<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 11, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
SUMMIT MEDICAL SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MINNESOTA 7371 41-1545493
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
INCORPORATION OR CODE NUMBER)
ORGANIZATION)
ONE CARLSON PARKWAY
MINNEAPOLIS, MINNESOTA 55447
(612) 473-3250
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
KEVIN R. GREEN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SUMMIT MEDICAL SYSTEMS, INC.
ONE CARLSON PARKWAY
MINNEAPOLIS, MINNESOTA 55447
(612) 473-3250
TELECOPY: (612) 473-8534
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
Copies to:
JONATHAN B. ABRAM, ESQ. LAWRENCE S. WITTENBERG, ESQ.
DORSEY & WHITNEY LLP TESTA, HURWITZ & THIBEAULT, LLP
PILLSBURY CENTER SOUTH HIGH STREET TOWER
220 SOUTH SIXTH STREET 125 HIGH STREET
MINNEAPOLIS, MINNESOTA 55402 BOSTON, MASSACHUSETTS 02110
(612) 340-2600 (617) 248-7000
TELECOPY: (612) 340-8738 TELECOPY: (617) 248-7100
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
REGISTERED REGISTERED PER SHARE PRICE FEE(1)
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<S> <C> <C> <C> <C>
Common Stock, $.01 par
value 2,139,000 $25.25 $54,009,750 $18,625
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</TABLE>
(1) Estimated solely for purposes of computing the registration fee and based
upon the average of the high and low prices for such Common Stock on June
6, 1996, as reported on the Nasdaq National Market.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
SUMMIT MEDICAL SYSTEMS, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING LOCATION IN
PROSPECTUS OF PART I ITEMS OF FORM S-1
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING IN
FORM S-1 REGISTRATION STATEMENT LOCATION IN PROSPECTUS
- ------------------------------- ----------------------
<S> <C> <C>
1. Forepart of the Registration Statement
and Outside Front Cover Page of
Prospectus.............................. Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages Inside Front Cover Page; Outside Back Cover
of Prospectus........................... Page
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges...... Prospectus Summary; Risk Factors
4. Use of Proceeds.......................... Use of Proceeds
5. Determination of Offering Price.......... Underwriting
6. Dilution................................. Not Applicable
7. Selling Security Holders................. Principal and Selling Shareholders
8. Plan of Distribution..................... Outside and Inside Front Cover Pages;
Underwriting; Outside Back Cover Page
9. Description of Securities to be Dividend Policy; Description of Capital
Registered.............................. Stock
10. Interests of Named Experts and Counsel... Legal Matters; Experts
11. Information with Respect to the Outside and Inside Front Cover Page;
Registrant.............................. Prospectus Summary; Use of Proceeds;
Capitalization; Price Range of Common
Stock; Risk Factors; Dividend Policy;
Selected Financial Data; Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Business; Management; Certain
Transactions; Principal and Selling
Shareholders; Description of Capital
Stock; Consolidated Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................. Not Applicable
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 11, 1996
1,780,000 Shares
LOGO
Common Stock
-----------
Of the 1,780,000 shares of Common Stock offered hereby, 1,500,000 shares are
being sold by Summit Medical Systems, Inc. ("Summit" or the "Company") and
280,000 shares are being sold by the Selling Shareholders. See "Principal and
Selling Shareholders." The Company will not receive any of the proceeds from
the sale of shares by the Selling Shareholders.
The Common Stock is traded on the Nasdaq National Market under the symbol
"SUMT." On June 6, 1996, the last reported sale price for the Common Stock on
the Nasdaq National Market was $24.75. See "Price Range of Common Stock."
-----------
FOR INFORMATION CONCERNING CERTAIN RISKS RELATED TO THIS OFFERING, SEE "RISK
FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HASTHE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CON-
TRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO SELLING
PUBLIC AND COMMISSIONS (1) COMPANY (2) SHAREHOLDERS
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<S> <C> <C> <C> <C>
Per Share.. $ $ $ $
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Total (3).. $ $ $ $
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</TABLE>
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(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses of $500,000 payable by the Company.
(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to 267,000 additional shares of
Common Stock solely to cover over-allotments, if any. If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company, will be $ , $ and
$ , respectively. See "Underwriting."
-----------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject
to the right of the Underwriters to cancel or modify such offer and to reject
any order in whole or in part. It is expected that delivery of the shares of
Common Stock will be made through the offices of Wessels, Arnold & Henderson,
L.L.C. ("Wessels, Arnold & Henderson"), Minneapolis, Minnesota, on or about
, 1996.
-----------
Wessels, Arnold & Henderson
Robertson, Stephens & Company
Volpe, Welty & Company
The Date of this Prospectus is , 1996
<PAGE>
The Summit Solution(TM)
Clinical Information to Monitor,
Manage and Report Patient Outcomes
Monitor Utilization
and Outcomes
Capture and Analyze Cost
Organize Data Effectiveness
[PHOTO APPEARS HERE]
Risk-Adjust Prepare Quality
Data Assurance Reports
Compare Report
National Clinical
Standards Outcomes
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS AND SELLING GROUP MEMBERS
(IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK
OF THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10b-6A
UNDER THE SECURITIES AND EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial data appearing elsewhere in this Prospectus. Except
as otherwise indicated, all information in this Prospectus assumes no exercise
of the Underwriters' over-allotment option. This Prospectus contains forward-
looking statements which involve risks and uncertainties. The Company's actual
results may differ significantly from the results discussed in the forward-
looking statements. Factors that might cause such a difference include, but are
not limited to, those discussed in "Risk Factors."
THE COMPANY
Summit is a leading provider of clinical outcomes database software and
related consulting services for selected medical specialties in the healthcare
industry. The Company's customers include specialty physicians, hospitals,
physician and hospital networks, managed care organizations and other
healthcare payors, and pharmaceutical and medical device firms. Summit's
database software enables healthcare providers to record, analyze and report
detailed clinical, economic and patient-reported outcomes data on medical
procedures, diseases and patient functional status. The Company collaborates
with national medical associations, leading hospitals and hospital networks,
physicians and medical device firms to design database fields and formats that
capture significantly more relevant and complete outcomes data than is
available from insurance claims data. The Company's customers use this outcomes
data to monitor and manage more effectively the quality and cost of patient
care by analyzing resource utilization, costs, provider practice patterns,
medical procedure selection and clinical outcomes. This outcomes data is also
used for contracting with third party payors and managed care organizations,
establishing quality assurance programs and complying with the informational
demands of regulatory agencies. To increase the value of its software, the
Company offers design, implementation, data management and consulting services
to its customers. Currently, approximately 1,700 healthcare organizations use
the Company's clinical outcomes database software and services.
The Company's clinical outcomes database software products and services give
healthcare providers comprehensive and detailed patient clinical information
that is necessary to compete effectively in today's healthcare market. The
Company's database software includes 39 database software procedure modules for
five medical specialties: cardiac and thoracic surgery, cardiology,
ophthalmology, urology and orthopedics. During 1996, the Company expects to
introduce procedure modules for endoscopy and critical care. The procedure
modules allow convenient and accurate data collection and provide meaningful
measurements of clinical outcomes. The Company's procedure modules for cardiac
surgery include a risk stratification tool that enables providers to analyze
retrospectively or to predict the effect of patient-specific risk factors on
certain clinical outcomes. The Company intends to develop risk stratification
tools for additional specialties. The Company also offers three additional
database software modules that measure clinical costs, patient health status
and satisfaction, inventory usage, and decision support software that forecasts
the rate of return on investments in employee wellness, occupational health and
pharmacological programs. Within each medical specialty, Summit's database
software modules may be bundled to form an integrated database that combines
data on clinical outcomes for several medical procedures, as well as data on
clinical costs and patient health status and satisfaction. For example, in
cardiology, a heart institute may combine the Company's software modules to
capture clinical data on diagnostic tests, such as echocardiography and cardiac
catheterization, and therapeutic procedures, such as angioplasty, while also
capturing the clinical costs associated with these tests and procedures. In
addition, the Company has begun to offer its customers combined information
service products that integrate the use of the Company's software and related
consulting services.
The Company's business strategy is to enter medical specialty markets that
have a substantial need for clinical outcomes information and to expand within
these markets by developing additional database software applications. As part
of this strategy, the Company typically seeks to collaborate with leading
national medical
3
<PAGE>
associations and leverage its distribution through joint marketing
relationships with leading vendors of healthcare products. The Company has
established joint marketing arrangements with SciMed Life Systems, Inc.
("SciMed"), a subsidiary of Boston Scientific Corporation ("Boston
Scientific"), a worldwide developer, manufacturer and marketer of medical
devices and four Boston Scientific divisions: Microvasive Urology, Microvasive
Endoscopy, Mansfield EP and Meadox Medicals; as well as with Allergan, Inc.
("Allergan"), a global provider of eye care and other specialty therapeutic
products, and Smith & Nephew Richards Inc. ("Smith & Nephew Richards"), a
global provider of medical orthopedic devices.
The Company also aggregates, manages and reports on the cumulative clinical
data generated by users of the Company's software who submit their data to
national databases. These national databases provide valuable benchmarks of
national practice patterns and clinical outcomes that individual providers can
use to compare and relate their own performance against national trends. The
Company has database relationships with the Society of Thoracic Surgeons (the
"STS"), the American Society of Cataract and Retractive Surgery (the "ASCRS")
and the American College of Cardiology (the "ACC" and together with the STS and
the ASCRS, collectively, the "Medical Association Partners"). Similarly, the
Company develops and manages databases for its joint marketing partners. In
addition, the Company has recently established a database for certain hospitals
within the Columbia/HCA Healthcare Corporation ("Columbia/HCA") network of more
than 300 hospitals. The Company is the sole vendor of cardiac surgery and
cardiology outcomes database software to Columbia/HCA.
The Company was incorporated in the State of Minnesota in January 1986.
Unless the context otherwise requires, references to the "Company" or to
"Summit" include Summit Medical Systems, Inc. and its consolidated
subsidiaries. The Company's principal executive offices are located at One
Carlson Parkway, Minneapolis, Minnesota 55447, and its telephone number is
(612) 473-3250.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company...... 1,500,000 shares
Common Stock Offered by the Selling
Shareholders............................ 280,000 shares
Common Stock to be Outstanding after the
Offering................................ 9,040,810 shares (1)
Use of Proceeds.......................... For working capital and other general
corporate purposes. See "Use of
Proceeds."
Nasdaq National Market Symbol............ SUMT
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- --------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Total revenue........... $1,585 $3,113 $5,405 $9,627 $13,801 $2,624 $3,913
Gross profit............ 847 1,949 3,577 6,627 9,726 1,749 2,679
Purchase of in-process
research and
development............ -- -- -- -- 7,435 -- --
Total operating
expenses............... 1,361 1,983 3,583 7,029 17,970 2,085 3,202
Income (loss) from
operations............. (514) (34) (6) (402) (8,244) (336) (523)
Net income (loss)....... $ (468) $ (31) $ 1 $ (334) $(7,658) $ (300) $ (281)
Net income (loss) per
share (2).............. $(0.21) $(0.01) $ 0.00 $(0.08) $ (1.37) $(0.07) $(0.04)
Weighted average shares
outstanding (2)........ 2,264 2,799 3,372 3,953 5,604 4,446 7,527
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------
ACTUAL AS ADJUSTED (3)
------- ---------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments....... $22,509 $57,092
Working capital......................................... 26,034 60,617
Total assets............................................ 30,707 65,290
Total shareholders' equity.............................. 27,623 62,206
</TABLE>
- --------
(1) Does not include an aggregate of 1,575,339 shares issuable upon exercise of
outstanding stock options and warrants as of June 6, 1996. The weighted
average exercise price of these option and warrant shares is $11.46 per
share. See "Management--Stock Option Plans" and "Management--Nonqualified
Stock Options."
(2) Computed on the basis described in Note 2 of Notes to Consolidated
Financial Statements.
(3) As adjusted to reflect the sale of 1,500,000 shares of Common Stock offered
by the Company hereby at an assumed public offering price of $24.75 per
share after deducting estimated underwriting discounts and commissions and
offering expenses payable by the Company. See "Use of Proceeds" and
"Capitalization."
The following trademarks of the Company are used in this Prospectus: Summit
Apex(TM), Summit Everest(TM), Summit Pinnacle(TM), Summit Vista(TM), The Summit
Solution(TM) and WELLCAST R.O.I.(R) This Prospectus also includes trade names,
trademarks and registered trademarks of companies other than Summit.
5
<PAGE>
RISK FACTORS
This Prospectus contains 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. Actual results could differ
materially from those projected in the forward-looking statements as a result
of the risk factors set forth below and elsewhere in this Prospectus. In
addition to the other information in this Prospectus, the following factors
should be carefully considered in evaluating the Company and its business
before purchasing the shares of Common Stock offered hereby.
DEPENDENCE ON JOINT MARKETING PARTNERS. A substantial portion of the
Company's total revenue depends on sales to the Company's joint marketing
partners. Sales to its joint marketing partner, Boston Scientific, including
SciMed and three Boston Scientific divisions, accounted for approximately 10%
of the Company's revenue in 1995. In addition, the Company has entered into
joint marketing relationships with a fourth division of Boston Scientific,
Allergan and Smith & Nephew Richards. The Company relies on its joint
marketing partners to provide substantial supplemental resources to the
Company's sales and marketing efforts. A significant portion of the Company's
revenue is, therefore, dependent upon the Company's ability to develop
products that meet the requirements of its joint marketing partners and upon
the marketing efforts of these joint marketing partners. Although the Company
believes its joint marketing partners have an economic incentive to market the
Company's database software, the Company's database software is not their
primary product and the amount of resources they devote to marketing the
database software and the timing of their marketing efforts are not within the
control of the Company. Moreover, the Company's database software is often
sold by the joint marketing partners as part of a package of goods and
services that includes the joint marketing partners' products. As a result,
sales of the Company's database software depends, in part, on demand for the
joint marketing partners' products. Upon termination of the joint marketing
arrangements under certain circumstances, the Company's joint marketing
partners would obtain certain rights to use the source code of the software
that is the subject of the applicable agreement. The failure of these joint
marketing partners to market successfully the Company's database software, or
the termination of these joint marketing arrangements, could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Sales and Marketing."
HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY. The
Company has experienced operating losses for each of the past five years and
for the quarter ended March 31, 1996. The Company's future profitability
depends on market acceptance of its clinical outcomes database software and
the development of new products and markets. There can be no assurance that
the Company will generate revenue sufficient to achieve profitability. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company has experienced and
expects to continue to experience variations in quarterly operating results.
The timing of purchases by the Company's joint marketing partners, which
typically have made large purchases to build up inventories for resale, may
significantly affect quarterly results. Quarterly variations may also result
from the timing of the release of certain new database software programs,
including database software programs for new medical procedures. Due to the
relatively fixed nature of most of the Company's costs, including personnel
and facilities costs, any unanticipated shortfall in revenue in any fiscal
quarter would have an adverse effect on the Company's results of operations in
that quarter.
In general, quarterly revenue is difficult to forecast because the market
for the Company's products and services are evolving rapidly and much of the
Company's sales are through indirect channels such as the Company's marketing
partners. Software license revenue from quarter to quarter is difficult to
forecast, as no significant order backlog exists at the end of any quarter
because the Company's products typically are shipped upon receipt of
customers' orders.
The Company in the past has realized a substantial portion of its revenue in
the last month of a quarter, with this revenue concentrated in the last weeks
or days of a quarter. It is not uncommon for the Company to experience strong
fourth quarters followed by lower first quarters. There can be no assurance
that the Company will not display this pattern in future years.
6
<PAGE>
The Company's quarterly results have been seasonal with a greater proportion
of the Company's revenue and operating profitability occurring in the second
half of the year. This seasonality is primarily attributable to hospital
budgeting practices, which typically cause discretionary purchases to be made
shortly before year end, and the Company's practice of announcing price
increases to take effect at the beginning of the following year. Moreover, the
majority of medical trade shows occur in the first half of the year, which
generate leads that result in increased sales in the latter part of the year.
As a result, the Company has typically experienced net losses in the first and
second quarters of each year.
Due to all of the foregoing factors, it is possible that in some future
quarters the Company's results of operations will be below the expectations of
public market analysts and investors. In such event, the price of the
Company's Common Stock would be adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
UNCERTAINTY OF ENTRANCE INTO NEW MARKETS AND ACCEPTANCE OF NEW PRODUCTS. The
Company's future success depends, in part, upon the Company's ability to enter
new medical specialty markets and develop and introduce new products. In 1996,
the Company intends to enter the new medical specialties of endoscopy and
critical care, and may enter additional medical specialties, in which it does
not have any operating experience. The Company also has introduced several new
products for which it has limited operating results. In addition, the Company
must develop and market new software products and consulting services obtained
through its acquisitions of Medical Information Systems Company, Inc. ("MIS")
and BSM Financial, Inc. ("BSM"), its acquisition of an exclusive license to a
clinical information database technology (which the Company refers to as its
"Keystone" technology) developed at Duke University ("Duke") by three
nationally recognized Duke cardiologists (collectively, the "Individual
Founders") and the formation of a joint venture (the "Joint Venture") with
Duke and the Individual Founders. In particular, the Company is using
substantial resources to develop and introduce an enhanced version of its
Summit Vista software, a new database software based on the Keystone
technology, and additional applications for its WELLCAST R.O.I. software. The
Company also intends to introduce additional risk stratification tools for
cardiac surgery during 1996 and develop predictive statistical tools for other
medical specialties in addition to the existing tool available for coronary
artery bypass surgery. In order to enter a new medical specialty or develop
these and future products, the Company will have to invest a significant
portion of its resources in research and development and to hire additional
personnel to market and manage the new products. The Company's future success
will depend heavily on sales of new products and consulting services, and the
failure of these products and services to find market acceptance would have a
material adverse effect on the Company's business, financial condition and
results of operations. Also, new products, when first released by the Company,
may contain undetected difficulties or defects that, despite testing by the
Company, are discovered only after they have been installed and used by
customers. There can be no assurance that such difficulties or defects will
not be discovered in the future, causing significant customer relations
issues, delays in product introduction and shipments, or requiring design
modifications that could adversely affect the Company's competitive position,
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business--Products," "Business--Services" and "Business--The Joint Venture."
DEPENDENCE ON DATABASE SPONSORS; CONTROL OF NATIONAL DATABASES. The Company
believes that the acceptance of its products by healthcare providers in the
cardiac and thoracic surgery, cardiology and ophthalmology markets is
significantly enhanced by its relationship with the Medical Association
Partners. The Company's agreements with the Medical Association Partners may
be terminated by the applicable Medical Association Partner if the Company
fails to perform its obligations under the respective agreement or at the end
of the current term of such agreement. In the event of termination of the ACC
or the STS agreement, the Company would not have access to the corresponding
national database in order to continue providing reports and updates to its
customers from the national database. On termination of the ASCRS agreement,
the Company can retain access to the database by purchasing the ASCRS's rights
to the database. In addition, upon termination of the STS and the ACC
agreements due to termination by the Company, termination by the STS or the
ACC, as applicable, after a material breach by the Company or in the event of
the Company's financial or other inability
7
<PAGE>
to serve the STS or the ACC, as applicable, but excluding any voluntary
termination of these agreements by the STS or ACC, the Company must assign its
rights in the software, documentation and materials, including source code,
that are created pursuant to the applicable agreement, and must deliver copies
of this source code to the STS or the ACC, as the case may be. Termination of
one or more of these agreements may have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--National Databases."
The ACC has notified the Company that it intends to renegotiate its current
agreement with the Company which would have terminated on May 1, 1996. During
December 1995, the Company and the ACC began preliminary discussions regarding
a new agreement. The Company and the ACC have agreed to extend the term of the
current agreement until July 1, 1996, to allow for additional time for
negotiation. Because the current negotiations are preliminary and any
agreement is subject to approval by the ACC and Summit, there can be no
assurance that the Company will be able to renegotiate an arrangement with the
ACC on favorable terms, or that the Company and the ACC will be able to enter
into an agreement by July 1, 1996. As of the date of this Prospectus, the
Company and the ACC have not agreed to extend the term of their agreement. The
failure to renegotiate the ACC agreement could have a material adverse effect
on the Company's business, financial condition and results of operations.
The terms of the Company's agreements with the Medical Association Partners
limit the Company's ability to derive certain commercial products from the
national databases. The Company may not sell the data in the respective
databases without the consent of the STS, the ACC or the ASCRS, as the case
may be. In addition, in the case of the ASCRS and the ACC, the Company cannot
use the database to develop additional statistical tools without the consent
of each such association. The Company believes that such consent will be
obtained because such tools are beneficial to these associations and its
members, but if it were not obtained, the Company's business could be
materially and adversely affected. See "Business--National Databases."
The agreements with the Medical Association Partners do not give the Company
exclusive rights to use the applicable national database. Each of the Medical
Association Partners may allow data to be entered using software other than
the Company's, including software sold by the Company's competitors. The STS
and the ACC have opened their national databases since April 1990 and March
1995, respectively, to allow participants using other vendors' software to
submit data. Although the Company believes that, to date, the Company's
business has not been materially and adversely affected by the opening of the
STS and ACC national databases, there can be no assurance that in the future
the Company will not experience greater competition in connection with the STS
and the ACC national databases. In addition, the Medical Association Partners
may permit access to their respective national databases by third parties to
perform analyses, generate reports and for other purposes. If the Medical
Association Partners were to permit access to the databases to Company
competitors for these purposes, the Company's business could be materially and
adversely affected. See "Business--National Databases."
INTEGRITY OF DATABASES. The Company's success depends significantly on the
integrity of the clinical outcomes data and statistical tools that are based
on the patient records entered into the national databases. Although the
Company believes that it takes adequate precautions to safeguard the validity
of the information entered into the national databases, including testing data
for completeness and consistency, the Company does not obtain independent
audits of the information provided by its customers. If a statistically
significant number of patient records were found to have been altered or
entered incorrectly, the Company's business, financial condition and results
of operations could be materially and adversely affected. See "Business--
National Databases."
MANAGEMENT OF GROWTH AND INTEGRATION OF ACQUISITIONS. The Company has
recently experienced a period of rapid growth which has placed significant
strains on the Company's management and administrative, operational and
financial resources. The failure of the Company to establish strong and
effective financial and management controls could have a material adverse
effect upon the Company's business, financial condition and results of
operations. The Company's recent growth has also resulted in an increase in
the level of responsibilities for existing personnel and the need to hire and
effectively manage an increasing number of employees. Certain of the Company's
key employees and management personnel joined the Company during 1995, and
effective in
8
<PAGE>
January 1996, the Company hired a new President and Chief Executive Officer.
There can be no assurance that the Company or its business will continue to
grow. However, if the Company's growth does continue, the Company will be
required to hire, motivate and effectively manage the increasing number of
employees and the failure to do so will materially and adversely affect the
Company's business and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The Company's success will also depend on its ability to integrate the
businesses of MIS, BSM and the Joint Venture into the Company's operations.
There can be no assurance that the anticipated benefits from the acquisitions
of BSM and MIS and the formation of the Joint Venture will be realized.
Additionally, there can be no assurance that the Company will be able to
effectively market existing products and services of BSM and MIS or that the
Joint Venture will be able to develop products that will achieve market
acceptance. The integration of BSM, MIS and the Joint Venture will require
substantial attention from management, many of whom have limited experience in
integrating acquisitions. The diversion of management's attention, the process
of integrating the businesses and any difficulties encountered in the
transition process could cause an interruption of business, and could have a
material adverse effect on the Company's operations and financial performance.
See "Business--Products" and "Business--The Joint Venture."
CHANGES IN GOVERNMENT REGULATION. The confidentiality of patient records and
the circumstances under which such records may be released to the national
databases is subject to substantial regulation by state governments. These
state laws and regulations govern both the disclosure and use of confidential
patient medical record information. Although compliance with these laws and
regulations is principally the responsibility of the hospital, physician or
other healthcare provider supplying the data to the Company, the national
databases have been designed to enable healthcare providers to comply with the
confidentiality requirements of state law. To protect patient confidentiality,
data entries to the national databases delete any patient identifiers,
including name, address, hospital and physician. The Company believes that its
procedures comply with the laws and regulations regarding the collection of
patient data in substantially all jurisdictions, but regulations governing
patient confidentiality rights are evolving rapidly.
Additional legislation governing the dissemination of medical record
information has been proposed at both the state and federal level. In general,
this legislation may require holders of such information to implement security
measures that may be of substantial cost to the Company. Currently pending in
Congress is the Medical Records Confidentiality Act of 1995 (the "1995 Act"),
which would protect and regulate the confidentiality of medical record
information. The 1995 Act would prohibit the disclosure of individually
identifiable health information, except with the patient's consent. Without the
patient's consent, medical record information may be disclosed only for other
limited purposes, including disclosures to permit the creation of
nonidentifiable health information and to facilitate medical research. The 1995
Act would preempt most state laws regarding access to, and the use and
disclosure of, medical record information. The Company presently collects,
compiles and discloses health care information which it believes is not
individually identifiable and therefore would not be protected health
information under the 1995 Act. The Company cannot accurately assess the
likelihood that the 1995 Act will become law, or the final scope of any law.
There can be no assurance that the 1995 Act, or other changes to state or
federal laws, will not materially restrict the ability of healthcare providers
to submit information from patient records to the Company.
The healthcare industry is subject to changing regulatory influences that may
affect the procurement practices and operations of healthcare industry
participants. During the past several years, government regulation of
reimbursement rates and capital expenditures in the United States healthcare
industry has increased. Lawmakers continue to propose programs to reform the
United States healthcare system, which may contain proposals to increase
governmental involvement in healthcare, lower reimbursement rates and otherwise
change the operating environment for the Company's customers. Healthcare
industry participants may react to these proposals by curtailing or deferring
investments, including investments in the Company's products. The Company
cannot predict what impact, if any, such factors may have on its business,
financial condition and results of operations.
9
<PAGE>
Although the Company is not currently subject to regulation by the United
States Food and Drug Administration (the "FDA"), the FDA could determine in
the future that the predictive applications of the Company's software make it
a clinical decision tool, and thus subject to FDA regulation. In that event,
the Company could experience delays in developing and marketing new software
and an increase in research and development costs which could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Government Regulation."
DEPENDENCE ON KEY PERSONNEL. The success of the Company and of its business
strategy is dependent in large part on its key management and operating
personnel, including its Chairman, Edward F. Sweeney, and its President and
Chief Executive Officer, Kevin R. Green. The Company believes that its future
success will also depend upon its ability to attract and retain highly-skilled
technical, managerial and marketing personnel. Such individuals are in high
demand and are often subject to competing offers. In particular, the Company's
success will depend on its ability to retain the services of its executive
officers. The Company has entered into employment agreements or
confidentiality and noncompetition agreements with each of its executive
officers. The Company will also have an ongoing need to expand its management
personnel and support staff. The loss of the services of one or more members
of management or key employees or the inability to hire additional personnel
as needed may have a material adverse effect on the Company. The Company does
not maintain key person life insurance policies on any of its employees. See
"Business--National Databases" and "Management."
HIGHLY COMPETITIVE INDUSTRY. The market for healthcare information systems
and services is highly competitive. The Company believes that the principal
competitive factors for clinical outcomes database software are the quality
and depth of the underlying clinical outcomes database, the usefulness of the
data and reports generated by the software, customer service and support,
ease-of-use, compatibility with the customer's existing information systems,
potential for product enhancements, and vendor reputation. The Company's
competitors include other providers of clinical outcomes software, healthcare
consulting firms, and providers of medical information derived from databases
based on claims data. Many of the Company's competitors and potential
competitors have greater financial, development, technical, marketing and
selling resources than the Company, and have substantial installed customer
bases in the healthcare industry. The Company also faces significant
competition from internal information services at hospitals, many of which
have developed their own outcomes databases. As the market for outcomes
software develops, additional competitors may enter the market and competition
may intensify. There can be no assurance that the Company's business will not
be materially and adversely affected by such competition. See "Business--
Competition."
DEPENDENCE ON PROPRIETARY TECHNOLOGY. The Company relies on a combination of
trade secrets, copyright and trademark laws, nondisclosure and other
contractual provisions, and technical measures to protect its proprietary
rights in its products. There can be no assurance that these protections will
be adequate or that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology. Although the Company believes that its products do not infringe
upon the proprietary rights of third parties, and it is not aware of any
threatened patent infringement claims relating to its products, there can be
no assurance that third parties will not assert infringement claims against
the Company in the future or that a license or similar agreement will be
available on reasonable terms in the event of an unfavorable ruling on any
such claim. In addition, any such claim may require the Company to incur
substantial litigation expenses or subject the Company to significant
liabilities and could have a material adverse effect on the Company's
business. See "Business--National Databases" and "Business--Proprietary Rights
and Licenses."
POSSIBLE VOLATILITY OF STOCK PRICE. The securities markets have from time to
time experienced significant price and volume fluctuations that may be
unrelated to the operating performance of particular companies. The market
prices of the equity securities of many publicly traded computer software
companies have in the past been, and in the future may be, especially
volatile. Announcements of operating results that differ from financial
analysts' projections or technological innovations or new products by the
Company or its competitors,
10
<PAGE>
developments or disputes concerning patents or proprietary rights, regulatory
developments and economic and other external factors, as well as period-to-
period fluctuations in the Company's financial results, may have a significant
effect on the market price of the Common Stock. See "Price Range of Common
Stock."
ABSENCE OF DIVIDENDS. The Company has never declared or paid any cash
dividends on its Common Stock and does not anticipate paying cash dividends in
the foreseeable future. See "Dividend Policy."
CONTROL BY EXISTING SHAREHOLDERS. Directors, executive officers and
principal shareholders of the Company, and certain of their affiliates, own
beneficially approximately 33.3% of the outstanding Common Stock prior to this
offering and will own approximately 25.0% of the outstanding Common Stock
after this offering. Accordingly, these shareholders, individually and as a
group, may be able to influence the outcome of shareholder votes, including
votes concerning the election of directors, the adoption or amendment of
provisions in the Company's Articles of Incorporation or Bylaws and the
approval of certain mergers and other significant corporate transactions,
including a sale of substantially all of the Company's assets. Such control by
existing shareholders could have the effect of delaying, deferring or
preventing a change in control of the Company. See "Principal and Selling
Shareholders."
POSSIBLE ISSUANCES OF PREFERRED STOCK; ANTI-TAKEOVER PROVISIONS. The Board
of Directors has authority to issue shares of preferred stock and to fix the
rights, preferences, privileges and restrictions, including voting rights, of
those shares without any further vote or action by the Company's shareholders.
The rights of the holders of the Common Stock will be subject to, and may be
adversely affected by, the rights of the holders of any preferred stock that
may be issued in the future. The issuance of preferred stock could have the
effect of delaying, deferring or preventing a change in control of the
Company. In addition, certain provisions of Minnesota law applicable to the
Company could have the effect of discouraging certain attempts to acquire the
Company, which could deprive the Company's shareholders of opportunities to
sell their shares of Common Stock at prices higher than the prevailing market
prices. See "Description of Capital Stock."
11
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of 1,500,000 shares of Common
Stock offered by the Company hereby are estimated to be $34.6 million ($40.8
million if the Underwriters' over-allotment option is exercised in full)
assuming a public offering price of $24.75, and after deducting estimated
underwriting discounts and commissions and offering expenses. The Company will
not receive any proceeds from the sale of the shares of Common Stock offered
by the Selling Shareholders.
The Company intends to use the net proceeds from this offering for working
capital and other general corporate purposes. The Company may also use a
portion of the net proceeds of the offering to acquire businesses or products
complementary to the Company's business, although the Company does not
currently have any commitments or agreements for any such acquisition and
there can be no assurance that any such acquisitions will be made. Pending
application of the proceeds as described above, the Company intends to invest
the net proceeds of this offering in short-term, interest-bearing, investment-
grade securities.
PRICE RANGE OF COMMON STOCK
The Company consummated its initial public offering of Common Stock on
August 4, 1995 at a price of $9.00 per share. The Company's Common Stock is
quoted on the Nasdaq National Market under the symbol "SUMT." The following
table sets forth the high and low sales prices of the Company's Common Stock
for the periods indicated as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
PERIOD HIGH LOW
------ ------- -------
<S> <C> <C>
1995
Third Quarter (commencing August 4, 1995).............. $17.125 $11.375
Fourth Quarter......................................... $25.50 $14.50
1996
First Quarter ......................................... $22.75 $16.00
Second Quarter (through June 6, 1996).................. $26.00 $19.375
</TABLE>
On June 6, 1996 the last reported sales price for the Company's Common Stock
on the Nasdaq National Market was $24.75 per share. At June 6, 1996 there were
approximately 150 record holders of the Company's Common Stock.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock and does not anticipate paying any cash dividends in the foreseeable
future. The Company currently intends to retain all available funds and any
future earnings for use in the operation of its business.
12
<PAGE>
CAPITALIZATION
The following table sets forth the long-term debt and capitalization of the
Company at March 31, 1996, and as adjusted to give effect to the sale of
1,500,000 shares of Common Stock offered by the Company at an assumed offering
price of $24.75 per share, after deducting estimated underwriting discounts
and commissions and offering expenses payable by the Company. See "Use of
Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt, excluding current portion................. $ 12 $ 12
------- -------
Common stock, $.01 par value: 38,933,333 shares
authorized; 7,536,545 shares issued and outstanding
actual; 9,036,545 shares issued and outstanding as
adjusted (1)............................................. 75 90
Additional paid-in capital................................ 36,218 70,786
Accumulated deficit....................................... (8,670) (8,670)
------- -------
Total shareholders' equity............................ 27,623 62,206
------- -------
Total capitalization.................................. $27,635 $62,218
======= =======
</TABLE>
- --------
(1) Does not include an aggregate of 1,575,339 shares issuable upon exercise
of outstanding stock options and warrants. The weighted average exercise
price of these option and warrant shares is $11.46 per share. See
"Management--Stock Option Plans" and "Management--Nonqualified Stock
Options."
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated financial statements of operations data set forth below for
each of the three years ended December 31, 1993, 1994 and 1995 and the
consolidated balance sheet data at December 31, 1994 and 1995 are derived
from, and are qualified by reference to, the audited consolidated financial
statements included elsewhere in this Prospectus. The consolidated statement
of operations data for the year ended December 31, 1991 and 1992 and the
consolidated balance sheet data at December 31, 1991 and 1992 are derived from
audited consolidated financial statements of the Company not included herein.
The consolidated statement of operations data for the three month periods
ended March 31, 1995 and 1996, and the consolidated balance sheet data at
March 31, 1995 and 1996, were derived from the Company's unaudited
consolidated financial statements. The management of the Company believes that
the unaudited financial information contains all adjustments necessary,
consisting only of normal, recurring accruals, for a fair presentation of the
financial position and results of operations for the applicable periods.
Operating results for the three months ended March 31, 1996 are not
necessarily indicative of the results that may be expected for any subsequent
period. The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Company's consolidated financial statements and related
notes, and other financial information included elsewhere herein.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- --------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------- ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Revenue:
Software licenses...... $ 940 $1,977 $3,713 $6,264 $ 8,157 $1,466 $1,987
Support and service.... 645 1,136 1,692 3,363 5,644 1,158 1,926
------ ------ ------ ------ ------- ------ ------
Total revenue.......... 1,585 3,113 5,405 9,627 13,801 2,624 3,913
Cost of sales:
Software licenses...... 126 224 444 651 1,039 149 377
Support and service.... 612 940 1,384 2,349 3,036 726 857
------ ------ ------ ------ ------- ------ ------
Total cost of sales.... 738 1,164 1,828 3,000 4,075 875 1,234
Gross profit............ 847 1,949 3,577 6,627 9,726 1,749 2,679
Operating expenses:
Selling and marketing.. 658 955 2,024 4,585 6,011 1,255 1,901
Research and develop-
ment.................. 135 263 569 817 1,230 276 361
Purchase of in-process
research and develop-
ment.................. -- -- -- -- 7,435 -- --
General and administra-
tive.................. 568 765 990 1,627 3,294 554 940
------ ------ ------ ------ ------- ------ ------
Total operating ex-
penses................ 1,361 1,983 3,583 7,029 17,970 2,085 3,202
------ ------ ------ ------ ------- ------ ------
Income (loss) from oper-
ations................. (514) (34) (6) (402) (8,244) (336) (523)
Interest income, net.... 46 3 7 84 586 36 259
------ ------ ------ ------ ------- ------ ------
Income (loss) before in-
come taxes............. (468) (31) 1 (318) (7,658) (300) (264)
Income tax expense...... -- -- -- 16 -- -- 17
------ ------ ------ ------ ------- ------ ------
Net income (loss)....... $ (468) $ (31) $ 1 $ (334) $(7,658) $ (300) $ (281)
====== ====== ====== ====== ======= ====== ======
Net income (loss) per
share (1).............. $(0.21) $(0.01) $ 0.00 $(0.08) $ (1.37) $(0.07) $(0.04)
====== ====== ====== ====== ======= ====== ======
Weighted average shares
outstanding (1)........ 2,264 2,799 3,372 3,953 5,604 4,446 7,527
====== ====== ====== ====== ======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------------------- --------------
1991 1992 1993 1994 1995 1995 1996
----- ------ ------ ------ ------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA:
Cash, cash equivalents and
short-term investments..... $ 53 $ 683 $ 570 $3,113 $22,754 $2,777 $22,509
Working capital (deficit)... (260) 738 326 3,550 26,306 3,213 26,034
Total assets................ 320 1,330 2,042 6,820 31,382 6,778 30,707
Long-term debt, excluding
current portion............ -- 36 61 6 21 34 12
Total shareholders' equity
(deficit).................. (158) 725 857 4,544 27,884 4,358 27,623
</TABLE>
- --------
(1) Computed on a fully diluted basis as described in Note 2 of Notes to
Consolidated Financial Statements.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains trend analysis and other 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.
Actual results could differ materially from those projected in the forward-
looking statements as a result of the risk factors set forth below and
elsewhere in this Prospectus, particularly under the caption "Risk Factors."
OVERVIEW
Summit was incorporated in 1986 to develop and market clinical outcomes
database software and related products and services for selected medical
specialties in the healthcare industry. Prior to 1990, Summit focused
primarily on the development and marketing of an early generation of its
clinical outcomes database software to healthcare providers. Since 1990, the
Company has secured agreements with national medical societies to manage and
maintain national databases in the areas of cardiac and thoracic surgery,
cardiology and ophthalmology; established joint marketing agreements with
leading healthcare companies; and introduced new database software products.
The Company first sold its clinical outcomes database software in the cardiac
and thoracic surgery market in 1986, and expanded into the cardiology market
in 1988, the orthopedic market in 1993, the ophthalmology market in 1994, and
the urology market in 1995. During 1996, the Company expects to introduce
database product lines for endoscopy and critical care. See "Risk Factors--
Uncertainty of Entrance into New Markets and Acceptance of New Products."
Summit's revenue has been generated primarily from sales of its products and
services to healthcare providers in cardiac and thoracic surgery and
cardiology.
The Company's revenue consists of fees charged for software licenses and
support and service. Revenue from sales of software licenses primarily
consists of purchases of database software licenses and software upgrades.
Support and service revenue primarily includes an annual service fee, training
fees, and, fees for implementation support, customized data management and
analysis, and consulting services. The Company's revenue has increased
primarily due to growth in unit sales through greater market penetration,
entry into new markets and increased support and service fees related to the
Company's greater installed customer base. During the last three years, price
increases and releases of several new database software modules have also
contributed to a lesser extent to revenue growth. Summit's revenue is derived
from direct sales to end users as well as from sales to its joint marketing
partners. Revenue from sales to joint marketing partners comprised 17% of
total revenue in 1995 and the Company anticipates that revenue from its
marketing partners will increase as a percentage of total revenue as its
current joint marketing relationships mature and the Company enters into joint
marketing relationships in new markets. In addition, the agreements with each
of the Company's joint marketing partners provide that, in order for the joint
marketing partners to retain their exclusive distribution rights, they must
meet certain minimum purchase requirements that generally increase during the
term of each agreement. These joint marketing agreements do not grant the
joint marketing partners any significant return or exchange rights. Revenue
from sales of software licenses is recognized upon shipment, while annual
service fees are recognized ratably over the period in which support services
are provided. All other revenue, including training, implementation and
consulting fees, is recognized upon performance of the applicable services.
Cost of software license revenue consists of expenses directly related to
sales of software licenses, including an allocated portion of expenses for
royalties, customer service, depreciation and freight, and expenses for user
guides, diskettes, and the amortization of capitalized software, which was
$92,000 in 1995 and $23,000 in the three months ended March 31, 1996. This
amortization expense resulted from the capitalization of $138,000 during 1994
for internally developed software related to the conversion of the Company's
software to a Windows platform. As of March 31, 1996, the Company had
amortized $122,000 of this amount. Cost of support and service revenue
consists of expenses directly related to sales of support and service,
including an allocated portion of expenses for royalties, customer service,
depreciation and freight, and expenses for training and clinical data
services. Selling and marketing expenses primarily include the salaries,
benefits and commissions associated with the Company's direct sales force,
product marketing, advertising and product literature. Research and
development expenses primarily include the salaries and benefits associated
with technical services and
15
<PAGE>
product development expenses for new versions of software. Research and
development costs have been expensed as incurred. General and administrative
expenses primarily include the salaries and benefits associated with general
management, finance and human resources, as well as the cost of legal and
professional services.
Recently, the Company has revised its plans to make strategic changes in its
product development activities which are intended to accelerate the
introduction of software products for a broader range of healthcare settings.
These recent changes may affect the Company's results of operations in future
periods. The Company plans to increase its expenditures on research and
development beginning in June 1996 in order to develop an enhanced version of
its Summit Vista software database product, and at the same time, to
accelerate the development of point-of-care, longitudinal software database
products for cardiology and other medical specialties. These point-of-care,
longitudinal software database products are based on the Keystone technology.
By proceeding with both development projects, the Company intends to
accelerate the introduction of products that may effectively operate in a
broader range of healthcare settings, from a single physician's office to an
integrated delivery system. Although the Company believes the higher level of
research and development expenses are appropriate based on management's
assessment of current business opportunities, this expected increase in
research and development expenditures is likely to affect adversely the
Company's operating results during the periods prior to commercial
introduction of the enhanced or new software database products. The
introduction of new or enhanced products is subject to substantial risks,
including that the development of the enhanced or new software products may be
subject to technological delays, the enhanced or new software products may
include unforeseen product defects, the enhanced or new software products may
fail to achieve market acceptance, and business opportunities may change
before the enhanced or new software products become available for commercial
sale. Accordingly, there can be no assurance that the increased expenditures
on research and development will result in increased revenue to the Company in
future periods.
To date, the Company has not incurred any substantial income tax liability
because of its historical operating losses. During 1995, the Company incurred
a loss of $7.7 million, primarily attributable to the $7.4 million purchase of
in-process research and development related to the Joint Venture with Duke. As
of December 31, 1995, the Company recorded a valuation allowance of $2.4
million against $2.5 million of future income tax deductions attributable to
this purchase of in-process research and development. In determining the
valuation allowance, the Company weighed its anticipated taxable income
against the Company's historical losses and the uncertainty associated with
its entry into new markets. As a result, the Company has decided to record as
a benefit only the amount necessary to offset current year income taxes, with
the remainder held as a valuation allowance at December 31, 1995. For future
periods, the valuation allowance, and the realization of any benefit, will be
evaluated based on the Company's earnings.
RECENT DEVELOPMENTS
On October 5, 1995, the Company acquired BSM, pursuant to a merger in which
BSM became a wholly owned subsidiary of the Company and the Company issued
182,524 shares of Common Stock in exchange for the outstanding stock of BSM.
On November 20, 1995, the Company acquired MIS pursuant to a merger in which
MIS became a wholly owned subsidiary of the Company and the Company issued
126,386 shares of Common Stock in exchange for the outstanding stock of MIS.
These mergers are accounted for as a pooling of interests and are reflected in
the financial statements of the Company on this basis.
On December 29, 1995, the Company entered into a software license agreement
(the "Software License Agreement") with Duke and formed the Joint Venture with
Duke and the Individual Founders pursuant to the LLC Agreement, which created
Cordillera L.L.C., a Delaware limited liability company. In connection with
the Software License Agreement, the Company issued 200,000 shares of Common
Stock to Duke and the seven-year Duke Warrant to purchase an additional
200,000 shares of Common Stock at $21.00 per share, the last reported sales
price of the Company's Common Stock on December 28, 1995, the day prior to the
issuance of the Duke Warrant. In addition, the Company granted to Kevin Green,
prior to his employment as the Company's President and Chief Executive
Officer, an option to purchase 40,000 shares of Common Stock at an exercise
price of $15.50 per share in consideration for his consulting services related
to the Joint Venture. The Company performed a purchase price allocation of
this acquisition and determined that the entire purchase price of
16
<PAGE>
$7,435,000, consisting of the market value of the stock ($4,200,000), the
value of the warrant issued to Duke ($2,600,000), the value of the option
issued to Mr. Green ($335,000) and related acquisition costs ($300,000) was
required to be allocated to in-process research and development acquired from
Duke. As required under generally accepted accounting principles, this amount
of $7,435,000 was expensed in December 1995, upon completion of the
acquisition and joint venture agreements.
The Company has also agreed to provide up to an additional $3.0 million of
additional capital for the Joint Venture, payable monthly in accordance with
the Joint Venture's annual operating budget, to fund start up and development
costs. The Software License Agreement also provides for the Company to pay
royalties to Duke and the Joint Venture on sales of products derived from the
Keystone technology. These royalty payments will be reduced by an amount equal
to 50% of the Company's additional capital contributions to the Joint Venture
as provided in the LLC Agreement. The Company will realize increased research
and development costs in 1996 as a result of expenses incurred by the Joint
Venture.
RESULTS OF OPERATIONS
The following table sets forth, for the fiscal periods indicated, certain
items from the consolidated statements of operations of the Company expressed
as a percentage of revenue:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
-------------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Revenue:
Software licenses................... 68.7% 65.1% 59.1% 55.9% 50.8%
Support and service................. 31.3 34.9 40.9 44.1 49.2
----- ----- ----- ------ ------
Total revenue..................... 100.0 100.0 100.0 100.0 100.0
Cost of sales:
Software licenses................... 8.2 6.8 7.5 5.7 9.6
Support and service................. 25.6 24.4 22.0 27.7 21.9
----- ----- ----- ------ ------
Total cost of sales............... 33.8 31.2 29.5 33.4 31.5
Gross profit.......................... 66.2 68.8 70.5 66.6 68.5
Operating expenses:
Selling and marketing............... 37.5 47.6 43.6 47.8 48.6
Research and development............ 10.5 8.5 8.9 10.5 9.2
Purchase of in-process research and
development........................ -- -- 53.9 -- --
General and administrative.......... 18.3 16.9 23.9 21.1 24.1
----- ----- ----- ------ ------
Total operating expenses.......... 66.3 73.0 130.3 79.4 81.9
Income (loss) from operations......... (0.1) (4.2) (59.8) (12.8) (13.4)
Interest income, net.................. 0.1 0.9 4.2 1.4 6.6
Income (loss) before income taxes..... -- (3.3) (55.6) (11.4) (6.8)
Income tax expense.................... -- 0.2 -- -- 0.4
Net income (loss)................... -- % (3.5)% (55.6)% (11.4)% (7.2)%
</TABLE>
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31,
1995
Revenue. Revenue was $3.9 million for the first quarter of 1996, an increase
of $1.3 million or 50% over the first quarter of 1995. Sales of software
licenses were $2.0 million for the first quarter of 1996, an increase of
$521,000 or 35% over the first quarter of 1995, and accounted for 40% of total
revenue growth. This increase is primarily attributable to increased unit
volume in cardiology and new subspecialty modules, a general price increase of
cardiology modules and increased sales of Windows Vista upgrades to the
Company's DOS customers. Support and service revenue was $1.9 million for the
first quarter of 1996, an increase of $768,000 or 68% over the first quarter
of 1995 and accounted for 60% of total revenue growth. This increase is
primarily attributable to increased training and service fees related to the
Company's greater installed customer base, additional development fees from
joint marketing partners, and increased consulting and data conversion fees.
17
<PAGE>
Cost of Sales. Cost of sales in the first quarter of 1996 was $1.2 million,
an increase of $359,000 or 43% over the same period of 1995. Cost of software
license revenue was $377,000 for the first quarter of 1996, an increase of
$228,000 or 153% over the first quarter of 1995. Cost of software license
revenue increased to 19% of software license revenue in the first quarter of
1996 compared to 10% in the first quarter of 1995 primarily due to increased
royalties and freight. Cost of support and service revenue was $857,000 for the
first quarter of 1996, an increase of $131,000 or 18% compared to the first
quarter of 1995. Cost of support and service revenue decreased to 45% of
support and service revenue in the first quarter of 1996 compared to 64% in the
first quarter of 1995 due to improved utilization of training and customer
support personnel in serving the Company's greater installed customer base.
Selling and Marketing Expenses. Selling and marketing expenses were $1.9
million during the first quarter of 1996, an increase of $646,000 or 52%
compared to the same quarter of 1995. This increase is primarily due to an
expansion of the domestic sales force, increased sales and marketing expenses
at Summit Medical Europe S.A.R.L. ("Summit Medical Europe"), and hiring of
additional marketing personnel.
Research and Development Expenses. Research and development expenses were
$361,000 in the first quarter of 1996, an increase of $85,000 or 31% compared
to the same quarter of 1995. This increase is due primarily to the hiring of
additional technical personnel to aid in the development of new software.
General and Administrative Expenses. General and administrative expenses were
$940,000 for the first quarter of 1996, an increase of $386,000 or 70% compared
to the first quarter of 1995. This increase is due primarily to the hiring of
additional executive and administrative personnel, higher legal and accounting
fees, and increased insurance expense.
Interest Income, Net. Interest income, net was $259,000 for the first quarter
of 1996, an increase of $223,000 compared to the first quarter of 1995. This
increase is due to the interest income earned on proceeds received from the
Company's August 1995 initial public offering.
Fiscal Year Ended December 31, 1995 Compared to Fiscal Year Ended December 31,
1994
Revenue. Revenue for 1995 was $13.8 million, an increase of $4.2 million or
44% over 1994. Sales of software licenses for 1995 were $8.2 million, an
increase of $1.9 million or 30% over 1994, and accounted for 45% of total
revenue growth. This increase is attributable to increased sales of cardiology,
cardiac surgery, and ophthalmology modules as well as higher prices for
procedure modules. Support and service revenue in 1995 was $5.6 million, an
increase of $2.3 million or 70% over 1994, due to increased service and
training fees related to the Company's greater installed customer base,
additional development fees from joint marketing partners related to urology
and endoscopy modules and greater consulting fees at the Company's BSM
consulting subsidiary. Support and service revenue accounted for 55% of total
revenue growth during 1995.
Cost of Sales. Cost of sales in 1995 was $4.1 million, an increase of $1.1
million or 37% over 1994, primarily due to increased sales of software licenses
and support and services. Cost of software license revenue in 1995 was $1.0
million, an increase of $388,000 or 63% over 1994. Cost of software license
revenue increased to 13% of software license revenue in 1995 compared to 10% in
1994 due to an increase in costs related to implementing customer interfaces.
Costs related to implementing customer interfaces have increased primarily due
to an increase in the proportion of Company sales to hospitals and hospital
networks which have larger and more complex information systems that require
significant interfaces. Although the Company believes that the trend of greater
interfaces will continue, the Company intends to use available integration
technology as part of its software to limit the cost of implementing customer
interfaces as a percentage of software license revenue. Cost of support and
service revenue in 1995 was $3.0 million, an increase of $687,000 or 30% over
1994. Cost of support and service revenue decreased to 54% of support and
service revenue in 1995 compared to 70% in 1994 due to improved utilization of
training and customer support personnel in serving the Company's greater
installed customer base.
Selling and Marketing Expenses. Selling and marketing expenses were $6.0
million in 1995, an increase of $1.4 million or 30% over 1994, due to expenses
relating to the expansion of the direct sales force in the United
18
<PAGE>
States, increased salaries for marketing personnel and expenses related to
hiring additional personnel related to new procedure modules.
Research and Development Expenses. Research and development expenses were
$1.2 million in 1995, an increase of $413,000 or 52% over 1994, due primarily
to the addition of technical and programming personnel by the Company and MIS.
During the fourth quarter of 1995, the Company also purchased $7.4 million of
in-process research and development related to the Keystone technology and the
Joint Venture.
General and Administrative Expenses. General and administrative expenses were
$3.3 million in 1995, an increase of $1.7 million or 106% over 1994, due
primarily to increased personnel and higher salaries for accounting, human
resources and business development personnel, increased administrative expenses
at Summit Medical Europe, higher legal and accounting fees, and acquisition and
nonrecurring charges and increased support salaries related to BSM and MIS.
Interest Income, Net. Interest income, net was $586,000 in 1995 compared to
$84,000 in 1994, due to interest income recorded on proceeds received from the
Company's August 1995 initial public offering.
Fiscal Year Ended December 31, 1994 Compared to Fiscal Year Ended December 31,
1993
Revenue. Revenue for 1994 was $9.6 million, an increase of $4.2 million or
78% over 1993. Sales of software licenses for 1994 were $6.3 million, an
increase of $2.6 million or 70% over 1993, and accounted for 62% of the total
revenue growth. The increase in sales of software licenses was primarily due to
increased sales of cardiology procedure modules, including sales to SciMed, the
Company's joint marketing partner in cardiology, initial sales in the
ophthalmology market during the fourth quarter of 1994 to Allergan, the
Company's joint marketing partner in ophthalmology, and to a lesser extent
higher prices for procedure modules. Support and service revenue in 1994 was
$3.4 million, an increase of $1.7 million or 100% over 1993, due to increased
annual support and service fees associated with the Company's greater installed
customer base, increased training fees as a result of the increase in sales of
software licenses, and growth in consulting fees at BSM. Support and service
revenue accounted for 40% of total revenue growth during 1994.
Cost of Sales. Cost of sales in 1994 was $3.0 million, an increase of $1.2
million or 67% over 1993. Cost of software license revenue in 1994 was
$651,000, an increase of $207,000 or 47% over 1993. Cost of software license
revenue decreased to 10% of software license revenue in 1994 compared to 12% in
1993 due to a decrease in royalties as a result of increased sales of software
not subject to medical association royalties. Cost of support and service
revenue in 1994 was $2.3 million, an increase of $965,000 or 72% over 1993.
Cost of support and service revenue decreased to 68% of support and service
revenue in 1994 compared to 79% in 1993 due to improved utilization of training
and customer support personnel in serving the Company's greater installed
customer base.
Selling and Marketing Expenses. Selling and marketing expenses were $4.6
million in 1994, an increase of $2.6 million or 130% over 1993, due to domestic
sales force expansion, establishment of Summit Medical Europe, hiring of
marketing personnel related to additional procedure modules and increased
spending on product literature.
Research and Development Expenses. Research and development expenses were
$817,000 in 1994, an increase of $248,000 or 44% over 1993, due primarily to
the hiring of additional technical personnel and programmers to aid in the
development of new software and conversion of existing software.
General and Administrative Expenses. General and administrative expenses were
$1.6 million in 1994, an increase of $637,000 or 66% over 1993, due primarily
to the hiring of additional personnel to support the Company's growth.
Interest Income, Net. Interest income, net was $84,000 in 1994 compared to
$7,000 in 1993 due to interest earned on short-term securities arising from the
proceeds of the sale of convertible preferred stock during 1994.
19
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly financial data
for 1994, 1995 and the first quarter of 1996. In the opinion of the Company's
management, this unaudited information has been prepared on the same basis as
the audited information included elsewhere in this Prospectus and includes all
adjustments necessary to present fairly the information set forth therein. The
operating results for any quarter are not necessarily indicative of results
for any future period:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------
DEC. DEC.
MARCH 31, JUNE 30, SEPT. 30, 31, MARCH 31, JUNE 30, SEPT. 30, 31, MARCH 31,
1994 1994 1994 1994 1995 1995 1995 1995 1996
--------- -------- --------- ------ --------- -------- --------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Software licenses..... $1,063 $1,181 $1,644 $2,375 $1,466 $1,727 $2,208 $ 2,756 $1,987
Support and service... 687 790 856 1,031 1,158 1,202 1,569 1,714 1,926
------ ------ ------ ------ ------ ------ ------ ------- ------
Total revenue....... 1,750 1,971 2,500 3,406 2,624 2,929 3,777 4,470 3,913
Cost of sales:
Software licenses..... 109 123 165 254 149 251 385 254 377
Support and service... 562 579 551 657 726 716 811 783 857
------ ------ ------ ------ ------ ------ ------ ------- ------
Total cost of sales. 671 702 716 911 875 967 1,196 1,037 1,234
Operating expenses...... 1,261 1,683 1,870 2,215 2,085 2,669 2,785 10,426(1) 3,202
------ ------ ------ ------ ------ ------ ------ ------- ------
Income (loss) from
operations............. (182) (414) (86) 280 (336) (707) (204) (6,993) (523)
Net income (loss)....... $ (181) $ (404) $ (84) $ 335 $ (300) $ (688) $ (6) $(6,664) $ (281)
====== ====== ====== ====== ====== ====== ====== ======= ======
</TABLE>
- --------
(1) Includes one-time expense of $7.4 million for the purchase of in-process
research and development in connection with the formation of the Joint
Venture.
The following table sets forth, as a percentage of revenue, certain
unaudited quarterly financial data:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1994 1994 1994 1994 1995 1995 1995 1995 1996
--------- -------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Software licenses..... 60.7% 59.9% 65.8% 69.7% 55.9% 59.0% 58.5% 61.7% 50.8%
Support and service... 39.3 40.1 34.2 30.3 44.1 41.0 41.5 38.3 49.2
----- ----- ----- ----- ----- ----- ----- ------ -----
Total revenue....... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of sales:
Software licenses..... 6.2 6.2 6.6 7.5 5.7 8.6 10.2 5.7 9.7
Support and service... 32.1 29.4 22.0 19.3 27.6 24.4 21.5 17.5 21.9
----- ----- ----- ----- ----- ----- ----- ------ -----
Total cost of sales. 38.3 35.6 28.6 26.8 33.3 33.0 31.7 23.2 31.6
Operating expenses...... 72.1 85.4 74.8 65.0 79.5 91.1 73.7 233.2 81.8
----- ----- ----- ----- ----- ----- ----- ------ -----
Income (loss) from
operations............. (10.4) (21.0) (3.4) 8.2 (12.8) (24.1) (5.4) (156.4) (13.4)
Net income (loss)....... (10.3)% (20.5)% (3.4)% 9.8% (11.4)% (23.5)% (0.2)% (149.1)% (7.2)%
===== ===== ===== ===== ===== ===== ===== ====== =====
</TABLE>
The Company has experienced significant quarterly fluctuations in operating
results, which it expects to continue for the foreseeable future. Quarterly
revenue is affected by the timing of purchases by the Company's joint
marketing partners, which typically have made large purchases to build up
inventories for resale, and the release of certain new database software,
including database software introduced for new procedures.
20
<PAGE>
In general, quarterly revenue is difficult to forecast because the market
for the Company's products and services are evolving rapidly and much of the
Company's sales are through indirect channels such as the Company's marketing
partners. Software license revenue from quarter to quarter is difficult to
forecast, as no significant order backlog exists at the end of any quarter
because the Company's products typically are shipped upon receipt of
customers' orders.
The Company in the past has realized a substantial portion of its revenue in
the last month of a quarter, with this revenue concentrated in the last weeks
or days of a quarter. It is not uncommon for the Company to experience strong
fourth quarters followed by lower first quarters. There can be no assurance
that the Company will not display this pattern in future years.
The Company's quarterly results have been seasonal, with a greater
proportion of the Company's revenue and operating profitability occurring in
the second half of the fiscal year. This seasonality is attributable to
hospital budgeting practices, which typically cause discretionary purchases to
be made shortly before year end and to the Company's practice of announcing
price increases to take effect at the beginning of the following year. In
addition, the majority of medical trade shows occur in the first half of the
year, which generate leads that result in increased sales in the latter part
of the year. As a result, the Company has typically experienced net losses in
the first and second quarters of each year.
Due to all of the foregoing factors, it is possible that in some future
quarters the Company's results of operations will be below the expectations of
public market analysts and investors. In such event, the price of the
Company's Common Stock would be adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through cash provided by
operations and through the sale of common and convertible preferred stock.
During 1993, the Company generated net cash from operations of $129,000, while
in 1994 and 1995, the Company used $699,000 and $2.9 million, respectively,
for operating activities, primarily in support of increased research and
development and marketing expenses, and financing receivables arising from the
significant increase in sales during both years. Cash provided by operating
activities was $36,000 for the three months ended March 31, 1996. The primary
sources of cash were a decrease in accounts receivable of $921,000 due to
collections exceeding revenues and an increase in accrued compensation and
royalties of $214,000. These sources were partially offset by a net loss of
$281,000, an increase in other current assets of $378,000 and a decrease in
accounts payable and accrued expenses of $483,000.
As of March 31, 1996, the Company had $5.4 million in accounts receivable,
including $2.2 million in accounts receivable over 90 days. Accounts
receivable over 90 days is primarily the result of increased sales and an
increase in special payment terms to large hospitals and other institutions
that have the ability to negotiate more favorable payment terms. The Company
has adopted a credit policy that establishes standard payment terms and
requires any material exceptions in the payment terms be approved by the
Company's Chief Financial Officer. The Company's collection personnel monitor
accounts receivable on an ongoing basis. The Company believes its current bad
debt provision of $100,000 is adequate and that collection of accounts
receivable over 90 days at March 31, 1996 in excess of this bad debt provision
is probable.
Cash of $160,000 was provided by financing activities during 1993 primarily
through the sale of common stock in a private placement and of proceeds of
long-term debt which were partially offset by principal payments on long-term
debt. Cash of $4.0 million was provided by financing activities during 1994
primarily through the sale of convertible preferred stock. Cash of $23.6
million was provided by financing activities for the year ended December 31,
1995, primarily from the net proceeds of sales of Common Stock in the
Company's initial public offering in August 1995. Cash of $19,000 used in
financing activities for the three months ended March 31, 1996 primarily
related to principal payments on a note payable to an officer and retirement
of long-term debt.
21
<PAGE>
Cash used in investing activities was $403,000 and $3.7 million during 1993
and 1994, respectively. Investments in 1993 consisted of purchases of computer
and telephone equipment, and furniture and fixtures. Investments in 1994
consisted of purchases of short-term investments, purchases of capital
equipment and computer software costs, partially offset by sales of short-term
investments. Net cash used for investing activities in 1995 was $18.9 million,
consisting primarily of purchases of short-term investments of $28.7 million
and of capital equipment of $1.0 million which were offset, in part, by $10.9
million of sales of short-term investments. Cash provided by investing
activities was $316,000 for the three months ended March 31, 1996, which
consists of the sales of short-term investments of $9.8 million and the
purchase of equipment and fixtures of $287,000, partially offset by the
purchase of short-term investments in the amount of $9.2 million.
As of March 31, 1996, the Company had net working capital of $26.0 million,
including cash and short-term investments of $22.5 million, and did not have
any material commitments for capital equipment.
The Company believes that the continued expenditure of funds will be
necessary to support its future growth. The Company believes that the cash and
short-term investments on hand at March 31, 1996 and the funds to be raised
from this offering, together with funds generated from operations, will be
adequate to fund its operations, capital requirements and expansion needs for
at least the next 12 months.
22
<PAGE>
BUSINESS
Summit is a leading provider of clinical outcomes database software and
related consulting services for selected medical specialties in the healthcare
industry. The Company's customers include specialty physicians, hospitals,
physician and hospital networks, managed care organizations and other
healthcare payors, and pharmaceutical and medical device firms. Summit's
database software enables healthcare providers to record, analyze and report
detailed clinical, economic and patient-reported outcomes data on medical
procedures, diseases and patient functional status. The Company offers 39
database software procedure modules for five medical specialties: cardiac and
thoracic surgery, cardiology, opthamology, urology and orthopedics. The
Company also offers three additional database software modules that measure
clinic costs, patient health status and satisfaction, and inventory usage, and
decision support software that forecasts the rate of return on investments in
employee wellness, occupational health and pharmacological programs. The
Company collaborates with national medical associations, leading hospitals and
hospital networks, physicians and medical device firms to design database
fields and formats that capture significantly more relevant and complete
outcomes data than is available from insurance claims data. The Company's
customers use this outcomes data to monitor and manage more effectively the
quality and cost of patient care by analyzing resource utilization, costs,
provider practice patterns, medical procedure and clinical outcomes selection.
This outcomes data is also used for contracting with third party payors and
managed care organizations, establishing quality assurance programs and
complying with the informational demands of regulatory agencies. To increase
the value of its software, the Company offers design, implementation, data
management and consulting services to its customers. Currently, approximately
1,700 healthcare organizations use the Company's clinical outcomes database
software and services.
INDUSTRY BACKGROUND
Healthcare delivery costs have risen dramatically in recent years compared
with the costs of other goods and services. In response, public and private
market reform initiatives are producing significant pressures to control
costs, leading to an increase in the importance of patient information that
can be used to improve the clinical efficiency of healthcare providers while
maintaining the quality of medical care. The ongoing pressure to contain
healthcare costs is accelerating the shift in economic risks from healthcare
payors to providers, as evidenced by the movement toward managed care
reimbursement models, including capitation.
In a managed care environment, healthcare providers compete for capitated or
other group rate contracts, and for opportunities in provider networks, by
differentiating their services based on costs and quality of patient care.
Third party payors also evaluate the efficiency and quality of providers when
negotiating discounted fee-for-service contracts, establishing provider
networks and adopting provider utilization reviews. To compete effectively in
this new healthcare environment, providers and payors must have access to
detailed patient information in order to identify clinical efficiencies and
improve practice patterns. Without detailed patient information, providers and
payors have limited capabilities to:
. Monitor appropriateness and utilization of diagnoses and treatments;
. Measure effectiveness of new technologies and therapeutics;
. Monitor practice patterns of providers; and
. Compare provider outcomes and performance.
Without these capabilities, providers have little relevant data to guide them
in controlling healthcare costs, providing high quality patient care and
responding to the competitive and regulatory changes in the healthcare market.
Most databases and information services used today for assessing the costs
and quality of patient care are based on health insurance claims data that
contain only limited clinical information concerning a patient and the
outcomes of medical procedures. For example, important information such as
operative mortality in connection with a procedure may not exist because
reimbursement information is classified by diagnosis rather than by actual
patient outcome. In addition, discrepancies exist between procedure
definitions used by hospital
23
<PAGE>
accounting staffs for billing purposes and those used by physicians for
clinical practices. Despite the deficiencies of claims data, healthcare
providers and payors often must rely on this imprecise data when assessing
quality of care, clinical efficiency and comparative patient outcomes.
The Company believes healthcare providers and payors require more
comprehensive and detailed patient clinical information in order to improve
clinical efficiency and quality of care. In addition, the patient information
that is needed in today's healthcare environment must include clinical data in
order to accurately interpret patient outcomes, quality of care provided and
costs relative to provider-specific performance.
THE SUMMIT SOLUTION
Recognizing the needs of healthcare providers and payors for more
comprehensive and detailed patient clinical information, the Company has
developed an integrated set of products and services that enable healthcare
providers to improve clinical efficiency and the quality of patient care. The
Company has collaborated with national medical associations, leading hospitals
and hospital networks, physicians and medical device firms to design database
products that are more meaningful and useful to healthcare providers as they
manage their practices. Healthcare providers can record patient information in
their own databases such as medical history, medical risk factors and
laboratory and diagnostic test results. Similarly, providers can capture
procedure information such as type of procedure, duration of procedure,
devices used and medications administered. In addition, clinical outcomes data
such as length of stay, complications, mortality and health status are also
captured. As a result, providers are able to utilize the Company's database
software to maintain databases that provide a comprehensive history of patient
medical care.
Summit's products and services give healthcare providers the means to
utilize their clinical information to improve the efficiency and quality of
medical care. With the Company's database software, healthcare providers can
monitor resource utilization and costs, provider practice patterns, clinical
outcomes and medical procedure selection, and use the information collected to
increase clinical efficiency. In addition, this data can be used for
contracting with third party payors and managed care organizations,
establishing quality assurance programs, and complying with the informational
demands of regulatory agencies. The national databases afford providers the
opportunity to compare their performance against national benchmarks, and to
relate their practice patterns and outcomes to national trends. The Company
has developed a predictive risk stratification tool for cardiac surgery that
enables providers to perform risk-adjusted analyses of clinical outcomes and
procedures and is developing risk stratification tools for other procedures.
The Company's software, enhanced by the national databases, gives healthcare
providers needed tools and knowledge to compete effectively in today's
healthcare environment.
SUMMIT'S STRATEGY
The Company's objective is to be the leading provider of clinical outcomes
database software and services to the healthcare market. To achieve this
objective, the Company pursues a business strategy that includes the following
key elements:
. Identify New Market Opportunities. The Company intends to offer products
and services to additional medical specialties that the Company
identifies as having a substantial need for clinical outcomes
information. The Company focuses on medical specialties that are
characterized by: high volume and high cost procedures; increasing
pressures to reduce costs; emerging, alternative or competing medical
technologies; or controversy surrounding published outcomes data. The
Company also intends to pursue opportunities to provide clinical outcomes
software and related consulting services to additional segments of the
healthcare market, such as payors, pharmaceutical companies integrated
delivery systems and capitated specialty care networks.
. Expand Within Existing Markets. The Company's strategy is to develop
software applications for additional procedures within its existing
medical specialty markets. The Company's software products are modular in
design, which allows the Company to develop and market additional
applications for existing customers. As part of this strategy, the
Company has continued adding procedure modules for certain of the
Company's medical specialties.
24
<PAGE>
. Leverage Core Competency through Alliances. The Company seeks to create
broad market acceptance of its clinical outcomes database software by
establishing strategic alliances with leading healthcare vendors. The
Company has established joint marketing relationships with leading
vendors in several medical specialties and intends to continue to pursue
joint marketing relationships in other medical specialties. In addition,
the Company intends to seek alliances with vendors of healthcare
information systems for the integration of the Company's clinical
outcomes database software into their product offerings. The Company also
intends to seek alliances with healthcare information systems companies
to develop combined derivative information products and analytical
services which leverage the core competencies of complementary systems.
The Company believes that these alliances will substantially expand the
sales force for the Company's systems and enable it to more effectively
pursue new market opportunities.
. Continue Product Development. The Company intends to continue to invest
in its clinical outcomes database software and in the development of new
products. In the second half of 1996, the Company expects to install an
enhanced version of its Summit Vista software at several charter user
sites. The Company also intends to introduce a point-of-care,
longitudinal database software product, based on the Keystone technology,
during the second half of 1996. Through the Joint Venture, the Company
will seek to develop on-line medical information data services, including
subscription products derived from the Company's and other national
databases. The Company also intends to develop additional risk
stratification tools using the national databases, which will allow
providers to measure and predict clinical outcomes on a risk-adjusted
basis.
. Expand Services. The Company believes that consulting and other
analytical services are a critical factor in its customers realizing the
full value of the Company's software. As a consequence, the Company
intends to expand the range of consulting and data interpretation
services and customer support it provides and has begun to integrate its
software and services into combined information service products. In
pursuit of this strategy, the Company acquired BSM, a national healthcare
consulting firm, which offers analytical services to support the use of
the Company's software. The Company is actively pursuing opportunities to
provide combined software products and analytical services to national
hospital and medical specialty networks.
. Establish National Databases with Medical Associations. The Company
typically seeks to collaborate with leading medical associations in the
development of its software and national databases. The Company believes
that these affiliations with leading medical associations provide the
Company with valuable technical assistance in developing the clinical
aspects of its software, as well as enhanced credibility with providers
in the relevant markets.
PRODUCTS
The Company offers clinical outcomes database software for the medical
specialties of cardiac and thoracic surgery, cardiology, ophthalmology,
urology and orthopedics. The Company believes the most accurate representation
of patient outcomes must include measurements of clinical outcomes and costs,
as well as measurements of a patient's health status and satisfaction. The
Company's database software products include 39 procedure modules in five
medical specialty markets. Each procedure module consists of a set of clinical
data fields and formats related to a specific medical procedure or disease,
which has been designed by the Company and leading physicians in their fields
of expertise to capture in-depth clinical data on patients and clinical
outcomes. The Company also offers three additional database software modules
for selected medical specialties that measure clinical costs, patient health
status and satisfaction, and inventory usage, and a decision support software
that forecasts the rate of return on investments in employee wellness,
occupational health, and pharmacological programs. The procedure and
additional database software modules may be bundled within a medical specialty
to form an integrated software solution that compiles data on clinical
outcomes for several medical procedures, as well as data on clinical costs and
patient health status and satisfaction. For example, in cardiology, a heart
institute may combine procedure and additional database software modules to
capture clinical data on diagnostic tests, such as echocardiography and
cardiac catheterization, and therapeutic procedures, such
25
<PAGE>
as angioplasty, while also capturing the clinical costs associated with these
tests and procedures. The list prices of the Company's modules range from
$2,500 to $21,500.
The following table summarizes the Company's modules by medical specialty.
<TABLE>
<CAPTION>
YEAR OF
MEDICAL SPECIALTY AVAILABLE MODULES FIRST SALE
----------------- ----------------- ----------
<C> <S> <C>
Cardiac and Thoracic Surgery Cardiac surgery--adult acquired disease(1) 1986
Cardiac surgery--congenital(1)
Esophageal cancer
Lung cancer
Lung volume reduction
Mediastinal surgery
Vascular surgery
Summit Everest cost containment
Summit Pinnacle health status and patient satisfaction
Cardiology PTCA/Atherectomy/Laser(1) 1988
Cardiac catheterization(1)
Implantable defibrillators and cardioverters(1)
Cardiac rehabilitation
Congestive heart failure
Coronary care unit
Echocardiography
Electrophysiology
Radiofrequency ablation
Stress test
Nuclear medicine database
Myocardial infarction
Holter monitor
Pacemaker
Summit Everest cost containment
Summit Pinnacle health status and patient satisfaction
Summit Apex inventory control
Orthopedics Hip replacement 1993
Knee replacement
Shoulder
Sports medicine
Summit Pinnacle health status and patient satisfaction
Ophthalmology Cataract(1) 1994
Glaucoma
Keratorefractive procedures
Vision care co-management
Summit Pinnacle health status and patient satisfaction
Urology Bladder cancer 1995
Benign prostatic hyperplasia
Impotence
Incontinence
Infertility
Nephrectomy
Prostate cancer
Stone disease
Penile prosthesis
Erectile dysfunction
Summit Pinnacle health status and patient satisfaction
</TABLE>
- --------
(1) Harvested to a national database.
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Procedure Modules
The Company's procedure modules are designed to capture and organize the
clinical data that healthcare providers require to compete effectively in
today's healthcare market. The procedure modules include analytical and
statistical tools for reviewing the clinical data of providers, enabling them
to improve their clinical efficiency and quality of medical care. Using the
report generating functions of the procedure modules, providers can
communicate their clinical outcomes to managed care organizations and
regulatory bodies, including peer review organizations and quality assurance
committees. The Company also aggregates the data generated by its customers in
national databases for certain medical specialties to provide national
benchmarks for comparison with the data generated by individual customers.
The software features of the procedure modules enable convenient and
accurate data collection. Data from a provider's information system or certain
diagnostic equipment can be directly accessed by the procedure modules using a
system interface, and the module's automatic data entry function enables the
provider to enter data efficiently by calling up only the additional screens
that require further data entry. In addition, the procedure modules can
calculate the entry of certain data fields that can be derived from data
already entered in the database. The procedure modules also include automatic
validity checks for certain data fields that prompt a review of an entry if it
falls outside certain parameters or is inconsistent with another entry. The
software's data collection features include an on-screen help system that
provides guidance on the use of the software, as well as data entry menus and
field definitions that give assistance in making the correct data entries. The
edit feature of the procedure modules allows providers to customize their
software to add data fields that they consider relevant or that managed care
organizations require them to collect. To protect the confidentiality of
patient data, the procedure modules contain an extensive security system that,
among other features, allows physicians in a group practice or hospital to
have access only to the records of each individual physician's patients.
The procedure modules include analytical and statistical tools that organize
the information collected in the provider's database and provide meaningful
measurements of the provider's clinical outcomes. The procedure modules afford
convenient access to the information in the database, allowing the patient
records to be searched by data field, and include functions for generating
patient listings, frequency tables, cross tabulations and statistical analyses
from the provider's database. For the cardiac surgery procedure module, the
Company has generated a statistical tool derived from the national database
for cardiac surgery, which allows the healthcare provider to analyze
retrospectively or to predict the effect of patient-specific risk factors that
influence operative mortality associated with coronary artery bypass
procedures. The Company intends to introduce additional risk stratification
tools for cardiac surgery during 1996 and to develop additional predictive
statistical tools derived from the national databases for other subspecialty
markets. The discussion above includes forward-looking statements designed to
provide investors with an overview of the Company's strategy regarding
procedure modules. There can be no assurance that Summit will be successful in
developing these tools or that these products will achieve market acceptance.
See "Risk Factors--Uncertainty of Entrance into New Markets and Acceptance of
New Products."
Once the clinical information is collected and analyzed, the report
generating and document processing features of the procedure modules enable
providers to communicate their clinical outcomes effectively and efficiently.
The procedure modules include a graphics package for charting and graphically
displaying clinical outcomes using bar charts, pie charts and three-
dimensional fill charts. The graphics package also allows providers to record
digitized images from diagnostic tests, such as an angioplasty report, in
their databases. In addition, the document processing functions can routinize
the production of referring physician letters, operative notes and discharge
summaries.
For those procedures indicated in the table above, the Company's customers
can receive reports from the national databases prepared by the Company which
contain information on trends in procedure utilization and outcomes, including
mortality and morbidity, as well as on statistical analyses of the
relationship between medical risk factors and outcomes. The information
provided by the national databases can be used with the information contained
in the provider's database to compare the provider's practice patterns and
clinical
27
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outcomes to national benchmarks. These comparisons can be used to compete for
managed care contracts based on clinical outcomes and to establish clinical
guidelines. As risk stratification tools are developed for additional
procedures, providers may perform risk-adjusted analyses of clinical outcomes
and procedures, based on individual patient risk factors. For example, a
physician will be able to enter a patient's medical history and risk factors
into the software to calculate a predicted clinical outcome for a specific
medical procedure or course of treatment.
Additional Modules
Summit Everest Cost Containment Module. The cost containment module is
designed to provide cardiac catheterization laboratories and cardiac surgery
centers with the ability to analyze costs, reimbursements and margins by
patient, physician or diagnostic related group. This module combines both
clinical and financial information for comparison of resource utilization
trends among patients with similar medical profiles. Providers can analyze
practice patterns, including technology, device and drug costs, and labor
usage, to improve clinical efficiency. In addition, the hospital, practice or
physician can use this module to project cost outcomes by modeling different
clinical pathways. This product is currently available for the cardiology and
cardiac surgery markets and the Company is evaluating similar programs for
other medical specialties.
Summit Pinnacle Health Status and Patient Satisfaction Module. This module
bundles two patient-derived outcomes measurement tools: a quality of life
application, incorporating the SF-36 health status survey, and one of three
patient satisfaction surveys measuring the patient's subjective satisfaction
with the medical care received from the provider. The health status
questionnaire is completed by patients both prior to, and at selected
intervals following, a course of treatment. The application identifies changes
in a patient's general health and functional status due to a particular
procedure. The patient satisfaction survey is also administered to patients on
a routine basis to identify levels of, and changes in, patient satisfaction.
For each of the Summit Pinnacle surveys, the patient completes a survey that
is entered into the Summit Pinnacle program for scoring and analysis. This
bundled module is available for all of the medical specialties covered by the
Company, except for ophthalmology and urology. In these specialties, the
health status tool is contained in the applicable procedure module.
Summit Apex Inventory Control Module. The inventory control module is
designed to be used in conjunction with the Company's cardiology modules in
hospitals. This module allows tracking of inventory using bar coding
technology along with a database which shares information with the Company's
Summit Everest and procedure modules. This application allows users to manage
inventory levels quickly and efficiently by identifying product usage by
procedure, hospital room and physician, as well as by incorporating data on
product costs and patient charges. Cardiac catheterization laboratory
administrators can use Summit Apex to generate custom reports and graphs to be
used in cost containment efforts. Through utilization of the analytical
capabilities of the inventory control system, users may reduce inventory
levels and identify the need to order additional product. The Company is
considering the development of inventory control modules for other medical
specialties.
WELLCAST R.O.I. Decision Support Software. WELLCAST R.O.I. is decision
support software provided by the Company's wholly owned subsidiary, MIS.
WELLCAST R.O.I. forecasts the rate of return on investments in employee
wellness, occupational health and pharmacological programs. The WELLCAST
R.O.I. software uses a copyrighted model to evaluate the medical and economic
costs of employees' diseases, including productivity losses, employee
overhead, and the costs of employee replacement, recruitment and re-training.
This software allows healthcare providers to assess the outcomes of
intervention programs offered to employees when they are well, and track and
report outcomes when employees become ill. Recently, MIS entered into an
agreement with Eli Lilly and Company ("Lilly") to develop predictive models
for diabetes and depression treatment expenditures using the WELLCAST R.O.I.
software. MIS will also assist Lilly's support of managed care organizations
and healthcare payors by providing customized analytical services designed to
optimize diabetes and depression treatment expenditures.
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Procedure Modules in Development
During 1996, the Company expects to introduce procedure modules for two
additional medical specialties: endoscopy and critical care. In the endoscopy
market, the Company plans to introduce procedure modules for colonoscopy,
endoscopic retrograde cholangiopancreatography and esophagastric duodenoscopy
beginning with the second quarter of 1996. For the critical care market, the
Company intends to introduce procedure modules for EMS/trauma care and
intensive care units beginning with the fourth quarter of 1996. The above
discussion contains forward-looking statements designed to provide investors
with an overview of the Company's procedure modules in development. There can
be no assurance that Summit will be successful in entering new markets or
developing and marketing new products, or that it will not experience
significant delays in the introduction of new products. In addition, there can
be no assurance that the new products developed by the Company will achieve
market acceptance. See "Risk Factors--Uncertainty of Entrance into New Markets
and Acceptance of New Products."
TECHNOLOGY AND SOFTWARE DEVELOPMENT
Current Summit Vista Software
The Company's current Summit Vista software operates on IBM or IBM-
compatible personal computers in DOS or Windows formats. The Company offers
all of its current procedure modules in its Summit Vista Windows format and
offers or intends to offer additional modules in this format. In addition to
the easy-to-use interface with the Windows platform, the Company's Summit
Vista Windows product includes an automatic document processor, multi-tasking
features, user-defined customization, embedded medical images and a robust
security system. The Company is selling the Summit Vista Windows format
primarily to new customers. Prior to 1994, all of the Company's modules
operated in a DOS environment, and approximately half of the Company's
installed base currently consists of DOS modules. The Company is offering
software upgrades to its DOS customers to migrate their modules to the Windows
versions for a separate fee.
The Company's current Summit Vista software is capable of operating on a
network, thereby allowing concurrent access to a database from several
locations. The Company has developed interfaces between its software and the
hemodynamic equipment of leading manufacturers and a majority of the
information systems of major vendors for healthcare facilities. These
interfaces enable the Company's modules to import data directly from a
hospital's or practice group's existing information systems.
Enhanced Vista Software
The Company is currently developing an enhanced version of its Summit Vista
software which the Company expects to install at several charter user sites
during the second half of 1996. The enhanced Summit Vista software will
include a system integration engine, enhanced data acquisition techniques,
electronic file transfer capabilities and new decision support systems. The
enhanced Summit Vista software will provide client controlled reporting and
query functions using a relational database system. In addition, the enhanced
Summit Vista software will incorporate Microsoft Word as the integrated
medical document processor for the software.
Keystone Software
In December 1995, the Company licensed a clinical information database
technology from Duke. This technology licensed from Duke is currently used at
five sites, including the Duke University Medical Center. The Company has
reengineered and adopted this technology for commercial sales to form the
Keystone technology. The Keystone technology is an information system for
cardiology procedure laboratories, tracking clinical factors and complications
encountered in a patient's diagnosis, treatment and longitudinal care, as well
as relevant utilization data on devices, supplies, medications, operating
rooms, laboratories and physician/practitioner services. The Keystone
technology follows a patient-centered, longitudinal medical record format
which differs from the Summit Vista software that is organized by specific
medical procedure. Using advanced data collection features, the Keystone
technology collects and validates data following accepted
29
<PAGE>
medical standards and nomenclature. Providers using the Keystone technology can
collect much of the data at the time medical care is provided to a patient and
automatically generate clinical reports for the patient's medical record. The
software assures data integrity at the server level by using advanced data
checks and procedures. The Keystone technology's structure will use algorithms
to assess quality of care, determine risk profiles of patient populations,
improve practice management, and review practice and referral patterns.
The Keystone technology consists of a relational database configured for a
three-tiered client/server architecture. The Keystone technology works with all
hardware platforms supported by the Windows NT. The range of platform choices
under the Keystone technology facilitates the integration of Keystone
technology into existing healthcare information networks found in a majority of
medical centers and physician offices. The technology's report and query tools
provide easy report generation capabilities, using state-of-the-art object
oriented technology, the Windows graphical user interface and common software
packages.
The Company is currently developing new point-of-care, longitudinal database
software, based on the Keystone technology, which is designed to include
several enhancements for commercial sale of the software. The Keystone software
is designed to offer scalability of both the technology platform and the
applications. The Keystone work-station software may be configured to operate
over a range of platforms from Windows 95 to Windows NT. Similarly, the
Keystone data collection applications may be scaled to provide different levels
of clinical detail depending on a user's requirements. The Keystone software
will also include advanced decision support systems that may be adapted to fit
the needs of various users. The Keystone software will include a third party
integration engine to provide rapid and cost effective integration of the
software into a user's information system. Access to the World Wide Web will
also be an integral feature of the Keystone software.
The Company expects to install a Keystone software product at several charter
user sites during the second half of 1996. The Keystone software will
complement the Company's existing products by providing systems for the
client/server platforms more commonly used by large medical centers and
integrated healthcare networks. The Company intends to continue to offer its
enhanced Summit Vista products for customers working on a personal computer or
network environment and to develop software packages and services for customers
who wish to migrate from the Summit Vista to the Keystone software.
The discussion above includes forward-looking statements designed to provide
investors with an overview of the Company's strategy regarding the development
and introduction of the enhanced Summit Vista and Keystone software. The
successful development of the enhanced Summit Vista and Keystone software
products and the integration of these software products into the Company's
product line are subject to risks. These risks include unforeseen technological
delays in product development, undetected defects in the software, new
competitive developments and other factors beyond the control of the Company
which could prevent the Company's expectations from being realized. See "Risk
Factors--Uncertainty of Entrance into New Markets and Acceptance of New
Products" and "--Management of Growth and Integration of Acquisitions."
SERVICES
The Company believes that providing its customers with training, support,
data management, implementation and other services helps ensure that customers
maximize the benefits offered by the Company's software. In addition, the
demand by customers for certain support services provides the Company with
incremental revenue opportunities. The Company also has begun to offer its
customers combined information service products that integrate the use of the
Company's software and its related consulting services. The Company's customers
have access to the following services and benefits:
Implementation Services. The Company offers implementation services at the
time of a software purchase, for which the Company charges an additional fee.
These services include a survey of the customer's existing information systems
and an analysis of the hardware, interface, networking, data conversion and
personnel needs of the customers. The implementation services also include
advanced training for the customer's personnel.
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<PAGE>
Customer Training. All customers are encouraged to attend the Summit
Training Institute, a four-day interactive workshop, designed for those
individuals managing the database, for which the Company charges a fee.
Instruction is provided on a continuous schedule at the Company's
headquarters. The Company also offers advanced training for existing
customers.
Customer Service and Support. As part of the purchase price of the software,
the Company provides basic customer service and support for either six or
twelve months after installation of the software and thereafter, the Company
charges an annual fee for these customer services and support. Included in the
basic services are: access to a toll-free hot line to answer questions ranging
from installing the software to creating customized reports; technical
assistance on software and hardware topics, networking, format designs and
migration of data from the provider's information systems into the Company's
database; technical upgrades; and data collection services. Customers
participating in the national databases receive regular reports and up to
three special analyses per quarter generated by the Company from the national
databases.
Data Management Services. In addition to its standard customer service, the
Company provides assistance to users requiring special data management
services, including assistance in gathering and analyzing data from their
files and the national databases. These additional data analyses and more in-
depth analyses are provided on a fee-for-service basis. The Company intends to
expand its data analyses services to assist providers in specialized analysis
for presentations or negotiations with managed care organizations and other
third party payors.
Consulting Services. The Company offers consulting services primarily
through its subsidiary, BSM. BSM is a national healthcare consulting firm
providing consulting services to healthcare providers, pharmaceutical and
medical device firms. BSM offers a range of advisory services to its clients
for effectively competing in managed care environments, including strategic
planning, data analysis and presentation, marketing and negotiating skills.
BSM also assists healthcare providers in forming integrated provider networks
and mergers and acquisitions. The Company has begun to offer combined
information service products that integrate the use of its clinical outcomes
software and BSM's related consulting services. After Summit software has been
installed at a provider site, opportunities exist to consult with a healthcare
provider on the uses of the data from the database, the packaging of the data
for external reporting, and the management of the data for internal quality
assurance. The Company believes that creating this ongoing relationship also
enhances the opportunities for the sale of additional and new software modules
in a healthcare organization. The above discussion includes forward-looking
statements designed to provide investors with an overview of the Company's
initial strategy to integrate and leverage BSM's business. There can be no
assurance that the Company will be able to integrate successfully BSM's
business or to obtain the expected benefits of the acquisition of BSM. See
"Risk Factors--Management of Growth and Integration of Acquisitions."
NATIONAL DATABASES
The Company maintains and manages national databases for three national
medical associations, the Society of Thoracic Surgeons, the American College
of Cardiology and the American Society of Cataract and Refractive Surgery, for
cardiac and thoracic surgery, cardiology, and ophthalmology, respectively.
These databases provide valuable benchmarks of national practice patterns and
clinical outcomes against which individual healthcare providers can compare
their own performance. The affiliations with the Medical Association Partners
are also valuable marketing relationships that provide the Company with access
to the membership of these associations. The Company pays royalties to each
Medical Association Partner, and has the right to use of the name and logo of
these associations.
STS National Database. The procedure modules for cardiac and thoracic
surgery have been developed under a contract with the STS. The STS is a
leading medical specialty society representing cardiac and thoracic surgeons,
with approximately 3,000 members in the United States and Canada, including an
estimated 70% of cardiac and thoracic surgeons in the United States. The
Company uses the STS's name and logo in promoting the STS-sponsored procedure
modules, while the STS promotes the Company's software and national databases
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in publications of the STS and by other means. The information collected from
these programs is included in STS-sponsored national databases, which
currently include patient records for approximately 700,000 procedures in
cardiac and thoracic surgery. The Company produces and distributes an annual
report on the national database, as well as up to three special analyses per
quarter for each participant.
The Company's agreement with the STS was originally executed in April 1990
and is effective through December 31, 1998. The Company is the copyright owner
of the software, documentation and other materials created pursuant to the
agreement, while the STS is the copyright owner of the remaining data in the
associated national database, the information format design used in the
software and all reports and information derived by either the Company or the
STS from the national database. As a result of the STS's ownership and certain
other rights, the Company may not use any data submitted to the national
database to develop commercial applications other than for the Company's
cardiac and thoracic surgery procedure modules, without the consent, licensing
or similar agreement of the STS. The STS database is open to allow
participants to enter data in the national database using the software of
other vendors provided the data conforms to the standard definitions and
format of the national database created by the Company and the STS. In the
event the Company's agreement with the STS is terminated by the Company or by
the STS due to the Company's material breach of the agreement or inability to
fulfill the agreement, the Company must assign its rights in the software,
documentation and materials, including source code, that are created pursuant
to the agreement, and must deliver copies of this source code, to the STS.
Upon termination of the Company's agreement with the STS under any other
circumstance or if the STS chooses not to extend the agreement, the Company
will retain all ownership rights to the software associated with the STS-
sponsored procedure modules, and the STS would be required independently to
develop, either directly or through a substitute vendor, the software
necessary to continue the national database.
ACC National Database. The Company has developed four of its cardiology
procedure modules, relating to angioplasties, cardiac catheterizations,
defibrillators and radiofrequency ablations, under a contract with the ACC.
The ACC is a leading medical specialty society representing cardiologists,
with approximately 22,000 members worldwide, including an estimated 85% of the
cardiologists in the United States. The Company uses the ACC's name and logo
in promoting the ACC-sponsored module, while the ACC promotes the software and
national databases in publications of the ACC and by other means. The
information collected from these modules is included in ACC-sponsored national
databases, which currently contain patient records for approximately 255,000
cardiology procedures. The Company produces up to three special analyses per
quarter for each participant, but unlike the STS relationship, the Company
does not produce any reports on the national database for the ACC, which
internally generates reports on the national database for distribution to its
membership.
The Company's agreement with the ACC was originally executed in February
1991 and automatically renews on May 1 of each year in the absence of a
written notice of termination. The ACC has notified the Company that it
intends to renegotiate its current agreement with the Company which would have
terminated on May 1, 1996. During December 1995, the Company and the ACC began
preliminary discussions regarding a new agreement. The Company and the ACC
have agreed to extend the term of the current agreement until July 1, 1996 to
allow for additional time for negotiation. While the negotiations are in
progress, the Company and the ACC are continuing to work together with the
Company recently completing a harvest of data for the ACC national database,
which the ACC will independently analyze. Because the current negotiations are
preliminary and any agreement is subject to approval by the ACC and Summit,
there can be no assurance that the Company will be able to renegotiate an
arrangement with the ACC on favorable terms or that the Company and the ACC
will be able to enter into an agreement by July 1, 1996. As of the date of
this Prospectus, the Company and the ACC have not agreed to extend the terms
of their agreement. The failure to renegotiate the ACC agreement could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company is the copyright owner of the software, documentation and other
materials created pursuant to the agreement, while the ACC is the copyright
owner of the associated national database, all reports based thereon and the
information format design used in the software. The ACC has recently opened
its database to allow participants to enter data in the national database
using the software of another vendor as long as the data conforms to the
standard definitions and format of the national database. As a result of the
ACC's ownership
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and certain other rights, the Company may not use any data submitted to the
national database to develop various risk stratification or other commercial
applications without the consent, licensing or similar agreement of the ACC.
The ACC may terminate its agreement with the Company upon the death, disability
or cessation of active involvement of Mr. Sweeney in the Company. In that event
or in the event the Company's agreement with the ACC is terminated by the
Company or by the ACC due to the Company's material breach of the agreement or
inability to fulfill the agreement, the Company must assign its rights in the
software, documentation and materials, including source code, that are created
pursuant to the agreement, and must deliver copies of this source code to the
ACC. Upon termination of the Company's agreement with the ACC under any other
circumstance or if the ACC chooses not to extend the agreement, the Company
will retain all ownership rights to the software associated with the ACC-
sponsored procedure modules, and the ACC would be required independently to
develop, either directly or through a substitute vendor, the software necessary
to continue the national database.
ASCRS National Database. The ophthalmology modules have been developed under
a contract with the ASCRS. The ASCRS is a subspecialty medical association
representing ophthalmologists, with approximately 7,200 members worldwide,
including approximately 45% of the ophthalmologists in the United States. The
Company uses the ASCRS's name and logo in promoting the ASCRS-sponsored module,
while the ASCRS promotes the software and national database in publications of
the ASCRS and by other means. The information collected from these modules is
included in the ASCRS-sponsored national database, which currently contains
patient records for approximately 40,000 ophthalmology procedures.
The Company's agreement with the ASCRS was originally executed in February
1994 and is effective until February 18, 1999, and will automatically renew for
another five year period unless either party provides notice 180 days prior to
February 18, 1999. The Company is the copyright owner of the software,
documentation and other materials created pursuant to the agreement, and the
Company and the ASCRS are the co-owners of the copyright for the data in the
associated national database and all reports based thereon. Upon termination of
the agreement, the ASCRS has the right to purchase the Company's interest in
the ASCRS national database; however, in the event of an offer by the ASCRS,
the Company first has a right to purchase the interest of the ASCRS in the
national database on the same terms as the ASCRS offer.
Data Collection and Integrity. Providers must submit complete entries of
their patient records to the Company in order to receive reports on the
national databases or software upgrades for risk stratification tools based on
a national database. Hospitals and physicians typically provide their data to
the Company electronically or on disks using the Company's software, although
members of the medical associations may submit manual data forms for a fee-per-
form. The national databases contain rigorous measures to protect patient and
provider confidentiality. No information which could identify the patient,
physician or hospital is included in the data submitted to the Company. The
Company uses several methods to test the validity of the data included in the
national databases. Before a submission of data is entered into a database, the
Company samples the file for missing data. The Company also samples the data
for clinical consistency and appropriateness to determine whether an entry in
one part of the patient record is consistent with entries in other parts of the
record. The Company returns data to a provider if it finds an unacceptable
level of missing data fields or clinical inconsistencies.
SALES AND MARKETING
The Company maintains a direct and area management sales force in the United
States which currently consists of 14 area managers and two national sales
managers who are responsible for coordinating sales activities with the
Company's joint marketing partners and pursuing targeted direct sale prospects.
The area managers are located in key cities in the United States (Atlanta,
Baltimore, Boston, Cincinnati, Chicago, Dallas, Denver, Kansas City, Los
Angeles, New Orleans, New York, Philadelphia, San Francisco and Tampa) and are
responsible for targeted sales activities within a geographic region. The
Company also has a national sales manager who is responsible for pursuing
initiatives with specialty physician networks. To serve the European and Middle
Eastern markets, the Company has established a subsidiary, Summit Medical
Europe, located in France.
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The Company's area managers work closely with the sales representatives of
the joint marketing partners to identify potential customers. Once a sales
representative of a joint marketing partner has identified an opportunity, the
area manager provides the sales representative with appropriate technical
information and product specifications. The area managers work with the sales
representative of the joint marketing partner to complete the sale to a
customer.
Direct sales leads are generated via focused mailing campaigns, trade show
displays, advertising and customer referral recommendations. Mailings are
targeted to members of the various medical associations and identify the
growing need for the physician to maintain a quality database. Sales
representatives are responsible for completing sales to targeted direct sales
prospects. Recently, the Company has begun telemarketing of its products and
services to existing and prospective customers.
The Company has established joint marketing arrangements with SciMed, a
leading provider of angioplasty catheters and a subsidiary of Boston
Scientific, and four divisions of Boston Scientific: Microvasive Urology,
Microvasive Endoscopy, Mansfield EP and Meadox Medicals (collectively, the
"Boston Scientific Divisions"). Under its joint marketing arrangement with
SciMed, SciMed markets adapted versions of the Company's angioplasty, cardiac
catheterization laboratory, cost and patient satisfaction modules. Microvasive
Urology markets adapted versions of the Company's BPH management and prostate
cancer procedure modules, and will market additional urology procedure modules
as such modules are developed. Microvasive Endoscopy will market adapted
versions of the Company's colonoscopy, endoscopic retrograde
cholangiopancreatography ("ERCP") and esophagastric duodenoscopy ("EGD")
modules, and will market additional pulmonary and alimentary endoscopy
procedure modules as such modules are developed. Mansfield EP will market
adapted versions of the Company's electrophysiology studies module, and will
market additional electrophysiology modules as such modules are developed.
Meadox Medicals will market adapted versions of the Company's current vascular
surgery module and will market additional vascular surgery modules as such
modules are developed. SciMed and the Boston Scientific Divisions purchase
modules from the Company for resale either as an independent product or as
part of a package of goods and services that SciMed or the Boston Scientific
Divisions provide to the customer. In connection with these joint marketing
arrangements, the Company will manage national databases comprised of data to
be collected from customers of SciMed or the Boston Scientific Divisions.
During the term of these joint marketing agreements, the Company may not
provide software for distribution by a competitor of SciMed or the Boston
Scientific Divisions, as long as SciMed or the Boston Scientific Divisions
meet applicable minimum purchase requirements. SciMed is the owner of the
programs developed for SciMed and the database containing information about
users of the Company's software purchased through SciMed. The Boston
Scientific Divisions are the owners of the programs and additional features
developed for the Boston Scientific Divisions and the databases collected on
their behalf. At the same time, the Company will own and manage national
databases comprised of data (excluding the fields developed for the Boston
Scientific Divisions) collected from the Boston Scientific Division's
customers and from customers that purchase procedure modules directly from the
Company. If the Company terminates any of the agreements or is unable to serve
SciMed or the Boston Scientific Divisions or purchasers of Company modules
from SciMed and the Boston Scientific Divisions under the terms of the
applicable agreement, or if SciMed or the Boston Scientific Divisions
terminate an agreement due to a material breach by the Company, the voluntary
or involuntary filing for bankruptcy of the Company or the sale of
substantially all of the assets or capital stock of the Company, SciMed or the
Boston Scientific Divisions will have continued access to and the right to use
the source code to the software programs subject to the agreement.
The Company has also established a joint marketing arrangement with
Allergan, a global provider of eye care and other specialty therapeutic
products, to market adapted versions of the Company's ophthalmology, cost and
patient satisfaction modules. Allergan purchases modules from the Company for
resale either as an independent product or as part of a package of goods and
services that Allergan provides to ophthalmologists. In connection with this
joint marketing arrangement, the Company will manage a national database
comprised of data to be collected from Allergan's customers. The Company's
agreement with Allergan is effective until August 14, 1997; however, either
party may terminate the agreement without cause after giving 60 days prior
notice. Allergan has a right of first refusal to obtain co-exclusive rights
and licenses to distribute certain software
34
<PAGE>
and related materials in every country of the world in the medical disciplines
of vision care, ophthalmology, orthopedics, neurology, pediatrics and
dermatology. In order to maintain its rights under the agreement, Allergan
must meet minimum purchase requirements. Allergan is the owner of the software
developed for it and the database containing information about users of the
Company's software purchased through Allergan. If Allergan terminates the
agreement due to the voluntary or involuntary filing of bankruptcy of the
Company, Allergan will have continued access to and right to use the source
code to the software programs subject to the agreement. Under its agreement
with Allergan, the Company has agreed not to provide, during the term of the
agreement and for one year after termination thereof, any software programs
for distribution by a competitor of Allergan, and during the term of the
agreement, Allergan agrees not to distribute any other national database
clinical outcomes software.
In November 1995, the Company established a joint marketing arrangement in
the United States with Smith & Nephew Richards to market adapted versions of
the Company's hip replacement, knee replacement and sports medicine knee and
shoulder clinical outcomes modules, as well as additional orthopedic procedure
modules as such modules are developed. Smith & Nephew Richards will purchase
modules from the Company for resale either as an independent product or a part
of a package of goods and services that Smith & Nephew Richards provides to
hospitals, orthopedic surgeons and other physicians. In connection with this
joint marketing arrangement, the Company will on behalf of Smith & Nephew
Richards maintain and manage a database comprised of data collected from Smith
& Nephew Richards' customers. The Company's agreement with Smith & Nephew
Richards is effective until January 31, 2001, and will automatically renew for
additional one-year periods unless either party provides 180 days prior notice
of termination. The Company and Smith & Nephew Richards each have a right of
first refusal to establish a joint marketing arrangement with the other if
either the Company or Smith & Nephew Richards intends to market orthopedic
procedure modules outside the United States or introduces modules in the
fields of orthopedic rehabilitation, wound care and otalaryngology (excluding
laryngology). During the term of the Smith & Nephew Richards agreement, the
Company may not provide orthopedic software for distribution by a competitor
of Smith & Nephew Richards, as long as Smith & Nephew Richards meets minimum
purchase requirements. The agreement provides that Smith & Nephew Richards is
the owner of the programs and additional features developed for Smith & Nephew
Richards under the agreement and the related database collected on its behalf.
At the same time, the Company will own and manage a national orthopedic
database comprised of data collected from Smith & Nephew Richards' customers
and from customers that purchase orthopedic procedure modules directly from
the Company. Upon termination of the agreement, the Company must provide Smith
& Nephew Richards with full and complete copies of the data from the programs
and separate database the Company developed for Smith & Nephew Richards under
the agreement and delete all such records from the Company's files.
CUSTOMERS
The Company's customers include specialty physicians, hospitals and
physician networks, managed care organizations and other healthcare payors,
and pharmaceutical and medical device firms located throughout the United
States and Europe. Currently, the Company has approximately 1,700 customers
for its clinical outcomes database software and services. Of these customers,
only Boston Scientific accounted for more than 10% of the Company's revenues
during 1995, representing approximately 10% of total revenue.
The Company's cardiology products are primarily designed for and sold to
hospitals, with cardiology group practices a secondary market. The Company
primarily markets its cardiac and thoracic surgery modules to hospitals and
cardiac and thoracic group practices. The primary target market for the
Company's ophthalmologic products are physician group practices. The Company's
urology products will be sold to office-based practices and to hospital
urological units. The primary market for the Company's orthopedic products is
single and multi-specialty practice groups.
The WELLCAST R.O.I. software of MIS is primarily sold to healthcare
providers, managed care organizations, corporate employers, and pharmaceutical
and device firms. The client base for the consulting services of BSM includes
physicians and physician groups, provider networks, hospitals, ambulatory
surgery
35
<PAGE>
centers, academic-based practices, and pharmaceutical and medical device
manufacturers, with the majority of services provided to physician groups and
corporate medical firms.
The Company is the sole vendor of cardiac surgery and cardiology outcomes
database software to Columbia/HCA's network. In addition, the Company has
recently begun to develop a cardiology database for certain hospitals within
the Columbia/HCA network of more than 300 hospitals.
THE JOINT VENTURE
On December 29, 1995, the Company entered into a Software License Agreement
with Duke and formed the Joint Venture with Duke and the Individual Founders
pursuant to a limited liability company agreement (the "LLC Agreement"), which
created Cordillera L.L.C., a Delaware limited liability company. Under the
Software License Agreement, Duke granted the Company an exclusive license to
the Keystone software. At the same time, Duke granted the Company non-
exclusive access to the Duke Databank for Cardiovascular Disease, which
includes 95,000 patient records and data on over 500,000 procedures. Based in
Durham, North Carolina, the Joint Venture will focus on on-line medical
information data services in cardiology and other medical specialties,
including subscription products derived from the Company's and other national
databases.
In connection with the Software License Agreement, the Company issued to
Duke 200,000 shares of Common Stock and the seven-year Duke Warrant to
purchase an additional 200,000 shares of Common Stock at $21.00 per share, the
last reported sale price of the Company's Common Stock on December 28, 1995,
the day prior to the issuance of the Duke Warrant. In addition, the Company
granted to Kevin Green, prior to his employment as the Company's President and
Chief Executive Officer, an option to purchase 40,000 shares of Common Stock
at a purchase price of $15.50 in consideration for his consulting services
related to the Joint Venture. The Software License Agreement also provides for
the Company to pay to Duke and the Joint Venture royalties based on sales of
products derived from the Keystone technology. These royalty payments will be
reduced by an amount equal to 50% of the Company's additional capital
contributions to the Joint Venture as provided in the LLC Agreement.
Under the LLC Agreement, the Company will initially own approximately 99% of
the membership interests in the Joint Venture. Duke and the Individual
Founders may exercise an option (the "Option") to acquire membership interests
in the Joint Venture which equal the Company's equity interest in the Joint
Venture. If the Option is exercised for any number of member units, the Duke
Warrant will terminate as to an equal number of shares of Common Stock. The
Joint Venture will be managed by a committee of five managers, comprised of
two managers appointed by the Company, one manager appointed by Duke, one
manager appointed by the Individual Founders and the chief executive officer
of the Joint Venture, who has not yet been appointed and must be unanimously
appointed by the other four managers. The Company has also agreed to provide
up to an additional $3 million of additional capital for the Joint Venture,
payable monthly in accordance with the Joint Venture's annual operating
budget, to fund start up and development costs. Upon any distribution from the
Joint Venture, out of cash flow or in the event of liquidation, the Company
will receive a priority distribution of this additional capital and a priority
return on this additional capital equal to 10% per annum of the average daily
balance of the Company's additional capital contribution.
Under the LLC Agreement, the Company has the exclusive right to sell
traditional healthcare information software products that do not require a
connection to an on-line service for their use. The Joint Venture has the
exclusive right to develop on-line healthcare information services, unless the
committee of the managers of the Joint Venture declines to pursue an on-line
opportunity. The Company has a right of first negotiation to commercialize any
on-line healthcare information software products and services, subscription
services and consulting services developed by the Joint Venture. In addition,
the Company has an option to purchase the outstanding equity interests of Duke
and the Individual Founders in the Joint Venture at the fair market value of
those equity interests at any time after the fifth anniversary of the LLC
Agreement or earlier under certain circumstances. In order to exercise this
option, the Company must offer the Individual Founders the opportunity to
continue to hold their same positions and authorities in the Joint Venture and
continue to receive the same
36
<PAGE>
salary and benefits for a period of three years following the exercise of the
option. The Company must also appoint Dr. Donald Fortin, one of the Individual
Founders, as an officer of the Company for a period of three years.
COMPETITION
The market for healthcare information systems and services is highly
competitive. The Company believes that the principal competitive factors for
outcomes software are the quality and depth of the underlying clinical
outcomes database, the usefulness of the data and reports generated by the
software, customer service and support, ease-of-use, compatibility of the
system, potential for product enhancements, and vendor reputation. The Company
believes its principal competitive advantages are the clinical focus of its
databases, the depth of patient records in its databases, its installed base
of programs, its customer service and its affiliation with the Medical
Association Partners.
The Company's competitors include both other providers of clinical outcomes
software, healthcare consulting firms and providers of medical information
derived from databases based on claims data. As the market for outcomes
software develops, additional competitors may enter the market and competition
may intensify. Many of the Company's competitors and potential competitors
have greater financial, development, technical, marketing and selling
resources than the Company, and have substantial installed customer bases in
the healthcare industry. The Company also faces significant competition from
internal information services at hospitals, many of which have developed their
own outcomes databases.
PROPRIETARY RIGHTS AND LICENSES
The Company depends upon a combination of trade secret, copyright and
trademark laws, license agreements, nondisclosure and other contractual
provisions, and technical measures to protect its proprietary rights in its
products. The Company distributes its products under software license
agreements which grant customers a nonexclusive, nontransferable license to
the Company's products and contain terms and conditions prohibiting the
unauthorized reproduction or transfer of the Company's products. The Company
attempts to protect its trade secrets and other proprietary information
through agreements with employees and consultants. The Company also seeks to
protect the source code of its products as a trade secret and as an
unpublished copyright work. There can be no assurance that these protections
will be adequate or that the Company's competitors will not independently
develop technologies that are substantially equivalent or superior to the
Company's technology. The Company believes that, due to the rapid pace of
innovation within the software industry, factors such as the technological and
creative skills of its personnel, and ongoing reliable product maintenance and
support, are more important in establishing and maintaining a leadership
position within the industry than are the various legal protections of its
technology. Although the Company believes that its products, trademarks and
other proprietary rights do not infringe upon the proprietary rights of third
parties, there can be no assurance that third parties will not assert
infringement claims against the Company in the future. See "Risk Factors--
Dependence on Proprietary Technology."
GOVERNMENT REGULATION
The confidentiality of patient records and the circumstances under which
such records may be released to the national databases is subject to
substantial regulation by state governments. These state laws and regulations
govern both the disclosure and use of confidential patient medical record
information. Although compliance with these laws and regulations is
principally the responsibility of the hospital, physician or other healthcare
provider supplying the data to the Company, the national databases have been
designed to enable healthcare providers to comply with the confidentiality
requirements of state law. To protect patient confidentiality, data entries to
the national databases delete any patient identifiers, including name,
address, hospital and physician. The Company believes that its procedures
comply with the laws and regulations regarding the collection of patient data
in substantially all jurisdictions, but regulations governing patient
confidentiality rights are evolving rapidly.
37
<PAGE>
Additional legislation governing the dissemination of medical record
information has been proposed at both the state and federal level. In general,
this legislation may require holders of such information to implement security
measures that may be of substantial cost to the Company. Currently pending in
Congress is the Medical Records Confidentiality Act of 1995 (the "1995 Act"),
which would protect and regulate the confidentiality of medical record
information. The 1995 Act would prohibit the disclosure of individually
identifiable health information, except with the patient's consent. Without
the patient's consent, medical information may be disclosed only for other
limited purposes, including disclosures to permit the creation of
nonidentifiable health information and to facilitate medical research. The
1995 Act preempts most state laws regarding access to, and the use and
disclosure of, medical record information. The Company collects, compiles and
discloses health care information which it believes is not individually
identifiable and therefore would not be protected health information under the
1995 Act. If the 1995 Act is enacted, it may simplify the Company's regulatory
compliance efforts by superseding the various, and sometimes inconsistent,
state laws governing the collection, use and disclosure of health care
information. The Company cannot accurately assess the likelihood that the 1995
Act will become law, or the final scope of any law.
The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operation
of healthcare facilities. During the past several years, the healthcare
industry has been subject to an increase in governmental regulation of, among
other things, reimbursement rates and certain capital expenditures. Many
lawmakers have announced that they intend to propose programs to reform the
United States healthcare system. These programs may contain proposals to
increase governmental involvement in healthcare, lower reimbursement rates and
otherwise change the operating environment for the Company's customers.
Healthcare providers may react to these proposals and the uncertainty
surrounding such proposals by curtailing or deferring investment, including
those for the Company's products and related services. Cost containment
measures instituted by healthcare providers as a result of regulatory reform
or otherwise could result in greater selectivity in the allocation of capital
funds. Such selectivity could have an adverse effect on the Company's ability
to sell its products and related services. The Company cannot predict with any
certainty what impact, if any, such proposals or healthcare reforms might have
on its business, financial condition and results of operations.
EMPLOYEES
As of March 31, 1996, the Company employed a total of 150 full-time
employees. None of the Company's employees is represented by a labor union.
The Company has experienced no work stoppages and believes that its employee
relations are excellent.
BACKLOG
The Company generally ships its products within a few days after acceptance
of a customer's purchase order and execution of a software license agreement.
Accordingly, the Company does not believe that its backlog at any particular
time is indicative of future sales levels.
FACILITIES
The Company occupies approximately 22,000 square feet of space at its
headquarters near Minneapolis, Minnesota, under a lease expiring in April
1997. In June 1995, the Company committed to an additional 8,800 square feet
of space near its current headquarters under a lease expiring in November
1996. The Company leases space in Nice, France for its European subsidiary.
The Company also leases space in Nevada for its BSM subsidiary, and space in
Massachusetts for its MIS subsidiary. The Company anticipates that it will
require additional space prior to and following expiration of its current
leases, and believes that such space will be available.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
38
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Edward F. Sweeney....... 56 Chairman of the Board of Directors
Kevin R. Green.......... 41 President, Chief Executive Officer and Director
Dennis H. Powers........ 60 Vice President, Business Development, Secretary and Director
George J. Marshalek,
Jr..................... 41 Vice President, Product Marketing and Development
William J. Cavanagh..... 58 Vice President, Sales
Anthony W. Rees......... 49 Vice President, Finance and Chief Financial Officer
Lisa K. Olson, Ph.D..... 38 Vice President, Corporate Marketing and Planning
Bruce S. Maller......... 42 Vice President of Summit and President and Chief Executive Officer of BSM
John M. Nehra........... 48 Director(1)(2)
Kent J. Thiry........... 40 Director(1)(2)
</TABLE>
- --------
(1) Member of the Compensation Committee of the Board of Directors.
(2) Member of the Audit Committee of the Board of Directors.
Mr. Sweeney has served as the Chairman of the Board of Directors since 1993.
From the formation of the Company in January 1986 to January 1996, Mr. Sweeney
served as President and Chief Executive Officer of the Company. From 1982 to
1985, Mr. Sweeney was the President of Medical Information Systems, Inc., a
clinical database company. From 1977 to 1982, Mr. Sweeney was the President of
SciMed Life Systems, Inc., a manufacturer of cardiology products.
Mr. Green has served as the President and Chief Executive Officer since
joining the Company in January 1996. Mr. Green has served as a Director since
February 1996. From September 1991 to December 1995, Mr. Green was employed by
Integrated Medical Systems, Inc. a provider of physician-focused electronic
communication networks and services, most recently as President and Chief
Executive Officer. From 1983 to 1991, Mr. Green was employed at CyCare
Systems, Inc., a provider of financial and administrative systems to the
healthcare industry, most recently as Senior Vice President in charge of an
operating unit.
Mr. Powers has served as a Vice President since joining the Company in
September 1990, most recently as Vice President, Business Development. Mr.
Powers has served as a Director since April 1992. From 1989 to August 1990,
Mr. Powers was a consultant to the Company. From 1985 to 1989, Mr. Powers was
employed by Medtronic, Inc. ("Medtronic"), a medical device manufacturer, most
recently as the General Manager of Medtronic Ventures, a business development
division.
Mr. Marshalek has served as the Vice President, Product Marketing and
Development since joining the Company in February 1996. From December 1993 to
December 1995, Mr. Marshalek was employed by Healthcare Data Interchange
Corporation, a wholly owned subsidiary of U.S. Healthcare, most recently as
President. From 1989 to December 1993, Mr. Marshalek was employed by GMIS,
Inc., a national health care information systems company, most recently as
Vice President of Product Marketing.
Mr. Cavanagh has served as the Vice President, Sales since joining the
Company in August 1993. From 1969 to July 1993, Mr. Cavanagh was employed by
Medtronic. Mr. Cavanagh served as the Western Regional Director of the
neurological division of Medtronic from May 1990 to May 1991 and as the
Midwest Regional Director of that division from May 1991 to July 1993.
Mr. Rees has served as the Vice President, Finance and Chief Financial
Officer since joining the Company in February 1995. From 1984 to January 1995,
Mr. Rees was the Vice President, Finance and Administration of Schneider (USA)
Inc. (formerly Angiomedics Inc.), a subsidiary of Pfizer, Inc., and a
manufacturer of cardiology
39
<PAGE>
and peripheral products. From 1977 to 1984, Mr. Rees was employed by
Medtronic, most recently as Director of International Planning and Control.
Dr. Olson has served as a Vice President since joining the Company in April
1995, most recently as Vice President, Corporate Marketing and Planning. From
November 1994 to April 1995, Dr. Olson was an independent consultant providing
marketing and management advice to healthcare organizations. From 1987 to
August 1994, Dr. Olson was an Associate Executive Vice President for the
American College of Cardiology, a 22,000 member nonprofit professional
society. Since December 1993, Dr. Olson has also been an Adjunct Professor at
Georgetown University in its healthcare business certificate program. From
September 1990 to August 1991, Dr. Olson was an Adjunct Professor at George
Washington University in its health services administration program.
Mr. Maller has served as a Vice President of the Company and the President
and Chief Executive Officer of BSM since the merger of a wholly owned
subsidiary of the Company and BSM in October 1995. From 1979 until September
1995, Mr. Maller served in the same capacity with BSM.
Mr. Nehra has served as a Director of the Company since November 1992. Since
1989, Mr. Nehra has been the managing general partner of Catalyst Ventures,
Limited Partnership ("Catalyst"), a venture capital firm. Since December 1993,
Mr. Nehra has also been a general partner of the general partner of New
Enterprise Associates VI, Limited Partnership ("NEA VI"), a venture capital
company. From 1983 to 1989, Mr. Nehra was a managing director of Alex. Brown &
Sons Incorporated, an investment banking firm, and was responsible for its
Capital Markets Group, including healthcare corporate finance. Mr. Nehra is
also a director of VIVRA Incorporated ("Vivra"), a specialty healthcare
company.
Mr. Thiry has served as a Director of the Company since May 1994. Since
September 1992, Mr. Thiry has been the President, Chief Executive Officer and
a director of Vivra. From April to August 1992, Mr. Thiry was the President
and Co-Chief Executive Officer of Vivra, and from September 1991 to March
1992, Mr. Thiry was the President and Chief Operating Officer of Vivra. From
1983 to August 1991, Mr. Thiry was employed by Bain & Company, Inc., a
management consulting firm, most recently as a Vice President.
All directors hold office until the next annual meeting of shareholders of
the Company and until their successors have been elected and qualified. The
Company's Articles of Incorporation provide that the Board of Directors shall
consist of no fewer than four directors; there are currently five members on
the Company's Board of Directors. The Company's executive officers are
appointed by the Board of Directors and serve until their successors are
elected or appointed.
COMMITTEES
In March 1995, the Board of Directors established a Compensation Committee
and an Audit Committee. The Compensation Committee of the Board of Directors
consists of Messrs. Nehra and Thiry. The Compensation Committee determines the
compensation for the President and the Chairman of the Board of Directors and
reviews recommendations of the President and the Chairman of the Board of
Directors concerning compensation for the other executive officers and
incentive compensation for employees of the Company, subject to ratification
by the full Board of Directors. The Compensation Committee also administers
the Company's Stock Option Plan of 1993 (the "1993 Stock Option Plan"), the
1995 Employee Stock Purchase Plan (the "1995 Stock Purchase Plan"), the 1995
Non-Employee Director Stock Option Plan (the "1995 Director Plan") and the
other outstanding stock options.
The Audit Committee of the Board of Directors consists of Messrs. Nehra and
Thiry. The Audit Committee reviews the results and scope of the audit and
other services provided by the Company's independent auditors, as well as the
Company's accounting principles and its system of internal controls, and
reports the results of these reviews to management and to the full Board of
Directors.
40
<PAGE>
DIRECTORS' COMPENSATION
Prior to the Company's initial public offering in August 1995, directors did
not receive any compensation from the Company for serving on the Board of
Directors. All directors are reimbursed for expenses incurred in connection
with attending board and committee meetings. Pursuant to the 1995 Director
Plan, all new directors who are not full-time employees will automatically
receive a stock option for 6,666 shares of Common Stock which as of June 6,
1996 had an aggregate market value of approximately $164,983, upon first being
elected to the Board of Directors, and all then-current non-employee directors
will automatically receive a stock option for an additional 2,000 shares of
Common Stock which as of June 6, 1996 had an aggregate market value of
approximately $49,500, the day after each annual meeting of the Company's
shareholders. The option exercise price per share for each option is equal to
the fair market value of the Common Stock on the date of grant. Pursuant to
the 1995 Director Plan, on April 26, 1996, Mr. Nehra and Mr. Thiry each were
granted options to purchase 2,000 shares of Common Stock at an exercise price
of $22.50 per share. See "Stock Option Plans--1995 Non-Employee Director Stock
Option Plan."
EXECUTIVE COMPENSATION
The following table sets forth all compensation for the last two fiscal
years awarded to or earned by (i) the individual who served as the Company's
Chief Executive Officer ("CEO") during those years and (ii) the Company's
executive officers other than the CEO whose salary and bonus exceeded $100,000
((i) and (ii), collectively, the "Named Executive Officers"):
Summary Compensation Table
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------------- ------------
COMMISSIONS ALL OTHER
NAME AND PRINCIPAL AND OTHER ANNUAL COMPENSATION
POSITION YEAR SALARY ($) BONUSES($) COMPENSATION($)(1)(2) OPTIONS (#) ($)(3)
- ------------------ ---- ---------- ----------- --------------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Edward F. Sweeney....... 1995 $152,000 $ -- $40,000 25,000(4) $180
President, Chief 1994 132,000 30,000 -- 66,666 180
Executive Officer and
Chairman of the Board
of Directors(5)
Dennis H. Powers........ 1995 110,000 -- 30,000 25,000(4) 180
Vice President,
Business Development 1994 103,000 20,000 -- 50,000 180
William J. Cavanagh..... 1995 100,000 74,000 40,000 10,000(4) 180
Vice President, Sales 1994 85,000 73,288 -- 13,333 180
Anthony W. Rees......... 1995 81,000 -- 25,000 53,333(6) 180
Vice President, Finance
and Chief Financial
Officer
</TABLE>
- --------
(1) In accordance with the rules of the Securities and Exchange Commission,
other compensation in the form of perquisites and other personal benefits
has been omitted in those cases where the aggregate amount of such
perquisites and other personal benefits constituted less than the lesser
of $50,000 or 10% of the total annual salary and bonus for the executive
officer for such year.
(2) Represents payments made December 31, 1995 which the Company has
classified as an advance against 1996 compensation for the Named Executive
Officer. See Note 6 of Notes to Consolidated Financial Statements. The
Company may deduct the advance from compensation payable to the Named
Executive Officer during 1996, unless the Named Executive Officer earlier
repays such advance. The Named Executive Officer is obligated to repay any
balance of the advance that remains outstanding at December 31, 1996, or
earlier upon termination of employment.
(3) Represents premiums paid by the Company on life insurance policies for the
benefit of the Named Executive Officer.
(4) Granted January 26, 1996 for services rendered during 1995.
(5) Effective January 15, 1996, Mr. Sweeney resigned as President and Chief
Executive Officer, while remaining Chairman of the Board of Directors and
Kevin R. Green became President and Chief Executive Officer.
(6) Options for 33,333 shares were granted on February 8, 1995 upon Mr. Rees's
hiring and 20,000 shares were granted January 26, 1996 for services
rendered during 1995.
41
<PAGE>
The Company did not make any restricted stock awards, grant any stock
appreciation rights or make any long-term incentive plan payouts during the
fiscal year ended December 31, 1995.
Options Granted During Fiscal Year
The following table sets forth certain information in connection with stock
option grants during the year ended December 31, 1995 to each of the Named
Executive Officers.
<TABLE>
<CAPTION>
Option Grants in the Year Ended December 31, 1995
POTENTIAL
REALIZED VALUE AT
INDIVIDUAL GRANTS ASSUMED ANNUAL
------------------------------------------------- RATES OF STOCK
NUMBER OF PERCENTAGE OF PRICE
SECURITIES TOTAL OPTIONS EXERCISE OR APPRECIATION FOR
UNDERLYING GRANTED TO BASE PRICE OPTION TERM(2)
OPTIONS EMPLOYEES PER SHARE EXPIRATION -----------------
NAME GRANTED IN FISCAL YEAR ($)(1) DATE 5% ($) 10% ($)
- ---- ---------- -------------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Edward F. Sweeney....... 25,000(3) 5.1% 17.00 1/26/01 117,420 259,467
Dennis H. Powers........ 25,000(3) 5.1 17.00 4/26/01 124,107 257,905
William J. Cavanagh..... 10,000(3) 2.0 17.00 4/26/01 49,643 107,162
Anthony W. Rees......... 33,333(4) 6.8 3.75 5/8/00 36,502 78,795
20,000(4) 4.1 17.00 4/26/01 99,286 214,324
</TABLE>
- --------
(1) All options were granted at an exercise price equal to market value on the
date of grant. For options granted to Mr. Rees prior to the Company's
initial public offering, the Board of Directors determined the market
value of the Common Stock based on various factors, including the illiquid
nature of an investment in the Company's Common Stock, the Company's
historical financial performance, the preferences (including liquidation)
of the Company's outstanding Series A Preferred Stock, the Company's
future prospects and the price paid for securities of the Company in arms-
length transactions between third parties.
(2) The 5% and 10% assumed annual compound rates of stock price appreciation
are mandated by the rules of the Securities and Exchange Commission and do
not represent the Company's estimate or projection of future Common Stock
prices.
(3) Granted January 26, 1996 for services rendered during 1995.
(4) Options for 33,333 shares were granted on February 8, 1995, upon hiring,
and options for 20,000 shares were granted January 26, 1996 for services
rendered during 1995.
Fiscal Year-End Option Values
The following table sets forth information concerning the number and value
of options held at December 31, 1995 by each of the Named Executive Officers.
No options held by such executive officers were exercised during 1995.
Option Values at December 31, 1995
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS AT THE-MONEY OPTIONS AT
DECEMBER 31, 1995 (#) DECEMBER 31, 1995 ($)(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Edward F. Sweeney........... 13,333 78,333 $236,661 $1,059,161
Dennis H. Powers............ 33,998 101,000 657,460 1,542,500
William J. Cavanagh......... 15,998 40,667 313,962 634,339
Anthony W. Rees............. -- 53,333 -- 681,661
</TABLE>
- --------
(1) These values have been calculated on the basis of the last reported sale
price of the Common Stock the Nasdaq National Market on December 29, 1995,
$21.50 per share, less the applicable option exercise price.
42
<PAGE>
STOCK OPTION PLANS
1993 Stock Option Plan
Under the 1993 Stock Option Plan, employees, including executive officers,
and any other persons providing services to the Company, are eligible to
receive awards. The 1993 Stock Option Plan provides for the grant of incentive
stock options intended to qualify for preferential tax treatment under Section
422 of the Internal Revenue Code of 1986, as amended (the "Code"), and for
nonqualified stock options that do not qualify for such treatment. The
exercise price of incentive stock options (which only employees are eligible
to receive) must equal or exceed the fair market value of the Common Stock on
the date of grant; the exercise price of nonqualified stock options may be
less than the fair market value of the Common Stock on the date of grant. The
1993 Stock Option Plan is administered by the Board of Directors, which has
delegated all authority under the 1993 Stock Option Plan to the Compensation
Committee, which is comprised of non-employee directors selected by the Board
of Directors. The Board of Directors may, subject to certain restrictions,
amend, modify or discontinue the 1993 Stock Option Plan before it terminates
on May 3, 2003.
A total of 2,126,666 shares of Common Stock are authorized for issuance
under the 1993 Stock Option Plan. As of March 31, 1996, the Company had
outstanding options to purchase an aggregate of 1,477,089 shares of Common
Stock at a weighted average exercise price of $12.01 per share, options for
30,979 shares of Common Stock had been exercised and options for 618,598
shares remained available for issuance under the 1993 Stock Option Plan. The
Company has typically granted options with five year terms, which vest
annually as to 20% of the aggregate number of shares covered by the option.
1995 Employee Stock Purchase Plan
On May 30, 1995, the Company adopted the 1995 Stock Purchase Plan. The 1995
Stock Purchase Plan will terminate on such date as the Board of Directors may
determine, or automatically as of the date on which all of the shares the
Company has reserved for purchase under the 1995 Stock Purchase Plan have been
sold. The Company has reserved 133,333 shares of Common Stock for issuance
under the 1995 Stock Purchase Plan. All employees that have met the service
eligibility requirements are eligible to participate in the 1995 Stock
Purchase Plan. Participating employees may direct the Company to make payroll
deductions of two to fifteen percent of their compensation during a purchase
period for the purchase of shares under the 1995 Stock Purchase Plan. The 1995
Stock Purchase Plan provides participating employees the right, subject to
certain limitations, to purchase the Company's Common Stock at a price equal
to the lower of 85% of the fair market value of the Company's Common Stock on
the first day, or the last day, of the applicable purchase period. The first
purchase period commenced on August 3, 1995, and ended on December 29, 1995.
Subsequent purchase periods will run for six months, subject to acceleration
in the case of a merger or consolidation in which the Company is not the
surviving corporation, or the liquidation, dissolution, or sale of
substantially all of the assets of the Company.
1995 Non-Employee Director Stock Option Plan
On May 30, 1995, the Company adopted the 1995 Director Plan. The 1995
Director Plan provides for an automatic grant of nonqualified stock options to
purchase 6,666 shares of Common Stock to non-employee directors on the date
such individuals are first appointed directors of the Company, and an
automatic grant to all non-employee directors of an option to purchase 2,000
shares of Common Stock on the day after each annual meeting of the Company's
shareholders. The option exercise price per share for each option is equal to
the fair market value of the Common Stock on the date of grant. Options vest
and become exercisable as to 100% of such shares on the first annual
anniversary of the date of such grant if the holder remains a director on such
date. The Company has reserved 66,666 shares of Common Stock for issuance
under the 1995 Director Plan.
EMPLOYMENT CONTRACTS
In October 1992, the Company entered into an employment agreement with Mr.
Sweeney. Mr. Sweeney agreed to provide services to the Company for an annual
salary of $120,000; the contract is terminable by the
43
<PAGE>
Company or the employee upon thirty days written notice. The Board of
Directors approved an increase in Mr. Sweeney's salary for 1994 to $132,000
and $152,000 in 1995. Under the agreement, Mr. Sweeney has agreed that the
Company has rights to all inventions conceived or produced by Mr. Sweeney
during the period of his employment. Mr. Sweeney also is subject to a
confidentiality provision and a two-year noncompetition provision as part of
the contract. The Company entered into a similar agreement with Mr. Powers,
also in October 1992. Under this agreement, Mr. Powers' annual salary is
$90,000, and the Board of Directors approved an increase in Mr. Powers' salary
for 1994 to $110,000.
In August 1993, the Company entered into an employment agreement with Mr.
Cavanagh. Mr. Cavanagh agreed to provide services to the Company for an annual
salary of $85,000; the contract is terminable by the Company or Mr. Cavanagh
upon ten working days written notice. In 1995, the Board of Directors approved
an increase in Mr. Cavanagh's salary to $100,000. Otherwise, the agreement is
identical to those entered into with Messrs. Sweeney and Powers.
In October 1995, the Company entered into an employment agreement with Mr.
Maller, Vice President of the Company and President of BSM Financial, Inc., a
wholly-owned subsidiary of the Company. Mr. Maller agreed to provide services
to the Company for an annual salary of $150,000, and the contract has a four-
year term. Under the agreement, Mr. Maller has agreed that the Company has
rights to all inventions, including intellectual property, conceived or
produced by Mr. Maller during the period of his employment. Mr. Maller is also
subject to a confidentiality provision and a one-year noncompetition provision
as part of the contract.
The Company has entered into an employment letter with Mr. Green, the
Company's President and Chief Executive Officer, pursuant to which he agrees
to provide services to the Company for an annual salary of $175,000, and a
bonus the Compensation Committee will determine. The Company also granted Mr.
Green an option to purchase 410,000 shares of Common Stock at an exercise
price of $17.00. The Company previously granted Mr. Green an option to
purchase 40,000 shares of Common Stock at an exercise price of $15.50 per
share for consulting services in connection with the formation of the Joint
Venture. The employment letter also provided for a grant of an option on an
additional 75,000 shares of Common Stock in each of 1996, 1997 and 1998 if the
Company achieves its earnings per share goals for those years. In the event of
a change of control of the Company, the employment letter guarantees Mr.
Green's compensation for two years and provides for the immediate vesting of
all options held by Mr. Green.
The Company has also entered into an employment letter with Mr. Marshalek,
the Company's Vice President Marketing and Development, pursuant to which he
agreed to provide services to the Company for an annual salary of $140,000,
and a bonus to be determined, of which $10,000 is guaranteed. The Company also
granted Mr. Marshalek an option to purchase 130,000 shares of Common Stock at
an exercise price of $17.25. In the event of a change of control of the
Company, the employment letter guarantees Mr. Marshalek's compensation for
twelve months and provides for the immediate vesting of all options held by
Mr. Marshalek.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In March 1995, the Company established a Compensation Committee of the Board
of Directors consisting of Messrs. Nehra and Thiry, the Company's independent
outside directors. See "--Committees."
In May 1994, Catalyst purchased 170,000 shares of Series A Preferred Stock,
which has since been converted into 113,333 shares of Common Stock, for
$425,000. In the same private placement, NEA VI purchased 465,000 shares of
Series A Preferred Stock, which has since been converted into 310,000 shares
of Common Stock, for $1,162,000. Mr. Nehra is a managing general partner of
Catalyst and a general partner of the general partner of NEA VI. In the same
private placement, Vivra purchased 565,000 shares of Series A Preferred Stock,
which has since been converted into 376,666 shares of Common Stock, for
$1,412,500. Mr. Nehra is a director of Vivra, and Mr. Thiry is President,
Chief Executive Officer and a director of Vivra. The holders of Common Stock
into which Series A Preferred Stock was converted are entitled to certain
registration rights. See "Description of Capital Stock--Registration Rights."
44
<PAGE>
In August 1995, as part of the Company's initial public offering of Common
Stock, NEA VI purchased 110,000 shares of Common Stock for $990,000. In the
same public offering, Vivra also purchased 110,000 shares of Common Stock for
$990,000.
NONQUALIFIED STOCK OPTIONS
As of March 31, 1996, the Company had outstanding nonqualified stock options
to purchase an aggregate of 93,790 shares of Common Stock, which were not
granted under the 1993 Stock Option Plan.
On May 4, 1993, the Company granted Mr. Nehra an option to acquire 33,332
shares of Common Stock at a price of $1.50 per share. The option has a term of
five years and 90 days and vests annually as to 20% of the aggregate number of
shares covered by the option, so long as Mr. Nehra remains a director of the
Company. On November 18, 1993, the Company granted Mr. Nehra an option to
acquire an additional 13,332 shares of Common Stock at a price of $1.50 per
share, subject to the same terms. On December 12, 1994, the Company granted
Mr. Nehra an option to acquire 16,666 shares of Common Stock at a price of
$3.75 per share, again on the same terms.
On December 12, 1994, the Company granted Mr. Thiry an option to acquire
16,666 shares of Common Stock at a price of $3.75 per share. The terms are the
same as for the options held by Mr. Nehra.
In connection with its acquisition of MIS, the Company assumed outstanding
options under MIS's stock option plan to purchase 13,794 shares of Common
Stock (as converted based on the exchange ratio in the merger). The Company
also assumed an outstanding MIS warrant to purchase 4,460 shares of Common
Stock (on an as converted basis).
CERTAIN TRANSACTIONS
Brian Sweeney, the son of Edward F. Sweeney, the Company's Chairman and
President, is employed by the Company as a Field Sales Manager. Brian
Sweeney's compensation from salary and commissions was $135,000 in 1994 and
$116,000 in 1995.
For a discussion of certain Company transactions in which Mr. Nehra and Mr.
Thiry had material interests, see "Management--Compensation Committee
Interlocks and Insider Participation." For a discussion of certain options
granted Mr. Green prior to his employment with the Company, see "Management--
Employment Contracts."
A majority of the disinterested members of the Board of Directors approved
the May 1994, August 1995 and October 1995 sales or exchanges of stock, and
the Company believes Brian Sweeney's compensation arrangement was on terms no
less favorable than could have been obtained from a party unaffiliated with
the Company agreeing to undertake the same responsibilities. All future
transactions between the Company and its officers, directors or affiliates
will be on terms at least as favorable to the Company as could be obtained
from unaffiliated third parties.
45
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth as of June 6, 1996 (unless otherwise
indicated), and as adjusted to reflect the sale of the shares offered by this
Prospectus, information regarding the beneficial ownership of the Company's
Common Stock by (i) each person known by the Company to beneficially own 5% or
more of the outstanding shares of Common Stock, (ii) each of the Company's
directors, (iii) each of the Company's Named Executive Officers, (iv) all
directors and executive officers as a group and (v) the Selling Shareholders.
Except as otherwise indicated, all persons listed below have sole voting and
investment powers with respect to the shares indicated:
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED OWNED AFTER THE
PRIOR TO OFFERING NUMBER OF OFFERING
NAME AND ADDRESS OF ----------------- SHARES TO BE -----------------
BENEFICIAL OWNER NUMBER(1) PERCENT SOLD IN OFFERING NUMBER(1) PERCENT
- ------------------- --------- ------- ---------------- --------- -------
<S> <C> <C> <C> <C> <C>
Edward F. Sweeney(2)...... 914,132 12.1% 100,000 814,132 9.0%
Summit Medical Systems,
Inc.
One Carlson Parkway
Minneapolis, MN 55447
Kevin R. Green(3)......... 163,000 2.1 -- 163,000 1.8
Dennis H. Powers(4)....... 103,982 1.4 -- 103,982 1.1
William J. Cavanagh(5).... 57,060 * -- 57,060 *
John M. Nehra(6)(7)....... 1,195,755 15.8 -- 1,195,755 13.2
1119 St. Paul Street
Baltimore, MD 21202
Kent J. Thiry(8)(9)....... 403,332 5.3 -- 403,332 4.5
400 Primrose #200
Burlingame, CA 94010
Catalyst Ventures, Limited
Partnership and New
Enterprise Associates VI,
Limited Partnership(10).. 765,414 10.2 -- 765,414 8.5
1119 St. Paul Street
Baltimore, MD 21202
VIVRA Incorporated........ 399,999 5.3 180,000 219,999 2.4
400 Primrose #200
Burlingame, CA 94010
Waddell & Reed, Inc.(11).. 720,000 9.5 -- 720,000 8.0
P.O. Box 29217
6300 Lamar Avenue
Overland, KS 66202-4200
All executive officers and
directors as a group
(10 persons)(12)......... 2,611,005 33.4 280,000 2,331,005 25.0
</TABLE>
- --------
*Represents beneficial ownership of less than 1%.
(1) Shares of Common Stock subject to options currently exercisable or
exercisable on or before August 5, 1996 ("Currently Exercisable Options")
are deemed outstanding for computing the percentage of the person holding
such options but are not deemed outstanding for computing the percentage
of any other person. Except as indicated by footnote, the persons named in
the table above have sole voting and investment power with respect to all
shares of Common Stock shown as beneficially owned by them. The Selling
Shareholders may offer and sell the Shares offered hereby from time to
time or not at all. The Company is therefore unable to predict how many
shares of Common Stock will be owned by any Shareholder at the conclusion
of this offering.
(2) Includes 13,333 shares issuable pursuant to Currently Exercisable Options.
(3) Includes 163,000 shares issuable pursuant to Currently Exercisable
Options.
(4) Includes 40,664 shares issuable pursuant to Currently Exercisable Options.
46
<PAGE>
(5) Includes 22,664 shares issuable pursuant to Currently Exercisable Options
and 6,666 shares owned by his wife, Phyllis J. Cavanagh. Mr. Cavanagh
disclaims any beneficial ownership of shares owned by Phyllis J. Cavanagh.
(6) Includes 28,664 shares issuable pursuant to Currently Exercisable Options.
(7) Includes shares owned by Catalyst, NEA VI and Vivra. Mr. Nehra, a director
of the Company, is managing general partner of Catalyst. He is also a
general partner of the general partner of NEA VI and a director of Vivra.
By virtue of these positions, Mr. Nehra may be deemed to share voting and
investment control over the shares owned by Catalyst, NEA VI and Vivra.
Therefore, Mr. Nehra may be deemed a beneficial owner of those shares. Mr.
Nehra disclaims any beneficial ownership of such shares.
(8) Includes 3,333 shares issuable pursuant to Currently Exercisable Options.
(9) Mr. Thiry, a director of the Company, is President and a director of
Vivra. By virtue of these positions, Mr. Thiry may be deemed to share
voting and investment control over the shares owned by Vivra. Therefore,
Mr. Thiry may be deemed a beneficial owner of those shares. Mr. Thiry
disclaims any beneficial ownership of such shares.
(10) Includes 412,081 shares owned of record by Catalyst and 353,333 shares
owned of record by NEA VI. By virtue of their relationship as affiliated
partnerships, Catalyst and NEA VI may be deemed to share voting and
investment control over such shares. Therefore, each of Catalyst and NEA
VI may be deemed to beneficially own all of such shares. Each of Catalyst
and NEA VI disclaims beneficial ownership of any shares which it does not
hold of record.
(11) Based solely on information contained in a Schedule 13G filed by Waddell
& Reed, Inc. on March 8, 1996.
(12) Includes 271,658 shares issuable pursuant to Currently Exercisable
Options.
47
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The total number of shares of all classes of stock that the Company has
authority to issue is 40,533,333 shares, all of $.01 par value, of which
1,600,000 shares are designated as Series A Preferred Stock. As of June 6,
1996 there were 7,540,810 shares of Common Stock outstanding, held of record
by approximately 150 shareholders.
COMMON STOCK
The holders of shares of Common Stock are entitled to one vote for each
share held of record on all matters on which shareholders are entitled or
permitted to vote. Since there is no cumulative voting for the election of
directors, the holders of more than 50% of the outstanding Common Stock can
elect all directors. Subject to preferences that may be applicable to any
outstanding preferred stock, holders of Common Stock are entitled to receive
ratably such dividends as may lawfully be declared by the Board of Directors
out of funds legally available therefor and in liquidation, and to share pro
rata in any other distribution to the holders of Common Stock. Holders of
Common Stock have no preemptive or subscription rights. There are no
conversion rights, redemption rights, sinking fund provisions or fixed
dividend rights with respect to the Common Stock. All outstanding shares of
Common Stock are fully paid and nonassessable, and the shares of Common Stock
to be sold pursuant to this offering will be fully paid and nonassessable.
PREFERRED STOCK
The Company's Board of Directors is authorized to issue preferred stock and
to fix the rights, preferences, privileges and restrictions, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of
shares constituting any series or the designation of such series, without any
further vote or action by the shareholders. Although there is no current
intention to do so, the issuance of preferred stock could have the effect of
delaying, deferring or preventing a change in control of the Company, which
may adversely affect the voting and other rights of the holders of Common
Stock.
REGISTRATION RIGHTS
Certain shareholders of the Company are entitled to require the Company to
register a total of 624,901 shares of outstanding Common Stock (the
"Registerable Shares"). Holders of Registerable Shares representing at least
40% of those Registerable Shares that are both (1) outstanding and (2) not yet
registered under the Securities Act pursuant to an effective registration
statement filed thereunder or publicly sold pursuant to Rule 144 of the
Securities Act ((1) and (2), collectively, the "Eligible Registerable
Shares"), may request the Company to file a registration statement covering
the Eligible Registerable Shares. The registration statement must cover at
least 20% of the Registerable Shares originally issued or have an anticipated
total price to the public in excess of $5.0 million. If the Company properly
completes a registered public offering in accordance with the request of the
holders of Eligible Registerable Shares, the Company will be obligated to
register such shares on only one occasion. The Company must bear the expenses
of such registration, except for underwriting discounts and commissions.
Holders of Eligible Registerable Shares also have the right, at any time and
without limitation on the number of such requests, to require the Company to
file a registration statement registering their shares on Form S-3, provided
that the Company is eligible to use Form S-3 and that the anticipated
aggregate offering price in the registration will exceed $1.0 million. Holders
of the Eligible Registerable Shares are also entitled to "piggy-back"
registration rights on registrations of the Company, subject to the right of
the managing underwriter of a particular offering to reduce, in view of
marketing conditions, the number of shares the holders propose to have the
Company register.
Duke and any persons or entities (the "Subsequent Holders"), to whom or
which Duke may transfer shares of Common Stock issued in connection with the
Software License Agreement or the Duke Warrant are entitled
48
<PAGE>
to require the Company to file a registration statement registering up to
400,000 shares of Common Stock (the "Duke Shares"), provided that holders of a
majority of the Duke Shares request this registration and the Company is
eligible to file a registration statement on Form S-3. Holders of the Duke
Shares may require only two registrations of Duke Shares. In addition, holders
of Duke Shares are entitled to piggy-back registration rights on registrations
of the Company in certain circumstances.
STATE LAW
Certain provisions of Minnesota law described below could have an anti-
takeover effect. These provisions are intended to provide management
flexibility to enhance the likelihood of continuity and stability in the
composition of the Company's Board of Directors and in the policies formulated
by the Board of Directors, and to discourage an unsolicited takeover of the
Company, if the Board of Directors determines that such a takeover is not in
the best interests of the Company and its shareholders. However, these
provisions could have the effect of discouraging certain attempts to acquire
the Company which could deprive the Company's shareholders of opportunities to
sell their shares of Common Stock at prices higher than prevailing market
prices.
Section 302A.671 of the Minnesota Statutes applies, with certain exceptions,
to any acquisition of voting stock of the Company (from a person other than
the Company, and other than in connection with certain mergers and exchanges
to which the Company is a party) resulting in the beneficial ownership of 20%
or more of the voting stock then outstanding. Section 302A.671 requires
approval of any such acquisitions by a majority vote of the shareholders of
the Company prior to its consummation. In general, shares acquired in the
absence of such approval are denied voting rights and are redeemable at their
then-fair market value by the Company within 30 days after the acquiring
person has failed to give a timely information statement to the Company or the
date the shareholders voted not to grant voting rights to the acquiring
person's shares.
Section 302A.673 of the Minnesota Statutes generally prohibits any business
combination by the Company, or any subsidiary of the Company, with any
shareholder that purchases 10% or more of the Company's voting shares (an
"interested shareholder") within four years following such interested
shareholder's share acquisition date, unless the business combination is
approved by a committee of all of the disinterested members of the Board of
Directors of the Company before the interested shareholder's share acquisition
date.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
The Company's Articles of Incorporation limit the liability of directors in
their capacity as directors to the Company or its shareholders to the full
extent permitted by Minnesota law. Minnesota law provides that, if so provided
in a company's articles of incorporation, a director shall not be liable to a
company or its shareholders for monetary damages for breach of fiduciary duty
as a director, except (i) for any breach of the director's duty of loyalty to
the company or its shareholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
for dividends, stock repurchases and other distributions made in violation of
Minnesota law or for violations of the Minnesota securities laws, (iv) for any
transaction from which the director derived an improper personal benefit or
(v) for any act or omission occurring prior to the effective date of the
provision in the company's articles of incorporation limiting such liability.
These provisions do not affect the availability of equitable remedies, such as
an action to enjoin or rescind a transaction involving a breach of fiduciary
duty, although, as a practical matter, equitable relief may not be available.
The above provisions also do not limit liability of the directors for
violations of, or relieve them from the necessity of complying with, the
federal securities laws.
The Company also maintains directors and officers liability insurance.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Norwest Bank,
Minnesota, N.A.
49
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions of the Underwriting Agreement,
the Underwriters named below (the "Underwriters"), through their
Representatives, Wessels, Arnold & Henderson, L.L.C., Robertson, Stephens &
Company LLC and Volpe, Welty & Company (the "Representatives"), have severally
agreed to purchase 1,780,000 shares of Common Stock from the Company and the
Selling Stockholders in the amounts set forth opposite their respective names
below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Wessels, Arnold & Henderson, L.L.C. ............................
Robertson, Stephens & Company LLC...............................
Volpe, Welty & Company..........................................
---------
Total....................................................... 1,780,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters' are
committed to purchase all of the shares of Common Stock being offered hereby
if any of such shares are purchased.
The Representatives of the Underwriters have advised the Company and the
Selling Shareholders that the Underwriters propose initially to offer the
shares of Common Stock to the public on the terms set forth on the cover page
of this Prospectus. The Underwriters may allow to related dealers a concession
not more than $ per share, and the Underwriters may allow, and such dealers
may re-allow, a concession of not more than $ per share to certain other
dealers. After the public offering, the offering price and other selling terms
may be changed by the Representatives of the Underwriters. The Common Stock
offered hereby is subject to receipt and acceptance by the Underwriters and to
certain other conditions, including the right to reject orders in whole or in
part.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a
maximum of 267,000 additional shares of Common Stock to cover over-allotments,
if any, at the public offering price, less the underwriting discounts and
commissions as set forth on the cover page of this Prospectus. To the extent
that the Underwriters exercise this option, the Underwriters will be
committed, subject to certain conditions, to purchase such additional shares
in approximately the same proportions as set forth in the above table. The
Underwriters may purchase such shares only to cover over-allotments made in
connection with the offering. If purchased, the Underwriters will offer such
additional shares on the same terms as those on which the 1,780,000 shares are
being offered.
The Underwriting Agreement provides that the Company and the Selling
Shareholders will indemnify the Underwriters and the Underwriters will
indemnify the Company and the Selling Shareholders against certain
liabilities, including civil liabilities under the Securities Act, or the
Company and the Selling Shareholders or the Underwriters, as the case may be,
will contribute to payments the indemnified party may be required to make in
respect thereof.
The Company, its executive officers and directors, and the Selling
Shareholders have agreed not to offer, sell or otherwise dispose of any of
their shares of Common Stock, or any other securities convertible into or
exchangeable for any shares of Common Stock, for a period of 120 days from the
date of this Prospectus, without the prior written consent of the
Representatives. The Company has agreed not to issue, sell, offer to sell,
contract to sell, grant options to purchase or otherwise dispose of any of the
Company's equity securities, or any securities convertible into or
exchangeable for its Common Stock, for a period of 120 days from the date of
this Prospectus without the prior written consent of the Representatives,
except that the Company may, without such consent, issue Common Stock upon the
exercise of outstanding options described herein.
50
<PAGE>
In connection with this offering, certain Underwriters and selling group
members (if any) or their respective affiliates who are qualified registered
market makers on the Nasdaq National Market may engage in passive market
making transactions in the Common Stock on the Nasdaq National Market in
accordance with Rule 10b-6A under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), during the two business day period before
commencement of offers or sales of the Common Stock. The passive market making
transactions must comply with applicable volume and price limits and be
identified as such. In general, a passive market maker may display its bid at
a price not in excess of the highest independent bid for the security; if all
independent bids are lowered below the passive market maker's bid, however,
such bid must then be lowered when certain purchase limits are exceeded.
LEGAL MATTERS
Certain legal matters with respect to this offering are being passed upon
for the Company by Dorsey & Whitney LLP, Minneapolis, Minnesota. Certain legal
matters will be passed upon for the Underwriters by Testa, Hurwitz &
Thibeault, LLP, Boston, Massachusetts.
EXPERTS
The consolidated financial statements as of December 31, 1994 and 1995, and
for each of the three years in the period ended December 31, 1995, that are
included in this Prospectus and in the Registration Statement, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon appearing elsewhere herein, and in the Registration Statement,
and are included in reliance upon such reports given upon the authority of
such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
A Registration Statement on Form S-1, including amendments thereto, relating
to the Common Stock offered hereby has been filed with the Securities and
Exchange Commission (the "Commission"), Washington, D.C. 20549. This
Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. Statements
contained in this Prospectus as to the contents of any contract or any other
document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or document (if any) filed as
an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to the
Registration Statement and the exhibits and schedules thereto. A copy of the
Registration Statement, including exhibits and schedules thereto, may be
inspected by anyone without charge at the Commission's principal office in
Washington, D.C. and copies of all or any part thereof may be obtained from
the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of certain fees prescribed by the
Commission.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed by the Company can be inspected and copied at the public
reference facilities of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's regional offices at 7 World Trade Center,
Suite 1300, New York, New York 10048 and CitiCorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. Such reports, proxy
statements and other information can also be inspected at the offices of the
National Association of Securities Dealers, 1735 K Street N.W., Washington,
D.C. 20006, which supervises the Nasdaq National Market on which the Common
Stock is traded.
51
<PAGE>
SUMMIT MEDICAL SYSTEMS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994 AND 1995
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors............................................. F-2
Consolidated Financial Statements
Consolidated Statements of Financial Position............................ F-3
Consolidated Statements of Operations.................................... F-4
Consolidated Statement of Changes in Shareholders' Equity................ F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Summit Medical Systems, Inc.
We have audited the consolidated statements of financial position of Summit
Medical Systems, Inc. as of December 31, 1994 and 1995, and the related
consolidated statements of operations, changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1995.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Summit Medical Systems, Inc. at December 31, 1994 and 1995, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Minneapolis, Minnesota
February 15, 1996
F-2
<PAGE>
SUMMIT MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
ASSETS 1994 1995 1996
------ ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents... $ 168,211 $ 2,035,399 $ 2,368,656
Short-term investments...... 2,944,657 20,718,674 20,140,280
Accounts receivable (net of
allowance of $79,553,
$100,397, and $110,343 at
1994, 1995 and March 31,
1996, respectively)........ 2,564,989 6,309,745 5,384,713
Notes receivable--officer... 24,297 59,632 27,080
Advances to officers and
employees.................. -- 190,000 190,000
Other current assets........ 117,872 469,303 994,058
---------- ----------- -----------
Total current assets...... 5,820,026 29,782,753 29,104,787
Deferred tax asset............ -- 110,062 --
Investments................... 42,418 -- --
Equipment and fixtures, net... 827,580 1,385,663 1,521,493
Computer software costs, net.. 129,899 103,207 80,284
---------- ----------- -----------
Total assets.............. $6,819,923 $31,381,685 $30,706,564
========== =========== ===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS'
EQUITY
-----------------------------
<S> <C> <C> <C> <C>
Current liabilities:
Accounts payable and accrued
expenses................... $ 513,033 $ 1,154,728 $ 770,032
Accrued compensation........ 528,049 498,057 780,998
Accrued royalties........... 262,906 332,773 264,107
Deferred revenue............ 884,222 1,334,967 1,229,068
Income tax payable.......... -- 110,062 8,062
Deferred tax liability...... 15,900 -- --
Note payable--officer....... 29,524 17,991 --
Notes payable and
convertible debentures..... 27,490 15,000 15,000
Current portion of long-term
debt....................... 9,210 13,278 4,000
---------- ----------- -----------
Total current liabilities. 2,270,334 3,476,856 3,071,267
Long-term debt--shareholder... 6,000 20,580 12,431
Commitments
Shareholders' equity:
Preferred stock, $.01 par
value:
Authorized shares--
1,600,000
Issued and outstanding
shares--1,600,000--1994;
-0- --1995 and March 31,
1996..................... 16,000 -- --
Common stock, $.01 par
value:
Authorized shares--
13,400,000--1994;
38,933,333--1995 and
March 31, 1996
Issued and outstanding
shares--3,255,061--1994;
7,515,565--1995;
7,536,545--March 31,
1996..................... 32,550 75,156 75,365
Additional paid-in capital.. 5,225,691 36,197,523 36,217,280
Accumulated deficit......... (730,652) (8,388,430) (8,669,779)
---------- ----------- -----------
Total shareholders'
equity................. 4,543,589 27,884,249 27,622,866
---------- ----------- -----------
Total liabilities and
shareholders' equity... $6,819,923 $31,381,685 $30,706,564
========== =========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
SUMMIT MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------- ----------------------
1993 1994 1995 1995 1996
---------- ---------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Software licenses..... $3,713,321 $6,263,569 $ 8,156,426 $1,465,829 $1,986,628
Support and service... 1,691,462 3,363,754 5,644,260 1,158,619 1,926,653
---------- ---------- ----------- ---------- ----------
Total revenue....... 5,404,783 9,627,323 13,800,686 2,624,448 3,913,281
Cost of sales:
Software licenses..... 443,655 650,697 1,038,889 149,444 376,944
Support and service... 1,383,758 2,349,190 3,036,134 726,058 857,570
---------- ---------- ----------- ---------- ----------
Total cost of sales. 1,827,413 2,999,887 4,075,023 875,502 1,234,514
---------- ---------- ----------- ---------- ----------
Gross profit............ 3,577,370 6,627,436 9,725,663 1,748,946 2,678,767
Operating expenses:
Selling and marketing. 2,023,537 4,585,099 6,010,843 1,254,924 1,901,340
Research and
development.......... 569,018 817,119 1,230,425 276,436 361,304
Purchase of in-process
research and
development.......... -- -- 7,435,000 -- --
General and
administrative....... 990,487 1,626,708 3,293,813 553,258 938,884
---------- ---------- ----------- ---------- ----------
Total operating
expenses........... 3,583,042 7,028,926 17,970,081 2,084,618 3,201,528
---------- ---------- ----------- ---------- ----------
Income (loss) from
operations............. (5,672) (401,490) (8,244,418) (335,672) (522,761)
Interest income, net.... 6,235 83,322 586,640 35,235 259,244
---------- ---------- ----------- ---------- ----------
Income (loss) before
income taxes........... 563 (318,168) (7,657,778) (300,437) (263,517)
Income tax expense...... -- 15,900 -- -- 17,832
---------- ---------- ----------- ---------- ----------
Net income (loss)....... $ 563 $ (334,068) $(7,657,778) $ (300,437) $ (281,349)
========== ========== =========== ========== ==========
Net income (loss) per
share
Primary............... $ .00 $ (.08) $ (1.37) $ (.09) $ (.04)
---------- ---------- ----------- ---------- ----------
Fully diluted......... $ .00 $ (.08) $ (1.37) $ (.07) $ (.04)
========== ========== =========== ========== ==========
Weighted average shares
outstanding
Primary............... 3,372,132 3,953,475 5,604,469 3,378,874 7,527,314
---------- ---------- ----------- ---------- ----------
Fully diluted......... 3,372,132 3,953,475 5,604,469 4,445,530 7,527,314
========== ========== =========== ========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
SUMMIT MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------- ----------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- ------- --------- ------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31,
1992................... -- $ -- 3,135,842 $31,358 $ 1,091,383 $ (397,147) $ 725,594
Issuance of common
stock................ -- -- 106,057 1,061 129,839 -- 130,900
Net income............ -- -- -- -- -- 563 563
---------- ------- --------- ------- ----------- ----------- -----------
Balance December 31,
1993................... -- -- 3,241,899 32,419 1,221,222 (396,584) 857,057
Issuance of preferred
stock at $2.50 per
share, net of
offering costs of
$106,900............. 1,600,000 16,000 -- -- 3,877,100 -- 3,893,100
Issuance of common
stock for debt....... -- -- 2,746 27 7,473 -- 7,500
Issuance of common
stock................ -- -- 10,416 104 119,896 -- 120,000
Net loss.............. -- -- -- -- -- (334,068) (334,068)
---------- ------- --------- ------- ----------- ----------- -----------
Balance December 31,
1994................... 1,600,000 16,000 3,255,061 32,550 5,225,691 (730,652) 4,543,589
Issuance of common
stock................ -- -- 7,167 72 104,936 -- 105,008
Exercise of stock
options.............. -- -- 76,665 767 26,731 -- 27,498
Employee stock
purchase plan........ -- -- 35,016 350 267,522 -- 267,872
Issuance of stock
related to
establishment of
joint venture........ -- -- 200,000 2,000 4,198,000 -- 4,200,000
Value of stock option
and warrant issued in
connection with joint
venture.............. -- -- -- -- 2,935,000 -- 2,935,000
Value of stock options
issued for services.. -- -- -- -- 218,684 -- 218,684
Conversion of
preferred stock into
common stock......... (1,600,000) (16,000) 1,066,656 10,667 5,333 -- --
Public offering
proceeds, net of
expenses of
$2,630,624........... -- -- 2,875,000 28,750 23,215,626 -- 23,244,376
Net loss.............. -- -- -- -- -- (7,657,778) (7,657,778)
---------- ------- --------- ------- ----------- ----------- -----------
Balance December 31,
1995................... -- -- 7,515,565 75,156 36,197,523 (8,388,430) 27,884,249
Exercise of stock
options.............. -- -- 20,980 209 19,757 19,966
Net loss.............. -- -- -- -- -- (281,349) (281,349)
---------- ------- --------- ------- ----------- ----------- -----------
Balance March 31, 1996
(unaudited)............ -- $ -- 7,536,545 $75,365 $36,217,280 $(8,669,779) $27,622,866
========== ======= ========= ======= =========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
SUMMIT MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -----------------------
1993 1994 1995 1995 1996
--------- ----------- ------------ ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)....... $ 563 $ (334,068) $ (7,657,778) $ (300,437) $ (281,349)
Adjustments to reconcile
net income (loss) to
net cash (used in)
provided by operating
activities:
Depreciation and amor-
tization.............. 162,508 299,452 619,321 112,340 148,991
Deferred income taxes.. -- 15,900 (125,962) -- --
Purchased in-process
research and develop-
ment.................. -- -- 7,135,000 -- --
Value of stock options
issued for services... -- -- 218,684 -- --
Losses on partnership
investments........... 2,288 1,895 -- -- --
Changes in operating
assets and liabili-
ties:
Accounts receivable... (528,436) (1,769,713) (3,744,756) (79,267) 920,563
Prepaid advance to of-
ficers and employees. -- -- (190,000) -- --
Other current assets.. (8,698) (57,691) (386,766) (3,220) (377,672)
Accounts payable and
accrued expenses..... 207,273 93,706 641,695 107,671 (486,696)
Accrued compensation
and royalties........ 341,755 364,528 39,875 38,685 214,275
Accrued settlement re-
serve................ -- 82,500 -- -- --
Income tax payable.... -- -- 110,062 -- --
Deferred revenue...... (48,133) 604,151 450,745 (23,182) (105,898)
--------- ----------- ------------ ---------- -----------
Net cash provided by
(used in) operating
activities......... 129,120 (699,340) (2,889,880) (147,410) 32,214
INVESTING ACTIVITIES
Purchase of short-term
investments............ -- (7,390,887) (28,700,801) (435,153) (9,203,645)
Sale (purchase) of long-
term investments....... (4,700) (4,700) 42,418 -- --
Sales of short-term
investments............ -- 4,446,230 10,884,966 1,027,457 9,782,039
Purchases of equipment
and fixtures........... (397,887) (566,887) (1,025,813) (286,929) (287,433)
Computer software costs. -- (137,899) (65,000) -- --
Disposal of equipment
and fixtures........... -- -- -- -- 25,534
--------- ----------- ------------ ---------- -----------
Net cash (used in)
provided by investing
activities............. (402,587) (3,654,143) (18,864,230) 305,375 316,495
FINANCING ACTIVITIES
Proceeds from long-term
debt................... 115,459 -- -- 27,612 16,431
Principal payments on
long-term debt......... (126,243) (85,771) (11,923) (7,426) (33,858)
Principal payments on
notes and debentures... -- (7,500) (93,699) -- --
Proceeds from notes
payable and convertible
debentures............. 30,000 12,490 65,000 -- --
Proceeds from note
payable--officer....... 10,158 19,366 17,166 -- --
Principal payments on
note payable--officer.. -- -- -- -- (17,991)
Issuance of Common
Stock.................. -- -- -- 105,008 --
Net proceeds from common
stock transactions..... 130,900 120,000 23,617,256 -- --
Net proceeds from
exercise of common
stock options.......... -- -- 27,498 10,000 19,966
Net proceeds from sale
of preferred stock..... -- 3,893,100 -- -- --
--------- ----------- ------------ ---------- -----------
Net cash provided by
(used in) financing
activities............. 160,274 3,951,685 23,621,298 135,194 (15,452)
--------- ----------- ------------ ---------- -----------
(Decrease) increase in
cash and cash
equivalents............. (113,193) (401,798) 1,867,188 293,159 333,257
Cash and cash equivalents
at beginning of period.. 683,202 570,009 168,211 169,211 2,035,399
--------- ----------- ------------ ---------- -----------
Cash and cash equivalents
at end of period........ $ 570,009 $ 168,211 $ 2,035,399 $ 462,370 $ 2,368,656
========= =========== ============ ========== ===========
Supplemental disclosures
of cash flow
information:
Cash paid during the pe-
riod for interest...... $ 7,148 $ 4,654 $ 7,706 $ 677 $ 1,455
Supplemental disclosure
of noncash investing
activities:
Equipment and fixtures
acquired in exchange
for long-term debt..... 49,876 -- 30,570 -- --
</TABLE>
See accompanying notes.
F-6
<PAGE>
SUMMIT MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995, AND MARCH
31, 1996 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS
Summit Medical Systems, Inc. (the Company) 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 record, analyze and report detailed
clinical information on medical procedures, diseases and patient outcomes.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, BSM Financial, Inc., Medical Information
Systems Company, Inc., Summit Medical Europe, and its joint venture with Duke
University. All intercompany balances and transactions have been eliminated.
Revenue Recognition
Software Licenses and Upgrades: The Company recognizes revenue from
contracts for sales of software licenses on shipment provided that no
significant vendor and post-contract support obligations remain outstanding
and that collections of resulting receivables are probable.
Support and Service: Agreements for service and support are recognized over
the period in which support services are provided using the straight-line
method. All other revenue, including training fees, is recognized upon
performance of the applicable services.
Cost of Sales
The Company records cost of sales on a basis that matches the expenses
incurred with the sales revenue generated. A portion of the costs is allocated
between software licenses and support and service based on the amount of
employee time spent completing the product shipments or providing services.
Management believes the allocation methods used for cost of sales are
reasonable.
Royalty Expense
The Company recognizes and accrues royalty expense at the time the Company
recognizes the related revenue from software licenses sold and services
rendered. Royalties are due and paid 45 days after the end of the quarter in
which the Company collects the related receivable.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. Cash equivalents are
carried at cost, which approximates market value.
Short-term Investments
Investments with a maturity of more than ninety days at the date of purchase
are classified as short-term investments. Management determines the
appropriate classification of debt securities at the time of purchase and
reevaluates such
F-7
<PAGE>
SUMMIT MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
designation as of each balance sheet date. The Company has classified its
short-term investments, consisting of U.S. Treasury Bills, U.S. Treasury
Notes, Commercial Paper and Discounted Notes, as available for sale. At
December 31, 1995 and March 31, 1996, the fair market value of the short-term
investments approximated the amortized cost, with no resulting unrealized
gains and losses recognized.
Accounts Receivable Allowance
The Company determines an allowance amount based upon an analysis of the
collectibility of specific accounts and the aging of the accounts receivable.
The Company's accounts receivable aging approximates that of the health care
industry and consists of large corporations and hospitals with excellent
credit history.
Equipment and Fixtures
Equipment and fixtures are stated at cost. The Company provides for
depreciation using accelerated methods at rates designed to amortize the cost
of equipment and fixtures over their estimated useful lives of three to seven
years.
Computer Software Costs
Computer software costs include the cost of internally developed software,
which have been capitalized in accordance with Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software to
be Sold, Leased or Otherwise Marketed." The capitalized costs are amortized at
the faster of projected revenue or straight-line basis over their estimated
useful lives, commencing when each product is available to the market.
Amortization expense, based on an eighteen-month useful life, for computer
software during 1995 and the three months ended March 31, 1996 was $91,000 and
$23,000, respectively. Accumulated amortization for computer software at
December 31, 1994 and 1995 was $8,000 and $99,000, respectively.
Deferred Revenue
Revenue related to the licensing of software is deferred until the software
is shipped. Revenue-related cash reserved in advance of performance for
service and support agreements is deferred and recognized on a straight-line
basis over the term of the agreement.
Income Taxes
The Company accounts for income taxes using the liability method. Deferred
income taxes are provided for temporary differences between financial
reporting and tax bases of assets and liabilities.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Net Income (Loss) Per Share
Net income (loss) per share is computed using the weighted average number of
common shares and common share equivalents, if dilutive, outstanding during
the periods presented after giving effect to the conversion of convertible
preferred stock into common stock. Pursuant to Securities and Exchange
Commission Staff Accounting Bulletin No. 83 ("SAB No. 83"), shares convertible
into common stock and common stock equivalent shares issued or granted by the
Company at prices less than the initial offering price during the 12 months
immediately preceding the initial public offering, have been included in the
determination of shares used in calculation of net loss per share, as if they
were outstanding for all periods presented up to the initial public offering
date.
F-8
<PAGE>
SUMMIT MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Subsequent to the initial public offering date, net (loss) per share is
computed by dividing the net (loss) for the period by the weighted average
number of shares of common stock outstanding during the period. Stock options
and warrants are excluded from the computation as they are antidilutive.
Interim Financial Information
The accompanying financial statements as of March 31, 1996 and for the
three-month periods ended March 31, 1996 and March 31, 1995 are unaudited. In
the opinion of the management of the Company, these financial statements
reflect all adjustments, consisting only of normal and recurring adjustments,
necessary for a fair presentation of the financial statements. The results of
operations for the three-month period ended March 31, 1996 are not necessarily
indicative of the results that may be expected for the full year ending
December 31, 1996.
Reclassification
Certain prior year items have been reclassified to conform with the 1995
presentation.
3. ACQUISITIONS OF MEDICAL INFORMATION SYSTEMS COMPANY, INC. AND BSM
FINANCIAL, INC.
Effective November 20, 1995, the Company acquired Medical Information
Systems Company, Inc., a developer of decision-support software for
determining expected outcomes from preventive care, occupational health, and
pharmacological interventions. The Company exchanged 126,386 shares of common
stock for all outstanding shares of Medical Information Systems Company, Inc.
Effective October 6, 1995, the Company acquired BSM Financial, Inc., a
health care consulting firm providing services in the areas of strategic
planning, data analysis and various other services. The Company exchanged
182,524 shares of common stock for all outstanding shares of BSM Financial,
Inc.
The mergers have been accounted for as poolings of interests. Pro forma
condensed statements of operations data for the years ended December 31, 1993,
1994 and 1995 are as follows:
<TABLE>
<CAPTION>
MEDICAL
SUMMIT INFORMATION
MEDICAL BSM FINANCIAL, SYSTEMS
SYSTEMS, INC. INC. COMPANY, INC. COMBINED
------------- -------------- ------------- -----------
<S> <C> <C> <C> <C>
1993
Revenue................. $ 4,495,925 $ 899,173 $ 9,685 $ 5,404,783
Net income (loss)....... 157,653 39,877 (196,967) 563
Net income (loss) per
share.................. $ .05 $ .22 $ (3.43) $ .00
1994
Revenue................. $ 8,191,282 $1,207,033 $ 229,008 $ 9,627,323
Net income (loss)....... 10,380 (31,234) (313,214) (334,068)
Net income (loss) per
share.................. $ .00 $ (.17) $ (2.82) $ (.08)
1995
Revenue................. $11,614,325 $1,824,418 $ 361,941 $13,800,686
Net income (loss)....... (7,229,398) 106,864 (535,244) (7,657,778)
Net income (loss) per
share.................. $ (1.37) $ .49 $ (4.24) $ (1.37)
</TABLE>
4. JOINT VENTURE
On December 29, 1995, the Company entered into a software license agreement
with Duke University ("Duke") and formed a joint venture with three of Duke's
nationally recognized cardiologists. Under the software license agreement,
Duke has granted the Company an exclusive license to the Duke Cardiology
Information System, a clinical information database system for cardiology. In
connection with the software license agreement, the Company issued 200,000
shares of Common Stock to Duke and a seven-year warrant to purchase an
additional 200,000 shares of Common Stock at $21.00 per share, the market
value of the Company's Common Stock on the day prior to the issuance of the
warrant. The Company also issued a vested option for 40,000 shares of Common
Stock at $15.50 per share, the market value of the Company's stock on the day
F-9
<PAGE>
SUMMIT MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of the issuance of the option. The option was issued to the Company's recently
hired chief executive officer for assistance received from him related to this
transaction while he was acting as an independent consultant to the Company.
The total purchase price of $7,435,000 consisting of the market price of the
stock ($4,200,000), the value of the option and warrant ($2,935,000) and
acquisition-related expenses ($300,000) has been allocated to in-process
software development technology and was expensed upon closing of the
transaction on December 29, 1995. The amounts paid were expensed as purchased
research and development based on the Company's determination that the
acquired technology has no alternative future use.
The Company's current ownership position in the joint venture is 99%, which
will result in essentially all start-up losses being consolidated into the
Company's operating results. In addition, Duke and the individual
cardiologists are entitled to subscribe for the purchase of up to a 50%
ownership position in the joint venture at any time prior to December 29,
2002, at a cost of $2,000.
The Company has also agreed to provide up to $3.0 million of additional
capital for the joint venture, payable in accordance with the joint venture's
annual operating budget, to fund start-up and development costs. Upon any
distributions from the joint venture, out of cash flow or in the event of
liquidation, the Company will receive a priority distribution of this
additional capital and a priority return on this additional capital equal to
10% of the average daily balance of the Company's additional capital
contribution. The software license agreement also provides for the Company to
pay royalties to Duke and the joint venture on sales of products derived from
the Duke Cardiology Information System. These royalty payments will be reduced
by an amount equal to 50% of the Company's additional capital contributions to
the joint venture.
5. NOTE RECEIVABLE--OFFICER
The note receivable from an officer is due on demand, bears interest at 9%
and is unsecured.
6. ADVANCES TO OFFICERS AND EMPLOYEES
On December 31, 1995, the Company paid bonuses to officers and employees on
the basis of preliminary financial results achieved in 1995. As a result of
subsequent adjustments in reporting the final results for 1995, it was
determined that $190,000 of these bonuses paid to officers and employees were
not in fact earned. The resulting payments made in December were treated as an
advance against 1996 bonuses, with the Company having the right to deduct this
advance from any bonus payment earned in 1996.
7. EQUIPMENT AND FIXTURES
Equipment and fixtures are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1994 1995 1996
---------- ---------- -----------
<S> <C> <C> <C>
Furniture and fixtures............. $ 477,946 $ 658,126 $ 790,283
Computer and telephone equipment... 813,207 1,566,864 1,676,759
Vehicles........................... 85,841 90,070 90,070
Leasehold improvements............. 20,078 53,724 73,571
---------- ---------- -----------
1,397,072 2,368,784 2,630,683
Less accumulated depreciation...... (569,492) (983,121) (1,109,190)
---------- ---------- -----------
$ 827,580 $1,385,663 $ 1,521,493
========== ========== ===========
</TABLE>
8. NOTE PAYABLE--OFFICER
During 1994 and 1995, an officer advanced funds in the form of a demand note
and expects to be paid in full within the next twelve months. No interest has
been accrued as the note does not provide for interest. During the three
months ended March 31, 1996 the note was paid in full.
F-10
<PAGE>
SUMMIT MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. SHORT-TERM NOTES PAYABLE
On July 2, 1995, prior to the merger with the Company, Medical Information
Systems Company, Inc. issued an aggregate of $45,000 of 11% unsecured
Promissory Notes due July 1, 1996 to two members of its Board of Directors.
10. CONVERTIBLE DEBENTURE
During 1993, the Company borrowed $30,000 from two health organizations in
the amount of $15,000 each. The convertible debentures provided for a one-year
term with interest at six percent, due at maturity.
During 1994, one lender exercised their option and converted their debenture
for 2,746 shares of Common Stock and $7,500 cash.
During 1995, the Company paid in full the remaining balance of $15,000.
11. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- MARCH 31,
1994 1995 1996
------- -------- ---------
<S> <C> <C> <C>
Note payable--bearing interest at prime
plus 2%, due in equal monthly
installments of $560, unsecured......... $12,720 $ 7,680 $ --
Note payable--bearing interest at 8%, due
in equal monthly installments of $627,
secured by a vehicle.................... -- 26,178 --
Capital lease--bearing interest at 10%,
due in equal monthly installments of
$238, secured by a copier............... 2,490 -- --
Capital lease--bearing interest at 16%
due in equal monthly installments of
$573, secured by a telephone system..... -- -- 16,431
------- -------- -------
Total debt............................... 15,210 33,858 16,431
Less current portion..................... (9,210) (13,278) (4,000)
------- -------- -------
Long-term debt, net of current portion... $ 6,000 $ 20,580 $12,431
======= ======== =======
</TABLE>
12. SALES OF PREFERRED STOCK
In 1994, the Company sold 1,600,000 shares of Series A Convertible Preferred
Stock in a private placement for $4,000,000 less related offering costs of
$106,900. Upon the closing of the initial public offering of the Company's
Common Stock in August 1995, all Preferred Stock then outstanding was
converted into an aggregate of 1,066,656 shares of Common Stock.
13. SALES OF COMMON STOCK
In August 1995, the Company sold 2,875,000 shares of Common Stock in its
initial public offering for $25,875,000, less related costs of $2,630,624.
14. LEASES
The Company leases its office space and certain office equipment under
operating leases. The office leases expire at various times through March 2001
and require the Company to pay a pro rata share of utilities for the building.
Future minimum payments under the leases at December 31, 1995 and March 31,
1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH
1995 31, 1996
------------ --------
<S> <C> <C>
Nine months ending December 31, 1996............. $ -- $343,280
Fiscal year:
1996............................................ 180,467 --
1997............................................ 17,123 219,385
1998............................................ -- 123,244
1999............................................ -- 126,425
2000............................................ -- 129,605
2001............................................ -- 32,660
</TABLE>
F-11
<PAGE>
SUMMIT MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Rent expense for the years ended December 31, 1994 and 1995 and the three
months ended March 31, 1996 was $349,600, $514,553 and $171,336, respectively.
15. INCOME TAXES
Income tax expense for the years ended December 31, 1994, 1995 and three
months ended March 31, 1996 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------- MARCH 31,
1994 1995 1996
----------------------- ------------
<S> <C> <C> <C>
Current........................... $ -- $ 110,062 $17,832
Deferred.......................... 15,900 (110,062) --
---------- ------------ -------
$ 15,900 $ -- $17,832
========== ============ =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities as of December 31, 1994
and 1995 and March 31, 1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1994 1995 1996
--------- ----------- -----------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss
carryforwards.................. $ 460,800 $ -- $ --
Temporary differences:
Purchase of in-process
research and development..... -- 2,478,104 2,478,104
Other......................... -- 19,461 19,461
Valuation allowance............. (188,800) (2,387,503) (2,487,795)
--------- ----------- -----------
272,000 110,062 9,770
Deferred tax liabilities:
Temporary differences:
Cash basis for tax purposes... 287,900 -- 17,832
--------- ----------- -----------
Net deferred tax asset............ $ (15,900) $ 110,062 $ (8,062)
========= =========== ===========
</TABLE>
16. STOCK OPTIONS
In 1993, the Company established the Stock Option Plan of 1993 whereby
293,333 shares of Common Stock have been reserved. The options can be either
incentive stock options or nonstatutory options to be granted to employees and
consultants of the Company. In January and December of 1994 and in March of
1996, the board of directors authorized increases of 133,333, 400,000 and
1,300,000 shares, respectively, of shares reserved for issuance under this
plan.
In May 1995, the Company adopted the 1995 Director Plan whereby 66,666
shares of Common Stock have been reserved. The plan provides for an automatic
grant of nonqualified stock options to purchase 6,666 shares of Common Stock
to nonemployee directors on the date such individuals are first appointed
directors of the Company, and an automatic grant of an option to purchase an
additional 2,000 shares of Common Stock on the day after each subsequent
annual meeting of the Company's shareholders. The option price is equal to the
fair market value of the Common Stock on the date of grant. Options vest and
become exercisable as to 100% of such shares on the first annual anniversary
of the date of such grant if the holder remains a director on such date.
F-12
<PAGE>
SUMMIT MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Option activity is summarized as follows:
<TABLE>
<CAPTION>
SHARES PLAN NON-PLAN EXERCISE
AVAILABLE OPTIONS OPTIONS PRICE
FOR GRANT OUTSTANDING OUTSTANDING EXERCISABLE PER SHARE
--------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1992................... -- -- 66,666 39,999 $.075
Establishment of Stock
Option Plan of 1993.. 293,333 -- -- -- --
Granted............... (265,312) 265,312 46,664 -- 1.50
Became exercisable.... -- -- -- 13,333 --
--------- --------- ------- -------
Balance at December 31,
1993................... 28,021 265,312 113,330 53,332 .075-1.50
Shares reserved....... 533,333 -- -- -- --
Granted............... (275,991) 275,991 33,332 -- 3.75
Became exercisable.... -- -- -- 84,128 --
Canceled.............. 40,000 (40,000) -- -- 1.50
--------- --------- ------- -------
Balance at December 31,
1994................... 325,363 501,303 146,662 137,460 .075-1.50
Granted............... (231,998) 231,998 13,794 -- 3.75-21.50
Became exercisable.... -- -- -- 156,988 --
Exercised............. -- (9,999) (66,666) (76,665) .075-1.50
Canceled.............. 13,333 (13,333) -- -- 3.75
--------- --------- ------- -------
Balance at December 31,
1995................... 106,698 709,969 93,790 217,783 1.50-21.50
Shares reserved....... 1,300,000 -- -- -- --
Granted............... (794,500) 794,500 -- -- 17.00-17.75
Became exercisable.... -- -- -- 134,333 --
Exercised............. -- (20,980) -- (20,980) 1.50-3.75
Canceled.............. 6,400 (6,400) -- -- 3.75
--------- --------- ------- -------
Balance at March 31,
1996 (unaudited)....... 618,598 1,477,089 93,790 331,136 $1.50-21.50
========= ========= ======= =======
</TABLE>
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." The Company has not determined the impact of the new statement
on its financial statements.
17. EMPLOYEE STOCK PURCHASE PLAN
In May 1995, the Company adopted the 1995 Employee Stock Purchase Plan
whereby 133,333 shares of Common Stock have been reserved. All employees who
have met the service eligibility requirements are eligible to participate and
may direct the Company to make payroll deductions of two to fifteen percent of
their compensation during a purchase period for the purchase of shares under
the plan. The 1995 Stock Purchase Plan provides participating employees the
right, subject to certain limitations, to purchase the Company's Common Stock
at a price equal to the lower of 85% of the fair market value of the Company's
Common Stock on the first day, or the last day, of the applicable purchase
period. The first purchase period commenced on August 3, 1995 and ended on
December 29, 1995. Subsequent purchase periods will run for six months,
subject to acceleration in the case of a merger or consolidation in which the
Company is not the surviving corporation, or the liquidation, dissolution or
sale of substantially all of the assets of the Company. In 1995, 35,016 shares
were purchased and issued. No shares were purchased during the three month
period ended March 31, 1996.
F-13
<PAGE>
SUMMIT MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
18. STOCK AUTHORIZATION AND STOCK SPLITS
In January 1994, the Board of Directors approved a 2-for-1 stock split
effected in the form of a stock dividend for Common Stock and options of the
Company, effective March 17, 1994.
In June 1995, the Board of Directors approved a 1.5-to-1 reverse stock split
for Common Stock and options of the Company, effective June 15, 1995.
All share, per share, weighted average share, and stock option information
in these financial statements has been restated to reflect these stock splits
as if they occurred at the beginning of the earliest period presented.
19. DISTRIBUTION AGREEMENTS
In 1994, 1995 and the three month period ended March 31, 1996, the Company
entered into product distribution agreements with the following companies.
These agreements grant each distributor an exclusive right and license to
market, sell and distribute selected programs worldwide. In order to maintain
exclusivity, each distributor has agreed to purchase a minimum number of
programs over the next five years.
<TABLE>
<CAPTION>
DISTRIBUTOR PRODUCT
----------- -------
<S> <C>
SciMed Life Systems, Inc.................... Cardiology programs
Allergan.................................... Ophthalmic programs
Microvasive Urology......................... Urology programs
Microvasive Endoscopy....................... Endoscopy programs
Mansfield EP................................ Electrophysiology programs
Smith & Nephew Richards..................... Orthopedic programs
Meadox Medicals............................. Vascular programs
</TABLE>
In June 1995, Medical Information Systems Company, Inc. ("MIS"), a wholly-
owned subsidiary of the Company, entered into a license agreement with
DRI/McGraw-Hill ("DRI") to utilize DRI's proprietary data and forecast
services for a two-year period. Pursuant to the agreement, MIS pays a monthly
license fee to DRI in the amount of $6,667 for twelve months and issued a
warrant to purchase 4,460 shares of the Company's common stock at $1.00 per
share for ten years. The value of this warrant was determined to be $60,000
and is being amortized as a cost of the data base over the two-year license
agreement period.
20. SIGNIFICANT CUSTOMER AND RELATED PARTY
The Company sells a substantial portion of its product to one customer.
During 1994, 1995 and the three months ended March 31, 1996, sales to this
customer aggregated $1,502,000, $1,320,514 and $488,050, respectively. At
December 31, 1994 and 1995 and March 31, 1996, amounts due from this customer
included in trade accounts receivable were $442,000, $692,465 and $581,505,
respectively.
Sales to VIVRA Heart Services in 1995 totaled $144,000. The Chief Executive
Officer of VIVRA is a director of the Company.
F-14
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING
SHAREHOLDER OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM
IT IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 12
Price Range of Common Stock............................................... 12
Dividend Policy........................................................... 12
Capitalization............................................................ 13
Selected Consolidated Financial Data...................................... 14
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 15
Business.................................................................. 23
Management................................................................ 39
Certain Transactions...................................................... 45
Principal and Selling Shareholders........................................ 46
Description of Capital Stock.............................................. 48
Underwriting.............................................................. 50
Legal Matters............................................................. 51
Experts................................................................... 51
Additional Information.................................................... 51
Available Information..................................................... 51
Index to Financial Statements............................................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1,780,000 Shares
LOGO
Common Stock
---------------
PROSPECTUS
---------------
Wessels, Arnold & Henderson
Robertson, Stephens & Company
Volpe, Welty & Company
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following expenses will be paid by the Company in connection with the
distribution of the securities registered hereby.
<TABLE>
<S> <C>
SEC registration fee............................................ $ 18,625
Legal fees and expenses......................................... 120,000
Accounting fees and expenses.................................... 45,000
Nasdaq fee...................................................... 17,500
NASD filing fee................................................. 5,901
Blue Sky fees and expenses...................................... 10,000
Printing fees and expenses...................................... 70,000
Miscellaneous................................................... 212,974
--------
Total....................................................... $500,000
========
</TABLE>
- --------
* All fees and expenses other than SEC registration fee, Nasdaq fee and NASD
filing fee are estimated and will be paid by the Company.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article VII of the Company's Restated Articles of Incorporation provides
that a director of the Company shall not be personally liable to the Company
or its shareholders for monetary damages for breach of fiduciary duty as a
director, except for (i) liability based on a breach of the duty of loyalty to
the Company or the shareholders; (ii) liability for acts or omissions not in
good faith or that involve intentional misconduct or a knowing violation of
law; (iii) liability based on the payment of an improper dividend or an
improper repurchase of the Company's stock under Minnesota Statutes Section
302A.559 or on the sale of unregistered securities or securities fraud under
Minnesota Statutes Section 80A.23; or (iv) liability for any transaction from
which the director derived an improper personal benefit. This article does not
affect the availability of equitable remedies, such as an action to enjoin or
rescind a transaction involving a breach of fiduciary duty, although as a
practical matter, equitable relief may not be available. This Article also
does not limit liability of the directors for violations of, or relieve them
from the necessity of complying with, the federal securities laws.
The various registration rights agreements between the Company and the
Selling Shareholders all contain provisions whereby the Selling Shareholders
have agreed to indemnify, under certain conditions, the Company, its
directors, certain of its officers and persons who control the Company within
the meaning of the Securities Act of 1933 against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since January 1, 1993, the Company has issued and sold the following
securities that were not registered under the Securities Act of 1933, as
amended (the "Securities Act") (the share numbers and per share price figures
have been adjusted to reflect all stock splits of Common Stock through the
date of this Prospectus):
1. On May 27, 1994, the Company issued and sold 170,000 shares of its Series
A Preferred Stock, since converted into 113,333 shares of Common Stock, to
Catalyst for $425,000; 465,000 shares of its Series A Preferred Stock, since
converted into 310,000 shares of its Common Stock, to NEA VI for $1,162,500;
and 565,000 shares of its Series A Preferred Stock, since converted into
376,666 shares of Common Stock, to Vivra for $1,412,500. All of these sales
were made at a price of $2.50 per share.
2. On July 29, 1994, the Company issued and sold 400,000 shares of its
Series A Preferred Stock, since converted into 266,666 shares of Common Stock,
to various investors for total consideration of $1,000,000, including 1,000
shares of its Series A Preferred Stock, since converted into 666 shares of
Common Stock, to
II-1
<PAGE>
Edward F. Sweeney, 6,000 shares of its Series A Preferred Stock, since
converted into 4,000 shares of Common Stock, to Dennis H. Powers as beneficial
owner, and 7,845 shares of its Series A Preferred Stock, since converted into
5,230 shares of Common Stock, to William J. Cavanagh. All of these sales were
made at a price of $2.50 per share.
3. On February 28, 1995, the Company issued and sold 6,666 shares of its
Common Stock to Allen Webb for $10,000, at price of $1.50 per share, pursuant
to the terms of an incentive stock option agreement between Mr. Webb and the
Company dated May 4, 1993.
4. On September 8, 1995, the Company issued and sold 3,333 shares of its
Common Stock to V. David Schwantes for $12,499, or $3.75 per share pursuant to
the terms of a incentive stock option agreement between Mr. Schwantes and the
Company dated September 8, 1994.
5. On September 26, 1995, the Company issued and sold 66,666 shares of its
Common Stock to Dr. Michael Kaye for $5,000, or $.75 per share pursuant to the
terms of a non-incentive stock option agreement between Dr. Kaye and the
Company dated October 1, 1989.
6. On October 5, 1995, the Company issued 182,524 shares of its Common Stock
to Bruce S. Maller in exchange for all of the outstanding shares of common
stock of BSM, pursuant to the terms of an Agreement and Plan of Merger between
the Company and BSM dated September 29, 1995.
7. On November 20, 1995, the Company issued 126,386 shares of its Common
Stock to the shareholders of MIS in exchange for all of the outstanding shares
of common stock of MIS, pursuant to the terms of an Agreement and Plan of
Merger between the Company and MIS dated November 15, 1995. In addition, the
Company assumed options under MIS's stock option plan to purchase 13,794
shares of Common Stock. The Company also assumed an outstanding MIS warrant to
purchase 4,460 shares of Common Stock.
8. On December 29, 1995, the Company issued (a) 200,000 shares of its Common
Stock, having an aggregate market value of $4.2 million, or $21.00 per share
and (b) a warrant to purchase 200,000 shares of its Common Stock at an
exercise price of $21.00 per share, each to Duke University in consideration
for a Software License Agreement.
The Company issued and sold Common Stock and Series A Preferred Stock as
listed in numbers 1-2 above in reliance upon Section 4(2) of the Securities
Act and Rule 505 of Regulation D promulgated thereunder. The Company, as
advisable, made inquiries of purchasers of securities in these transactions
and obtained representations from such purchasers to establish that such
issuances qualified for an exemption from the registration requirements.
The Company issued and sold Common Stock listed in numbers 3-8 above in
reliance upon Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1 Underwriting Agreement
*3.1 Restated Articles of Incorporation of the Company, as amended
*3.2 Bylaws of the Company
*4.1 Form of Certificate for Common Stock
5.1 Opinion of Dorsey & Whitney LLP as to the legality of issuance of
the Common Stock (including consent)
*10.1 Agreement Regarding Distribution of Software Programs between
Allergan, Inc., and Summit Medical Systems, Inc., dated September
1, 1994
*10.2 Agreement Regarding Distribution of Software Programs between
SciMed Life Systems, Inc., and Summit Medical Systems, Inc., dated
March 1, 1994, as amended in September 1994
*10.3 ACC National Database Development Agreement, dated February 8,
1991
*10.4 American Society of Cataract and Refractive Surgery National
Database Development Agreement, dated February 18, 1994
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
*10.5 First Amendment and Restatement of STS National Database Agreement,
dated March 26, 1995
*10.6 Ninth Amendment, dated January 24, 1995, to Lease Agreement of July
5, 1988, between Carlson Center II Limited Partnership and Summit
Medical Systems, Inc.
*10.7 First Amendment, dated January 31, 1995, to Lease Agreement of
February 2, 1993, between Collin Equities, Inc., and Summit Medical
Systems, Inc.
*10.8 Summit Medical Systems, Inc., 1993 Employee Stock Option Plan
*10.9 Summit Medical Systems, Inc., 1995 Employee Stock Purchase Plan
*10.10 Summit Medical Systems, Inc., 1995 Non-Employee Director Stock
Option Plan
*10.11 Employment Agreement dated October 19, 1992, between Summit Medical
Systems, Inc., and Edward F. Sweeney
*10.12 Employment Agreement dated October 19, 1992, between Summit Medical
Systems, Inc., and Dennis Powers
*10.13 Employment Agreement dated August 2, 1993, between Summit Medical
Systems, Inc., and William Cavanagh
*10.14 Agreement Regarding Distribution of Software Programs between Boston
Scientific Corporation and Summit Medical Systems, Inc., dated June
30, 1995
*10.15 Amendment by Letter dated July 26, 1995 of Agreement Regarding
Distribution of Software Programs between SciMed Life Systems, Inc.
and Summit Medical Systems, Inc., dated March 1, 1994, as amended in
September 1994
*10.16 Amendment by Letter dated July 18, 1995 of Agreement Regarding
Distribution of Software Programs between Summit Medical Systems,
Inc., and Boston Scientific Corporation, dated June 30, 1995
*10.17 Amendment by Letter dated July 26, 1995 of Agreement Regarding
Distribution of Software Programs between Summit Medical Systems,
Inc., and Boston Scientific Corporation, dated June 30, 1995
****10.18 Agreement Regarding Distribution of Software Programs between Boston
Scientific Corporation and Summit Medical Systems, Inc. dated
September 1, 1995
**10.19 Agreement and Plan of Merger between BSM Acquisition Corp., BSM
Financial, Inc., Bruce S. Maller and Summit Medical Systems, Inc.
dated September 29, 1995
***10.20 Agreement and Plan of Merger between MIS Acquisition Corp., Medical
Information Systems Company, Inc. and Summit Medical Systems, Inc.
dated November 15, 1995
****10.21 License Agreement between Duke University and Summit Medical
Systems, Inc. dated December 29, 1995
****10.22 Cordillera L.L.C. Limited Liability Company Agreement dated December
29, 1995
****10.23 Sublicense and Distribution Agreement between Cordillera L.L.C. and
Summit Medical Systems, Inc. dated December 29, 1995
****10.24 Employment Letter dated January 19, 1996, between Summit Medical
Systems, Inc. and George J. Marshalek, Jr.
****10.25 Agreement Regarding Distribution of Software Programs between Smith
& Nephew Richards, Inc. and Summit Medical Systems, Inc. dated
November 10, 1995
****10.26 Agreement Regarding Distribution of Software Programs between Boston
Scientific Corporation and Summit Medical Systems, Inc. dated
December 1, 1995
****10.27 Employment Letter of December 29, 1995, between Summit Medical
Systems, Inc., and Kevin R. Green
****10.28 Employment letter dated October 5, 1995, between Summit Medical
Systems, Inc., and Bruce S. Maller
10.29 Amendment by Letters dated January 2, 1996 and January 16, 1996, of
ACC National Database Development Agreement, dated February 8, 1991
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
11.1 Statement re: computation of per share earnings
21.1 Subsidiaries
23.1 Consent of Ernst & Young LLP
23.2 Consent of Dorsey & Whitney LLP (included in Exhibit 5.1)
24.1 Powers of attorney
</TABLE>
- --------
*Incorporated by reference to the Exhibit with the same number in the Company's
Registration Statement on Form S-1 (File No. 33-93700)
**Incorporated by reference to the Company's Current Report on Form 8-K dated
October 19, 1995 (File No. 0-26390).
***Incorporated by reference to the Company's Current Report on Form 8-K dated
December 4, 1995 (File No. 0-26390).
****Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 333-01958).
(b) FINANCIAL STATEMENT SCHEDULES
Independent Auditors' Report on Schedule for Years Ended December 31, 1993,
1994 and 1995
Schedule II--Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant Item 14 or otherwise, the registrant has been advised that,
in the opinion of the Securities and Exchange Commission, such indemnification
is against public policy as expressed in such Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in such Act and will be governed by the
final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) under the Securities Act
if, in the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offer.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT ON FORM S-1 TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED, IN MINNEAPOLIS,
MINNESOTA, ON JUNE 11, 1996.
Summit Medical Systems, Inc.
/s/ Kevin R. Green
By __________________________________
Kevin R. Green
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON JUNE 11, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ Kevin R. Green President and Chief
__________________________________________ Executive Officer and
Kevin R. Green Director (Principal
Executive Officer)
/s/ Anthony W. Rees Vice President, Finance and
__________________________________________ Chief Financial Officer
Anthony W. Rees (Principal Financial and
Accounting Officer)
/s/ Edward F. Sweeney Chairman of the Board and
________________________________________ Director
Edward F. Sweeney
/s/ Dennis H. Powers Vice President, Business
_________________________________________ Development and Director
Dennis H. Powers
/s/ John M. Nehra Director
__________________________________________
John M. Nehra
/s/ Kent J. Thiry Director
__________________________________________
Kent J. Thiry
</TABLE>
II-5
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Summit Medical Systems, Inc.
We have audited the consolidated financial statements of Summit Medical
Systems, Inc. as of December 31, 1994 and 1995, and for each of the three years
in the period ended December 31, 1995, and have issued our report thereon dated
February 15, 1996 (included elsewhere in this Registration Statement). Our
audits also included the financial statement schedule listed in Item 16(b) of
this Registration Statement. This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
Minneapolis, Minnesota
February 15, 1996
S-1
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
SUMMIT MEDICAL SYSTEMS, INC.
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
------ -------------------- --------------------------------- ------------ --------------
ADDITIONS
---------------------------------
CHARGED TO OTHER
BALANCE AT BEGINNING CHARGED TO COSTS ACCOUNTS-- DEDUCTIONS-- BALANCE AT END
DESCRIPTION OF PERIOD AND EXPENSES DESCRIBE DESCRIBE OF PERIOD
----------- -------------------- ---------------- ---------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1993
Deducted from asset
accounts:
Allowance for
doubtful accounts.. $ 10,000 $14,000 $-- $ 4,000(1) $ 20,000
Year ended December 31,
1994
Deducted from asset
accounts:
Allowance for
doubtful accounts.. $ 20,000 $82,783 $-- $23,250(1) $ 79,533
Year ended December 31,
1995
Deducted from asset
accounts:
Allowance for
doubtful accounts.. $ 79,533 $20,864 $-- $ -- $100,397
Three months ended March
31, 1996
Deducted from asset
accounts:
Allowance for
doubtful accounts.. $100,397 $ 9,946 $-- $ -- $110,343
</TABLE>
- --------
(1) Write-off uncollectible accounts receivable.
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
1.1 Underwriting Agreement
*3.1 Restated Articles of Incorporation of the Company, as amended
*3.2 Bylaws of the Company
*4.1 Form of Certificate for Common Stock
5.1 Opinion of Dorsey & Whitney LLP as to the legality of issuance
of the Common Stock (including consent)
*10.1 Agreement Regarding Distribution of Software Programs between
Allergan, Inc., and Summit Medical Systems, Inc., dated
September 1, 1994
*10.2 Agreement Regarding Distribution of Software Programs between
SciMed Life Systems, Inc., and Summit Medical Systems, Inc.,
dated March 1, 1994, as amended in September 1994
*10.3 ACC National Database Development Agreement, dated February 8,
1991
*10.4 American Society of Cataract and Refractive Surgery National
Database Development Agreement, dated February 18, 1994
*10.5 First Amendment and Restatement of STS National Database
Agreement, dated March 26, 1995
*10.6 Ninth Amendment, dated January 24, 1995, to Lease Agreement of
July 5, 1988, between Carlson Center II Limited Partnership and
Summit Medical Systems, Inc.
*10.7 First Amendment, dated January 31, 1995, to Lease Agreement of
February 2, 1993, between Collin Equities, Inc., and Summit
Medical Systems, Inc.
*10.8 Summit Medical Systems, Inc., 1993 Employee Stock Option Plan
*10.9 Summit Medical Systems, Inc., 1995 Employee Stock Purchase Plan
*10.10 Summit Medical Systems, Inc., 1995 Non-Employee Director Stock
Option Plan
*10.11 Employment Agreement dated October 19, 1992, between Summit
Medical Systems, Inc., and Edward F. Sweeney
*10.12 Employment Agreement dated October 19, 1992, between Summit
Medical Systems, Inc., and Dennis Powers
*10.13 Employment Agreement dated August 2, 1993, between Summit
Medical Systems, Inc., and William Cavanagh
*10.14 Agreement Regarding Distribution of Software Programs between
Boston Scientific Corporation and Summit Medical Systems, Inc.,
dated June 30, 1995
*10.15 Amendment by Letter dated July 26, 1995 of Agreement Regarding
Distribution of Software Programs between SciMed Life Systems,
Inc. and Summit Medical Systems, Inc., dated March 1, 1994, as
amended in September 1994
*10.16 Amendment by Letter dated July 18, 1995 of Agreement Regarding
Distribution of Software Programs between Summit Medical
Systems, Inc., and Boston Scientific Corporation, dated June
30, 1995
*10.17 Amendment by Letter dated July 26, 1995 of Agreement Regarding
Distribution of Software Programs between Summit Medical
Systems, Inc., and Boston Scientific Corporation, dated June
30, 1995
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
****10.18 Agreement Regarding Distribution of Software Programs between
Boston Scientific Corporation and Summit Medical Systems,
Inc. dated September 1, 1995
**10.19 Agreement and Plan of Merger between BSM Acquisition Corp.,
BSM Financial, Inc., Bruce S. Maller and Summit Medical
Systems, Inc. dated September 29, 1995
***10.20 Agreement and Plan of Merger between MIS Acquisition Corp.,
Medical Information Systems Company, Inc. and Summit Medical
Systems, Inc. dated November 15, 1995
****10.21 License Agreement between Duke University and Summit Medical
Systems, Inc. dated December 29, 1995
****10.22 Cordillera L.L.C. Limited Liability Company Agreement dated
December 29, 1995
****10.23 Sublicense and Distribution Agreement between Cordillera
L.L.C. and Summit Medical Systems, Inc. dated December 29,
1995
****10.24 Employment Letter dated January 19, 1996, between Summit
Medical Systems, Inc. and George I. Marshalek, Jr.
****10.25 Agreement Regarding Distribution of Software Programs between
Smith & Nephew Richards, Inc. and Summit Medical Systems,
Inc. dated November 10, 1995
****10.26 Agreement Regarding Distribution of Software Programs between
Boston Scientific Corporation and Summit Medical Systems,
Inc. dated December 1, 1995
****10.27 Employment Letter of December 29, 1995, between Summit
Medical Systems, Inc., and Kevin R. Green
****10.28 Employment Letter dated October 5, 1995, between Summit
Medical Systems, Inc. and Bruce S. Maller
10.29 Amendment by Letters dated January 2, 1996 and January 16,
1996, of ACC National Database Development, dated February 8,
1991
11.1 Statement re: computation of per share earnings
21.1 Subsidiaries
23.1 Consent of Ernst & Young LLP
23.2 Consent of Dorsey & Whitney LLP (included in Exhibit 5.1)
24.1 Powers of attorney
</TABLE>
- --------
* Incorporated by reference to the Exhibit with the same number in the
Company's Registration Statement on Form S-1 (File No. 33-93700)
** Incorporated by reference to the Company's Current Report on Form 8-K
dated October 19, 1995 (File No. 0-26390).
*** Incorporated by reference to the Company's Current Report on Form 8-K
dated December 4, 1995 (File No. 0-26390).
**** Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 333-01958).
<PAGE>
DRAFT 5/31/96
-------------
__________ Shares
SUMMIT MEDICAL SYSTEMS, INC.
Common Stock
UNDERWRITING AGREEMENT
----------------------
June , 1996
WESSELS, ARNOLD & HENDERSON, L.L.C.
ROBERTSON, STEPHENS & COMPANY LLC
VOLPE, WELTY & COMPANY
As Representatives of the several Underwriters
c/o Wessels, Arnold & Henderson, L.L.C.
901 Marquette Avenue, Suite 2700
Minneapolis, Minnesota 55402-3280
Dear Sirs:
SECTION 1. Introduction. Summit Medical Systems, Inc., a Minnesota
corporation (the "Company"), proposes to issue and sell ________ shares of its
authorized but unissued Common Stock (the "Common Stock") and certain
stockholders of the Company named in Schedule B annexed hereto (hereafter called
the "Selling Stockholders") propose to sell an aggregate of _______ shares of
the Company's issued and outstanding Common Stock to the several underwriters
named in Schedule A annexed hereto (the "Underwriters"), for whom you are acting
as Representatives. Said aggregate of ________ shares are herein called the
"Firm Common Shares." In addition, the Company proposes to grant to the
Underwriters an option to purchase up to ______ additional shares of Common
Stock (the "Optional Common Shares"), as provided in Section 4 hereof. The Firm
Common Shares and, to the extent such option is exercised, the Optional Common
Shares, are hereinafter collectively referred to as the "Common Shares."
You have advised the Company and the Selling Stockholders that the
Underwriters propose to make a public offering of their respective portions of
the Common Shares on the effective date of the registration statement
hereinafter referred to, or as soon thereafter as in your judgment is advisable.
The Company and each of the Selling Stockholders hereby confirm their
respective agreements with respect to the purchase of the Common Shares by the
Underwriters as follows:
<PAGE>
SECTION 2. Representations and Warranties of the Company. The
Company jointly and severally represents and warrants to the several
Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-________) with
respect to the Common Shares has been carefully prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as amended (the
"Act"), and the rules and regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") thereunder, and has been
filed with the Commission under the Act. The Company has prepared and has filed
or proposes to file prior to the effective date of such registration statement
an amendment or amendments to such registration statement, which amendment or
amendments have been or will be similarly prepared. There have been delivered
to you four manually signed copies of such registration statement and
amendments, together with four copies of each exhibit filed therewith.
Conformed copies of such registration statement and amendments (but without
exhibits) and of the related preliminary prospectus (meeting the requirements of
Rule 430 of the Rules and Regulations) contained therein have been delivered to
you in such reasonable quantities as you have requested for each of the
Underwriters. Copies of such registration statement, including any amendments
thereto, the preliminary prospectuses contained therein and the exhibits,
financial statements and schedules, as finally amended and revised, have
heretofore been delivered by the Company to you and, to the extent applicable,
were identical to the electronically transmitted copies thereof filed with the
Commission pursuant to the Commission's Electronic Data Gathering, Analysis and
Retrieval System ("EDGAR"), except to the extent permitted by Regulation S-T.
The Company will next file with the Commission one of the following: (i) prior
to the effectiveness of such registration statement, a further amendment
thereto, including the form of final prospectus, or (ii) a final prospectus in
accordance with Rules 430A and 424(b) of the Rules and Regulations. As filed,
such amendment and form of final prospectus, or such final prospectus, shall
include all Rule 430A Information (as defined below) and, except to the extent
that you shall agree in writing to a modification, shall be in all substantive
respects in the form furnished to you prior to the date and time that this
Agreement was executed and delivered by the parties hereto, or, to the extent
not completed at such date and time, shall contain only such specific additional
information and other changes (beyond that contained in the latest Preliminary
Prospectus (as defined below)) as the Company shall have advised you in writing
prior to the execution of this Agreement would be included or made therein. If
such registration statement has been declared effective by the Commission under
the Act, no post-effective amendment to such registration statement has been
filed as of the date of this Agreement.
The term "Registration Statement" as used in this Agreement shall mean
such registration statement at the time such registration statement becomes
effective, together with any registration statement filed by the Company
pursuant to Rule 462(b) of the Act, and, in the event any post-effective
amendment thereto becomes effective prior to the First Closing Date (as
hereinafter defined), shall also mean such registration statement as so amended;
provided, however, that such term shall also include all Rule 430A Information
deemed to be included in such registration statement at the time such
registration statement becomes effective as provided by Rule 430A of the Rules
and Regulations. The term "Preliminary Prospectus" shall mean any preliminary
prospectus referred to in the preceding paragraph and any preliminary prospectus
-2-
<PAGE>
included in the Registration Statement at any time prior to the time it becomes
effective. The term "Prospectus" as used in this Agreement shall mean (a) the
prospectus relating to the Common Shares in the form in which it is first filed
with the Commission pursuant to Rule 424(b) and Rule 430A of the Rules and
Regulations, (b) the term sheet or abbreviated term sheet filed by the Company
with the Commission pursuant to Rule 424(b)(7) together with the last
preliminary prospectus included in the Registration Statement filed prior to the
time it becomes effective or filed pursuant to Rule 424(a) under the Act that is
delivered by the Company to the Underwriters for delivery to purchasers of the
Common Shares, or, (c) if no filing pursuant to Rule 430A and/or Rule 424(b) of
the Rules and Regulations is required, shall mean the form of final prospectus
included in the Registration Statement at the time such registration statement
becomes effective. The term "Rule 430A Information" means information with
respect to the Common Shares and the offering thereof permitted to be omitted
from the Registration Statement when it becomes effective pursuant to Rule 430A
of the Rules and Regulations. Any reference herein to any Prospectus shall be
deemed to refer to and include any supplements thereto filed with the Commission
after the date of filing of the Prospectus under Rules 424(b) and 430A, and
prior to the termination of the offering of the Common Shares by the
Underwriters. Additionally, all references to the Registration Statement, any
Preliminary Prospectus, the Prospectus, or any amendment or supplement to any of
the foregoing, shall be deemed to include the respective copies thereof filed
with the Commission pursuant to EDGAR.
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus, nor has the Commission instituted or
threatened proceedings for that purpose. Each Preliminary Prospectus has
conformed in all material respects to the requirements of the Act and the Rules
and Regulations and, as of its date, has not included any untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. At the time the Registration Statement becomes effective,
and at all times subsequent thereto up to and including each Closing Date
hereinafter mentioned, the Registration Statement and the Prospectus, and any
amendments or supplements thereto, as the case may be, will (i) contain all
statements and information required to be included therein by the Act and the
Rules and Regulations and in all respects conform or will conform, as the case
may be, to the requirements of the Act and the Rules and Regulations and (ii)
will not include any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and neither the Prospectus nor any supplement thereto
will include any untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided, however, no
representation or warranty contained in this subsection 2(b) shall be applicable
to information contained in or omitted from any Preliminary Prospectus, the
Registration Statement, the Prospectus or any such amendment or supplement in
reliance upon, and in conformity with, written information furnished to the
Company by or on behalf of any Underwriter, directly or through the
Representatives, specifically for use in the preparation thereof.
(c) The Company does not own or control, directly or indirectly, any
corporation, association or other entity other than Summit Medical Europe
S.A.R.L., BSM
-3-
<PAGE>
Financial, Inc., Medical Information Systems Company, Inc. and Cordillera L.L.C.
(individually a "Subsidiary" and collectively the "Subsidiaries"). Each of the
Company and the Subsidiaries has been duly incorporated and is validly existing
as a corporation in good standing under the laws of its jurisdiction of
incorporation, with full power and authority (corporate and other) to own and
lease its properties and conduct its business as described in the Prospectus;
the Company owns all of the outstanding capital stock of the Subsidiaries free
and clear of all claims, liens, charges and encumbrances; each of the Company
and the Subsidiaries is in possession of and operating in compliance with all
authorizations, licenses, permits, consents, certificates and orders material to
the conduct of its business, all of which are valid and in full force and
effect; each of the Company and the Subsidiaries is duly qualified to do
business and in good standing as a foreign corporation in each jurisdiction in
which the ownership or leasing of properties or the conduct of its business
requires such qualification, except for jurisdictions in which the failure to so
qualify would not have a material adverse effect upon the Company or the
Subsidiaries, as the case may be; and no proceeding has been instituted in any
such jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit
or curtail, such power and authority or qualification.
(d) The Company has an authorized and outstanding capital stock as set
forth under the heading "Capitalization" in the Prospectus; the issued and
outstanding shares of Common Stock have been duly authorized and validly issued,
are fully paid and nonassessable, have been issued in compliance with all
federal and state securities laws, were not issued in violation of or subject to
any preemptive rights or other rights to subscribe for or purchase securities,
and conform to the description thereof contained in the Prospectus. All issued
and outstanding shares of capital stock of the Subsidiaries have been duly
authorized and validly issued and are fully paid and nonassessable. Except as
disclosed in or contemplated by the Prospectus and the financial statements of
the Company, and the related notes thereto, included in the Prospectus, neither
the Company nor any Subsidiary has outstanding any options to purchase, or any
preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or commitments to
issue or sell, shares of its capital stock or any such options, rights,
convertible securities or obligations. The Company has not granted any option
or other right to purchase, or issued any security or obligation convertible
into, or entered into any contract or commitment to sell, shares of any
Subsidiary owned by the Company. The description of the Company's stock option,
stock bonus and other stock plans or arrangements, and the options or other
rights granted and exercised thereunder, set forth in the Prospectus accurately
and fairly presents the information required to be shown with respect to such
plans, arrangements, options and rights.
(e) The Common Shares to be issued and sold by the Company have been
duly authorized and, when issued, delivered and paid for in the manner set forth
in this Agreement, will be duly authorized, validly issued, fully paid and
nonassessable, and will conform to the description thereof contained in the
Prospectus. No preemptive rights or other rights to subscribe for or purchase
exist with respect to the issuance and sale of the Common Shares by the Company
pursuant to this Agreement. No stockholder of the Company has any right which
has not been waived to require the Company to register the sale of any shares
owned by such stockholder under the Act in the public offering contemplated by
this Agreement. No
-4-
<PAGE>
further approval or authority of the stockholders or the Board of Directors of
the Company will be required for the transfer and sale of the Common Shares to
be sold by the Selling Stockholders or the issuance and sale of the Common
Shares to be sold by the Company as contemplated herein.
(f) The Company has full legal right, power and authority to enter
into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company and
constitutes a valid and binding obligation of the Company enforceable in
accordance with its terms, except to the extent that the validity or
enforceability of this Agreement may be subject to or affected by (i) applicable
bankruptcy, insolvency, fraudulent conveyance and transfer, reorganization,
moratorium or similar laws affecting the rights and remedies of creditors
generally, (ii) principles affording traditional equitable defenses (e.g.,
waiver, duress, laches and estoppel) as applied to a party seeking enforcement
and (iii) federal policy regarding the indemnification and contribution
provisions of this Agreement. The making and performance of this Agreement by
the Company and the consummation of the transactions herein contemplated will
not violate any provisions of the Company's Articles of Incorporation or Bylaws
and will not conflict with, result in the breach or violation of, or constitute,
either by itself or upon notice or the passage of time or both, a default under
any agreement, mortgage, deed of trust, lease, franchise, license, indenture,
permit or other instrument to which the Company or any Subsidiary is a party or
by which the Company or any Subsidiary or any of their respective properties may
be bound or affected which conflicts, breaches or might, individually or in the
aggregate, prevent or adversely affect the transactions contemplated by this
Agreement or result in a material adverse change in the condition (financial or
otherwise), properties, business or results of operations of the Company and
Subsidiaries, taken together any statute or any authorization, judgment, decree,
order, rule or regulation of any court or any regulatory body, administrative
agency or other governmental body applicable to the Company or any Subsidiary or
any of their respective properties. No consent, approval, authorization or
other order of any court, regulatory body, administrative agency or other
governmental body is required for the execution and delivery of this Agreement
or the consummation of the transactions contemplated by this Agreement, except
for compliance with the Act, the Blue Sky laws applicable to the public offering
of the Common Shares by the several Underwriters, compliance with Canadian and
European law and the clearance of such offering with the National Association of
Securities Dealers, Inc. (the "NASD").
(g) Ernst & Young LLP, who have expressed their opinion with respect
to the financial statements and schedules filed with the Commission as a part of
the Registration Statement and included in the Prospectus and in the
Registration Statement, are independent public accountants as required by the
Act and the Rules and Regulations.
(h) The consolidated financial statements of the Company and the
Subsidiaries, together with related notes and schedules included in the
Registration Statement and the Prospectus, present fairly the consolidated
financial position of the Company and the Subsidiaries as of the respective
dates of such financial statements, and the consolidated results of operations,
changes in stockholders' equity and cash flows of the Company and the
Subsidiaries for the respective periods covered thereby. Such financial
statements have been
-5-
<PAGE>
prepared in accordance with generally accepted accounting principles applied on
a consistent basis throughout the periods involved, and all adjustments
necessary for a fair presentation of results for such periods have been made. No
other financial statements or schedules are required to be included in the
Registration Statement. The selected financial data set forth in the Prospectus
under the captions "Capitalization," "Summary Consolidated Financial Data" and
"Selected Consolidated Financial Data" fairly present the information set forth
therein on the basis stated in the Registration Statement.
(i) Except as to defaults which individually or in the aggregate would
not have a material adverse effect on the Company, neither the Company nor any
Subsidiary is in violation or default of any provision of its Articles of
Incorporation or Bylaws or is in breach of or default with respect to any
provision of any agreement, judgment, decree, order, mortgage, deed of trust,
lease, franchise, license, indenture, permit or other instrument to which it is
a party or by which it or any of its properties are bound; and there does not
exist any state of facts which constitutes an event of default on the part of
the Company or any Subsidiary as defined in such documents or which, with notice
or lapse of time or both, would constitute such an event of default.
(j) There are no contracts, royalty agreements or other documents
required to be described in the Registration Statement or to be filed as
exhibits to the Registration Statement by the Act or by the Rules and
Regulations which have not been described or filed as required. The contracts
and agreements so described in the Prospectus are in full force and effect on
the date hereof; and neither the Company nor any Subsidiary nor, to the best of
the Company's knowledge, any other party, is in breach of or default under any
of such contracts and agreements, except as to breaches or defaults which
individually or in the aggregate would not have a material adverse effect on the
Company.
(k) There are no legal or governmental actions, suits or proceedings
pending or, to the Company's knowledge, threatened to which the Company, any
Subsidiary or, to the Company's knowledge any director or officer of the Company
or any Subsidiary, is or may be a party or of which property owned or leased by
the Company or any Subsidiary is or may be the subject, or related to
environmental or discrimination matters, which actions, suits or proceedings
might, individually or in the aggregate, prevent or adversely affect the
transactions contemplated by this Agreement or result in a material adverse
change in the condition (financial or otherwise), properties, business, results
of operations or prospects of the Company and the Subsidiaries taken together.
Neither the Company nor any Subsidiary is subject to the provisions of any
injunction, judgment, decree or order of any court, regulatory body,
administrative agency or other governmental body.
(l) The Company or a Subsidiary has good and marketable title to all
the properties and assets reflected as owned in the financial statements
hereinabove described (or elsewhere described in the Prospectus), subject to no
lien, mortgage, pledge, charge or encumbrance of any kind except (i) those, if
any, reflected in such financial statements (or elsewhere described in the
Prospectus), or (ii) those which are not material in amount and do not adversely
affect the use made and proposed to be made of such property by the Company and
the Subsidiaries. Each of the Company and the
-6-
<PAGE>
Subsidiaries holds its leased properties under valid and binding leases, with
such exceptions as are not materially significant in relation to the business of
the Company.
(m) Since the respective dates as of which information is given in the
Registration Statement, as it may be amended, (i) neither the Company nor any
Subsidiary has incurred any material liabilities or obligations, indirect,
direct or contingent, or entered into any material verbal or written agreement
or other transaction which is not in the ordinary course of business or which
could result in a material reduction in the future earnings of the Company and
the Subsidiaries taken together; (ii) neither the Company nor any Subsidiary has
sustained any material loss or interference with its business or properties from
fire, flood, windstorm, accident or other calamity, whether or not covered by
insurance; (iii) the Company has not paid or declared any dividends or other
distributions with respect to its capital stock and neither the Company nor any
Subsidiary is in default in the payment of principal or interest on any
outstanding debt obligations; (iv) there has not been any change in the capital
stock (other than upon the sale of the Common Shares hereunder and upon the
issuance and exercise of options and warrants described in the Registration
Statement) or indebtedness material to the Company and the Subsidiaries taken
together; and (v) there has not been any material adverse change or any
development involving a prospective material adverse change in or affecting the
condition (financial or otherwise), business, properties, results of operations
or prospects of the Company and the Subsidiaries taken together, whether or not
occurring in the ordinary course of business. Neither the Company nor any
Subsidiary has any material contingent obligations that are not disclosed in the
Registration Statement, as it may be amended.
(n) Except as disclosed in the Prospectus: the Company and the
Subsidiaries have the right to use all trademarks, trade names, trade secrets,
servicemarks, inventions, patent rights, mask works, copyrights, licenses,
software code, database screens, formats, algorithms and underlying data,
approvals and governmental authorizations now used in, and are material to the
conduct of their respective businesses taken together; the expiration of any
trademarks, trade names, trade secrets, servicemarks, inventions, patent rights,
mask works, copyrights, licenses, approvals or governmental authorizations would
not have a material adverse effect on the condition (financial or otherwise),
business, results of operations or prospects of the Company and the Subsidiaries
taken together; and the Company has no knowledge of any infringement by it or by
any Subsidiary of trademark, trade name rights, patent rights, mask works,
copyrights, licenses, trade secret, servicemarks or other similar rights of
others, and there is no claim being made against the Company or any Subsidiary
regarding trademark, trade name, patent, mask work, copyright, license, trade
secret or other infringement which could have a material adverse effect on the
condition (financial or otherwise), business, results of operations or prospects
of the Company and the Subsidiaries, taken together.
(o) The Company has not been advised, and has no reason to believe,
that either it or any Subsidiary is not conducting business in compliance with
all applicable laws, rules and regulations of the jurisdictions in which it is
conducting business, including, without limitation, all applicable local, state,
federal and foreign environmental laws and regulations; except where failure to
be so in compliance would not materially adversely affect the condition
-7-
<PAGE>
(financial or otherwise), business, results of operations or prospects of the
Company and the Subsidiaries, taken together.
(p) The Company and the Subsidiaries have filed all necessary federal,
state and foreign income and franchise tax returns and have paid all taxes shown
as due thereon; and the Company has no knowledge of any tax deficiency which has
been or might be asserted or threatened against the Company or any Subsidiary
which could materially and adversely affect the business, operations or
properties of the Company and the Subsidiaries, taken together.
(q) Neither the Company nor any Subsidiary has, directly or
indirectly, at any time during the past five years (i) made any unlawful
contributions to any candidate for political office, or failed to disclose fully
any contribution in violation of law, or (ii) made any payment to a federal,
state or foreign governmental officer or official, or other person charged with
similar public or quasi-public duties, other than payments required or permitted
by the laws of the United States or any jurisdiction thereof.
(r) All material transactions during the Company's current or last
three fiscal years between the Company and the officers, directors and 5%
shareholders of the Company have been accurately disclosed in the Prospectus to
the extent required; and the terms of each such transaction are in all material
respects fair to the Company and no less favorable to the Company than the terms
that could have been obtained from unrelated parties.
(s) The Company maintains insurance of the types and in the amounts
which it deems adequate for its business, including, but not limited to, general
liability insurance and insurance covering all real and personal property owned
or leased by the Company and its subsidiaries against theft, damage,
destruction, acts of vandalism and all other risks customarily insured against,
all of which insurance is in full force and effect.
(t) The Company does not maintain any employee benefit plan subject to
Title IV of the Employee Retirement Income Security Act of 1974, as amended.
(u) The Company is not an "investment company" as
defined in the Investment Company Act of 1940 (the "1940 Act").
(v) The Company has not distributed and will not distribute prior to
any Closing Date any offering material in connection with the offering and sale
of the Common Shares other than the Prospectus, the Registration Statement and
the other materials permitted by the Act.
(w) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might be reasonably expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Common Shares.
(x) The Company's Common Stock is registered pursuant to Section 12(g)
of the Exchange Act and the Common Shares have been approved for quotation on
the Nasdaq
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National Market, subject to official notice of issuance, and the Company has
taken no action designed to, or likely to have the effect of, terminating the
registration of the Common Shares under the Exchange Act, nor has the Company
received any notification that the Commission is contemplating terminating such
registration.
(y) The Company has not incurred any liability for a fee, commission,
or other compensation on account of the employment of a broker or finder in
connection with the transactions contemplated by this Agreement other than as
contemplated hereby.
SECTION 3. Representations, Warranties and Covenants of the Selling
Stockholders.
(a) Each of the Selling Stockholders severally represents and warrants
to, and agrees with, the several Underwriters that:
(i) Such Selling Stockholder, on the First Closing Date and the Second
Closing Date (each as hereinafter defined), as the case may be, will have good
and valid title to the Common Shares proposed to be sold by such Selling
Stockholder hereunder, free and clear of all voting trust arrangements, liens,
encumbrances, equities, security interests, restrictions and claims whatsoever,
and full right, power and authority to execute and deliver this Agreement and
the Power of Attorney and Custody Agreement (the "Power of Attorney and Custody
Agreement") hereinafter referred to and to sell, assign, transfer and deliver
such Common Shares hereunder; and upon delivery of and payment for such Common
Shares hereunder, the several Underwriters will acquire good and valid title
thereto, free and clear of all liens, encumbrances, equities, claims,
restrictions, security interests, voting trusts or other defects of title
whatsoever.
(ii) Such Selling Stockholder has executed and delivered a Power of
Attorney and Custody Agreement appointing ____________ and _____________, and
each of them, as such Selling Stockholder's attorneys-in-fact (the "Attorneys-
in-Fact") with authority to execute and deliver this Agreement on behalf of such
Selling Stockholder, to determine the purchase price to be paid by the
Underwriters to the Selling Stockholders as provided in Section 4 hereof and to
authorize the delivery of the Common Shares to be sold by such Selling
Stockholder in connection with this Agreement, and caused to be executed and
delivered on its behalf a Power of Attorney and Custody Agreement and in
connection therewith such Selling Stockholder further represents, warrants and
agrees that such Selling Stockholder has deposited in custody, under the Power
of Attorney and Custody Agreement, with the agent named therein (the "Agent") as
custodian, certificates in negotiable form for the Common Shares to be sold
hereunder by such Selling Stockholder, for the purpose of further delivery
pursuant to this Agreement. Such Selling Stockholder agrees that the Common
Shares to be sold by such Selling Stockholder on deposit with the Agent are
subject to the interests of the Underwriters, that the arrangements made for
such custody and the appointment by such Selling Stockholder of the Attorneys-
in-Fact under the Power of Attorney and Custody Agreement, are to that extent
irrevocable, and that the obligations of such Selling Stockholder hereunder
shall not be terminated, except as provided in this Agreement or in the Power of
Attorney and Custody Agreement, by any act of such Selling Stockholder, by
operation of law, by the death or
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incapacity of such Selling Stockholder if such Selling Stockholder is a natural
person, the death or incapacity of any executor or trustee of any Selling
Stockholder that is an estate or trust, the termination of any estate or trust
that is a Selling Stockholder, the liquidation, dissolution, merger or
consolidation of any Selling Stockholder that is a corporation, partnership or
other business entity or by the occurrence of any other event. If any Selling
Stockholder that is a natural person should die or become incapacitated, or if
the executor or trustee of any Selling Stockholder that is an estate or trust
shall die or become incapacitated, or if any Selling Stockholder that is an
estate or trust shall be terminated, or if any Selling Stockholder that is a
corporation, partnership or other business entity shall be liquidated,
dissolved, merged or consolidated, or if any other event should occur, before
the delivery of the Common Shares hereunder, the documents evidencing Common
Shares then on deposit with the Agent shall be delivered by the Agent in
accordance with the terms and conditions of this Agreement as if such death,
incapacity, termination, dissolution, liquidation, merger or consolidation, or
other event had not occurred, regardless of whether or not the Agent shall have
received notice thereof.
(iii) The execution, delivery and performance of this Agreement and
the Power of Attorney and Custody Agreement and the consummation of the
transactions contemplated hereby and by the Power of Attorney and Custody
Agreement will not conflict with or result in a breach or violation by such
Selling Stockholder of any of the terms or provisions of, or constitute a
default by such Selling Stockholder under, any indenture, mortgage, deed of
trust, trust (constructive or other), loan agreement, lease, franchise, license
or other agreement or instrument to which such Selling Stockholder is a party or
by which such Selling Stockholder or any of its properties is bound, any
statute, or any judgment, decree, order, rule or regulation of any court or
governmental agency or body applicable to such Selling Stockholder or any of its
properties or the Certificate of Incorporation or By-laws (or comparable
documents, as the case may be) of such Selling Stockholder if such Selling
Stockholder is a corporation.
(iv) All consents, approvals, authorizations and orders necessary for
the execution and delivery by such Selling Stockholder of this Agreement, the
Power of Attorney and the Custody Agreement, and for the sale and delivery of
the Common Shares to be sold by such Selling Stockholder hereunder, have been
obtained.
(v) Such Selling Stockholder has not taken and will not take, directly
or indirectly, any action that is designed to or that has constituted or that
might reasonably be expected to cause or result in stabilization or manipulation
of the price of any security of the Company to facilitate the sale or resale of
the Common Shares.
(vi) Each Preliminary Prospectus and the Prospectus, insofar as it has
related to such Selling Stockholder, has conformed in all material respects to
the requirements of the Act and the Rules and Regulations and has not included
any untrue statement of a material fact or omitted to state a material fact
necessary to make the statements therein not misleading in light of the
circumstances under which they were made; and neither the Registration Statement
nor the Prospectus, nor any amendment or supplement, as the case may be,
thereto, as it relates to such Selling Stockholder, will include any untrue
statement of a material fact or omit to state any
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material fact required to be stated therein or necessary to make the statements
therein not misleading.
(vii) The representations and warranties of the Company set forth in
Section 2 herein are true and correct in all material respects.
(b) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal Responsibility
Act of 1982 with respect to the transactions herein contemplated, each of the
Selling Stockholders agrees to deliver to you prior to or at the First Closing
Date or the Second Closing Date, as the case may be, a properly completed and
executed United States Treasury Department Form W-9 (or other applicable form or
statement specified by Treasury Department regulations in lieu thereof).
(c) Each of the Selling Stockholders agrees with the Company and the
Underwriters not to offer, sell, contract to sell, pledge, grant any option to
purchase or otherwise dispose of any Common Stock of the Company (including,
without limitation, Common Stock which may be deemed to be beneficially owned by
such Selling Stockholder in accordance with the Rules and Regulations) or any
securities convertible into or exercisable or exchangeable for Common Stock or
any rights to acquire Common Stock during the period from the execution of a
lock-up agreement continuing and including the date of 120 days after the date
of the Prospectus, directly or indirectly, other than the following types of
transfers: (i) gifts, provided donees thereof agree in writing to be bound by
the terms of this subsection and such written agreements have been received by
you as conditions precedent to each such gift, (ii) transfers to affiliates (as
such term is defined in Rule 405 promulgated under the Act) of the transferor,
provided that such transferees agree in writing to be bound by the terms of this
subsection and such written agreements have been received by you, as conditions
precedent to each such transfer, (iii) pursuant to this Agreement, or (iv) with
the prior written consent of Wessels, Arnold & Henderson, L.P.
SECTION 4. Purchase, Sale and Delivery of Common Shares. On the
basis of the representations, warranties and agreements herein contained, but
subject to the terms and conditions herein set forth, (i) the Company agrees to
issue and sell to the Underwriters ______ of the Firm Common Shares and (ii) the
Selling Stockholders agree, severally and not jointly, to sell to the
Underwriters, in the respective amounts set forth in Schedule B hereto, an
aggregate of _______ of the Firm Common Shares. The Underwriters agree,
severally and not jointly, to purchase from the Company and the Selling
Stockholders, respectively, the number of Firm Common Shares described below.
The purchase price per share to be paid by the several Underwriters to the
Company and to the Selling Stockholders, respectively, shall be $____ per share.
The obligation of each Underwriter to the Company shall be to purchase
from the Company that number of full shares which (as nearly as practicable, as
determined by you) bears to the number of Firm Common Shares being sold by the
Company the same proportion as the number of shares set forth opposite the name
of such Underwriter in Schedule A hereto bears to the total number of Firm
Common Shares. The obligation of each Underwriter to each Selling
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Stockholder shall be to purchase from such Selling Stockholder that number of
full shares which (as nearly as practicable, as determined by you) bears to the
number of Firm Common Shares being sold by such Selling Stockholder the same
proportion as the number of shares set forth opposite the name of such
Underwriter in Schedule A hereto bears to the total number of Firm Common
Shares.
Delivery of certificates for the Firm Common Shares to be purchased by
the Underwriters and payment therefor shall be made at the offices of Dorsey &
Whitney P.L.L.P., Pillsbury Center South, 210 South Sixth Street, Minneapolis,
Minnesota 55402 (or such other place as may be agreed upon by the Company and
the Representatives) at such time and date, not later than the third full
business day following the date of this Agreement, unless otherwise required by
the Commission pursuant to Rule 15c6-1 of the Securities Exchange Act of 1934,
as amended (the "Exchange Act") (the "First Closing Date"). (As used herein,
"business day" means a day on which the New York Stock Exchange is open for
trading and on which banks in New York are open for business and not permitted
by law or executive order to be closed.)
Delivery of certificates for the Firm Common Shares shall be made by
or on behalf of the Company and the Selling Stockholders to you, for the
respective accounts of the Underwriters with respect to the Firm Common Shares
to be sold by the Company and by the Selling Stockholders, against payment by
you, for the accounts of the several Underwriters, of the purchase price
therefor by certified or official bank check or checks payable in next day funds
to the order of the Company and of the Agent in proportion to the number of Firm
Common Shares to be sold by the Company and the Selling Stockholders,
respectively. The certificates for the Firm Common Shares shall be registered
in such names and denominations as you shall have requested upon at least forty-
eight hours prior notice, and shall be made available for checking and packaging
on the business day preceding the First Closing Date at a location in New York,
New York, as may be designated by you. Time shall be of the essence, and
delivery at the time and place specified in this Agreement is a further
condition to the obligations of the Underwriters.
In addition, on the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company hereby grants an option to the several Underwriters to
purchase, severally and not jointly, up to an aggregate of _______ Optional
Common Shares at the purchase price per share to be paid for the Firm Common
Shares, for use solely in covering any over-allotments made by you for the
account of the Underwriters in the sale and distribution of the Firm Common
Shares. The option granted hereunder may be exercised in whole or in part at
any time (but not more than once) within 30 days after the first date that any
of the Common Shares are released by you for sale to the public, upon written
notice by you to the Company setting forth the aggregate number of Optional
Common Shares as to which the Underwriters are exercising the option, the names
and denominations in which the certificates for such shares are to be registered
and the time and place at which such certificates will be delivered. Such time
of delivery (which may not be earlier than the First Closing Date), being herein
referred to as the "Second Closing Date," shall be determined by you, but if at
any time other than the First Closing Date shall not be earlier than three nor
later than five full business days after delivery of such notice of exercise.
The number
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of Optional Common Shares to be purchased by each Underwriter shall be
determined by multiplying the number of Optional Common Shares to be sold
pursuant to such notice of exercise by a fraction, the numerator of which is the
number of Firm Common Shares to be purchased by such Underwriter as set forth
opposite its name in Schedule A and the denominator of which is the total number
of Firm Common Shares (subject to such adjustments to eliminate any fractional
share purchases as you in your discretion may make). Certificates for the
Optional Common Shares will be made available for checking and packaging on the
business day preceding the Second Closing Date at a location in New York, New
York, as may be designated by you. The manner of payment for and delivery of the
Optional Common Shares shall be the same as for the Firm Common Shares purchased
as specified in the two preceding paragraphs. At any time before lapse of the
option, you may cancel such option by giving written notice of such cancellation
to the Company. If the option is canceled or expires unexercised in whole or in
part, the Company will deregister under the Act the number of Optional Common
Shares as to which the option has not been exercised.
You have advised the Company and the Selling Stockholders that each
Underwriter has authorized you to accept delivery of its Common Shares, to make
payment and to furnish receipt therefor. You, individually and not as the
Representatives of the Underwriters, may (but shall not be obligated to) make
payment for any Common Shares to be purchased by any Underwriter whose funds
shall not have been received by you by the First Closing Date or the Second
Closing Date, as the case may be, for the account of such Underwriter, but any
such payment shall not relieve such Underwriter from any of its obligations
under this Agreement.
Subject to the terms and conditions hereof, the Underwriters propose
to make a public offering of their respective portions of the Common Shares as
soon after the effective date of the Registration Statement as in the judgment
of the Representatives is advisable and at the public offering price set forth
on the cover page of and on the terms set forth in the Prospectus.
SECTION 5. Covenants of the Company. The Company covenants and
agrees that:
(a) The Company will use its best efforts to cause the Registration
Statement and any amendment thereof, if not effective at the time and date that
this Agreement is executed and delivered by the parties hereto, to become
effective. If the Registration Statement has become or becomes effective
pursuant to Rule 430A of the Rules and Regulations, or the filing of the
Prospectus is otherwise required under Rule 424(b) of the Rules and Regulations,
the Company will file the Prospectus, properly completed in a form approved by
you, pursuant to the applicable paragraph of Rule 424(b) of the Rules and
Regulations within the time period prescribed and will provide evidence
satisfactory to you of such timely filing. The Company will promptly advise you
in writing (i) of the receipt of any comments of the Commission, (ii) of any
request of the Commission for amendment of or supplement to the Registration
Statement (either before or after it becomes effective), any Preliminary
Prospectus or the Prospectus or for additional information, (iii) when the
Registration Statement shall have become effective and (iv) of the issuance by
the Commission of any stop order suspending the effectiveness of the
Registration Statement or the use of the Prospectus, or the institution or
threatening of any proceedings for that purpose. The Company will use its best
efforts to prevent the issuance of
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any such stop order and, if the Commission shall enter any such stop order at
any time, the Company will use its best efforts to obtain the lifting of such
order at the earliest possible moment. The Company will not file any amendment
to the Registration Statement (either before or after it becomes effective), or
supplement to any Preliminary Prospectus or the Prospectus of which you have not
been furnished with a copy a reasonable time prior to such filing or to which
you reasonably object or which is not in compliance with the Act and the Rules
and Regulations. To the extent applicable, the copies of the Registration
Statement and each amendment thereto (including all exhibits filed therewith),
any Preliminary Prospectus or Prospectus (in each case, as amended or
supplemented) furnished to the Underwriters will be identical to the
electronically transmitted copies thereof filed with the Commission pursuant to
EDGAR, except to the extent permitted by Regulation S-T.
(b) The Company will fully and completely comply with the provisions
of Rule 430A of the Rules and Regulations with respect to information omitted
from the Registration Statement in reliance upon such Rule.
(c) If at any time a prospectus relating to the Common Shares is
required to be delivered under the Act any event occurs, as a result of which
the Prospectus, as then supplemented, would include an untrue statement of a
material fact, or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made when such Prospectus is delivered, not misleading, or if
for any other reason it is necessary at any time to supplement the Prospectus,
as then supplemented, to comply with the Act or the Rules and Regulations, the
Company will promptly advise you thereof and will promptly prepare and file with
the Commission, at its own expense, an appropriate amendment to the Registration
Statement or supplement to the Prospectus which will correct such statement or
omission or an amendment to the Registration Statement or supplement to the
Prospectus which will effect such compliance and will use its best efforts to
cause the same to become effective as soon as possible.
(d) As soon as practicable, but not later than 45 days after the end
of the first quarter ending after one year following the "effective date of the
Registration Statement" (as defined in Rule 158(c) of the Rules and
Regulations), the Company will make generally available to its security holders
an earnings statement (which need not be audited) covering a period of 12
consecutive months beginning after the effective date of the Registration
Statement which will satisfy the provisions of the last paragraph of Section
10(a) of the Act and the relevant Rules and Regulations (including, at the
option of the Company, Rule 158).
(e) The Company will deliver to, or upon the order of, the
Representatives, from time to time, as many copies of any Preliminary Prospectus
as the Representatives may reasonably request. The Company will deliver to, or
upon the order of, the Representatives at any time when delivery of a Prospectus
is required under the Act, as many copies of the Prospectus in final form, or as
thereafter supplemented, as the Representatives may reasonably request. The
Company will deliver to the Representatives at or before the First Closing Date
four signed copies of the Registration Statement and all amendments thereto
including all exhibits filed therewith, and will deliver to the Representatives
such number of copies of the
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Registration Statement, including documents incorporated by reference therein,
but without exhibits, and of all amendments thereto, as the Representatives may
reasonably request.
(f) The Company shall cooperate with you and your counsel in order to
qualify or register the Common Shares for sale under (or obtain exemptions from
the application of) the Blue Sky laws of such jurisdictions as you designate,
will comply with such laws and will continue such qualifications, registrations
and exemptions in effect so long as reasonably required for the distribution of
the Common Shares. The Company shall not be required to qualify as a foreign
corporation or to file a general consent to service of process in any such
jurisdiction where it is not presently qualified or where it would not be
subject to taxation as a foreign corporation. The Company will advise you
promptly of the suspension of the qualification or registration of (or any such
exemption relating to) the Common Shares for offering, sale or trading in any
jurisdiction or any initiation or threat of any proceeding for any such purpose,
and in the event of the issuance of any order suspending such qualification,
registration or exemption, the Company, with your cooperation, will use its best
efforts to obtain the withdrawal thereof. The Company will, from time to time,
prepare and file such statements, reports, and other documents, as are or may be
required to continue such qualifications in effect for so long a period as the
Representatives may reasonably request for distribution of the Common Shares.
(g) During the period of five years after the First Closing Date, the
Company will furnish to the Representatives and, upon request of the
Representatives, to each of the other Underwriters: (i) as soon as practicable
after the end of each fiscal year, copies of the Annual Report of the Company
containing the balance sheet of the Company as of the close of such fiscal year
and statements of income, stockholders' equity and cash flows for the year then
ended and the opinion thereon of the Company's independent public accountants;
(ii) as soon as practicable after the filing thereof, copies of each proxy
statement, Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Report on
Form 8-K or other report filed by the Company with the Commission, the NASD or
any securities exchange; and (iii) as soon as available, copies of any report or
communication of the Company mailed generally to holders of its Common Stock. To
the extent applicable, such reports or documents shall be identical to the
electronically transmitted copies thereof filed with the Commission pursuant to
EDGAR, except to the extent permitted by Regulation S-T.
(h) From the execution of the lock-up agreements and continuing to and
including the date 120 days after the first date that any of the Common Shares
are released by you for sale to the public, without the prior written consent of
the Representatives, the Company will not, other than pursuant to outstanding
stock options and warrants disclosed in the Prospectus, issue, offer, sell,
contract to sell, pledge, grant options to purchase or otherwise dispose of any
of the Company's equity securities or any other securities convertible into or
exchangeable with its Common Stock or other equity security, or file any
registration statement with the Commission other than registration statements on
Form S-8.
(i) The Company will apply the net proceeds of the sale of the Common
Shares sold by it in accordance with its statements under the caption "Use of
Proceeds" in the
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Prospectus and will file such reports with the Commission with respect to its
sale of the Common Shares and the application of the proceeds therefrom as may
be required by Rule 463 under the Act. The Company will invest such proceeds
pending their use in such a manner that, upon completion of such investment, the
Company will not be an "investment company" as defined in the 1940 Act.
(j) The Company will use its best efforts to permit quotation, subject
to notice of issuance, on the Nasdaq National Market, of the Common Shares to be
issued and sold by the Company.
(k) The Company will maintain a transfer agent and, if necessary under
the jurisdiction of incorporation of the Company, a registrar (which may be the
same entity as the transfer agent) for its Common Stock.
(l) The Company will inform the Florida Department of Banking and
Finance at any time prior to the consummation of the distribution of the
Securities by the Underwriters if it commences engaging in business with the
government of Cuba or with any person or affiliate located in Cuba. Such
information will be provided within 90 days after the commencement thereof or
after a change occurs with respect to previously reported information.
(m) The Company will use its best efforts to do and perform all things
required or necessary to be done and performed under this Agreement by the
Company prior to the First Closing Date or the Second Closing Date, as the case
may be, and to satisfy all conditions precedent to the delivery of the Common
Shares.
Wessels, Arnold & Henderson, L.L.C., on behalf of the Underwriters, may, in your
sole discretion, waive in writing the performance by the Company of any one or
more of the foregoing covenants or extend the time for their performance.
SECTION 6. Payment of Expenses. Whether or not the transactions
contemplated hereunder are consummated or this Agreement becomes effective or is
terminated, the Company agrees to pay all costs, fees and expenses incurred in
connection with the performance of its obligations hereunder and in connection
with the transactions contemplated hereby, including without limiting the
generality of the foregoing, (i) all expenses incident to the issuance and
delivery of the Common Shares (including all printing and engraving costs), (ii)
all fees and expenses of the registrar and transfer agent of the Common Stock,
(iii) all necessary issue, transfer and other stamp taxes in connection with the
issuance and sale of the Common Shares to the Underwriters, (iv) all fees and
expenses of the Company's counsel and the Company's independent accountants, (v)
all costs and expenses incurred in connection with the preparation, printing,
filing, shipping and distribution of the Registration Statement, each
Preliminary Prospectus and the Prospectus (including all exhibits and financial
statements) and all amendments and supplements provided for herein, this
Agreement, the Agreement Among Underwriters, the Selected Dealers Agreement, the
Underwriters' Questionnaire, the Invitation Letter, the Underwriters' Power of
Attorney and the Blue Sky memoranda, and any amendments or supplements thereto,
(vi) all filing fees, attorneys' fees and expenses incurred by the Company
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or the Underwriters in connection with qualifying or registering (or obtaining
exemptions from the qualification or registration of) all or any part of the
Common Shares for offer and sale under the Blue Sky laws, (vii) the filing fee
of, and all fees and expenses incurred by the Company or the Underwriters
incident to securing any required approval from, the NASD and (viii) all other
fees, costs and expenses referred to in Item 13 of the Registration Statement.
Except as provided in this Section 6, Section 8 and Section 9 hereof, the
Underwriters shall pay all of their own expenses, including the fees and
disbursements of their counsel (excluding those relating to qualification,
registration or exemption under the Blue Sky laws, the preparation of the Blue
Sky memoranda referred to above and in securing any approval of the NASD).
The Selling Stockholders will pay (directly or by reimbursement) all
fees and expenses incident to the performance of their obligations under this
Agreement which are not otherwise specifically provided for herein, including
but not limited to (i) any fees and expenses of counsel for such Selling
Stockholders; and (ii) all taxes incident to the sale and delivery of the Common
Shares to be sold by such Selling Stockholders to the Underwriters hereunder.
SECTION 7. Conditions of the Obligations of the Underwriters. The
obligations of the several Underwriters to purchase and pay for the Firm Common
Shares on the First Closing Date and the Optional Common Shares on the Second
Closing Date shall be subject to the accuracy of the representations and
warranties on the part of the Company and the Selling Stockholders herein set
forth as of the date hereof and as of the First Closing Date or the Second
Closing Date, as the case may be, to the accuracy of the statements of Company
officers and the Selling Stockholders made pursuant to the provisions hereof, to
the performance by the Company and the Selling Stockholders of their respective
obligations hereunder, and to the following additional conditions:
(a) The Registration Statement shall have become effective not later
than 5 p.m., Washington, D.C. time, on the date of this Agreement, or at such
later time as shall have been consented to by you; if the filing of the
Prospectus, or any supplement thereto, is required pursuant to Rule 424(b) of
the Rules and Regulations, the Prospectus shall have been filed in the manner
and within the time period required by Rule 424(b) of the Rules and Regulations;
and prior to such Closing Date, no stop order suspending the effectiveness of
the Registration Statement shall have been issued and no proceedings for that
purpose shall have been instituted or shall be pending or, to the knowledge of
the Company, or you, shall be contemplated by the Commission; and any request of
the Commission for inclusion of additional information in the Registration
Statement, or otherwise, shall have been complied with to your satisfaction.
(b) Since the respective dates as of which information is given in the
Registration Statement and Prospectus, (i) there shall not have been any change
in the capital stock, other than pursuant to the exercise of outstanding options
and warrants disclosed in the Prospectus, of the Company or any Subsidiary or
any change in the indebtedness (other than in the ordinary course of business)
of the Company or any Subsidiary, (ii) except as set forth in or contemplated by
the Registration Statement or the Prospectus, no verbal or written agreement or
other transaction shall have been entered into by the Company or any Subsidiary,
which is not in the ordinary course of business or which could result in a
material reduction in the future
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earnings of the Company and any Subsidiary, (iii) no loss or damage (whether or
not insured) to the property of the Company or any Subsidiary shall have been
sustained, (iv) no legal or governmental action, suit or proceeding affecting
the Company or any Subsidiary which affects or may affect the transactions
contemplated by this Agreement shall have been instituted and (v) there shall
not have been any change, or any development involving a prospective change, in
or affecting the condition (financial or otherwise), business, management,
backlog, properties, results of operations or prospects of the Company and the
Subsidiaries which, in any such case described in clauses (i), (ii), (iii), (iv)
and (v) in the judgment of the Representatives, is so material and adverse as to
make it impracticable or inadvisable to proceed with the public offering or the
delivery of the Common Shares as contemplated hereby.
(c) There shall have been furnished to you, as Representatives of the
Underwriters, on each Closing Date, in form and substance satisfactory to you,
except as otherwise expressly provided below:
(i) An opinion of Dorsey & Whitney P.L.L.P., counsel for the Company,
addressed to the Underwriters and dated the First Closing Date, or the Second
Closing Date, as the case may be, to the effect that:
(1) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of its jurisdiction of
incorporation, is duly qualified to do business as a foreign corporation and is
in good standing in Missouri, Maryland and Ohio [list other jurisdictions where
qualified], and has full corporate power and authority to own its properties and
conduct its business as described in the Prospectus;
(2) The authorized, issued and outstanding capital stock of the
Company is as set forth under the caption "Capitalization" in the Prospectus all
outstanding shares of Common Stock (including any Firm Common Shares and
Optional Common Shares) have been duly authorized and validly issued, are fully
paid and nonassessable, were not issued in violation of or subject to any
preemptive rights or other rights to subscribe for or purchase any securities
and conform to the description thereof contained in the Prospectus; without
limiting the foregoing, to such counsel's knowledge, there are no preemptive or
other rights to subscribe for or purchase any of the Common Shares to be sold by
the Company hereunder;
(3) The certificates evidencing the Common Shares to be delivered
hereunder are in due and proper form under the Minnesota Business Corporation
Act, and when duly countersigned by the Company's transfer agent and registrar,
and delivered to you or upon your order against payment of the agreed
consideration therefor in accordance with the provisions of this Agreement, the
Common Shares represented thereby will be duly authorized and validly issued,
fully paid and nonassessable, will not have been issued in violation of or
subject to any preemptive rights or other rights to subscribe for or purchase
securities known to such counsel and will conform in all material respects to
the description thereof contained in the Prospectus;
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(4) Except as disclosed in or specifically contemplated by the
Prospectus, to such counsel's knowledge, there are no outstanding options,
warrants or other rights calling for the issuance of, and no commitments, plans
or arrangements to issue, any shares of capital stock of the Company or any
security convertible into or exchangeable for capital stock of the Company;
(5) (A) The Registration Statement has become effective under the
Act, and, to such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement or preventing the use of the
Prospectus has been issued and no proceedings for that purpose have been
instituted or are pending or threatened by the Commission; any required filing
of the Prospectus and any supplement thereto pursuant to Rule 424(b) of the
Rules and Regulations has been made in the manner and within the time period
required by such Rule 424(b);
(B) The Registration Statement and each amendment thereto and the
Prospectus and each supplement thereto (except for the financial statements and
schedules included therein as to which such counsel need express no opinion)
comply as to form in all material respects with the requirements of the Act and
the Rules and Regulations;
(C) To such counsel's knowledge, there are no franchises, leases,
contracts, agreements or documents of a character required to be disclosed in
the Registration Statement or Prospectus or to be filed as exhibits to the
Registration Statement which are not disclosed or filed, as required; and
(D) To such counsel's knowledge, there are no legal or governmental
actions, suits or proceedings pending or threatened against the Company, any
Subsidiary or any of their respective properties which are required to be
described in the Prospectus and which are not described as required.
(6) The statements under the captions "Management", "Shares Eligible
for Future Sale" and "Description of Capital Stock" in the Prospectus and Item
14 of Part II of the Registration Statement insofar as such statements
constitute a summary of legal matters, documents or proceedings referred to
therein, fairly present the information called for with respect to such legal
matters, documents and proceedings;
(7) The Company has full right, power and authority to enter into this
Agreement and to sell and deliver the Common Shares to be sold by it to the
several Underwriters; this Agreement has been duly and validly authorized by all
necessary corporate action by the Company and has been duly and validly executed
and delivered by and on behalf of the Company. No approval, authorization,
order, consent, registration, filing, qualification, license or permit of or
with any court, regulatory, administrative or other governmental body is
required for the execution and delivery of this Agreement by the Company or the
consummation of the transactions contemplated by this Agreement, except such as
have been obtained and are in full force and effect under the Act and such as
may be required under applicable Blue Sky laws
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in connection with the purchase and distribution of the Common Shares by the
Underwriters and the clearance of such offering with the NASD;
(8) The execution and performance of this Agreement and the
consummation of the transactions herein contemplated will not conflict with,
result in the breach of, or constitute, either by itself or upon notice or the
passage of time or both, a default under, any agreement, mortgage, deed of
trust, lease, franchise, license, indenture, permit or other instrument, known
to such counsel, to which the Company or any Subsidiary is a party or by which
the Company or any Subsidiary or any of their respective property may be bound
or affected or violate any of the provisions of the Articles of Incorporation or
Bylaws of the Company or, so far as is known to such counsel, violate any
statute, judgment, decree, order, rule or regulation of any court or
governmental body having jurisdiction over the Company or any Subsidiary or any
of its or their property;
(9) To such counsel's knowledge, no holders of securities of the
Company have rights which have not been waived to the registration of shares of
Common Stock or other securities, because of the filing of the Registration
Statement by the Company or the offering contemplated hereby; and
(10) The Company is not an "investment company" as defined in the
1940 Act.
Such counsel shall also include a statement to the effect that nothing
has come to such counsel's attention that would lead such counsel to believe
that either at the effective date of the Registration Statement or at the
applicable Closing Date the Registration Statement or the Prospectus, or any
amendment or supplement thereto, contains any untrue statement of a material
fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading.
(ii) An opinion of Shearman & Sterling, counsel for the Company,
addressed to the Underwriters and dated the First Closing Date, or the Second
Closing Date, as the case may be, to the effect that:
(1) Summit Medical Europe S.A.R.L. has been duly incorporated and is
validly existing as a corporation in good standing under the laws of France, is
duly qualified to do business as a foreign corporation and is in good standing
in France, and has full corporate power and authority to own its properties and
conduct its business as described in the Prospectus.
(2) All of the issued and outstanding shares of Summit Medical Europe
S.A.R.L. have been duly and validly authorized and issued, are fully paid and
nonassessable and are owned beneficially by the Company free and clear of all
liens, encumbrances, equities, claims, security interests, voting trusts or
other defects of title whatsoever.
(3) To such counsel's knowledge, there are no legal or governmental
actions, suits or proceedings pending or threatened against Summit Medical
Europe S.A.R.L. or
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any of its properties which are required to be described in the Prospectus and
which are not described as required.
(4) The execution and performance of this Agreement and the
consummation of the transactions herein contemplated will not conflict with,
result in the breach of, or constitute, either by itself or upon notice or the
passage of time or both, a default under, any agreement, mortgage, deed of
trust, lease, franchise, license, indenture, permit or other instrument to which
Summit Medical Europe S.A.R.L. is a party or by which Summit Medical Europe
S.A.R.L. or any of its property may be bound or affected or violate any of the
provisions of the Articles of Incorporation or Bylaws of Summit Medical Europe
S.A.R.L. or, so far as is known to such counsel, violate any statute, judgment,
decree, order, rule or regulation of any court or governmental body having
jurisdiction over Summit Medical Europe S.A.R.L. or any of its property.
(iii) An opinion of ______________, counsel for the Company,
addressed to the Underwriters and dated the First Closing Date, or the Second
Closing Date, as the case may be, to the effect that:
(1) BSM Financial, Inc. has been duly incorporated and is validly
existing as a corporation in good standing under the laws of _________, is duly
qualified to do business as a foreign corporation and is in good standing in
_________, and has full corporate power and authority to own its properties and
conduct its business as described in the Prospectus.
(2) All of the issued and outstanding shares of BSM Financial, Inc.
have been duly and validly authorized and issued, are fully paid and
nonassessable and are owned beneficially by the Company free and clear of all
liens, encumbrances, equities, claims, security interests, voting trusts or
other defects of title whatsoever.
(3) To such counsel's knowledge, there are no legal or governmental
actions, suits or proceedings pending or threatened against BSM Financial, Inc.
or any of its properties which are required to be described in the Prospectus
and which are not described as required.
(4) The execution and performance of this Agreement and the
consummation of the transactions herein contemplated will not conflict with,
result in the breach of, or constitute, either by itself or upon notice or the
passage of time or both, a default under, any agreement, mortgage, deed of
trust, lease, franchise, license, indenture, permit or other instrument to which
BSM Financial, Inc. is a party or by which BSM Financial, Inc. or any of its
property may be bound or affected or violate any of the provisions of the
Articles of Incorporation or Bylaws of BSM Financial, Inc. or, so far as is
known to such counsel, violate any statute, judgment, decree, order, rule or
regulation of any court or governmental body having jurisdiction over BSM
Financial, Inc. or any of its property.
(iv) An opinion of _____________, counsel for the Company, addressed
to the Underwriters and dated the First Closing Date, or the Second Closing
Date, as the case may be, to the effect that:
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(1) Medical Information Systems Company, Inc. has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of _______, is duly qualified to do business as a foreign corporation and
is in good standing in ________, and has full corporate power and authority to
own its properties and conduct its business as described in the Prospectus.
(2) All of the issued and outstanding shares of Medical Information
Systems Company, Inc. have been duly and validly authorized and issued, are
fully paid and nonassessable and are owned beneficially by the Company free and
clear of all liens, encumbrances, equities, claims, security interests, voting
trusts or other defects of title whatsoever.
(3) To such counsel's knowledge, there are no legal or governmental
actions, suits or proceedings pending or threatened against Medical Information
Systems Company, Inc. or any of its properties which are required to be
described in the Prospectus and which are not described as required.
(4) The execution and performance of this Agreement and the
consummation of the transactions herein contemplated will not conflict with,
result in the breach of, or constitute, either by itself or upon notice or the
passage of time or both, a default under, any agreement, mortgage, deed of
trust, lease, franchise, license, indenture, permit or other instrument to which
Medical Information Systems Company, Inc. is a party or by which Medical
Information Systems Company, Inc. or any of its property may be bound or
affected or violate any of the provisions of the Articles of Incorporation or
Bylaws of Medical Information Systems Company, Inc. or, so far as is known to
such counsel, violate any statute, judgment, decree, order, rule or regulation
of any court or governmental body having jurisdiction over Medical Information
Systems Company, Inc. or any of its property.
(v) An opinion of ______________, counsel for the Company, addressed
to the Underwriters and dated the First Closing Date, or the Second Closing
Date, as the case may be, to the effect that:
(1) Cordillera L.L.C. has been duly incorporated and is validly
existing as a limited liability company in good standing under the laws of
_________, is duly qualified to do business as a foreign limited liability
company and is in good standing in ________, and has full corporate power and
authority to own its properties and conduct its business as described in the
Prospectus.
(2) All of the issued and outstanding shares of Cordillera L.L.C. have
been duly and validly authorized and issued, are fully paid and nonassessable
and __% are owned beneficially by the Company free and clear of all liens,
encumbrances, equities, claims, security interests, voting trusts or other
defects of title whatsoever.
(3) To such counsel's knowledge, there are no legal or governmental
actions, suits or proceedings pending or threatened against Cordillera L.L.C. or
any of its
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properties which are required to be described in the Prospectus and which are
not described as required.
(4) The execution and performance of this Agreement and the
consummation of the transactions herein contemplated will not conflict with,
result in the breach of, or constitute, either by itself or upon notice or the
passage of time or both, a default under, any agreement, mortgage, deed of
trust, lease, franchise, license, indenture, permit or other instrument to which
Cordillera L.L.C. is a party or by which Cordillera L.L.C. or any of its
property may be bound or affected or violate any of the provisions of the
Certificate of Formation of Cordillera L.L.C. or the Limited Liability Company
Agreement of Cordillera L.L.C. or, so far as is known to such counsel, violate
any statute, judgment, decree, order, rule or regulation of any court or
governmental body having jurisdiction over Cordillera L.L.C. or any of its
property.
(vi) Such opinion or opinions of Testa, Hurwitz & Thibeault, LLP,
counsel for the Underwriters, dated the First Closing Date or the Second Closing
Date, as the case may be, with respect to the incorporation of the Company, the
sufficiency of all corporate proceedings and other legal matters relating to
this Agreement, the validity of the Common Shares, the Registration Statement
and the Prospectus and other related matters as you may reasonably require, and
the Company and the Selling Stockholders shall have furnished to such counsel
such documents and shall have exhibited to them such papers and records as they
may reasonably request for the purpose of enabling them to pass upon such
matters. In connection with such opinions, such counsel may rely on
representations or certificates of officers of the Company and governmental
officials.
(vii) A certificate of the Company executed by the chief executive
officer and the chief financial or accounting officer of the Company, dated the
First Closing Date or the Second Closing Date, as the case may be, to the effect
that:
(1) The representations and warranties of the Company set forth in
Section 2 of this Agreement are true and correct as of the date of this
Agreement and as of the First Closing Date or the Second Closing Date, as the
case may be, and in all material respects, the Company has complied with all the
agreements and satisfied all the conditions on its part to be performed or
satisfied on or prior to such Closing Date;
(2) The Commission has not issued any order preventing or suspending
the use of the Prospectus or any Preliminary Prospectus filed as a part of the
Registration Statement or any amendment thereto; no stop order suspending the
effectiveness of the Registration Statement has been issued; and, no proceedings
for that purpose have been instituted or are pending or, to the knowledge of the
respective signers, are contemplated by the Commission;
(3) Each of the respective signers of the certificate has carefully
examined the Registration Statement and the Prospectus; in his opinion and to
his knowledge,
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neither the Registration Statement or any amendment thereto nor the Prospectus
or any supplement thereto includes any untrue statement of a material fact or
omits to state any material fact required to be stated therein or necessary to
make the statements therein not misleading;
(4) Since the initial date on which the Registration Statement was
filed, no agreement, written or oral, transaction or event has occurred which
should have been set forth in an amendment to the Registration Statement or in a
supplement to or amendment of any prospectus which has not been disclosed in
such a supplement or amendment;
(5) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, and except as disclosed in or
contemplated by the Prospectus, there has not been any material adverse change
or a development involving a material adverse change in or affecting the
condition (financial or otherwise), business, management, properties, results of
operations, or prospects of the Company and the Subsidiaries; and no legal or
governmental action, suit or proceeding is pending or threatened against the
Company or any Subsidiary which is material to the Company and the Subsidiaries,
whether or not arising from transactions in the ordinary course of business, or
which may adversely affect the transactions contemplated by this Agreement;
since such dates and except as so disclosed, neither the Company nor any
Subsidiary has entered into any verbal or written agreement or other transaction
which is not in the ordinary course of business or which could result in a
material reduction in the future earnings of the Company or incurred any
material liability or obligation, direct, contingent or indirect, made any
change in its capital stock, made any material change in its short-term debt or
funded debt or repurchased or otherwise acquired any of the Company's capital
stock; and the Company has not declared or paid any dividend, or made any other
distribution, upon its outstanding capital stock payable to stockholders of
record on a date prior to the First Closing Date or Second Closing Date; and
(6) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus and except as disclosed in or
contemplated by the Prospectus, the Company and the Subsidiaries have not
sustained a material loss or damage by strike, fire, flood, windstorm, accident
or other calamity (whether or not insured).
(viii) On the First Closing Date or the Second Closing Date, as the
case may be, a certificate, dated such Closing Date and addressed to you, signed
by or on behalf of each of the Selling Stockholders to the effect that the
representations and warranties of such Selling Stockholder in this Agreement are
true and correct, as if made at and as of the such Closing Date and such Selling
Stockholder has complied with all the agreements and satisfied all the
conditions on its part to be performed or satisfied prior to the such Closing
Date.
(ix) On the date this Agreement is executed and also on the First
Closing Date and the Second Closing Date, a letter addressed to you, as
Representatives of the Underwriters, from Ernst & Young, independent
accountants, the first one to be dated the date of this Agreement, the second
one to be dated the First Closing Date and the third one (in the event of a
Second Closing) to be dated the Second Closing Date, in form and substance
satisfactory to you.
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(x) On or before the First Closing Date, letters from each holder of
more than ______ shares of the Company's Common Stock, each of the Company's
option holders and each director and officer of the Company, in form and
substance satisfactory to you, confirming that from the date of execution and
continuing to and including the date of 120 days after the first date that any
of the Common Shares are released by you for sale to the public, such person or
entity will not offer, sell, contract to sell, grant any option to purchase, or
otherwise dispose of any Common Stock of the Company or any securities
convertible into or exercisable or exchangeable for such Common Stock or in any
other manner transfer all or a portion of the economic consequences associated
with the ownership of any such Common Stock (including without limitation by way
of equity swap, hedging or any other form of derivative transaction), except
with the prior written consent of Wessels, Arnold & Henderson, L.L.C.
(xii) The Common Shares shall have been duly accepted for quotation,
subject to notice of issuance, through the Nasdaq National Market.
(xii) Opinion of counsel for each Selling Stockholder (such counsel
being reasonably acceptable to you), each addressed to the Underwriters and
dated the First Closing Date, to the effect that:
(1) A Power of Attorney and a Custody Agreement have been duly
executed and delivered by such Selling Stockholder and constitute valid and
binding agreements of such Selling Stockholder in accordance with their
respective terms;
(2) This Agreement has been duly executed and delivered by or on
behalf of such Selling Stockholder and constitutes the valid and binding
agreement of each Selling Stockholder enforceable in accordance with its terms,
such enforceability subject to applicable bankruptcy, insolvency,
reorganization, moratorium and similar laws affecting creditors' rights and
remedies generally and to general principles of equity, and subject to the
extent that rights to indemnification hereunder may be limited by applicable
laws; and the sale of the Common Shares to be sold by such Selling Stockholder
hereunder and the compliance by such Selling Stockholder with all of the
provisions of this Agreement, the Power of Attorney and the Custody Agreement
and the consummation of the transactions herein and therein contemplated will
not conflict with or result in a breach or violation of any terms or provisions
of, or constitute a default under, any statute, indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument known to such counsel to
which such Selling Stockholder is a party or by which such Selling Stockholder
is bound, to which any of the property or assets of such Selling Stockholder is
subject, nor will such action result in any violation of the provisions of the
Certificate of Incorporation (or similar document) or By-laws of such Selling
Stockholder if such Selling Stockholder is a corporation, the Articles or
Certificate of Partnership (or similar document) or partnership agreement of
such Selling Stockholder if such Selling Stockholder is a partnership, or any
order, rule or regulation known to such counsel of any court or governmental
agency or body having jurisdiction over such Selling Stockholder or the property
of such Selling Stockholder;
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(3) No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the transactions
contemplated by this Agreement in connection with the Common Shares to be sold
by such Selling Stockholder hereunder, except such as have been obtained under
the Act and such as may be required under state securities or Blue Sky laws in
connection with the purchase and distribution of such Common Shares by the
Underwriters; and
(4) Assuming that the Underwriters are bona fide purchasers who have
no knowledge of any adverse claim to the Common Shares to be sold to them by
such Selling Stockholder pursuant to this Agreement, the Underwriters will, upon
payment for such Common Shares in accordance with the terms of this Agreement,
receive good and marketable title to the Common Shares, free and clear of all
liens, encumbrances, equities or claims, within the meaning of the Uniform
Commercial Code.
In rendering such opinion, such counsel may rely, as to matters of
local law, on opinions of local counsel, and as to matters of fact as to
ownership of and liens, encumbrances, equities or claims on the Common Shares
sold by a Selling Stockholder, on certificates of such Selling Stockholder and
of officers of the Company and of governmental officials, in which case their
opinion is to state that they are so doing and that the Underwriters are
justified in relying on such opinions or certificates and copies of said
opinions or certificates are to be attached to the opinion.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are reasonably satisfactory
to you and to Testa, Hurwitz & Thibeault, LLP, counsel for the Underwriters.
The Company shall furnish you with such manually signed or conformed copies of
such opinions, certificates, letters and documents as you request. Any
certificate signed by any officer of the Company and delivered to the
Representatives or to counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to the Underwriters as to the
statements made therein.
If any condition to the Underwriters' obligations hereunder to be
satisfied prior to or at the First Closing Date is not so satisfied, this
Agreement at your election will terminate upon notification by you as
Representatives to the Company and the Selling Stockholders without liability on
the part of any Underwriter, the Company or the Selling Stockholders except for
the expenses to be paid or reimbursed by the Company and by the Selling
Stockholders pursuant to Sections 6 and 8 hereof and except to the extent
provided in Section 10 hereof.
SECTION 8. Reimbursement of Underwriters' Expenses. Notwithstanding
any other provisions hereof, if this Agreement shall be terminated by you
pursuant to Section 7, or if the sale to the Underwriters of the Common Shares
on the First Closing Date is not consummated because of any refusal, inability
or failure on the part of the Company or the Selling Stockholders to perform any
agreement herein or to comply with any provision hereof, the Company agrees to
reimburse you and the other Underwriters upon demand for all out-of-pocket
expenses that shall have been reasonably incurred by you and them in connection
with the proposed purchase and the sale of the Common Shares, including but not
limited to fees and disbursements of counsel,
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printing expenses, travel expenses, postage, telegraph charges and telephone
charges relating to the offering contemplated by the Prospectus. Any such
termination shall be without liability of any party to any other party except
that the provisions of this Section, Section 6 and Section 10 shall at all times
be effective and shall apply.
SECTION 9. Effectiveness of Registration Statement. You, the Company
and the Selling Stockholders will use your, its and their best efforts to cause
the Registration Statement to become effective, to prevent the issuance of any
stop order suspending the effectiveness of the Registration Statement and, if
such stop order is issued, to obtain as soon as possible the lifting thereof.
SECTION 10. Indemnification.
(a) The Company and each of the Selling Stockholders jointly and
severally agree to indemnify and hold harmless each Underwriter and each person,
if any, who controls any Underwriter within the meaning of the Act against any
losses, claims, damages, liabilities or expenses, joint or several, to which
such Underwriter or such controlling person may become subject, under the Act,
the Exchange Act, or other federal or state statutory law or regulation, or at
common law or otherwise (including in settlement of any litigation, if such
settlement is effected with the written consent of the Company), insofar as such
losses, claims, damages, liabilities or expenses (or actions or proceedings in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the Registration Statement,
any Preliminary Prospectus or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state in any of them a material fact required to be stated therein or necessary
to make the statements in any of them not misleading, and will reimburse each
Underwriter and each such controlling person for any legal and other expenses as
such expenses are reasonably incurred by such Underwriter or such controlling
person in connection with investigating, defending, settling, compromising or
paying any such loss, claim, damage, liability, expense or action; provided,
however, that (i) neither the Company nor any Selling Stockholders shall be
liable in any case to the extent that any such loss, claim, damage, or liability
arises out of or is based upon an untrue statement, or omission or alleged
omission, made in the Registration Statement or the Prospectus, or any amendment
or supplement thereto, in reliance upon written information furnished to the
Company by an Underwriter through the Representatives; (ii) neither the Company
nor any Selling Stockholders shall be liable with respect to any Preliminary
Prospectus to the extent that any loss, claim, damage or liability of such
Underwriter results from the fact that such Underwriter sold Common Shares to a
person who was not sent or given a copy of the Prospectus if the loss, claim,
damage or liability of such Underwriter results from an untrue statement or
omission of a material fact contained in the Preliminary Prospectus which was
corrected in the Prospectus; and (iii) in no event shall any Selling Stockholder
be liable under this paragraph for an amount in excess of the aggregate public
offering price of the Common Shares sold by such Selling Stockholder to the
Underwriters (before deducting expenses but after deducting discounts and
commissions paid thereon to the Underwriters by such Selling Stockholder). The
Company and the Selling Stockholders may agree, as among themselves and without
limiting the rights of the Underwriters under this Agreement, as to their
respective
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amounts of such liability for which they each shall be responsible. This
indemnity agreement will be in addition to any liability which the Company or
the Selling Stockholders may otherwise have.
(b) Each Underwriter will severally, but not jointly, indemnify and
hold harmless the Company, each of its directors, each of its officers who
signed the Registration Statement, the Selling Stockholders and each person, if
any, who controls the Company or any Selling Stockholder within the meaning of
the Act, against any losses, claims, damages, liabilities or expenses to which
the Company, or any such director, officer, Selling Stockholder or controlling
person may become subject, under the Act, the Exchange Act, or other federal or
state statutory law or regulation, or at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the written
consent of such Underwriter), insofar as such losses, claims, damages,
liabilities or expenses (or actions in respect thereof as contemplated below)
arise out of or are based upon any untrue or alleged untrue statement of any
material fact contained in the Registration Statement, any Preliminary
Prospectus or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, in reliance upon and in
conformity with the written information furnished to the Company by such
Underwriter through you expressly for use therein; and will reimburse the
Company, or any such director, officer, Selling Stockholder or controlling
person for any legal and other expense reasonably incurred by the Company, or
any such director, officer, Selling Stockholder or controlling person in
connection with investigating, defending, settling, compromising or paying any
such loss, claim, damage, liability, expense or action.
(c) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party under this
Section, notify the indemnifying party in writing of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party for contribution or
otherwise than under the indemnity agreement contained in this Section or to the
extent it is not prejudiced as a proximate result of such failure. In case any
such action is brought against any indemnified party and such indemnified party
seeks or intends to seek indemnity from an indemnifying party, the indemnifying
party will be entitled to participate in, and, to the extent that it may wish,
jointly with all other indemnifying parties similarly notified, to assume the
defense thereof with counsel reasonably satisfactory to such indemnified party;
provided, however, if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be a conflict between the positions of
the indemnifying party and the indemnified party in conducting the defense of
any such action or that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those available to
the indemnifying party, the indemnified party or parties shall have the right to
select separate
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counsel, which shall be reasonably satisfactory to the Company, to assume such
legal defenses and to otherwise participate in the defense of such action on
behalf of such indemnified party or parties. It is understood that the
indemnifying party shall not, in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for the fees and expenses of
more than one separate firm at any time for all such indemnified parties;
provided, however, that the indemnifying party shall be liable for the fees and
expenses of more than one separate firm if any indemnified party reasonably
believes there exists a conflict of interest sufficient to require such separate
counsel. Upon receipt of notice from the indemnifying party to such indemnified
party of its election so to assume the defense of such action and approval by
the indemnified party of counsel, the indemnifying party will not be liable to
such indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed such counsel in
connection with the assumption of legal defenses in accordance with the proviso
to the next preceding sentence or (ii) the indemnifying party shall not have
employed counsel reasonably satisfactory to the indemnified party to represent
the indemnified party within a reasonable time after notice of commencement of
the action, in each of which cases the fees and expenses of counsel shall be at
the expense of the indemnifying party.
(d) If the indemnification provided for in this Section 10 is required
by its terms but is for any reason held to be unavailable to or otherwise
insufficient to hold harmless an indemnified party under paragraphs (a), (b) or
(c) in respect of any losses, claims, damages, liabilities or expenses referred
to herein, then each applicable indemnifying party shall contribute to the
amount paid or payable by such indemnified party as a result of any losses,
claims, damages, liabilities or expenses referred to herein (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company, the Selling Stockholders and the Underwriters from the offering of the
Common Shares or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the Company, the Selling Stockholders and the Underwriters in
connection with the statements or omissions or inaccuracies in the
representations and warranties herein which resulted in such losses, claims,
damages, liabilities or expenses, as well as any other relevant equitable
considerations. The respective relative benefits received by the Company, the
Selling Stockholders and the Underwriters shall be deemed to be in the same
proportion, in the case of the Company and the Selling Stockholders, as the
total price paid to the Company and to the Selling Stockholders, respectively,
for the Common Shares sold by them to the Underwriters (net of underwriting
discounts or commissions but before deducting expenses); and in the case of the
Underwriters, as the underwriting discounts or commissions received by them
bears to the total of such amounts paid to the Company and to the Selling
Stockholders and received by the Underwriters as underwriting discounts or
commissions. The relative fault of the Company, the Selling Stockholders and
the Underwriters shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact, relates to information
supplied by the Company, the Selling Stockholders or the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The amount paid or payable by a
party as a result of the losses, claims, damages, liabilities and expenses
referred
-29-
<PAGE>
to above shall be deemed to include, subject to the limitations set forth in
subparagraph (c) of this Section 10, any legal or other fees or expenses
reasonably incurred by such party in connection with investigating or defending
any action or claim. The provisions set forth in subparagraph (c) of this
Section 10 with respect to notice of commencement of any action shall apply if a
claim for contribution is to be made under this subparagraph (d); provided,
however, that no additional notice shall be required with respect to any action
for which notice has been given under subparagraph (c) for purposes of
indemnification. The Company, the Selling Stockholders and the Underwriters
agree that it would not be just and equitable if contribution pursuant to this
Section 10 were determined solely by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other method
of allocation which does not take account of the equitable considerations
referred to in this paragraph. Notwithstanding the provisions of this Section
10, no Underwriter shall be required to contribute any amount in excess of the
amount of the total underwriting discounts or commissions received by such
Underwriter in connection with the Common Shares underwritten by it and
distributed to the public. No person guilty of fraudulent misrepresentation
(within the meaning of Section 10(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant to this
Section 10 are several in proportion to their respective underwriting
commitments and not joint.
SECTION 11. Default of Underwriters. It shall be a condition to this
Agreement and the obligation of the Company and the Selling Stockholders to sell
and deliver the Common Shares hereunder, and of each Underwriter to purchase the
Common Shares in the manner as described herein, that, except as hereinafter in
this paragraph provided, each of the Underwriters shall purchase and pay for all
the Common Shares agreed to be purchased by such Underwriter hereunder upon
tender to the Representatives of all such shares in accordance with the terms
hereof. If any Underwriter or Underwriters default in their obligations to
purchase Common Shares hereunder on either the First or Second Closing Date and
the aggregate number of Common Shares which such defaulting Underwriter or
Underwriters agreed but failed to purchase on such Closing Date does not exceed
one-eleventh of the total number of Common Shares which the Underwriters are
obligated to purchase on such Closing Date, the non-defaulting Underwriters
shall be obligated severally, in proportion to their respective commitments
hereunder, to purchase the Common Shares which such defaulting Underwriters
agreed but failed to purchase on such Closing Date. If any Underwriter or
Underwriters so default and the aggregate number of Common Shares with respect
to which such default occurs is more than the above percentage and arrangements
satisfactory to the Representatives and the Company for the purchase of such
Common Shares by other persons are not made within 48 hours after such default,
this Agreement will terminate without liability on the part of any non-
defaulting Underwriter, the Company or the Selling Stockholders except for the
expenses to be paid by the Company and the Selling Stockholders pursuant to
Section 6 hereof and except to the extent provided in Section 10 hereof.
In the event that Common Shares to which a default relates are to be
purchased by the non-defaulting Underwriters or by another party or parties, the
Representatives or the Company shall have the right to postpone the First or
Second Closing Date, as the case may be, for not more than five business days in
order that the necessary changes in the Registration Statement,
-30-
<PAGE>
Prospectus and any other documents, as well as any other arrangements, may be
effected. As used in this Agreement, the term "Underwriter" includes any person
substituted for an Underwriter under this Section. Nothing herein will relieve a
defaulting Underwriter from liability for its default.
SECTION 12. Termination. This Agreement may be terminated by you by
notice to the Company and the Selling Stockholders as follows:
(a) At any time prior to the earlier of (i) the time the Common Shares
are released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m.
on the first business day following the date of this Agreement;
(b) At any time prior to the First Closing Date or the Second Closing
Date, as the case may be, if any of the following has occurred: (i) since the
respective dates as of which information is given in the Registration Statement
and the Prospectus, any change or any development involving a prospective change
in or affecting the condition, financial or otherwise, of the Company and the
Subsidiaries taken as a whole or the earnings, business affairs, management or
business prospects of the Company and the Subsidiaries taken as a whole, whether
or not arising in the ordinary course of business, which in the judgment of the
Representatives is so material and adverse as to make it impracticable or
inadvisable to proceed with the public offering or the delivery of the Common
Shares as contemplated hereby, (ii) any outbreak or escalation of hostilities or
declaration of war or national emergency after the date hereof or other national
or international calamity or crisis or change in financial markets or economic
or political conditions if the effect of such outbreak, escalation, declaration,
emergency, calamity, crisis or change on the financial markets of the United
States would, in your reasonable judgment, make the offering or delivery of the
Shares impracticable or inadvisable, (iii) suspension of trading in securities
on the New York Stock Exchange or the American Stock Exchange or in the national
market system or over-the-counter market by the NASD or limitation on prices
(other than limitations on hours or numbers of days of trading) for securities
on either such Exchange or in the national market system or over-the-counter
market by the NASD, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of any
court or other governmental authority which in the judgment of the
Representatives is so material and adverse as to make it impracticable or
inadvisable to proceed with the public offering or the delivery of the Common
Shares as contemplated hereby, (v) declaration of a banking moratorium by either
federal or New York State authorities, or (vi) the taking of any action by any
federal, state or local government or agency in respect of its monetary or
fiscal affairs which in your reasonable opinion has a material adverse effect on
the securities markets in the United States. Any termination pursuant to this
Section 12 shall be without liability on the part of any Underwriter to the
Company or the Selling Stockholders or on the part of the Company or the Selling
Stockholders to any Underwriter (except for expenses to be paid or reimbursed by
the Company pursuant to Sections 6 and 8 hereof and except to the extent
provided in Section 10 hereof);
(c) As otherwise provided in this Agreement.
-31-
<PAGE>
SECTION 13. Survival. The respective indemnities, agreements,
representations, warranties and other statements of the Company, of its officers
and of the several Underwriters set forth in or made pursuant to this Agreement
will remain in full force and effect, regardless of any investigation made by or
on behalf of any Underwriter or the Company or any of its or their partners,
officers or directors or any controlling person, as the case may be, and will
survive delivery of and payment for the Common Shares sold hereunder and any
termination of this Agreement.
SECTION 14. Notices. All communications hereunder shall be in
writing and, if sent to the Representatives shall be mailed, delivered or
telegraphed and confirmed to you care of Wessels, Arnold & Henderson, L.L.C. at
901 Marquette Avenue, Suite 2700, Minneapolis, Minnesota 55402-3280, Attention:
Syndicate Department, with a copy to Testa, Hurwitz & Thibeault, LLP, High
Street Tower, 125 High Street, Boston, Massachusetts 02110, Attention: Lawrence
S. Wittenberg, Esq., and if sent to the Company shall be mailed, delivered or
telegraphed and confirmed to the Company at One Carlson Parkway, Minneapolis, MN
55447 with a copy to Dorsey & Whitney LLP., Pillsbury Center South, 210
South Sixth Street, Minneapolis, Minnesota 55402, Attention: Richard G.
Swanson, Esq. The Company or you may change the address for receipt of
communications hereunder by giving notice to the others.
SECTION 15. Successors. This Agreement will inure to the benefit of
and be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 11 hereof, and to the benefit of the officers and directors
and controlling persons referred to in Section 10, and in each case their
respective successors, personal representatives and assigns, and no other person
will have any right or obligation hereunder. No such assignment shall relieve
any party of its obligations hereunder. The term "successors" shall not include
any purchaser of the Common Shares as such from any of the Underwriters merely
by reason of such purchase.
SECTION 16. Representation of Underwriters. You will act as
Representatives for the several Underwriters in connection with all dealings
hereunder, and any action under or in respect of this Agreement taken by you
jointly as Representatives or by Wessels, Arnold & Henderson, L.L.C., on behalf
of the Representatives, will be binding upon all the Underwriters.
SECTION 17. Partial Unenforceability. The invalidity or
unenforceability of any Section, paragraph or provision of this Agreement shall
not affect the validity or enforceability of any other Section, paragraph or
provision hereof. If any Section, paragraph or provision of this Agreement is
for any reason determined to be invalid or unenforceable, there shall be deemed
to be made such minor changes (and only such minor changes) as are necessary to
make it valid and enforceable.
SECTION 18. Applicable Law. This Agreement shall be governed by and
construed in accordance with the internal laws (and not the laws pertaining to
conflicts of laws) of the State of Minnesota.
SECTION 19. General. This Agreement constitutes the entire agreement
of the parties to this Agreement and supersedes all prior written or oral and
all contemporaneous oral agreements,
-32-
<PAGE>
understandings and negotiations with respect to the subject matter hereof. This
Agreement may be executed in several counterparts, each one of which shall be an
original, and all of which shall constitute one and the same document.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be amended
or modified, and the observance of any term of this Agreement may be waived,
only by a writing signed by the Company and you.
[Signature Page To Follow]
-33-
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed copies hereof, whereupon it
will become a binding agreement among the Company and the several Underwriters
including you, all in accordance with its terms.
Very truly yours,
SUMMIT MEDICAL SYSTEMS, INC.
By:
------------------------------
SELLING SHAREHOLDERS LISTED ON
SCHEDULE B
By:
------------------------------
Attorney-in-Fact
The foregoing Underwriting Agreement
is hereby confirmed and accepted by
us in Minneapolis, Minnesota as of
the date first above written.
WESSELS, ARNOLD & HENDERSON, L.L.C.
ROBERTSON, STEPHENS & COMPANY L.L.C.
VOLPE, WELTY & COMPANY
Acting as Representatives of the several
Underwriters named in the attached
Schedule A.
- ----------
By WESSELS, ARNOLD & HENDERSON, L.L.C.
By:
------------------------------------
Managing Director
-34-
<PAGE>
SCHEDULE A
----------
<TABLE>
<CAPTION>
Number of Firm
Common Shares
to be Purchased
---------------
Name of Underwriter
- ----------------------------------
<S> <C>
Wessels, Arnold & Henderson, L.L.C. ........... ---------
Robertson, Stephens & Company LLC ............. ---------
Volpe, Welty & Company ........................ ---------
Total .................................... =========
- ----------------------------------
</TABLE>
<PAGE>
SCHEDULE B
----------
<TABLE>
<CAPTION>
Number of Firm
Common Shares
to be Purchased
---------------
Name of Selling Stockholder
- -----------------------------
<S> <C>
........................................ _______
........................................ _______
........................................ _______
Total ............................. =======
- -----------------------------
</TABLE>
<PAGE>
EXHIBIT 5.1
Summit Medical Systems, Inc.
One Carlson Parkway
Minneapolis, MN 55447
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
We have acted as counsel to Summit Medical Systems, Inc., a Minnesota
corporation (the "Company"), in connection with the registration with Securities
and Exchange Commission of up to 2,456,400 shares of common stock of the
Company, par value $.01 per share (the "Common Stock"), including 1,500,000
shares to be sold by the Company (the "Company Common Stock") (including (a)
267,000 shares subject to the Underwriters' over-allotment option) and (b) up to
409,400 shares that may be registered on a registration statement pursuant to
Rule 462(b) under the Securities Act (the registration statement on Form S-1 and
the registration statement pursuant to Rule 462(b), collectively, the
"Registration Statement") and 280,000 shares of Common Stock to be sold by
certain selling shareholders (the "Selling Shareholder Common Stock").
We have examined such documents and have reviewed such questions of
law as we have considered necessary and appropriate for the purposes of our
opinions set forth below. In rendering our opinions, we have assumed the
authenticity of all documents submitted to us as originals, the genuineness of
all signatures and the conformity to authentic originals of all documents
submitted to us as copies. We have also assumed the legal capacity for all
purposes relevant hereto of all natural persons and, with respect to all parties
to agreements or instruments relevant hereto other than the Company, that such
parties had the requisite power and authority (corporate or otherwise) to
execute, deliver and perform such agreements or instruments, that such
agreements or instruments have been duly authorized by all requisite action
(corporate or otherwise), executed and delivered by such parties and that such
agreements or instruments are the valid, binding and enforceable obligations of
such parties. As to questions of fact material to our opinions, we have relied
upon certificates of officers of the Company and of public officials. We have
also assumed that the Company Common Stock will be sold for a price per share
not less than the par value per share of the Common Stock, will be priced by
authorizing resolutions adopted by the Company's
<PAGE>
Summit Medical Systems, Inc.
Page 2
Board of Directors in accordance with such resolutions and will be issued and
sold as described in the Registration Statement.
Based on the foregoing, we are of the opinion that, (1) the shares of
Company Common Stock to be sold by the Company pursuant to the Registration
Statement have been duly authorized by all requisite corporate action and, upon
issuance, delivery and payment therefor as described in the Registration
Statement, will be validly issued, fully paid and nonassessable and that, (2)
the Selling Shareholder Common Stock to be sold by the selling shareholders
pursuant to the Registration Statement have been duly authorized by all
requisite corporate action, have been validly issued and are fully paid and
nonassessable.
Our opinions expressed above are limited to the laws of the State of
Minnesota.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, and to the reference to our firm under the heading
"Legal Matters" in the Prospectus constituting part of the Registration
Statement.
Dated: June 11, 1996
Very truly yours,
/s/ Dorsey & Whitney LLP
JBA
<PAGE>
[LETTERHEAD OF AMERICAN COLLEGE OF CARDIOLOGY APPEARS HERE]
January 2, 1996
Edward Sweeney
President
Summit Medical Systems, Inc.
One Carlson Parkway
Minneapolis, MN 55447
Dear Ed:
I enjoyed the opportunity to meet and have lunch with you on
Thursday, December 21. It was a very useful exchange of
information that I hope continues as our professional
relationship evolves. In this regard, we discussed extending the
deadline for completing a new contract between ACC and Summit
Medical Systems to July 1, 1996. This means that the current
contract would remain operative until that date. Your written
confirmation of this new deadline is requested.
My best wishes to you for a prosperous New Year.
Sincerely,
/s/ David J. Feild
David J. Feild
Executive Vice President
CC: Karl E. Hammermeister, M.D.,F.A.C.C.
David P. Bodycombe, M. Sc., Sc.D.
<PAGE>
[LETTERHEAD OF SUMMIT MEDICAL APPEARS HERE]
January 16, 1996
Mr. David J. Feild
Executive Vice President
American College of Cardiology
Heart House
9111 Old Georgetown Road
Bethesda, MD 20814-1699
Dear Dave:
In response to your letter of January 2, 1996, this will confirm that our
current contract will remain operative until July 1, 1996 to provide more time
to complete a new contract between the ACC and Summit Medical.
We certainly enjoyed our Christmas lunch with you and Dave, and we extend our
very best wishes for a great year for the American College of Cardiology.
Warmest personal regards,
/s/ Edward F. Sweeney
Edward F. Sweeney
Chairman
EFS:nlb
cc: Karl E. Hammermeister, MD,FACC
David P. Bodycombe, M.Sc., Sc.D.
<PAGE>
EXHIBIT 11.1
STATEMENT RE: COMPUTATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
1993 1994 1995 1995 1996
---------- ---------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
PRIMARY EARNINGS PER
SHARE:
Weighted average shares
outstanding........... 3,256,608 3,246,886 4,908,117 3,263,350 7,527,314
SAB No. 83 shares--for
stock options granted
at exercise prices
less than the 12
months preceding the
initial public offer-
ing using the treasury
method................ 115,524 115,524 68,048 115,524 --
---------- ---------- ----------- ---------- ----------
3,372,132 3,362,410 4,976,165 3,378,874 7,527,314
========== ========== =========== ========== ==========
Net income (loss)........ $ 563 $ (334,068) $(7,657,778) $ (300,437) $ (281,349)
========== ========== =========== ========== ==========
Net income (loss) per
share................... $ 0.00 $ (0.10) $ (1.54) $ (0.09) $ (0.04)
========== ========== =========== ========== ==========
FULLY DILUTED EARNINGS
PER SHARE:
Weighted average shares
outstanding........... 3,256,608 3,246,886 4,908,117 3,263,350 7,527,314
SAB No. 83 shares--for
stock options granted
at exercise prices
less than the 12
months preceding the
initial public offer-
ing using the treasury
method................ 115,524 115,524 68,048 115,524 --
Additional shares from
the conversion of all
series of convertible
preferred stock....... -- 591,050 628,304 1,066,656 --
---------- ---------- ----------- ---------- ----------
3,372,132 3,953,460 5,604,469 4,445,530 7,527,314
========== ========== =========== ========== ==========
Net income (loss)........ $ 563 $ (334,068) $(7,657,778) $ (300,437) $ (281,349)
========== ========== =========== ========== ==========
Net income (loss) per
share....................$ 0.00 $ (0.08) $ (1.37) $ (0.07) $ (0.04)
========== ========== =========== ========== ==========
</TABLE>
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES
BSM Financial, Inc., a Massachusetts corporation
Medical Information Systems Company, Inc., a Minnesota corporation
Summit Medical Europe S.A.R.L., organized under French law
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated February 15, 1996 related to the consolidated
financial statements and schedule of Summit Medical Systems, Inc., included in
the Registration Statement on Form S-1 and related Prospectus of Summit
Medical Systems, Inc. for the registration of its Common Stock.
Ernst & Young LLP
Minneapolis, Minnesota
June 10, 1996
<PAGE>
Exhibit 24.1
POWER OF ATTORNEY
Each of the undersigned hereby appoints Kevin R. Green and Anthony W.
Rees, and each of them individually, his or her attorney-in-fact and agent, with
full powers of substitution and resubstitution, to execute on his or her behalf
in any and all capacities the Registration Statement on Form S-1 to be filed
under the Securities Act of 1933 for the registration of the sale of Common
Stock of Summit Medical Systems, Inc. (the "Company") by the Company and certain
shareholders of the Company and to perform any acts necessary to be done in
order to file any and all pre-effective and post-effective amendments thereto,
and any and all instruments or documents filed as part of or in connection with
such Registration Statement or amendments thereto including those pursuant to
Rule 462, and hereby ratify and confirm all that said attorney-in-fact and
agent, or his substitutes, may lawfully do or cause to be done by virtue hereof.
Effective as of: June 3, 1996
- ------------------------- -------------------------
John M. Nehra Kent J. Thiry
- ------------------------- -------------------------
Dennis H. Powers Edward F. Sweeney
/s/ Kevin R. Green
- ------------------------- -------------------------
Anthony W. Rees Kevin R. Green
<PAGE>
Exhibit 24.1
POWER OF ATTORNEY
Each of the undersigned hereby appoints Kevin R. Green and Anthony W.
Rees, and each of them individually, his or her attorney-in-fact and agent, with
full powers of substitution and resubstitution, to execute on his or her behalf
in any and all capacities the Registration Statement on Form S-1 to be filed
under the Securities Act of 1933 for the registration of the sale of Common
Stock of Summit Medical Systems, Inc. (the "Company") by the Company and certain
shareholders of the Company and to perform any acts necessary to be done in
order to file any and all pre-effective and post-effective amendments thereto,
and any and all instruments or documents filed as part of or in connection with
such Registration Statement or amendments thereto including those pursuant to
Rule 462, and hereby ratify and confirm all that said attorney-in-fact and
agent, or his substitutes, may lawfully do or cause to be done by virtue hereof.
Effective as of: June 3, 1996
- ------------------------- -------------------------
John M. Nehra Kent J. Thiry
/s/ Edward F. Sweeney
- ------------------------- -------------------------
Dennis H. Powers Edward F. Sweeney
- ------------------------- -------------------------
Anthony W. Rees Kevin R. Green
<PAGE>
Exhibit 24.1
POWER OF ATTORNEY
Each of the undersigned hereby appoints Kevin R. Green and Anthony W.
Rees, and each of them individually, his or her attorney-in-fact and agent, with
full powers of substitution and resubstitution, to execute on his or her behalf
in any and all capacities the Registration Statement on Form S-1 to be filed
under the Securities Act of 1933 for the registration of the sale of Common
Stock of Summit Medical Systems, Inc. (the "Company") by the Company and certain
shareholders of the Company and to perform any acts necessary to be done in
order to file any and all pre-effective and post-effective amendments thereto,
and any and all instruments or documents filed as part of or in connection with
such Registration Statement or amendments thereto including those pursuant to
Rule 462, and hereby ratify and confirm all that said attorney-in-fact and
agent, or his substitutes, may lawfully do or cause to be done by virtue hereof.
Effective as of: June 3, 1996
/s/ Kent J. Thiry
- ------------------------- -------------------------
John M. Nehra Kent J. Thiry
- ------------------------- -------------------------
Dennis H. Powers Edward F. Sweeney
- ------------------------- -------------------------
Anthony W. Rees Kevin R. Green
<PAGE>
Exhibit 24.1
POWER OF ATTORNEY
Each of the undersigned hereby appoints Kevin R. Green and Anthony W.
Rees, and each of them individually, his or her attorney-in-fact and agent, with
full powers of substitution and resubstitution, to execute on his or her behalf
in any and all capacities the Registration Statement on Form S-1 to be filed
under the Securities Act of 1933 for the registration of the sale of Common
Stock of Summit Medical Systems, Inc. (the "Company") by the Company and certain
shareholders of the Company and to perform any acts necessary to be done in
order to file any and all pre-effective and post-effective amendments thereto,
and any and all instruments or documents filed as part of or in connection with
such Registration Statement or amendments thereto including those pursuant to
Rule 462, and hereby ratify and confirm all that said attorney-in-fact and
agent, or his substitutes, may lawfully do or cause to be done by virtue hereof.
Effective as of: June 3, 1996
- ------------------------- -------------------------
John M. Nehra Kent J. Thiry
- ------------------------- -------------------------
Dennis H. Powers Edward F. Sweeney
/s/ Anthony W. Rees
- ------------------------- -------------------------
Anthony W. Rees Kevin R. Green
<PAGE>
Exhibit 24.1
POWER OF ATTORNEY
Each of the undersigned hereby appoints Kevin R. Green and Anthony W.
Rees, and each of them individually, his or her attorney-in-fact and agent, with
full powers of substitution and resubstitution, to execute on his or her behalf
in any and all capacities the Registration Statement on Form S-1 to be filed
under the Securities Act of 1933 for the registration of the sale of Common
Stock of Summit Medical Systems, Inc. (the "Company") by the Company and certain
shareholders of the Company and to perform any acts necessary to be done in
order to file any and all pre-effective and post-effective amendments thereto,
and any and all instruments or documents filed as part of or in connection with
such Registration Statement or amendments thereto including those pursuant to
Rule 462, and hereby ratify and confirm all that said attorney-in-fact and
agent, or his substitutes, may lawfully do or cause to be done by virtue hereof.
Effective as of: June 3, 1996
- ------------------------- -------------------------
John M. Nehra Kent J. Thiry
/s/ Dennis H. Powers
- ------------------------- -------------------------
Dennis H. Powers Edward F. Sweeney
- ------------------------- -------------------------
Anthony W. Rees Kevin R. Green
<PAGE>
Exhibit 24.1
POWER OF ATTORNEY
Each of the undersigned hereby appoints Kevin R. Green and Anthony W.
Rees, and each of them individually, his or her attorney-in-fact and agent, with
full powers of substitution and resubstitution, to execute on his or her behalf
in any and all capacities the Registration Statement on Form S-1 to be filed
under the Securities Act of 1933 for the registration of the sale of Common
Stock of Summit Medical Systems, Inc. (the "Company") by the Company and certain
shareholders of the Company and to perform any acts necessary to be done in
order to file any and all pre-effective and post-effective amendments thereto,
and any and all instruments or documents filed as part of or in connection with
such Registration Statement or amendments thereto including those pursuant to
Rule 462, and hereby ratify and confirm all that said attorney-in-fact and
agent, or his substitutes, may lawfully do or cause to be done by virtue hereof.
Effective as of: June 3, 1996
/s/ John M. Nehra
- ------------------------- -------------------------
John M. Nehra Kent J. Thiry
- ------------------------- -------------------------
Dennis H. Powers Edward F. Sweeney
- ------------------------- -------------------------
Anthony W. Rees Kevin R. Green
