Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Annual Report -- [x] Reg. S-K Item 405 36 143K
2: EX-10.G1 Addendum to Employment Agreement-Holbrook 2 11K
3: EX-10.H1 Addendum to Employment Agreement-Wesson 2 11K
4: EX-10.I1 Stock Incentive Plan of 1996 11 47K
5: EX-10.K1 Fourth Amendment to Business Loan Agreement 5 24K
6: EX-10.Q Office Lease 28 127K
7: EX-10.R Employment Agreement 23 47K
8: EX-13.A Management's Discussion & Analysis 32 142K
9: EX-21.B Subsidiaries of the Registrant 1 6K
10: EX-23.G Consent of Ernst & Young 1 7K
11: EX-27.B Financial Data Schedule 2 7K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO _________________
Commission file number: 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 offices) (Zip Code)
Registrant's telephone number, including area code (520) 570-2000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 21, 1997, the registrant had 15,362,587 shares of Common Stock
outstanding. The aggregate market value of the Common Stock held by
nonaffiliates of the registrant, based on the closing price of the Common Stock
on March 21, 1997 as reported by Nasdaq, was $42,338,119. Shares of Common
Stock held by shareholders who may be deemed to be affiliates for this purpose
have been excluded. This determination of affiliate status is not necessarily a
determination for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for 1996 are
incorporated by reference into Parts II and IV of this Form 10-K.
Portions of the registrant's Proxy Statement for the 1997 Annual Meeting of
Shareholders are incorporated by reference into Part III of this Form 10-K.
SUNQUEST INFORMATION SYSTEMS, INC.
Form 10-K - 1996
TABLE OF CONTENTS
[Download Table]
Page
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PART I
Item 1 - Business
General 1
Recent Developments 3
Products 3
Third-Party Marketing Arrangements 10
Products Under Development 12
Client Services 13
Marketing 14
Technology 15
Research and Development 15
Competition 16
Regulation 17
Proprietary Rights 19
System Acquisition Agreements 20
Backlog 20
Employees 21
Executive Officers of the Registrant 21
Item 2 - Properties 23
Item 3 - Legal Proceedings 24
Item 4 - Submission of Matters to a Vote of Security Holders 24
PART II
Item 5 - Market for Registrant's Common Equity and Related
Stockholder Matters 24
Item 6 - Selected Financial Data 25
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 25
Item 8 - Financial Statements and Supplementary Data 25
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 25
PART III
Item 10 - Directors and Executive Officers of the Registrant 26
Item 11 - Executive Compensation 26
Item 12 - Security Ownership of Certain Beneficial Owners and
Management 26
Item 13 - Certain Relationships and Related Transactions 26
PART IV
Item 14 - Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 27
Signatures 31
Part I
Item 1. Business.
General
Sunquest Information Systems, Inc. ("Sunquest" or the "Company") provides
health care information systems ("HCISs") to large and mid-sized hospitals,
clinics and other facilities, including integrated delivery networks ("IDNs")
comprised of multi-entity, multi-site health care organizations. With the
purchase of Antrim Corporation ("Antrim") on November 26, 1996, the Company
acquired significant market share in the commercial and medical reference
laboratory market. See "--Recent Developments." Sunquest was established in
1979 and has become a market leader in the sale of laboratory information
systems ("LISs") that integrate disparate equipment and data sources in order to
automate a laboratory department's specialized processes and manage its large
volumes of clinical data. As of December 31, 1996, the Company had an installed
customer base of more than 950 sites in the United States, Canada, Europe,
Mexico and Saudi Arabia. Sunquest is applying its open systems, integration and
clinical experience to develop and service enterprise-wide clinical repository,
point-of-care, managed care, and commercial and reference laboratory systems
targeted at the information needs of the emerging IDN market. The Company's
clinical repository systems are in production use at the Company's initial site,
a multi-entity, 812-bed IDN. Installation at the Company's second site, New
Hanover Regional Medical Center, is nearing completion. Implementation planning
and site pre-work are currently underway at a third site in the United Kingdom.
In order to lower health care delivery costs while improving the quality of
patient care, IDNs need detailed clinical and management information that
enables providers within the IDN to manage such important processes as: (i) the
patient care process across multiple delivery sites; (ii) the appropriateness of
diagnoses, treatments and resource utilizations; (iii) provider performance and
clinical outcomes; (iv) performance under managed care contracts; and (v)
commercial and medical reference laboratory processing and business practices.
A comprehensive clinical repository addresses these information needs by
integrating clinical and financial data from various information systems of the
IDN's clinical departments and administrative areas. A clinical repository
forms the foundation for a computerized patient record ("CPR"), which offers
providers throughout an IDN immediate on-line access to more complete patient
data across multiple delivery sites. Significant market opportunities exist for
HCIS vendors offering open architecture clinical repository systems. These
systems permit IDNs to select and integrate best-of-fit information systems by
either retaining existing legacy systems or selecting from an array of new and
existing systems from different vendors.
1
Sunquest offers four suites of information systems: departmental clinical
systems, clinical repository systems, managed care systems, and commercial and
medical reference laboratory systems. The Company's departmental clinical
systems consist of laboratory information systems and radiology information
systems. These systems capture departmental information, communicate with
patient care areas and other information systems, provide comprehensive
management reports and incorporate rules-based decision tools for ordering tests
and analyzing results. The radiology systems also facilitate accurate
scheduling of diagnostic exams, film management and department specific
reporting. Sunquest estimates that it has installed in its LIS client base over
8,300 interfaces that were developed for approximately 425 separate instruments
and 550 HCISs of other vendors. The Company's clinical repository systems are
comprised of a clinical database, an interface engine, and integration and
access tools. These systems collect clinical data from legacy departmental
systems and then organize, index and store these data in a relational database.
With these clinical repository systems, a clinician can access, from a single
source, a comprehensive record of prior illnesses, treatments, orders, results
and diagnoses for which data have been stored in the clinical repository. The
Company's managed care systems support the insurance contract administration
functions of risk-bearing managed care organizations, such as health maintenance
organizations ("HMOs"), and managed care entities within IDNs. These systems
are designed to meet the demands of the evolving capitation and fixed fee
reimbursement structures. The Company's commercial and medical reference
laboratory systems support the distinct needs of high-volume commercial
laboratories including test processing, billing requirements and optimization of
business practices.
Sunquest markets its products and services internationally through its
direct sales force and marketing relationships with other information systems
vendors. These relationships include a marketing partnership with IBM as an
LIS, radiology and clinical repository vendor in IBM's Open Healthcare Alliance.
The Company's customers include Geisinger System Services, Florida Hospital,
Aurora Health Care, IHC Health Services, Inc., Advocate Health Care and
Allegheny Health Management Services.
Sunquest Information Systems, Sunquest, FlexiLab, FlexiRad, CareGiver,
IntelliCare and SCPR, among other marks, are registered trademarks of Sunquest
Information Systems, Inc. CMDR, Flexi-3R, MCM Payor & design and the Sunquest
Information Systems logo & design, among other marks, are trademarks of Sunquest
Information Systems, Inc. Antrim, Answers, The Answer is Antrim, OnlineLab and
the Antrim logo & design, among other marks, are registered trademarks of Antrim
Corporation.
2
Recent Developments
In June 1996, the Company completed its initial offering of stock to the
public. A total of 3,450,000 shares of Common Stock were sold at a price of $16
per share, with net proceeds to the Company of $50.1 million after offering
expenses. In connection with the public offering, the Company's status as an S
corporation terminated and, as a result, the Company became subject to federal
and state income taxes.
On November 26, 1996, the Company purchased all of the outstanding stock of
Antrim from Antrim's parent corporation, The Compucare Company, for $5.0 million
in a transaction accounted for under the purchase method of accounting. Antrim
was founded in 1982 and is a leading provider of laboratory information systems
for commercial and medical reference laboratories with 235 client sites
installed at December 31, 1996. The acquisition of Antrim demonstrates the
Company's continued commitment to growth through strategic acquisitions. The
interoperability of Antrim's commercial lab product and the Company's multi-
hospital product is proven in seven IDNs, each having a large commercial
reference laboratory business. The functionality of the combined systems
strengthens the Company's position as a leader serving the changing needs of the
health care industry.
Products
Sunquest offers four suites of information systems: (i) departmental
clinical systems that automate the operations of laboratory and radiology
departments within a hospital; (ii) clinical repository systems that integrate
departmental systems and serve as the foundation for the CPR; (iii) managed care
systems that automate the administrative functions of managed care
organizations; and (iv) commercial and medical reference laboratory systems that
automate the clinical, financial, information support and business management
operations of commercial medical laboratories.
Departmental Clinical Systems
Departmental clinical systems were the first applications developed by
Sunquest. They manage the information needed to automate the operations of
laboratory and radiology departments in one or more facilities and can also
contribute the majority of the clinical data that populates a clinical
repository. These systems capture departmental information, communicate with
patient care areas and other information systems, provide comprehensive
management reports and incorporate rules-based decision tools for ordering tests
and analyzing results. The rules-based logic in the Company's LISs provides
clinicians immediate access to current and archived information about the
patient with complete data integrity checking. For example, the LISs perform
checks for duplicate, inconsistent or illogical test orders.
3
Laboratory Information Systems
Sunquest's FlexiLab system manages the workflow and reporting requirements
of the chemistry, hematology, blood bank, anatomic pathology and outreach
areas of the laboratory. Quality assurance validations occur dynamically
as results are entered. For example, a clinician can define normal test
result ranges by age, sex and test method. Later, if the results are out of
range, Sunquest's FlexiLab system immediately informs the technologist of
the validation failure. Sunquest estimates that it has installed in its
LIS client base over 7,600 interfaces that were developed for approximately
350 separate instruments and 550 HCISs of other vendors. This interface
library allows the Company to seamlessly integrate virtually any lab
instrument or HCIS into a client's LIS. All data gathered by the system
can be accessed from a clinical repository. The Company uses a variety of
configuration options to support multi-hospitals and IDNs.
The General Laboratory module is the core of the FlexiLab system and
manages the processes of the high test volume areas of the laboratory.
This module includes volume and performance statistics, patient
archiving, demographics, patient reporting, security and audit trails.
Sunquest has recently released Windows-based functionality to its General
Laboratory module that features a new database schema, episodal
management and outpatient tracking capabilities. Episodal management
enables the entire on-line clinical patient record to be viewed at the
laboratory level for clinical treatment analysis and financial and
managed care cost analysis. Outpatient tracking capabilities enable
separate tracking of the patient and the specimen, improving the
efficiency with which a provider can manage concurrent care processes.
The Microbiology module in FlexiLab provides a comprehensive, paperless
environment that enhances the communication of microbiology and
epidemiological results. User definable, automated rules assist the
microbiologist in measuring the effectiveness of medications on specific
organisms in order to predict effects on a patient's outcome.
The Blood Bank module automates a hospital's complete transfusion
service, including inventory and distribution of blood products to the
patient. This module, which uses rules-based logic, is designed to
prevent the distribution of inappropriate blood products. For example,
the Blood Bank module automatically provides notice if the blood product
has not been appropriately matched to the patient at the time of issue.
The donor module automates the collection procedures and management of
blood product inventories. It also manages and tracks blood donated by
patients for their own use and provides quality controls to assure
compliance with rules of good practice.
4
The Mulhos module utilizes the FlexiLab system to support multiple
facilities. Each facility can have its own individualized reports, rules
and options which allow for differences among facilities. The Mulhos
module manages vital inter-institutional issues such as the security of
patient information and conflicts between each facility's patient
identification system.
The Outreach/Commercial Lab module enables the hospital laboratory to
expand beyond the traditional acute care needs of an IDN. Automated
results reporting to remote physician offices and rapid order entry are
among the features that support the commercial laboratory environment.
Other features include the ability to update client data and courier
routes in order to improve the laboratory's ability to manage its
operations. Customized client reports assist the laboratory in designing
its own patient reports.
The Flexi-3R module provides redundancy and high systems availability
within the LIS. Flexi-3R provides a secondary database that allows high
volume printing of management and patient reports. Queries can be made
into this database without affecting the response time of the primary
database.
Radiology Information Systems
Sunquest's FlexiRad system is designed to streamline the operations of the
radiology department and facilitate orders, intelligent scheduling, film
management and reporting. FlexiRad, when used in conjunction with
FlexiLab, provides an integrated view of results for radiology
professionals. For example, laboratory results may be viewed before
certain invasive radiology procedures. FlexiRad offers the option of
processing patient orders directly via an order entry format, through an
order communications interface with a hospital information system or
through an interface to the clinical repository system. FlexiRad is
functionally complete and is installed at 15 sites.
Clinical Repository Systems
Sunquest began marketing its clinical repository systems in 1995. These
systems are designed to integrate both the Company's departmental clinical
systems as well as those provided by other systems vendors, regardless of the
architectures, platforms and data structures of those systems. This approach to
integrating disparate information systems across an enterprise with a common
clinical repository supports a provider's best-of-fit strategy and preserves the
provider's investment in existing legacy departmental systems.
5
The Company's clinical repository systems, collectively known as
IntelliCare, are comprised of a clinical database, integration and access tools,
and an interface engine. The systems form the foundation for the CPR. The
clinical repository systems collect clinical data from legacy departmental
systems, which may be provided by Sunquest or other vendors. These data are
organized, indexed and stored in a relational database for access and reporting
as required for patient care and outcomes research. Examples of data stored
include patient demographic data, diagnoses, problem lists, procedures and
treatments, orders and results and physician notes that document the care
process. The clinician can access these data from a single source and have a
comprehensive record of prior illnesses, treatments, orders, results and
diagnoses. Sunquest's open systems approach embraces best-of-fit applications
and legacy departmental systems from other vendors.
Scalable Clinical Patient Repository ("SCPR"), a module within IntelliCare,
is a scalable clinical patient repository utilizing a relational database.
The SCPR module accepts standard HL-7 formatted data from existing and new
systems and allows clinicians, administrators and analysts to access
patient information at the point-of-care.
The Company's integration and access tools collect clinical data from
departmental systems to populate a client's clinical repository. The clinical
data can be displayed according to each provider's needs through the CareGiver
software residing on the clinician's PC workstation. This software supports
patient care decisions by providing patient test results more efficiently and
offers flexible results reporting capabilities. For example, a clinician can
"drill down" and see numeric results, and then display a graph of any of the
available results. The clinician can also use the CareGiver software to place
orders. Health care providers can be located in the hospital, at the
physician's office or at a remote location, allowing patient care to be
delivered with increased efficiency by making information available on an
enterprise-wide basis.
The CareGiver Communication module provides an easy-to-use, comprehensive
order and results communication system designed for physicians, nurses,
clerks, technologists, therapists and administrators. The system allows
individual user preferences, generates enterprise-wide order communications
and uses scalable client-server architecture.
The CareGiver View module supports flexible results display and clinical
decision-making by providing access to results data in multiple formats.
Data can be presented as spreadsheets, graphs, and text, as well as in
icon-based summaries. Results views can be customized for a specific
clinician or group, and can easily be defined. CareGiver View allows
trending of results for one encounter or across encounters and allows
providers to "drill down" for more detailed results information.
6
The interface engine, part of which is licensed or purchased from a third-
party, links applications that use HL-7 or proprietary communications protocols
through a single-point interface hub. This single-point interface connection
facilitates the installation of the clinical data repository. The interface
engine connects all systems on the network, converts communications protocols
and routes network communications among all systems that need to share data.
IntelliCare, including the SCPR module, and the CareGiver Communication and
CareGiver View modules have been successfully installed and are in production
use on an enterprise-wide basis at Moses Cone Health Systems. Moses Cone is a
multi-entity facility in Greensboro, North Carolina and includes a 547-bed acute
care hospital, a 115-bed specialty hospital, a 150-bed extended care facility
and other health care facilities. New Hanover Regional Medical Center is the
Company's second IntelliCare site. New Hanover is a 648-bed tertiary care
medical center associated with four medical schools. New Hanover is a teaching
hospital and major referral center and also includes the 60-bed Coastal
Rehabilitation Hospital as part of its delivery network. The SCPR module was
put into service in November 1996, and the CareGiver Communication and CareGiver
View modules went into service on the first units of the floor of the hospital
in December 1996. Implementation planning and site pre-work are currently
underway at a third site in the United Kingdom.
Because the Company has only recently begun to market its clinical
repository systems, it has not yet established firm market prices for these
systems. The Company's future success will depend to a significant degree upon
its ability to enhance the functionality of, and successfully market, its
clinical repository systems. If the Company's clinical repository systems are
not developed substantially on schedule, do not perform substantially as
expected or are not accepted in the marketplace, the Company's business and
results of operations will be materially adversely affected.
Managed Care Systems
The Company's Managed Care Manager Payor ("MCM Payor") is a system that
supports the administrative insurance functions of managed care organizations,
such as HMOs, management services organizations and IDNs that offer their own
managed care insurance products. MCM Payor is designed to meet the demands of
evolving point-of-care and capitated payment structures. The systems have the
flexibility to meet the requirements of health care organizations seeking to
offer risk-bearing managed care products on a small, medium or large scale. MCM
Payor includes a claims administration system that automates capitation/risk
management, claims adjudication, enrollment, premium billing and accounts
receivable, referral tracking, utilization reports, coordination of benefits,
patient history, medical referrals, authorizations and membership services.
7
The Enrollment System module is the foundation of MCM Payor. The Enrollment
System maintains group and membership information and supports all
functions in an integrated system. Enrollment is maintained interactively,
providing on-line eligibility information and a variety of enrollment
reports.
The Billing and Accounts Receivable module generates group and direct pay
bills, maintains accounts receivable, posts cash receipts, and provides
revenue and accounts receivable reports.
The Capitation module produces monthly capitation checks, rosters and
activity reports to designated providers.
The Claims module addresses claims adjudication for pharmacy, hospital and
physician claims.
The Utilization Reports module details and summarizes data in MCM Payor.
The Coordination of Benefits module maintains coordination of benefits
information for health plan members known to be covered by other insurance
companies.
The Referral module manages referrals for a patient to see a specialist or
other provider. On an interactive basis, it maintains a description of the
referral, including information regarding the patient, the referring
physician, the referred specialist, the range of dates for the referral,
the number of visits authorized and the amount of money authorized.
The Authorization module manages pre-certifications of hospital stays or
expensive outpatient procedures. The number of days for a stay can be pre-
certified with additional days approved or denied with an attached
explanation.
The Inpatient Census module monitors inpatient admissions beginning with
pre-certification, then documents the subsequent admission and discharge.
The module is used to monitor pre-certifications, current admissions and
length of stay and to provide utilization reports and financial reports of
incurred inpatient expenses.
Sunquest purchased the technology underlying MCM Payor in February 1995 but
did not acquire the installed MCM Payor client base. The Company has furthered
the development of the MCM Payor technology and released a new version for
client-server architecture in September 1996. Subsequent to the release of the
new version, the Company has sold and installed one MCM Payor system.
8
Commercial and Medical Reference Laboratory Systems
Antrim offers commercial laboratory systems for the medical laboratory
marketplace. These departmental clinical systems support laboratory processing,
billing processes and business practices of a high-volume commercial laboratory.
Clinical Systems
The Answers: General Laboratory is the core product of Antrim. This
LIS is a high-volume system, supporting the requirements of all of the
departments of a laboratory. The system can be installed in hospital
and commercial laboratories.
The Answers: Microbiology is an additional module to the Answers:
General Laboratory system and fully automates the microbiology
department, allowing it to operate in a paperless environment.
Financial Systems
The Answers: Accounts Receivable/Billing application supports order
entry, billing production, cash receipts processing, accounts
receivable adjustment, management reporting, revenue analysis and cash
collection analysis.
The Answers: General Ledger application supports journal entry,
journal processing, posting to the general ledger and the production
of accounting reports and financial statements.
The Answers: Accounts Payable application supports invoice processing,
disbursement scheduling and selection, checkbook processing, check
production, management reporting and the preparation of accounting
reports and 1099 forms.
The Answers: Materials Management application supports retail sales,
purchasing, receiving, inventory control, issuing and distribution of
supplies and comprehensive management reporting.
The Answers: Payroll application supports timecard processing,
disbursement scheduling and selection, checkbook processing, check
processing, management reporting and the preparation of payroll
reports and W-2 forms.
The Answers: Fixed Assets application supports asset acquisition,
transfer and disposition. Comprehensive periodic and management
reporting capabilities are available.
9
The Answers: Electronic Claims/EDI services provides the capabilities
to electronically transmit insurance claims to Medicare, Medicaid and
other carriers.
Information Support Systems
The Answers: OnlineLab application electronically unites laboratories
with the physicians' offices they serve. Special features provide for
the online submission of laboratory orders and reporting of results at
the physician's office. Comprehensive reporting features are
provided, including ad hoc cumulative report generation.
The Answers: Report Writer application supports query requests,
information retrieval from Antrim's systems, data formatting for
reporting and disposition of reports to other applications, terminals
and/or printers.
The Answers: Optical Disk Archiving application downloads data from
the laboratory's host computer and reformats data for long-term
storage. It provides rapid access to archived information and
expedient reporting of information to terminals, export files,
printers and facsimile machines.
Business Management Systems
The Answers: Courier Management application provides the ability to
optimize courier routes using route quality electronic maps. This
leads to more efficient courier routes, allowing the laboratory to
realize savings in courier expenses and increased customer service.
Third-Party Marketing Arrangements
Sunquest believes that there are advantages to open system solutions that
facilitate the interoperation of products from other vendors. Consequently, the
Company has entered into an assortment of value added remarketer ("VAR")
agreements, joint marketing agreements and licensing agreements with other
vendors.
Hardware and resold software are purchased from third-party vendors under
VAR agreements and sold to customers in conjunction with the Company's software
products. Hardware support is the responsibility of the hardware manufacturers
under agreements negotiated directly between the supplier and the customer or
agreements where Sunquest acts as an intermediary in negotiating the support
agreement.
10
Subsequent to December 31, 1995, the Company entered into agreements with
third parties to offer the following functionalities in conjunction with the
Company's products:
Point-of-Care
In May 1996 the Company entered into a joint marketing-referral agreement
with PACE Health Management Systems, Inc. ("PACE"). PACE is a growing
provider of advanced point-of-care modules, including care planning,
assessments, clinical notes, critical pathways and discharge education.
Enterprise Scheduling
In January 1997 the Company entered into a VAR agreement with Centennial
Systems, Inc. which grants Sunquest a non-exclusive license to market,
sublicense, support and otherwise use the Baseline 2000 Multi-Resource
Scheduling System . This stand-alone product allows clinicians to schedule
IDN resources such as rooms, beds, lab tests and outpatient clinics across
the IDN's multiple facilities and services.
Rules-Based Orders
In February 1997 the Company entered into a non-exclusive license agreement
with Multum Information Services, Inc. ("Multum") whereby Sunquest will
market Multum's MediSource drug information service to be provided as an
option with Sunquest's proprietary system. The Company anticipates that
the first use of the Multum software development kit will be in
enhancements to the CareGiver Communication module to provide
comprehensive, patient-specific drug and pharmacy clinical information
during the clinical ordering cycle.
Anatomic Pathology
In February 1997, the Company entered into a VAR agreement with Dynamic
Healthcare Technologies, Inc. ("Dynamic"). The agreement grants the Company
a non-exclusive license to modify, interface, market, sublicense, support
and otherwise use the Dynamic software program known as CoPath
Client/Server ("CoPath") which is a computer clinical information system
used in surgical pathology, cytology and autopsy. Dynamic has over 250
clients using CoPath.
11
Products Under Development
The following products are under development utilizing the same client-
server architecture as the Company's existing clinical repository systems.
CareGiver Workstation will provide a common application for Sunquest's and
other vendors' systems, including single point log-on, a common patient
finder and device control for display and printing. Sunquest and non-
Sunquest applications will have a common "look and feel" for patient
inquiry and users will not be required to exit the system to access other
vendors' systems. This product will facilitate the inter-operation of
CareGiver software with other vendors' open clinical systems. When
developed, CareGiver Workstation will supplement or replace CareGiver View.
CareGiver Documentation will provide tools for planning and documenting
patient care throughout the enterprise. The system will support multiple
health care professionals, including nurses, therapists and physicians, and
will address ambulatory and in-patient settings. CareGiver Documentation
will support managed care through clinical pathways defined by the
enterprise as well as outcomes management and variance tracking. CareGiver
Documentation will significantly enhance the functionality of CareGiver
modules by providing a structured, user-friendly methodology for inputting
patient information into the clinical repository.
CareGiver Event Management will provide alerts and decision support to
health care providers to assure high quality patient care. The system will
accept standardized input from feeder systems in the IntelliCare
environment, check this information against a variety of rules and provide
prompt notification to clinicians of any adverse situation. The system
will also provide expert advice to assist clinicians in determining the
optimum, cost effective antibiotic treatment of infectious diseases.
Cost Management Data Repository ("CMDR") is the planned financial data
repository to be integrated with IntelliCare. Data from financial
information sources, including actual or estimated service costs, hospital
claims, physician claims, patient accounting records and managed care
applications, will comprise the repository. By linking financial data to
clinical data, CMDR will enable clients to improve the quality and cost of
patient care.
Lab Data Network ("LDN") is a product and service offering comprised of
numerous component solutions to address the laboratory consolidation trend
in the health care industry. LDN enables disparate lab systems within a
health care network to send orders, specimens and results to each other and
to a central lab data warehouse. Core lab and "Centers of Excellence"
models can be effectively automated with LDN. The outreach client base is
provided with a GUI longitudinal results view from the lab data warehouse
populated by disparate lab systems.
12
Global Participant Index ("GPI") is a generic term for a software product
required by IDNs for administration of their membership. This product will
uniquely identify a patient or client who may have different identifiers at
various hospitals, clinics and physician practices before they joined the
integrated network. The GPI accepts inputs from network entities, assigns
unique identifiers, if required, and provides positive identification of
the member. Enhanced versions of the product enable patient registration,
physicians registration, physicians credentialling, automated member chart
location and emergency admission data capture in hospitals and others.
The AnswerNet application is a remote information access system that
accesses information on the various Antrim information systems, utilizing
industry standard web technology on a corporation intranet.
There can be no assurance that the Company will not experience difficulties
that could delay or prevent the successful and timely development, introduction
and marketing of new and enhanced products.
Client Services
At December 31, 1996, the Company employed a service organization of
approximately 370 professionals who provide implementation, application and
system support, education and consulting services to the Company's clients. The
client services organization primarily employs medical technologists and other
health care professionals in supporting and implementing clinical information
systems. These personnel are complemented by computer professionals to support
complex IDNs. Client services employees attend rigorous training including,
where required, a formal nine to 12-month initial training program to comply
with the Company's certification requirements.
Sunquest utilizes a "train the trainer" philosophy to educate its clients.
This training consists of a structured process of project management and
education with flexible schedule options, with training held at both the
Company's and the clients' sites. System conversion, instrument training and
operations training are included in the Company's post-implementation program.
Each client is assigned a support analyst who understands how the software has
been tailored for the client and how best to provide ongoing support. Full
application and systems support coverage is available from the Company's "help
desk" 24 hours a day and seven days a week. The Company is developing systems
to track the quality of its services by providing immediate on-line project
status reports to clients and providing on-line client support through an expert
system. Instrument interface, network consulting, operating system and hardware
support are provided by experts in each area.
Sunquest also provides consulting services to assist clients in analyzing
and implementing strategic organizational changes, such as planning an IDN
expansion program, reengineering departmental processes, redesigning local or
wide-area networks, and
13
establishing new commercial laboratories. Additional client education services
are provided through computer-based training or formal ongoing educational
courses and seminars.
Balance View Consulting is a division of Sunquest that performs consulting
primarily to the Company's installed base. The consulting ranges from training
in the better use of Sunquest's products to full reengineering projects.
Balanced View Consulting will also provide System Managers on a monthly or
yearly basis, implementation assistance and specific project work on a hourly-
fee basis.
Marketing
The primary markets for the Company's systems and services are comprised of
approximately 3,500 acute care hospitals in the United States and Canada that
have more than 250 beds and approximately 4,000 commercial and medical reference
laboratories in the United States. The Company also markets its systems and
services to approximately 600 hospitals in the United Kingdom and Germany that
have more than 100 beds. Sunquest's principal sources of referrals are its
clients and consultants. Sunquest also seeks to enhance its market recognition
through participation in industry seminars and trade shows, Company-sponsored
seminars, the Sunquest User Group and Regional User Group meetings in the United
States and the United Kingdom, the Antrim User Group meetings, direct mail
campaigns, telemarketing and advertisements in trade journals.
The Company is also entering into marketing relationships with other
industry vendors. For example, in June 1995, the Company joined the IBM Open
Healthcare Alliance in which IBM acts as a value-added remarketer of the
Company's systems and those of other providers of HCISs. The Company's
agreement with IBM covers marketing activities in the United States and Puerto
Rico. In October 1995, Sunquest Europa Limited, a wholly owned subsidiary of
the Company, entered into an agreement with IBM under which IBM will serve as a
value-added remarketer of the Company's systems in certain Asian-Pacific
countries. To date, IBM has not sold any of the Company's products. Both IBM
agreements are terminable by either IBM or Sunquest upon 90 days' notice.
The Company's marketing department is composed of a team of specialists in
product management, sales support, competitive analysis, quoting, proposals and
advertising. Its sales force is organized into six divisions: (i) FlexiLab
Sales, offering LISs information systems; (ii) FlexiRad Sales, offering
radiology information systems; (iii) European Sales, offering the Company's
systems in the United Kingdom and Germany; (iv) IntelliCare Sales, offering
clinical information repositories, order entry and enterprise-wide results and
data viewing systems; (iv) MCM Payor Sales, targeting third party
administrators, insurers and HMOs; and (vi) Antrim Sales, offering commercial
and medical reference laboratory systems.
14
Technology
Sunquest's HCISs operate on IBM RS6000 and a variety of Digital Equipment
Corporation ("DEC") server systems. Users access the Company's applications
using IBM compatible PCs and/or terminals. FlexiLab and FlexiRad are offered on
both IBM and DEC platforms. IntelliCare, CareGiver Communication, CareGiver View
and MCM Payor are offered on the IBM RS6000 and will also be offered on DEC
platforms. Antrim's suite of products is being offered on IBM RS6000 and DEC
platforms.
The Company utilizes the M computer language (also known as "MUMPS" or
"Massachusetts General Hospital Utility Multi-Programming System") in the
development of its departmental clinical systems. IntelliCare and the CareGiver
systems have been developed, and MCM Payor is being developed, using a three-
tier client-server architecture with the presentation layer (user interface) on
the client, the business logic layer on both the client and the server, and the
relational database layer. The PC operating system is Windows (currently
Windows 3.11 or Windows 95), and the server operating system is UNIX. Antrim
has developed all its information systems in the M language. Antrim's Online Lab
for Windows system was developed in Visual Basic. The AnswerNet product under
development utilizes both M and web standard HTML languages.
Sunquest is migrating departmental clinical systems to the three-tier
client-server model by developing the object-oriented presentation layer and
client-side business logic layer so that M-based data structures, relational
data structures and object database structures (all residing on the server) can
be deployed incrementally, depending on the state of product evolution.
Although the Company does not believe that such migration is currently necessary
to satisfy its clients' needs, the Company expects to transition all of its
systems and modules to object orientation using the C++ programming language and
relational and object database technology.
Sunquest sells third-party terminals, label and page printers, storage
devices and other peripheral devices. The Company also provides services to
configure computer systems and networks. The Company has one-year renewable
reseller agreements with DEC and IBM and a variety of reseller agreements with
other middleware and device vendors.
Research and Development
The Company believes that the continuing rapid evolution of the HCIS market
has made a substantial and sustained commitment to product development essential
to the long-term success of its business. The Company has a defined product
development process characterized by its release management methodology. This
process includes on-going analysis of the HCIS marketplace, determination of
users' requirements, preparation of design specifications, and usability testing
to ensure that new systems meet clients' standards.
15
Sunquest's product development managers are responsible for product
architecture, improvements to existing products, construction verification and
inspection. The Company's product development engineers are assigned to one of
three distinct functional groups: (i) the product engineering group, which is
responsible for the ongoing evolution of the Company's existing products to meet
the changing demands of the market; (ii) the service engineering group, which
prioritizes corrections and improvements to deployed systems; and (iii) the
infrastructure engineering group, which researches industry-standard components
and develops new technologies for integration into the Company's current and
future products. As of December 31, 1996, approximately 156 product development
engineers were assigned to improving and extending the Company's existing
systems and approximately 56 engineers were assigned to the development of
products in new product areas.
In 1996, 1995 and 1994, the Company's research and development expenses
before capitalization of software development costs totaled approximately $12.8
million, $11.8 million and $9.7 million, respectively.
Competition
The markets for HCISs, including the markets for the Company's information
systems, are highly competitive. Most of the Company's revenues are derived
from lengthy, competitive procurement processes managed by sophisticated
purchasers that extensively investigate and compare the products offered by the
Company and its competitors. The Company believes that the principal
competitive factors influencing the market for its HCISs include vendor and
product reputation, product architecture, functionality and features, ease of
use, rapidity of implementation, quality of client support, product performance
and price. There can be no assurance that the Company will be able to compete
successfully with respect to any of such factors.
The Company's principal competitors are Cerner Corporation, HBO & Company,
Medical Information Technology, Inc., Shared Medical Systems Corporation, Soft
Computer Consultants, Inc. and Triple G Corporation. In addition, the Company
competes with a large number of other information system vendors. The market
for clinical repository systems is in an early stage, and a significant number
of vendors are currently offering or developing competitive versions of clinical
repository systems. These vendors include not only existing clinical
information systems suppliers, but other vendors throughout the HCIS industry,
such as suppliers of practice management systems.
16
Many of the Company's current and potential competitors have significantly
greater financial, managerial, development, technical, marketing and sales
resources than the Company and may be able to devote those resources to develop
and introduce clinical information systems more rapidly than the Company or
clinical information systems with significantly greater functionality than, and
superior overall performance to, those offered by the Company. These
competitors may also be able to initiate and withstand significant price
decreases more effectively than the Company. Moreover, the continuing
consolidation of hospitals and other health care providers has resulted in fewer
individual purchasing decisions, a trend that may favor larger vendors with
greater numbers of hospitals currently under contract.
To be competitive, the Company must be able to respond effectively to the
introduction of new and improved HCISs by its competitors. There can be no
assurance that the Company will be able to develop new or improved HCISs and
services in a timely and cost effective manner or that the Company's current and
future HCISs and services will achieve and maintain market acceptance.
Regulation
The United States Food and Drug Administration ("FDA") is authorized to
regulate medical devices under the Federal Food, Drug and Cosmetic Act, as
amended. In 1989, the FDA issued a draft policy addressing the regulation of
certain computer software products as medical devices. The draft policy stated
that the FDA would regulate certain computer software products via the FDA's
"general controls," which include registration listing, good manufacturing
practices and the clearance of pre-market notifications ("501(k)s"), and that
other types of computer software products also considered by the FDA to be
medical devices would not be actively regulated.
The FDA has been inconsistent in its interpretation, application and
enforcement of this draft policy. At present, the FDA is actively reevaluating
this draft policy to determine the types of computer software products it will
consider to be medical devices and how they will be regulated. Recent public
statements made by FDA representatives suggest that certain computer software
products will be regulated via a variety of FDA controls, including clearance of
a 510(k) demonstrating "substantial equivalence" to other products prior to
marketing. Other computer software products may be regulated via "software
quality audits" verifying that the computer software has been appropriately
developed plus other regulatory controls. Other types of computer software
products would be only minimally regulated.
17
Depending on how the FDA interprets and applies it policies as well as the
type of computer software at issue, the Company's software products may be
subject to any of these requirements. It is also possible that the Company's
software products, other than its blood bank software products, will not be
actively regulated.
In March 1994, the FDA issued a letter advising that the FDA considers
medical devices to include software products intended for use in the manufacture
of blood and blood components or for the maintenance of data used to assist
personnel in making decisions concerning the suitability of blood donors and the
release of blood or blood components for transfusion or further manufacture. As
such, the FDA determined that manufacturers and distributors of these products,
such as the Company, are subject to FDA regulation, including the submission of
510(k)s. In October 1995, the FDA extended the time for blood bank software
manufacturers to file 510(k)s with the FDA to March 31, 1996. Sunquest complied
with this requirement within such deadline. Antrim complied with this
requirement in April 1996, having applied for and received an extension of time
to file its 510(k).
Antrim was the subject of a good manufacturing practices ("GMP") audit
conducted by the FDA in March 1996. As a result of the audit, Antrim received a
warning letter from the FDA in June 1996 instructing Antrim to resolve certain
GMP issues and to contract with an independent, third-party auditor to certify
that certain procedures were in place. The independent audit was conducted in
November 1996 and the results of the audit indicated that the non-compliance
issues had not been resolved. Sunquest intends to assist Antrim in achieving
compliance with FDA policies going forward and to help Antrim sunset Antrim's
blood bank product and replace it with Sunquest's blood bank product. Until
then, Sunquest intends to (i) provide quality assurance management, guidance and
assistance to Antrim, (ii) oversee Antrim's implementation of good manufacturing
practices, and (iii) assist Antrim in developing the necessary procedures and
processes for software testing and support.
Compliance with the FDA's current requirements, and any future requirements
imposed by the FDA, could be costly and could delay or preclude the introduction
of certain new products. The Company is unable to determine at this time the
effect, if any, that these requirements may have on its business.
In addition, the health care industry is subject to changing political,
economic and regulatory influences that may effect the procurement practices and
operation of health care providers. Many lawmakers have announced that they
intend to propose programs to reform the United States health care system.
These programs may contain proposals to increase governmental involvement in
health care, lower reimbursement rates and otherwise change the regulatory
environment in which the Company's clients operate. Health care providers may
react to these proposals and the uncertainty surrounding such proposals by
curtailing or deferring investments, including those for the Company's HCISs.
Even if health care providers do not curtail or defer investments, they may
institute cost containment measures in anticipation of regulatory reform or for
other reasons. These measures may result in greater selectivity in the
allocation of capital funds, which could have a material adverse effect on the
Company's ability to sell its HCISs and services. The Company cannot predict
with any
18
certainty what impact, if any, such legislative or market-driven reforms might
have on its business and results of operations. There can be no assurance that
such proposed changes, if adopted, would not have a material adverse effect on
the Company's business and results of operations.
Proprietary Rights
The Company's future success depends in large part upon its ability to
protect its technology and proprietary rights. The Company relies on a
combination of patent, copyright, trade secret and trademark laws and
contractual restrictions to establish and protect its proprietary rights,
although the laws of certain foreign countries in which the Company licenses or
may license its products may not protect the Company's proprietary rights to the
same extent as do laws in the United States. It is the Company's policy to
require employees, consultants, clients and, in certain circumstances, suppliers
to execute nondisclosure agreements upon the commencement of a relationship with
the Company.
The system acquisition agreements under which the Company licenses its
software products to its clients generally prohibit the assignment or transfer
of the software or use of the software by any person or entity other than the
named client or its affiliates or successors. The agreements provide that the
Company retains ownership of the software and proprietary information and of all
rights therein. Except for information which is in the public domain, the
client is required to hold the software and proprietary information in
confidence and use reasonable care to preserve and safeguard such information.
The trade name Sunquest and other trade names used by Sunquest in its
business, such as FlexiLab and FlexiRad, have been registered in the United
States Patent and Trademark Office. The name Sunquest has also been registered
by Sunquest in the United Kingdom and Germany. The trade name Antrim and other
trade names used by Antrim in its business, such as Answers and The Answer is
Antrim, have also been registered with the United States Patent and Trademark
Office. See "--General." In addition, certain of the Company's products are the
subject of patent protection or a pending patent application.
Despite the actions taken by the Company to protect its technology and
proprietary rights, it may nonetheless be possible for third parties to
misappropriate the Company's technology and proprietary information or to
develop independently similar or superior technology. There can be no assurance
that the legal protections afforded to the Company and the measures taken by the
Company will be adequate to protect its intellectual property. Any
misappropriation of the Company's technology or proprietary information could
have a material adverse effect on the Company's business and results of
operations. Moreover, the Company is subject to the risk that others will
assert adverse claims and commence litigation alleging infringement or
misappropriation of their intellectual property rights. From time to time,
certain persons have made such claims against the Company. Although the Company
does not know of any infringement or misappropriation by the Company of
proprietary rights of others, there can be no assurance that others will not
assert claims or commence litigation
19
with respect to the Company's current or future HCISs. In any such event, the
Company may be required to engage in protracted and costly litigation,
regardless of the merits of such claims; discontinue the use of certain software
codes, processes or trademarks; cease to manufacture, use and license infringing
products; develop non-infringing technology; or enter into license arrangements
with respect to the disputed intellectual property. There can be no assurance
that the Company would be able to develop alternative technology or that any
necessary licenses would be available or that, if available, such licenses could
be obtained on commercially reasonable terms. Responding to and defending any of
these claims could distract the attention of management and have a material
adverse effect on the Company's business and results of operations.
System Acquisition Agreements
The Company typically furnishes its systems to its clients pursuant to
system acquisition agreements that grant perpetual, non-exclusive and non-
transferable licenses to use those systems, including the source code for
certain of the Company's proprietary software included therein. Under these
agreements, the Company also resells certain items of hardware to its clients.
Clients pay specified fees for the license of software proprietary to the
Company and the sublicense of software proprietary to third parties. Clients
also pay specified fees for hardware, installation and training in the use of
the system. License fees for the Company's systems are typically based on a
number of factors, including the number and type of software modules included in
the system, as well as the volume of use by the client. The Company generally
supports and maintains the licensed systems and provides modifications,
enhancements and upgrades for a monthly fee under separate maintenance
agreements.
Backlog
At December 31, 1996, the Company had a total contract backlog of $87.3
million, which consisted of $41.9 million of system sales and $45.4 million of
support and service. At December 31, 1995, total contract backlog was $62.7
million, which consisted of $33.7 million of system sales and $29.0 million of
support and service. System sales backlog consists of the unearned amounts of
signed contracts which have not yet been recognized as revenues. Support and
service backlog consists primarily of contracted software support for a period
of 12 months. The Company is unable to predict accurately the amount of backlog
it expects to fill in any particular period, since it adjusts the timing of
installations to accommodate clients' needs and since installations typically
require eight to 12 months to complete.
20
Employees
As of December 31, 1996, the Company had 755 employees. None of the
Company's employees are represented by a labor union, nor has the Company
experienced any work stoppages. The Company believes that it has good relations
with its employees.
Executive Officers of the Registrant
Information concerning the executive officers of the Company is set forth
below.
[Download Table]
Name Age Position
---- --- --------
Sidney A. Goldblatt 62 President, Chief Executive Officer and
Director
Richard A. Wesson 56 Chief Operating Officer
Nina M. Dmetruk 44 Executive Vice President-Chief Financial
Officer, Secretary and Director
Albert A. DeStefano 53 Executive Vice President-Sales and Marketing
James F. Garliepp 45 Executive Vice President-Chief Technology
Officer
Joanna S. Broder 53 Senior Vice President-Client Services
Samuel A. Miller 58 Senior Vice President-Engineering
T. Paul Thomas 37 Senior Vice President-Marketing
Bradley L. Goldblatt 33 Treasurer and Director
Sidney A. Goldblatt, M.D., a co-founder of the Company, has been President
of the Company since 1986, Chief Executive Officer since December 1994 and a
director of the Company since its formation in 1979. Dr. Goldblatt also served
as Chief Operating Officer of the Company from December 1992 to August 1994.
Dr. Goldblatt has served as President and sole shareholder of S. Goldblatt
Pathology Associates, P.C. since 1971.
Richard A. Wesson, Ph.D., has been Chief Operating Officer since August
1994. From July 1990 until he joined the Company, Dr. Wesson was employed by
Wyse Technology, a supplier of computer terminals, where he served as Vice
President of Business Development and Strategic Management from July 1993 to
June 1994 and as Vice President of the Systems Division from February 1992 to
July 1993.
Nina M. Dmetruk has been Executive Vice President-Chief Financial Officer
of the Company since September 1991 and a director of the Company since December
1991. She has served as Secretary of the Company since August 1996. Effective
May 26, 1996, Ms. Dmetruk entered into an employment agreement with the Company
under which she agreed to serve as the Executive Vice President-Chief Financial
Officer of the Company on a full-time
21
basis. During her earlier service as Executive Vice President-Chief Financial
Officer, Ms. Dmetruk was not an employee of the Company and devoted
approximately 60% to 80% of her time to the Company's business. Ms. Dmetruk is a
CPA and a CFP and until May 1996 was the sole owner of a public accounting firm
for more than five years.
Albert A. DeStefano has been Executive Vice President-Sales and Marketing
since February 1997. From May 1996 until he joined the Company, Mr. DeStefano
was employed by the Emtek Division of Motorola, a health care software company,
where he served as President and Chief Executive Officer. From July 1993 to May
1996, Mr. DeStefano was employed by Emtek Healthcare Systems, Inc., a health
care software company, where he served as Director and Chief Executive Officer.
From October 1992 to July 1993, Mr. DeStefano was a Consultant for Sheldon
Dornfest Associates, LTD, a health care consulting company. From October 1989
to October 1992, Mr. DeStefano was Chief Operating Officer of the Company.
James F. Garliepp has been Executive Vice President-Chief Technology
Officer since September 1991. Mr. Garliepp previously served as Senior Vice
President-Technology from 1989 to September 1991 and served in various other
positions from 1982 to 1989.
Joanna S. Broder joined the Company in March 1997 as Senior Vice President-
Client Services. From January 1995 until she joined the Company, Ms. Broder was
employed by AT&T Government Markets, a telecommunications company, where she
served as Assistant Vice President, Collaborative Solutions. From November 1989
to November 1994, Ms. Broder was employed by Digital Equipment Corporation, a
computer manufacturing company, where she served as Program Manager.
Samuel A. Miller has been Senior Vice President-Engineering since January
1997. From August 1996 until January 1997, Mr. Miller served as Vice President-
Strategic Planning of the Company. From March 1996 to July 1996, Mr. Miller was
a Consultant for the Worldcare Corporation, a health care telemedicine company.
From March 1994 to December 1995, Mr. Miller was employed by Massachusetts
General Hospital, where he served as Senior Vice President of Operations and
Chief Information Officer. From January 1992 to March 1994, Mr. Miller was
employed by Chedoke-McMaster Hospitals, where he served as Vice President of
Professional Services and Chief Information Officer.
T. Paul Thomas joined the Company in May 1996 as Senior Vice President-
Marketing. From October 1994 until he joined the Company, Mr. Thomas was
employed by Apple Computer, Inc., where he served as Director of Channel
Strategy from October 1994 to January 1996 and as Senior Director of Channel
Marketing from January 1996 to April 1996. From November 1993 to October 1994,
Mr. Thomas was employed by Artisoft, Inc., a hardware, software and systems
sales and marketing company, where he served as Vice President of Channel
Development from November 1993 to February 1994 and as Vice President of
Worldwide Marketing from February 1994 to October 1994. From January 1990 to
November 1993, Mr. Thomas was employed by Compaq Computer Corp., Inc., where he
22
served as Manager of Marketing Operations from January 1991 to September 1992
and as Director of Channel Development from September 1992 to November 1993.
Bradley L. Goldblatt has been Treasurer and a director of the Company since
December 1992. From June 1991 to February 1993, he was a Research Laboratory
Technician at the Eye and Ear Institute of Pittsburgh. Bradley Goldblatt is the
son of Dr. Goldblatt.
The executive officers of the Company are elected by and serve at the
discretion of the Board of Directors.
Item 2. Properties.
The Company's principal executive and administrative offices and its
sales and marketing, customer services and product development facilities are
located in two buildings containing 102,000 square feet of office space and
85,000 square feet of office space, respectively, in Tucson, Arizona, which the
Company leases from Any Travel, Inc., a travel agency located in Tucson,
Arizona, which is owned by related parties. The lease for the 102,000 square
foot building, which includes an adjacent two-level parking facility, currently
requires monthly rental payments of $92,128 and expires in September 2001. The
Company occupies approximately 36,000 square feet of office space in the other
building and subleases the remaining space to a number of subtenants. The lease
for the second building currently requires monthly rental payments of $70,940
and expires in May 2004. Sunquest receives monthly rental payments under the
subleases totaling approximately $46,000. The Company also owns a two-story
building, containing approximately 18,000 square feet, in Johnstown,
Pennsylvania, which it intends to use as an office facility.
On February 21, 1997, the Company purchased land and a building in Tucson,
Arizona, for cash in the amount of $1.8 million. The Company anticipates the
facility will be used for customer-related activities.
Antrim leases office space in Plano, Texas, containing approximately 47,420
square feet. The lease currently requires monthly rental payments of $55,323
and expires in May 2001.
The Company believes that its facilities will be adequate for its current
operations for at least the next twelve months.
Borrowings under the Company's line of credit with Bank of America
Arizona are secured by all of the Company's assets. The Company has also granted
liens on all of its assets to a vendor to secure amounts due for the purchase of
hardware and other equipment.
23
Item 3. Legal Proceedings.
As of the date hereof, the Company is not a party to any proceedings the
outcome of which, in the opinion of management, would have a material adverse
effect on the Company's results of operations or financial condition.
On June 20, 1995, the Company received a letter from the attorney for a
software producer in California claiming that certain communications between the
companies gave rise to a contract for, among other things, the development of a
Sunquest radiology scheduling system using technology developed by the software
producer. The letter alleged that the software producer had incurred damages of
approximately $3.9 million as a result of Sunquest's breach of the alleged
contract and further asserted that the software producer was prepared to
commence litigation immediately. By letter of June 22, 1995, the attorney was
informed of Sunquest's position that it had not entered into a contract with the
software producer and that the asserted claim for breach of contract was
meritless. To the Company's knowledge, no lawsuit has been filed. In the event
that the alleged claim is pursued in court, the Company believes that the
resolution of the claim will not have a material adverse effect on its results
of operations or financial condition.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of shareholders during the quarter
ended December 31, 1996.
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
The Company's Common Stock is traded on the over-the-counter market and is
quoted on the Nasdaq National Market System under the symbol "SUNQ." Trading
commenced May 31, 1996 as a result of the Company's initial offering of stock to
the public. The following table sets forth, for the periods indicated, the high
and low sales prices of the Common Stock as reported by the Nasdaq National
Market System.
[Download Table]
Price Range
Period High Low
------------------------------------------------------
1996
Second quarter (from May 31) $19.750 $12.000
Third quarter $19.000 $10.125
Fourth quarter $18.625 $13.000
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Except for S corporation distributions, no dividends have been declared or
paid on the Company's Common Stock. The Company anticipates that it will retain
future earnings, if any, to fund the development and growth of its business and
does not anticipate paying any cash dividends on its Common Stock in the
foreseeable future. The Company's line of credit and guaranty agreements
prohibit the payment of any capital distributions or dividends other than the S
corporation distributions. At March 21, 1997, there were 18 holders of record of
the Common Stock, and the Company believes that on that date there were in
excess of 700 beneficial owners of the Common Stock.
Item 6. Selected Financial Data.
The information required by this item is included in the Company's Annual
Report to Shareholders for the fiscal year ended December 31, 1996 (the "Annual
Report") and is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The information required by this item is included in the Annual Report
and is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
The financial statements, together with the report thereon of Ernst & Young
LLP dated February 14, 1997, and supplementary data required by this item are
included in the Annual Report and are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
On March 6, 1996, the Company's Board of Directors ratified management's
decision to retain Ernst & Young LLP as the independent accountants for the
Company and dismissed the Company's former auditors. The former auditors did
not report on the Company's financial statements for the year ended December 31,
1995. There were no disagreements with the former auditors on any matter
regarding accounting principles or practices, financial statement disclosures or
auditing scope or procedures related to the financial statements which the
former auditors reported on at the time of the change or with respect to the
Company's financial statements which the former auditors reported on for the
fiscal year 1994, which, if not resolved to the former auditors' satisfaction,
would have caused it to make reference to the subject matter of the disagreement
in connection with its report. Prior to retaining Ernst
25
& Young LLP, the Company had not consulted with Ernst & Young LLP regarding
accounting principles.
Part III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item with respect to directors is
included in the Company's Proxy Statement for the 1997 Annual Meeting of
Shareholders (the "Proxy Statement") and is incorporated herein by reference.
The information required by this item with respect to executive officers is
included in Item 1 of this Form 10-K under "Executive Officers of the
Registrant."
Item 11. Executive Compensation.
The information required by this item is included in the Proxy Statement
and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
The information required by this item is included in the Proxy Statement
and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is included in the Proxy Statement
and is incorporated herein by reference.
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Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as a part of this Report:
(1) Financial Statements (Incorporated by reference in Item 8)
----------------------------------------------------------
Report of Independent Auditors dated February 14, 1997
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Income for the years ended December 31, 1996,
1995 and 1994
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements
[All financial statement schedules are omitted as inapplicable or
because the required information is included in the Consolidated
Financial Statements or the Notes to Consolidated Financial Statements]
(2) Exhibits
--------
2A Stock Purchase Agreement with The Compucare Company, dated as of
November 26, 1996, filed as Exhibit 2A to Form 8-K dated December 11,
1996 and incorporated herein by reference.
3A Amended and Restated Articles of Incorporation of the registrant. (1)
3B Amended and Restated Bylaws of the registrant. (1)
10A Profit Sharing Plan, as amended December 28, 1994, together with
Profit Sharing Trust Agreement. (1) (2)
10B Lease Agreement dated as of September 17, 1991 between the registrant,
as lessee, and Any Travel, Inc., as lessor, with respect to the premises
located at 4801 East Broadway Boulevard, Tucson, Arizona. (1)
27
10C Promissory Note dated as of June 15, 1992 from Any Travel, Inc. to
the registrant. (1)
10D Continuing Guaranty Agreement dated June 4, 1992, as amended March
1 1996, of the registrant to Bank of America Arizona, together with
related Promissory Note dated June 4, 1992 from Any Travel, Inc. to
Bank of America Arizona. (1)
10E Triple Net Lease Agreement dated as of May 2, 1994 between the
registrant, as lessee, and Any Travel, Inc., as lessor, with
respect to the premises located at 1121-1161 North El Dorado Place
in Tucson, Arizona. (1)
10F Promissory Note dated as of May 2, 1994 from Any Travel, Inc. to
the registrant. (1)
10G Employment Agreement dated May 6, 1994 between Reid Scott Holbrook
and the registrant. (1) (2)
10G.1 Amendment dated May 24, 1996 to Exhibit 10G. (2) (3)
10H Employment Agreement dated July 24, 1994 between Richard A. Wesson
and the registrant. (1) (2)
10H.1 Amendment dated May 26, 1996 to Exhibit 10H. (2) (3)
10I.1 Stock Incentive Plan of 1996, as amended November 8, 1996. (2) (3)
10K Business Loan Agreement dated as of March 8, 1996, as amended March
11, 1996, among the registrant, Sunquest Europa Limited and Bank of
America Arizona, and related Security Agreements. (1)
10K.1 Amendment dated November 29, 1996 to Exhibit 10K. (3)
10L Management Services Agreement dated as of March 28, 1996, between
the registrant and LabFUSION, Inc. (1)
10M Trademark License Agreement dated as of April 1, 1993, between the
registrant, as licensor, and LabFUSION, Inc., as licensee. (1)
10N Tax Indemnification Agreement dated as of April 30, 1996, between
the registrant and its shareholders of record as of
April 30, 1996. (1)
10O Agreement dated as of September 23, 1994 between the registrant and
IDX Corporation. (1)
28
10P Employment Agreement effective May 26, 1996 between Nina M. Dmetruk
and the registrant. (1) (2)
10Q Lease dated June 1, 1996 between Antrim Corporation, as lessee, and
Massachusetts Mutual Life Insurance Company, as lessor, with
respect to office space in Plano, Texas. (3)
10R Employment Agreement dated as of January 31, 1997 between Albert A.
DeStefano and the registrant. (2) (3)
10S Form of Underwriting Agreement dated May 30, 1996, filed as Exhibit
1A to Registration Statement No. 333-2790 and incorporated herein
by reference.
13A Financial Information Section of Annual Report to Shareholders for
1996. (3)
16A Letter regarding change in independent auditors, dated
May 9, 1996. (1)
21B Subsidiaries of the registrant. (3)
23G Consent of Independent Auditors dated March 23, 1997. (3)
27B Financial Data Schedule for the year ended December 31, 1996. (3)
___________________
(1) Filed, under the same number, as an exhibit to Registration Statement
No. 333-2790 and incorporated herein by reference.
(2) Management contract or compensatory plan or arrangement.
(3) Filed herewith.
29
(b) Reports on Form 8-K
A Current Report on Form 8-K, dated December 11, 1996, was filed by the
registrant during the quarter ended December 31, 1996 reporting the
purchase of all of the outstanding stock of Antrim Corporation.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Johnstown, Commonwealth of Pennsylvania, on March 27, 1997.
SUNQUEST INFORMATION SYSTEMS, INC.
(Registrant)
By: /s/ Sidney A. Goldblatt
-------------------------------------
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
[Download Table]
Signature Title Date
--------- ----- ----
/s/ Sidney A. Goldblatt President and Chief Executive March 27, 1997
------------------------ Officer (Principal Executive
Sidney A. Goldblatt Officer) and Director
/s/ Nina M. Dmetruk Executive Vice President and March 27, 1997
------------------------ Chief Financial Officer
Nina M. Dmetruk (Principal Financial and
Accounting Officer) and Director
/s/ Bradley L. Goldblatt Director March 27, 1997
-------------------------
Bradley L. Goldblatt
/s/ Richard W. Barker Director March 27, 1997
------------------------
Richard W. Barker
/s/ Stanley J. Lehman Director March 27, 1997
------------------------
Stanley J. Lehman
31
SUNQUEST INFORMATION SYSTEMS, INC.
Form 10-K For Fiscal Year Ended December 31, 1996
Commission File No. 0-28212
----------------------------------
EXHIBIT INDEX
-------------
Exhibit No. Document
----------- --------
2A Stock Purchase Agreement with The Compucare Company, dated as
of November 26, 1996.*
3A Amended and Restated Articles of Incorporation of the
registrant.*
3B Amended and Restated Bylaws of the registrant.*
10A Profit Sharing Plan, as amended December 28, 1994, together
with Profit Sharing Trust Agreement.*
10B Lease Agreement dated as of September 17, 1991 between the
registrant, as lessee, and Any Travel, Inc., as lessor, with
respect to the premises located at 4801 East Broadway
Boulevard, Tucson, Arizona.*
10C Promissory Note dated as of June 15, 1992 from Any Travel, Inc.
to the registrant.*
10D Continuing Guaranty Agreement dated June 4, 1992, as amended
March 15, 1996, of the registrant to Bank of America Arizona,
together with related Promissory Note dated June 4, 1992 from
Any Travel, Inc. to Bank of America Arizona.*
10E Triple Net Lease Agreement dated as of May 2, 1994 between the
registrant, as lessee, and Any Travel, Inc., as lessor, with
respect to the premises located at 1121-1161 North El Dorado
Place in Tucson, Arizona.*
10F Promissory Note dated as of May 2, 1994 from Any Travel, Inc.
to the registrant.*
10G Employment Agreement dated May 6, 1994 between Reid Scott
Holbrook and the registrant.*
10G.1 Amendment dated May 24, 1996 to Exhibit 10G.
10H Employment Agreement dated July 24, 1994 between Richard A.
Wesson and the registrant.*
10H.1 Amendment dated May 26, 1996 to Exhibit 10H.
10I.1 Stock Incentive Plan of 1996, as amended November 8, 1996.
10K Business Loan Agreement dated as of March 8, 1996, as amended
March 11, 1996, among the registrant, Sunquest Europa Limited
and Bank of America Arizona, and related Security Agreements.*
10K.1 Amendment dated November 29, 1996 to Exhibit 10K.
10L Management Services Agreement dated as of March 28, 1996
between the registrant and LabFUSION, Inc.*
10M Trademark License Agreement dated as of April 1, 1993
between the registrant, as licensor, and LabFUSION,
Inc., as licensee.*
10N Tax Indemnification Agreement dated as of April 30, 1996
between the registrant and its shareholders of record as of
April 30, 1996.*
10O Agreement dated as of September 23, 1994 between the registrant
and IDX Systems Corporation.*
10P Employment Agreement effective May 26, 1996 between Nina M.
Dmetruk and the registrant.*
10Q Lease dated June 1, 1996 between Antrim Corporation, as lessee,
and Massachusetts Mutual Life Insurance Company, as lessor,
with respect to office space in Plano, Texas.
10R Employment Agreement dated as of January 31, 1997 between
Albert A. DeStefano and the registrant.
10S Form of Underwriting Agreement dated May 30, 1996.*
13A Financial Information Section of Annual Report to
Shareholders for 1996.
16A Letter regarding change in independent auditors, dated May 9,
1996.*
21B Subsidiaries of the registrant.
23G Consent of Independent Auditors, dated March 23, 1997.
27B Financial Data Schedule for the year ended December 31, 1996.
___________________
*Incorporated by reference.
Dates Referenced Herein and Documents Incorporated by Reference
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