10-Q 1 r31q01.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ___________ Commission file number: 0-28212 SUNQUEST INFORMATION SYSTEMS, INC. (Exact name of registrant as specified in its charter) PENNSYLVANIA 86-0378223 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 4801 East Broadway Boulevard Tucson, Arizona 85711 (Address of principal executive office) (Zip Code) (520) 570-2000 (Registrant's telephone number, including area code) Not Applicable (Former name, former address, and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No On May 7, 2001, there were 15,578,169 shares of Common Stock outstanding. Sunquest Information Systems, Inc. Form 10-Q For the Quarterly Period Ended March 31, 2001 Table of Contents Page ---- Part I. Financial Information Item 1. Financial Statements (a.) Condensed consolidated balance sheets as 3 of March 31, 2001 (unaudited) and December 31, 2000 (b.) Unaudited condensed consolidated 4 statements of income and comprehensive income for each of the three-month periods ended March 31, 2001 and March 31, 2000 (c.) Unaudited condensed consolidated 5 statements of cash flows for each of the three- month periods ended March 31, 2001 and March 31, 2000 (d.) Notes to unaudited condensed consolidated 6 financial statements Item 2. Management's Discussion and Analysis of 10 Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About 14 Market Risk Part II. Other Information Item 1. Legal Proceedings 15 Item 2. Changes in Securities and Use of Proceeds 15 Item 3. Defaults Upon Senior Securities 15 Item 4. Submission of Matters to a Vote of Security 16 Holders Item 5. Other Information 16 Item 6. Exhibits and Reports on Form 8-K 16 (a.) Exhibits 16 (b.) Reports on Form 8-K 16 Signatures 17 2 Part I. Financial Information Item 1. Financial Statements Sunquest Information Systems, Inc. Condensed Consolidated Balance Sheets (In thousands)

See accompanying notes. 3 Sunquest Information Systems, Inc. Condensed Consolidated Statements of Income and Comprehensive Income (In thousands, except per share amounts) (Unaudited)

See accompanying notes. 4 Sunquest Information Systems, Inc. Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited)

See accompanying notes. 5 Notes to Unaudited Condensed Consolidated Financial Statements Note 1 - Interim Statement Presentation The unaudited condensed consolidated financial statements of Sunquest Information Systems, Inc. (the "Company") have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the "Commission") and in accordance with generally accepted accounting principles for the preparation of interim financial statements. Accordingly, certain information and footnote disclosures normally included in annual financial statements have been omitted or condensed. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto incorporated by reference into the Company's 2000 Annual Report on Form 10-K filed with the Commission. The 2000 balance sheet amounts were derived from audited statements. The consolidated financial statements for the period ended March 31, 2001 include the accounts of the Company, Sunquest Europa Limited, Sunquest Germany GmbH, Antrim Corporation, Sunquest Pharmacy Information Systems, Inc., e-Suite, Inc. ("e-Suite"), Sunquest Information Systems (India) Private Limited ("Sunquest India") and Diagnostix.com, Inc. ("Diagnostix.com"). Sunquest India and e-Suite are wholly owned subsidiaries that were formed during the first quarter of 2000. Diagnostix.com, a wholly owned subsidiary, was formed during the third quarter of 2000. All transactions between the Company and its consolidated subsidiaries have been eliminated in preparing the consolidated financial statements. In the opinion of management, all necessary adjustments, consisting of normal and recurring adjustments, have been made to provide a fair presentation to the unaudited financial information. The operating results for the three months ended March 31, 2001 are not necessarily indicative of the results that may be expected for any other interim period or for the full year ending December 31, 2001. Note 2 - Employee Stock Purchase Plan In the three months ended March 31, 2001, the Company issued 7,453 shares of its Common Stock for approximately $58,000 pursuant to the Employee Stock Purchase Plan. Note 3 - Taxes The effective income tax rates are based upon the relationship of annual forecasted income and income taxes. To the extent that these rates differ from the federal statutory rates, the cause is primarily related to state income taxes and tax credits. 6 Note 4 - Net Income Per Share The following table sets forth the computation of basic and diluted net income per share:

Note 5 - Investments At March 31, 2001, all of the Company's investments in debt securities have been classified as available-for-sale securities. Available-for-sale securities are carried at fair value with net unrealized gains and losses on such securities, net of tax, reported as a component of shareholders' equity and other comprehensive income. At March 31, 2001, the amortized cost of the Company's investment in debt securities approximated the fair value and as such, there was no adjustment to shareholders' equity. Note 6 - Segment Information Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"), redefined how operating segments are determined and requires disclosure of certain financial and descriptive information about a company's operating segments. In addition, SFAS No. 131 establishes standards for related disclosures about major customers, products and services and geographic areas. Operating segments are defined as a component of a business enterprise that discrete financial information is available for review by the chief operating decision maker, or decision-making group, in making decisions about resources to be allocated and to assess performance. 7 Currently, the Company manages its operations through two business segments: Core Business and e-Commerce. Core Business: This reportable segment consists of the Company's healthcare information systems that include software licenses, related hardware, relicensed software, resold software and value-added services. The principal markets for this segment include large and mid-sized hospitals, clinics and other facilities, including integrated delivery networks ("IDNs"). e-Commerce: This reportable segment consists of the Company's Internet-based product offerings and web-based development. Currently, the Company offers three products, e- Reference Lab, e-Financial and e-CEM ("Clinical Event Manager"), which are Internet-based application service provider ("ASP") products hosted and maintained at the Company's offices and accessed by customers over the Internet for a monthly fee. By hosting and maintaining applications at a central site and providing user access over the Internet, these products eliminate the customer's need for capital investment in information systems and internal staff, while providing access to state-of-the-art clinical systems. In addition, e-Hospital Lab is in Beta testing and development has begun on the Web enabling of some of the Core Business segment's products. The principal markets for e-Reference Lab and e-Hospital Lab are the smaller hospital and commercial laboratories. e-Financial and e-CEM are suitable for institutions of any size. In August 2000, the Company announced the formation of Diagnostix.com. Diagnostix.com is a business-to-business ("B2B") portal currently in development with two Beta sites. Diagnostix.com plans phased development of Web-based products designed to streamline communication between the many constituents of health care - IDNs, laboratories, pharmacies, physicians and patients. Products offered by Diagnostix.com are currently in the development and testing phase, and no revenues are anticipated until the second half of 2001. The Company's strategic initiatives include the development of future releases of ASP product offerings as well as introducing additional Internet ventures and products, which will target expanded markets. The Company evaluates performance based on several factors, of which the primary financial measure is net income for the Core Business segment and net income potential for the e-Commerce segment. In arriving at each reportable segment's net income, the Company is allocating department overhead expenses, sales and marketing expenses, general and administrative expenses and other income/expense. These items are being allocated as follows: (1) department overhead and general and administrative expenses on direct labor; (2) sales and marketing based on total sales dollars and (3) other income/expense based on revenue dollars. 8 Summarized financial information concerning the Company's operating segments is shown below:

[FN] Diluted net income (loss) per share is determined for each operating segment assuming diluted shares outstanding for the Company are attributable to each segment. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements -------------------------- This report, and other reports and communications to shareholders, contains forward-looking statements, including statements which contain words such as "will," "expects," "believes," "plans," "anticipates" and words of similar impact. Certain other factors affecting future performance, including but not limited to dependence on laboratory information system products, competition in the marketplace, purchase and installation decisions of customers, pricing decisions of competitors, changes in regulatory requirements, product status and development risks, uncertainties concerning the commercial use of the Internet and dependence on third party products, could cause actual results to differ materially from such forward- looking statements. These and other factors affecting future performance are detailed in Sunquest Information Systems, Inc.'s (the "Company's") 2000 Annual Report on Form 10-K filed with the Securities and Exchange Commission. General ------- The results of operations for the three months ended March 31, 2001 are not necessarily indicative of the results that may be expected for any other interim period or for the full year ending December 31, 2001. Core Business Segment In its Core Business segment, the Company designs, develops, markets, installs and supports healthcare information systems for large and mid-sized hospitals, clinics and other facilities, including IDNs. The clinical applications and information systems offered by its Core Business segment include laboratory, radiology, pharmacy, clinical data management and clinical financial reporting. Revenues from the Company's Core Business segment are derived from the licensing of software, the provision of value-added services and the sale of related hardware. Net income for the Company's Core Business segment was $4.6 million and $3.1 million for the three months ended March 31, 2001 and 2000, respectively. Diluted net income per share was $.29 and $.20 for the three months ended March 31, 2001 and 2000, respectively. e-Commerce Segment The Company's e-Commerce segment currently provides Internet- based ASP products. e-Reference Lab and e-Hospital Lab are targeted at commercial laboratories and hospitals with less than 200 beds. e-Financial and e-CEM are suitable for institutions of any size. During 2000, through e-Suite, Inc., a wholly owned subsidiary, the Company expanded the distribution of products via this Internet-delivered ASP model. At March 31, 2001, the Company had three 10 ASP products, e-Reference Lab, e-Financial and e-CEM, in general release and live at six sites. A fourth ASP product, e-Hospital Lab, is in Beta testing. The Company is also web-enabling some of its Core Business products. In August 2000, the Company announced the formation of a new business, Diagnostix.com, a wholly owned subsidiary. Diagnostix.com is a business-to-business (B2B) portal currently in development with two Beta clients. Diagnostix.com plans phased development of Web-based products designed to streamline communication between the many constituents of healthcare - IDNs, laboratories, pharmacies, physicians and patients. Products offered by Diagnostix.com are currently in the development and testing phase, and no revenues are anticipated until the second half of 2001. Net loss for the Company's e-Commerce segment was $2.3 million and $451,000 for the three months ended March 31, 2001 and 2000, respectively. The diluted net loss per share was $.14 and $.03 for the three months ended March 31, 2001 and 2000, respectively. Revenues from the ASP products currently included in the e- Commerce segment are derived from monthly subscription fees and related installation services. Expenses included in the e- Commerce segment relate to the design, development, marketing, installation and support of both the existing ASP products and the products under development, which include the Web enabling of some of the Core Business segment's products, as well as the development of Diagnostix.com's Web-based products. Results of Operations --------------------- Comparison of Three Months Ended March 31, 2001 and March 31, 2000 Revenues. The Company's total revenues were $31.8 million for the three months ended March 31, 2001 compared to $28.7 million for the three months ended March 31, 2000, an increase of $3.1 million, or 10.9%. Revenues from system sales were $12.4 million for the three months ended March 31, 2001 compared to $9.9 million for the three months ended March 31, 2000, an increase of $2.5 million, or 25.4%. This increase was primarily attributable to an increase in installations of software and hardware system deliveries. Revenues from support and service were $19.4 million for the three months ended March 31, 2001 compared to $18.8 million for the three months ended March 31, 2000, an increase of $609,000, or 3.2%. This increase was primarily attributable to an 11.7% growth in support services to the Company's installed customer base partially offset by decreased consulting and other fee-for-service activities. At March 31, 2001, the Company had a total contract backlog of $123.2 million, which consisted of $49.3 million of system sales and services, and $73.9 million of support and subscription fees. The Company's total contract backlog at December 31, 2000 was $121.3 million, which consisted of $49.4 million of system sales and services, and $71.9 million of support and subscription fees. At March 31, 2000, total contract backlog was $121.2 million, 11 which consisted of $53.2 million of system sales and services, and $68.0 million of support and subscription fees. Cost of System Sales. Cost of system sales was $6.4 million for the three months ended March 31, 2001 compared to $5.0 million for the three months ended March 31, 2000, an increase of $1.4 million, or 27.0%. As a percentage of total revenues, cost of system sales was 20.1% in 2001 compared to 17.6% in 2000. The dollar increase was primarily attributable to increases in hardware and operating system deliveries and increased support and maintenance costs. This increase in support and maintenance costs is primarily attributable to resold hardware maintenance agreements for additional sites. Amortization of previously capitalized software development costs was $861,000 for the three months ended March 31, 2001 compared to $896,000 for the three months ended March 31, 2000, a decrease of $35,000, or 3.9%. The decrease in amortization was primarily attributable to decreased amortization of the Company's reference laboratory systems. The decrease was partially offset by increased amortization of the Company's clinical laboratory systems. Client Services. Client services expenses were $7.7 million for the three months ended March 31, 2001 compared to $8.3 million for the three months ended March 31, 2000, a decrease of $582,000, or 7.0%. As a percentage of total revenues, client services expenses were 24.2% in 2001 compared to 28.8% in 2000. The dollar decrease was primarily attributable to the redeployment of resources to research and development related duties in support of the Company's development of its e-Commerce products. Research and Development. Research and development expenses were $6.2 million for the three months ended March 31, 2001 compared to $4.1 million for the three months ended March 31, 2000, an increase of $2.1 million, or 49.8%. As a percentage of total revenues, research and development expenses were 19.5% in 2001 compared to 14.4% in 2000. The dollar increase in research and development expenses was primarily attributable to increased efforts related to the development, enhancement and documentation of the Company's e-Commerce and pharmacy systems. The Company capitalized $781,000 of its software development costs for the three months ended March 31, 2001 compared to $911,000 for the three months ended March 31, 2000, a decrease of $130,000, or 14.3%. The decrease in capitalized software development costs was primarily attributable to decreased capitalization of the Company's clinical and reference laboratory systems. The decreases were partially offset by increased capitalization of the Company's e-Commerce and pharmacy systems. Sales and Marketing. Sales and marketing expenses were $3.9 million for the three months ended March 31, 2001 compared to $4.1 million for the three months ended March 31, 2000, a decrease of $178,000, or 4.4%. As a percentage of total revenues, sales and marketing expenses were 12.2% in 2001 compared to 14.2% in 2000. The dollar decrease was primarily attributable to a decrease in sales efforts related to turnkey financial and reference laboratory products. The decrease was partially offset by increased commissions resulting from a 26.6% growth in sales bookings during the first quarter of 2001 compared to the corresponding period in 2000 and an increase in the sales staff for the Company's e-Commerce products. 12 General and Administrative. General and administrative expenses were $4.7 million for the three months ended March 31, 2000 compared to $3.6 million for the three months ended March 31, 2000, an increase of $1.1 million, or 31.3%. As a percentage of total revenues, general and administrative expenses were 14.7% in 2001 compared to 12.4% in 2000. The dollar increase was primarily attributable to increases in legal fees, depreciation expense, variable compensation relating to employee incentives and the Company's e-Commerce initiatives. Liquidity and Capital Resources ------------------------------- At March 31, 2001, the Company had cash and short-term investments of $67.8 million, which consisted of cash of $7.1 million and short-term investments of $60.8 million. This compares to cash and short-term investments of $70.4 million at December 31, 2000 and cash and short-term investments of $53.7 million at March 31, 2000, a decrease of $2.6 million and an increase of $14.1 million, respectively. Cash provided by operating activities was $908,000 for the three months ended March 31, 2001 compared to $9.3 million for the three months ended March 31, 2000. As of March 31, 2001, the Company had net trade receivables of $37.3 million which consisted of $23.8 million in net billed trade receivables and $13.5 million in unbilled trade receivables. At December 31, 2000, the Company had net trade receivables of $35.4 million which consisted of $21.9 million in net billed trade receivables and $13.5 million in unbilled trade receivables. The unbilled receivables represent revenue that has been recognized in accordance with the percentage-of-completion accounting method, but which has not yet been billed to customers under contractual milestone billings. Generally, the unbilled amounts will be billed and collected within the following twelve months. The Company maintains an allowance for doubtful accounts that it believes is adequate to cover potential credit losses. The average collection period, a rolling twelve-month average, on net billed trade receivables was 67 days at March 31, 2000 compared to 73 days at December 31, 2000 and 80 days at March 31, 2000. Days sales outstanding (DSO) was 105 at March 31, 2001 compared to 99 at December 31, 2000 and 125 at March 31, 2000. Cash used in investing activities was $1.9 million for the three months ended March 31, 2001. Purchases of investments totaled $26.2 million and proceeds from the sale of investments totaled $27.4 million. Purchases of property and equipment totaled $1.1 million and consisted primarily of purchases of computer software, computers and computer-related equipment and leasehold improvements. Capitalized software development costs totaled $1.9 million. Of this amount, $1.1 million was related to purchases of software from third party vendors. Cash used in financing activities was $189,000 for the three months ended March 31, 2001. Of this amount, $298,000 was used for principal payments on capital leases. This amount was partially offset by the issuance of 7,453 shares of Common Stock for approximately $58,000 under the Employee Stock Purchase Plan and the issuance of 5,966 shares of Common Stock for approximately $51,000 under the Stock Incentive Plan of 1996, as amended. 13 At March 31, 2001, working capital was $78.9 million compared to $78.0 million at December 31, 2000. The Company has a revolving line of credit with a bank allowing the Company to borrow up to $10.0 million. Any borrowings under the line of credit will bear interest at the bank reference rate unless the Company elects a fixed rate or certain variable rates contemplated by the agreement. All outstanding principal and interest under the line of credit is due August 28, 2001 except for any amounts outstanding under stand-by letters of credit which have a maximum maturity of 365 days. Borrowings under the line of credit are secured by all of the Company's assets. Approximately $570,000 of the line of credit is used to secure letters of credit and is not available for immediate expenditure. There were no borrowings outstanding as of March 31, 2001. The Company has no significant purchase commitments at this time. However, the Company continues to be actively involved in identifying and evaluating potential acquisitions, which may result in the future expenditure of funds. Management believes that existing cash, short-term investments, cash available under its revolving line of credit and funds generated from operations will be sufficient to meet operating requirements for at least the next twelve months. To date, inflation has not had a material impact on the Company's revenues or income, and the Company does not expect inflation to have a material impact in the foreseeable future. New Accounting Standards ------------------------ In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and for Hedging Activities" ("SFAS No. 133"). SFAS No. 133 provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. The Company adopted SFAS No. 133 during the first quarter of 2001. The adoption of SFAS No. 133 did not have any impact on the Company's financial statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to market risk from changes in interest rates. The Company's primary interest rate risk relates to its short-term investments in Tax-exempt Municipal Bonds and Short-term Demand Notes, all of which are classified as available- for-sale. At March 31, 2001, the Company had total short-term investments of $60.8 million. Assuming a 10% increase in interest rates on the Company's short-term investments (i.e., an increase from the March 31, 2001 weighted-average interest rate of 3.599% to a weighted-average interest rate of 3.959%), the fair value of these investments would decrease by approximately $331,000. 14 Part II. Other Information Item 1. Legal Proceedings On May 31, 2000, the Company instituted a civil action against Park City Solutions, Inc. ("Park City") and R. Scott Holbrook ("Mr. Holbrook") in the United States District Court for the Western District of Pennsylvania. The complaint alleges that Mr. Holbrook (a former senior executive of the Company) and Park City and/or its subsidiaries have infringed on the Company's intellectual property, misappropriated the Company's trade secrets, wrongfully solicited the Company's employees, induced and attempted to induce the Company's customers to violate their software licensing agreements, engaged in unfair competition, and improperly used the Company's proprietary information to target and solicit the Company's customers. Among other things, the complaint seeks damages for the full extent of defendants' wrongdoing. In addition, on May 31, 2000, the Company filed a motion for preliminary injunction seeking to enjoin, among other things, Park City from using its current corporate logo, which the Company believes infringes on one of the Company's marks. On August 9, 2000, the Court granted the Company's motion for preliminary injunction and enjoined Park City from making any use of its corporate logo during the pendency of the litigation or until further order of the Court. On June 21, 2000, Mr. Holbrook filed a motion to dismiss the civil action as to Mr. Holbrook based on lack of personal jurisdiction. Mr. Holbrook's motion to dismiss was granted on April 6, 2001. The Company intends to aggressively pursue its claims in the civil action. At the present time, the Company is unable to determine the probable outcome of the lawsuit. The Company is also subject to legal proceedings and claims covering a wide range of matters that arose in the ordinary course of business. Management is of the opinion that the potential liability with respect to these legal proceedings and claims will not materially affect the Company's financial position, results of operations or cash flows. Item 2. Changes in Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities None. 15 Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a.) Exhibits 10.1 - First Amendment to Lease Agreement dated April 9, 2001 between the registrant, as lessee, and Any Travel, Inc., as lessor, with respect to the premises located at 4801 East Broadway Boulevard, Tucson, Arizona, filed herewith. 10.2 - Fourth Amendment to Business Loan Agreement dated December 30, 1997, among the registrant, Sunquest Europa Limited, Antrim Corporation, Sunquest Pharmacy Information Systems, Inc., Sunquest Information Systems (India) Private Limited, e-Suite, Inc, Diagnostix.com, Inc. and Bank of America N.A., filed herewith. (b.) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the quarter ended March 31, 2001. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SUNQUEST INFORMATION SYSTEMS, INC. (Registrant) Date: May 11, 2001 By: /s/ Nina M. Dmetruk ____________________________________________ Nina M. Dmetruk Executive Vice President and Chief Financial Officer (Authorized Officer of the Registrant and Principal Financial and Accounting Officer) 17

SUNQUEST INFORMATION SYSTEMS INC 10-Q