September 30, 1996, total revenue increased 41% to $13,128,000 compared to
$9,330,000 during the comparable period of 1995.
SOFTWARE LICENSE REVENUE primarily consists of sales of database software
licenses, software upgrades and networking fees. Sales of software licenses were
$1,817,000 for the third quarter of 1996, a decrease of $391,000 or 18% from the
third quarter of 1995. This decrease is attributable to decreased corporate
partner activity, organizational issues related to the sales division occuring
during the quarter, the inability to close several large software system sales,
and lower unit volume in non procedure modules and upgrades. For the nine months
ended September 30, 1996, software license revenue increased 27% to $6,841,000
compared to $5,401,000 for the same period of 1995. This increase is
attributable to increased unit volume in cardiology and a general price increase
of cardiology modules.
SUPPORT AND SERVICE REVENUE primarily includes an annual service fee,
training fees, consulting, hardware and module development income. Support and
service revenue was $2,281,000 for the third quarter of 1996, an increase of
$712,000 or 45% over the third quarter of 1995. This increase is attributable to
increased service fees related to the company's greater installed customer base,
and increased consulting fees. For the nine months ended September 30, 1996,
support and service revenue increased 60% to $6,287,000 compared to $3,930,000
for the comparable period of 1995 due to increased training and service fees.
COST OF SALES:
TOTAL COST OF SALES was $1,427,000 in the third quarter of 1996, an
increase of 19% or $231,000 over the same period of 1995. Total cost of sales
for the nine months ended September 30, 1996 was $4,080,000, an increase of
$1,040,000 or 34%. The increase in both periods relate to the increase in total
revenue.
Page 5
<PAGE>
COST OF SOFTWARE LICENSES was $224,000 for the third quarter of 1996, a
decrease of $161,000 or 42% from the third quarter of 1995. This
disproportionate decrease is a result of recognizing a larger percentage of
revenue from sources which do not incur a royalty expense. For the nine months
ended September 30, 1996 cost of software licenses was $855,000, an increase of
$69,000 or 9% compared to the same period in 1995, due to increased software
revenue offset by recognizing a larger percentage of revenue from sources which
do not incur a royalty expense.
COST OF SUPPORT AND SERVICE was $1,203,000 for the third quarter of 1996,
and increase of $392,000 or 48% compared to the second quarter of 1995. The cost
of support and service for the nine months ended September 30, 1996 was
$3,225,000, an increase of $972,000 or 43%, compared to the same period in 1995.
Both increases were due primarily to increased customer support costs related to
the increase in support and service revenue and increased salary expense for
personnel in the customer service and data management areas.
OPERATING EXPENSES:
SELLING AND MARKETING expenses were $1,899,000 during the third quarter of
1996, an increase of $417,000 or 28% compared to the same quarter of 1995. This
increase is primarily due to increased sales personnel and the hiring of
additional marketing personnel. For the nine months ended September 30, 1996,
selling and marketing expenses were $5,974,000, an increase of $1,793,000 or 43%
compared to the same period of 1995 for the same reasons mentioned above.
RESEARCH AND DEVELOPMENT expense was $951,000 in the third quarter of 1996,
an increase of $669,000 or 237% compared to the same quarter of 1995. For the
nine months ended September 30, 1996, research and development expense was
$1,970,000, an increase of $1,081,000 or 122% over the same period of 1995. The
increase is due primarily to the hiring of additional technical personnel and
contractors to aid in the development of the Company's new Vista Elite(TM) and
point of care longitudinal software systems.
GENERAL AND ADMINISTRATIVE expense was $1,288,000 for the third quarter of
1996, an increase of $265,000 or 26% compared to the third quarter of 1995. For
the nine months ended September 30, 1996 general and administrative expense was
$3,188,000, an increase of $709,000 or 29% over the same period in 1995. The
increase is due primarily to the hiring of additional executive and
administrative personnel, higher legal and professional fees, and increased
insurance expense.
INTEREST INCOME, NET of interest expense was $630,000 for the third quarter
of 1996, an increase of $423,000 compared to the third quarter of 1995. Interest
income, net of interest expense was $1,230,000 for the nine months ended
September 30, 1996, an increase of $960,000 compared to the same period in 1995.
Both increases are due to the interest income earned on proceeds received from
the Company's August 1995 and July 1996 public stock offerings.
INCOME TAX EXPENSE. The Company recorded minimal income tax expense for the
nine months of 1996 due to the year to date loss. No income tax was recorded for
1995 due to the Company's accumulated net operating loss carryforward.
Page 6
<PAGE>
NET LOSS. The Company recorded a net loss of $837,000 or $.09 per share for
the quarter ended September 30, 1996 compared to a net loss of $6,000 or $.00
per share for the quarter ended September 30, 1995 (fully diluted). For the nine
months ended September 30, 1996 the Company recorded a net loss of $871,000 or
$.11 per share as compared to a net loss of $993,000 or $.24 per share (fully
diluted) for the same period in 1995. Fully diluted earnings per share reflect a
decrease of $.09 per share for the third quarter ended September 30, 1996
compared to the third quarter of 1995 resulting from the increase in net loss
offset by the increase in weighted shares outstanding due to the Company's two
public stock offerings. Fully diluted earnings per share reflect an increase of
$.13 per share for the nine months ended September 30, 1996 compared to 1995
resulting from the increase in weighted average shares outstanding, again due to
the company's two public stock offerings.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1996, the Company's cash and short
term investments increased $26,588,000 to $49,342,000.
Cash used in operating activities was $1,067,000 for the nine months ended
September 30, 1996. The primary uses of cash included a net loss of $871,000,
increases in accounts receivable of $804,000 and other current assets of
$356,000 and a decrease in accounts payable and accrued expenses of $258,000.
These were partially offset by an increase in accrued compensation of $618,000
and depreciation and amortization recorded of $575,000.
Cash used in investing activities was $16,281,000 for the nine months ended
September 30, 1996, which consists primarily of the purchase of short term
investments of $52,891,000 and the purchase of equipment and fixtures of
$1,308,000 partially offset by the sales and maturities of short term
investments of $37,891,000.
Cash provided by financing activities for the nine months ended September 30,
1996, was $29,553,000 related to the Company's follow-on stock offering in July
1996 which netted $29,450,000.
The Company has committed to purchase approximately $500,000 of office furniture
and telephone equipment related to a pending corporate relocation. The Company
believes that the cash and short-term investments of $49,342,000 at September
30, 1996, together with anticipated cash flows from operations, will be
sufficient to fund its operations, capital requirements and expansion needs for
at least the next 12 months.
Page 7
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
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
None
The following exhibits are included herein:
(11.1) Computation of Earnings Per Share
(27) Financial Data Schedule
Page 8
<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
Summit Medical Systems, Inc.
----------------------------
Date November 14, 1996 /s/ Anthony W. Rees
------------------ -------------------
Anthony W. Rees, Vice President of Finance
and Chief Financial Officer
Page 9
<PAGE>
EXHIBIT 11.1
SUMMIT MEDICAL SYSTEMS, INC.
Computation of Earnings Per Share
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE:
Weighted average shares outstanding 9,250,403 5,758,307 8,111,590 3,265,746
SAB No. 83 shares--for stock options granted
at exercise prices less than the 12 months
preceding the initial public offering
using the treasury method -- 42,694 -- 81,972
---------- ---------- ---------- ----------
9,250,403 5,801,001 8,111,590 3,347,718
========== ========== ========== ==========
Net loss $ (837,178) $ (6,126) $ (870,514) $ (993,349)
========== ========== ========== ==========
Net loss per share $ (0.09) $ 0.00 $ (0.11) $ 0.30)
========== ========== ========== ==========
FULLY DILUTED EARNINGS PER SHARE:
Weighted average shares outstanding 9,250,403 6,152,506 8,111,590 4,105,786
SAB No. 83 shares--for stock options granted
at exercise prices less than the 12 months
preceding the initial public offering
using the treasury method -- 42,694 -- 81,972
---------- ---------- ---------- ----------
9,250,403 6,195,200 8,111,590 4,187,758
========== ========== ========== ==========
Net loss $ (837,178) $ (6,126) $ (870,514) $ (993,349)
========== ========== ========== ==========
Net loss per share $ (0.09) $ 0.00 $ (0.11) $ (0.24)
========== ========== ========== ==========
</TABLE>
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
Consolidated Statement of Financial Position for September 30, 1996 and
Consolidated Statement of Operations for three months ended September 30, 1996
and nine months ended September 30, 1996 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JUN-01-1996 JAN-01-1996
<PERIOD-END> SEP-30-1996 SEP-30-1996
<CASH> 0 49,342,133
<SECURITIES> 0 0
<RECEIVABLES> 0 7,246,301
<ALLOWANCES> 0 (132,642)
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 58,098,019
<PP&E> 0 3,568,317
<DEPRECIATION> 0 (1,472,247)
<TOTAL-ASSETS> 0 60,402,448
<CURRENT-LIABILITIES> 0 3,835,219
<BONDS> 0 0
<COMMON> 0 93,356
0 0
0 0
<OTHER-SE> 0 56,442,995
<TOTAL-LIABILITY-AND-EQUITY> 0 60,402,448
<SALES> 4,098,474 13,127,916
<TOTAL-REVENUES> 4,098,474 13,127,916
<CGS> 1,427,402 4,079,887
<TOTAL-COSTS> 5,565,160 15,211,068
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,397 4,429
<INCOME-PRETAX> (836,678) (852,712)
<INCOME-TAX> 500 17,802
<INCOME-CONTINUING> (837,178) (870,514)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (837,178) (870,514)
<EPS-PRIMARY> (.09) (.11)
<EPS-DILUTED> (.09) (.11)
</TABLE>
