Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 2000 Form 10-K 43 229K
2: EX-10.5 First Amendment to Antrim Lease Agreement 7 34K
3: EX-13.1 Financial Section of 2000 Annual Report 35 157K
4: EX-21.1 Subsidiaries of the Registrant 1 4K
5: EX-23.1 Consent of Independent Auditors 1 6K
6: EX-27.1 Financial Data Schedule for 12/31/2000 1 6K
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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
_______________ TO _________________
Commission file number: 0-28212
SUNQUEST INFORMATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 86-0378223
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
4801 East Broadway Boulevard
Tucson, Arizona 85711-3609
(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 16, 2001, the registrant had 15,568,890 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 16, 2001 as
reported by Nasdaq, was $41,392,958 (calculated by excluding
shares owned beneficially by directors, executive officers and
other affiliates as a group from total shares outstanding
solely for the purpose of this response).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for
2000 are incorporated by reference into Parts II and IV of
this Form 10-K.
Portions of the registrant's Proxy Statement for the 2001
Annual Meeting of Shareholders are incorporated by reference
into Part III of this Form 10-K.
Except as specifically incorporated by reference herein, the
Annual Report to Shareholders for 2000 and the Proxy Statement
are not to be deemed filed as part of this Annual Report on
Form 10-K.
SUNQUEST INFORMATION SYSTEMS, INC.
Form 10-K - 2000
TABLE OF CONTENTS
Page
----
PART I
Item 1 - Business
General 1
Segment Information 1
Industry 2
Products and Services 3
Third-Party Arrangements 13
Products Under Development 13
Client Services 15
Marketing 16
Technology 16
Research and Development 17
Competition 18
Regulation 18
Proprietary Rights 20
System Acquisition Agreements and Subscription Agreements 21
Backlog 22
Employees 22
Other Factors Affecting Future Performance 22
Executive Officers of the Registrant 29
Item 2 - Properties 30
Item 3 - Legal Proceedings 31
Item 4 - Submission of Matters to a Vote of Security Holders 32
PART II
Item 5 - Market for Registrant's Common Equity and Related
Stockholder Matters 33
Item 6 - Selected Financial Data 33
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 33
Item 7A - Quantitative and Qualitative Disclosures about
Market Risk 34
Item 8 - Financial Statements and Supplementary Data 34
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 34
PART III
Item 10 - Directors and Executive Officers of the Registrant 34
Item 11 - Executive Compensation 34
Item 12 - Security Ownership of Certain Beneficial Owners
and Management 34
Item 13 - Certain Relationships and Related Transactions 35
PART IV
Item 14 - Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 35
Signatures 38
i
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. 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. In 1991, the Company also began marketing the FlexiRad
product, a radiology information system. Sunquest became a
public company on June 10, 1996, when it closed its initial
public offering of Common Stock. With the purchase of Antrim
Corporation ("Antrim") on November 26, 1996, the Company
acquired a presence in the commercial and medical reference
laboratory market. In August 1997, Sunquest purchased certain
inpatient pharmacy software systems, and in November 1997,
entered into a software license agreement for an outpatient
pharmacy system. In 1998, the Company introduced the Clinical
Event Manager product, a medical rules-based clinical alerting
system for use with any HL-7 formatted medical data.
During the first quarter of 2000, through e-Suite, Inc.
("e-Suite"), a wholly owned subsidiary, the Company expanded
the distribution of products via the Internet-delivered
Application Service Provider ("ASP") model and began software
development activities in Bangalore, India, through its wholly
owned subsidiary Sunquest Information Systems (India) Private
Limited ("Sunquest India"). Sunquest India was formed to
accelerate time to market for the Company's products using
highly qualified personnel in a cost-effective manner. During
the third quarter of 2000, the Company formed a new business,
Diagnostix.com, Inc. ("Diagnostix.com"), a wholly owned
subsidiary. Diagnostix.com is a business-to-business ("B2B")
portal currently in development with three beta clients.
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.
As of December 31, 2000, Sunquest had an installed
customer base of more than 1,200 sites, including 175 of the
world's largest IDNs, in the United States, Canada, United
Kingdom, Saudi Arabia, Ireland and Denmark.
Segment Information
-------------------
Currently, the Company manages its operations through two
business segments: Core Business and e-Commerce.
Core Business: This reportable segment consists of the
Company's health care information systems that include
software licenses, related hardware, relicensed
1
software, resold software and value-added services. The
principal markets for this segment include large and mid-sized
hospitals, clinics and other facilities, including IDNs.
e-Commerce: This reportable segment consists of the
Company's Internet-based product offerings. Currently,
the Company offers three products, e-Reference Lab, e-Financial
and e-CEM ("Clinical Event Manager"), which are
Internet-based 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 the
products currently available are the smaller hospital and
commercial laboratories. Also, 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. The Company's strategic initiatives include
development of future releases of ASP product offerings
as well as introducing additional Internet ventures and
products, which will target expanded markets.
For financial information related to the Company's
business segments, see Note 13 of Notes to Consolidated
Financial Statements, which is incorporated by reference into
Part II, Item 8.
Industry
--------
In recent years, the health care industry has
experienced, and continues to experience significant changes.
Increases in health care costs have led the industry to move
from a fee-for-service model to alternative payment models.
This has resulted in a shift of financial risk from the payor
to the health care provider and has caused the industry to
focus on the cost-effectiveness of high quality care. In
addition, the health care industry has been experiencing
consolidation among health care providers which has led to the
development of large IDNs. These organizations have been
formed to manage the continuum of health care services for
population groups across both inpatient and outpatient
settings with the dual goals of improved quality of patient
care and reduced costs for patients and members.
In order to achieve their dual goals, IDNs need detailed
clinical and management information systems that enable
providers within the IDN to manage such important processes
as: (i) patient care processes across multiple delivery sites;
(ii) the appropriateness of diagnoses, treatments and resource
utilizations; (iii) provider performance and clinical
outcomes; and (iv) commercial and medical reference laboratory
processing and business practices. Significant market
opportunities exist for HCIS vendors offering open systems
architecture that allows interoperability with legacy systems
and solutions from other leading vendors. These systems
permit IDNs to select and integrate information systems by
either retaining existing legacy systems or selecting from an
array of new systems. With rapid Internet adoption, the
opportunity also exists for expanded e-commerce solutions
including ASP and transaction-based delivery models. Based on
these opportunities, Sunquest offers
2
six groups of health care information systems and services in
addition to its stand-alone product offerings.
Sunquest markets its products and services
internationally through its direct sales force and marketing
relationships with other information systems vendors.
Products and Services
---------------------
Sunquest's business strategy is to engineer its products
for the changing health care environment, now characterized by
the emergence of IDNs, an increasing trend to outpatient care
delivery, and increasing Internet adoption. These health care
organizations are also altering their purchasing strategy to
one in which they deal with a limited number of vendors. In
response, Sunquest has adopted a product development strategy
aimed at the creation of single-vendor, integrated, Web-based
solutions. This strategy encompasses a four-part approach:
(i) integrating products and services into a single,
comprehensive suite of applications, (ii) introducing ASP
versions of both current and future products, (iii) leveraging
the Company's core competencies and existing customer base by
introducing e-commerce products to the physician and patient
community, and (iv) leveraging intellectual capital within
Sunquest India by moving large portions of development
activity to a lower cost environment providing the triple
benefits of increased productivity, lower costs and
accelerated time to market, while maintaining high levels of
technical competence.
With rapid Internet adoption, the opportunity also exists
for expanded e-commerce solutions including ASP delivery
models. In an ASP model, clinical management applications and
data are processed centrally and distributed along with remote
expert services to customers via Internet technology. By
leveraging the Internet to reduce the cost of distribution and
support, ASP models are able to provide a solution that is
cost effective, thereby reducing customers' capital
expenditures and the need for management information systems'
staff. In response, Sunquest offers the ASP group of
products.
Sunquest's products and services are organized along six
groups of health care information systems and services in
addition to its stand-alone product offerings. This approach
leverages technology across Sunquest's product offerings
allowing customers more efficient access and utilization of
the Company's clinical information systems and support
services. The Company currently offers: (i) the departmental
clinical systems that automate the operations of laboratories,
radiology and pharmacy departments within a clinical
environment such as a hospital as well as systems that
automate the clinical, financial and information support
operations of commercial medical laboratories; (ii) the
integration and connectivity systems that allow Sunquest
products to communicate with other vendors' software and
hardware products; (iii) customer support and services; (iv)
consulting; (v) the clinical data management systems that
integrate patient care data directly to the caregiver or
clinical department; and (vi) the ASP products that are
designed to leverage the Internet to reduce the cost of
distribution and support.
3
Departmental Clinical Systems
Departmental systems for the laboratory were the first
products developed by Sunquest, and were followed by the
addition of radiology and pharmacy systems. This group of
systems automates the information needed to manage the
workflow and information needs of laboratory, radiology and
pharmacy departments in both single and multiple facilities.
These systems provide automation services specific to the
needs of the department and capture information for use by
physicians and other caregivers for better patient care. In
addition to the departmental clinical group, each product
comprising the group is individually available as a stand-
alone department solution.
Sunquest is closely monitoring the evolution of
Administrative Simplification Regulations being promulgated by
the Department of Health and Human Services ("DHHS") in
response to the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA"). Currently, the DHHS has
released only the Transactions and Code Sets Rules and the
Privacy Rules as final rules. The following eight
additional regulations are in various stages of completion:
Security, Claims Attachments, Electronic Signature,
Enforcement, Health Plan Identifiers, Employer Identifiers,
Individual Identifiers (on hold) and Provider Identifiers.
Presently, the Transactions and Code Sets Rules are effective
and require most covered entities to be compliant on October
16, 2002. Sunquest has assessed its product performance
against the new standards, and communicated standards
utilization, and in one instance a utilization schedule, for
each of its products. Compliance with the Transactions and
Code Sets Rules will not have a material impact on the
Company's business.
Privacy Rules are scheduled to become effective on April
14, 2001, with a scheduled compliance date for most covered
entities of April 14, 2003. The DHHS has opened the final
rules for a 30-day comment period ending March 30, 2001.
These comments may impact the content, the effective date and
the compliance date of the Privacy Rules. The Company will
communicate product enhancement schedules as the requirements
of the Privacy Rules and Security Rules become more
definitive. The impact that these two rules will have on
Sunquest's business, if any, has not been determined.
Sunquest has and continues to evaluate all of the
Administrative Simplification Regulations as they are drafted
and modified. At present, Sunquest does not believe that the
eight additional pending regulations will have a material
effect on its business. See "Regulation" below.
Clinical Laboratory System
Sunquest's FlexiLab laboratory information system manages
the workflow and reporting requirements of the chemistry,
microbiology, hematology, 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.
The General Laboratory module is the core of the FlexiLab
system and manages the processes of the high volume test
areas of the laboratory. This module includes
4
volume and performance statistics, patient archiving,
demographics, patient reporting including an online call back
module to organize and track phone results, security and audit
trails. The General Laboratory module features episodal
management and outpatient tracking capabilities and is
moving towards full Windows-based functionality and
client server architecture. 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 Specimen Management, Routing and Tracking ("SMART")
sub-system provides for container level identification
numbers that increase FlexiLab's ability to intelligently
route and track specimens within the enterprise and
enable more robust interface capabilities to laboratory
instrument automation (robotics) systems.
The Call Back module provides a completely electronic
call notification system that can be monitored by
laboratory or clerical personnel. Calls can be generated
during the order entry and result entry process. The
calls can be triggered automatically based on rule
definitions or by manually appending a special callback
code. The Call Back module allows the client to
prioritize the calls, filter results according to user-
defined filters, enter both internal and reportable
comments and re-queue specimens when office personnel are
unavailable. The Call Back module also allows the client
to view patient results, tag additional tests as called,
and print or fax reports directly from the application.
Pursuant to a Software Sale Agreement with SystemLink,
Inc. ("SystemLink"), Sunquest has purchased Histo Trac, a
human leukocyte antigen ("HLA") typing laboratory system
developed by SystemLink. Sunquest subsequently renamed
the product Sunquest HLA. Sunquest and SystemLink will
separately market, license and sell this system.
Sunquest HLA is a Windows-based laboratory system that
integrates data from donor/recipient typing, cross-match
and automated instruments to deliver a comprehensive HLA
laboratory information system that streamlines management
processes. The automated sample accessioning, test
resulting and reporting eliminates the need for logbooks
and other manual record keeping and reduces the chances
for medical errors. Legacy databases can be combined
with Sunquest HLA to provide complete patient testing and
results histories. The Sunquest HLA automates
information tracking and reporting resulting in lower
costs and improved service.
The Commercial Outreach module enables the hospital
laboratory to expand beyond the traditional acute care
needs of an IDN. Automated results reporting to remote
physician offices, rapid order entry, and customer
service tools 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.
Reports are available at the patient and also the
individual physician order level.
Requisition Based Reports ("RBR") is an application
within the Commercial Outreach module that provides
patient test results reports grouped by requisition
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number that can be associated with multiple accession
numbers. RBR enables outreach physicians and other
medical staff to view all results for a single
requisition number in a single report that corresponds to
work flow associated with outreach marketing practices.
One of the main advantages of the RBR application is that
reports can be delivered electronically to clients'
printers or fax machines. RBR also offers the ability to
provide clients with preprinted multi-part requisition
forms that include clients' names, addresses and other
client-specific information.
Client Calls is an application within the Commercial
Outreach module that provides the means for Sunquest's
clients to document and track calls directed to their
service centers from their clients, physicians' offices
and clinics. The application provides the functionality
to record and categorize issues; direct a call to a
department or specific user for resolution; enter
multiple progress notes to maintain a complete record of
the call details; change the status of a call from open
to resolved; control the list of calls displayed for a
user by applying user-defined filters; access all call
information in a tree structure history file; and print a
variety of reports that help to track call issues and
categories, types of issues per client, and numbers of
issues for a client over a specified timeframe along with
ad hoc reports.
The Episode Management module facilitates the automatic
creation of patient episodes and events based on defined
rules. The Episode Management module supports multiple
overlapping episodes of care with multiple active events
within each episode, providing the ability to print a
single cumulative report as well as generate a single
event report.
The LabAccess Results Workstation module provides easily
accessible and comprehensive on-line processing of data
through defined specimen viewing configurations that are
supported by color-coded Quality Assurance ("QA") result
failures and Quality Control ("QC") specimen groupings.
Specimens may be displayed in a spreadsheet format, with
failures indicated through color changes in the displayed
results, or individually. Individual specimens or
batches of specimen tests results may be released to the
patient file at any time. On-line results entry and
assessment allow data to be viewed for either a single
analyzer or for multiple analyzers that run similar or
dissimilar tests. A user-defined, auto-verification
process tags normal results for release and suspect
results for closer review.
The Multi-Facility Support ("Mulhos") module utilizes the
FlexiLab system to support multiple facilities. Each
facility can have its own individualized reports, rules
and options, which allows 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 Microbiology module in the FlexiLab system 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.
6
Pursuant to an amended and restated value added reseller
agreement ("VAR") with Dynamic Healthcare Technologies,
Inc. ("Dynamic"), Sunquest is marketing and selling
Dynamic's anatomic pathology product, CoPathPlus
("CoPath"). In addition, the Company has the right to
enhance and integrate the CoPath software with the
FlexiLab system. CoPath provides a comprehensive display
of patient and specimen information via a graphical user
interface. Health care providers are able to tailor
report formats, screen layouts and incorporate images for
a clear picture of diagnostic findings. An integrated
report writer allows the user to create their own ad hoc
reports or select from the management report options
built into the system. CoPath provides fast turnaround,
including automatic faxing capabilities.
The Blood Bank 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.
The Blood Bank Transfusion 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 Transfusion module
automatically provides notice if the blood product has
not been appropriately matched to the patient at the time
of issue.
The Remote Web Access module is a browser-based
laboratory data access tool that provides physicians and
clinicians secure and confidential Internet access to
General Laboratory, Blood Bank, Microbiology and CoPath
results information. Users can view laboratory
information such as patient results and order status,
print reports, graph cumulative results and review the
test dictionary. This information is accessible at
anytime, from anywhere, with a Web browser connected to a
corporate Intranet or a secure, high speed Internet
connection.
The Medical Necessity Checker module is integrated with
the FlexiLab system, ordering workflow to facilitate
efficient, automatic Medicare-compliant billing. The
Medical Necessity Checker validates orders as they are
entered in order to prepare Advanced Beneficiary Notices
("ABNs"), if necessary, to obtain reimbursement for the
related procedures. User-defined compliance tables are
used for the validation process. The Medical Necessity
Checker displays non-compliant orders and provides the
user with the ability to record the existence of a signed
ABN. An alert flag for any non-compliant tests are then
stored with the patient data for reporting purposes.
Pursuant to an Original Equipment Manufacturer license
agreement with Seagate Software Information Management
Group, Inc. ("Seagate"), Sunquest is marketing and
selling Seagate's Crystal Reports and Crystal Info
products. The Seagate products are integrated with
Sunquest's Departmental Clinical Systems group of
products through an industry standard Open Database
Connection (ODBC) methodology. The Seagate products
provide an effective and comprehensive ad hoc report
writer that allows health care providers to tailor output
and report delivery mechanisms. The flexibility of these
tools allow for a wide variety of report formats coupled
with graphical images and the ability to distribute
information through flat
7
files, email and Web pages. The Seagate products also include
an Online Analytic Processing (OLAP) tool for data cube
manipulation within the scope of the data warehouse.
Clinical Radiology System
Sunquest's FlexiRad radiology information system is designed
to streamline the operations of the radiology department and
facilitate orders, intelligent scheduling of both patients
and resources, fee billing, patient tracking, film
management and reporting. Using client server architecture
and a graphical user interface, the FlexiRad product is easy
to use, reducing training time on the system.
The FlexiRad system offers a full suite of interfaces:
admissions, discharge and transfer (ADT), orders, results
reporting, billing scheduling and Picture Archiving
Communications Systems (PACS). Additional interfaces
unique to a radiology department and offered by the
FlexiRad system include interfaces to digital dictation
systems, speech recognition systems, transcription
systems and top-of-the-line mammography products (MRS).
These interfaces provide more information to the FlexiRad
system and further reduce the turnaround time of patient
reporting.
All information collected by the FlexiRad system can be
viewed with Seagate's Crystal Reports, an effective and
comprehensive ad hoc report writer. This tool allows the
user to customize reports. In addition, off-the-shelf
software, such as Microsoft Access, can be used to write
customized reports.
Further integration is provided directly with the
FlexiLab system. When an exam is being ordered, the
radiology user can view related laboratory results on
that patient, assisting the health care provider in
determining the appropriateness of the order. On the
results side, radiology patient reports can be correlated
with anatomic pathology reports, providing useful
information deemed necessary for biopsy recommendations.
The Company also markets and sells Talk Technology, Inc.'s
TalkStationRadiology software, a speech recognition, dictation
and clinical workflow solution for radiology reporting, pursuant
to a marketing and distribution agreement. TalkStationRadiology
assists radiology departments and group practices in improving
efficiencies by reducing the turnaround time and
eliminating transcription costs while improving service
to referring clinicians. The TalkStationRadiology
software is currently marketed as an interfaced solution
to Sunquest's FlexiRad system. The Company plans on
embedding TalkStationRadiology within the FlexiRad system
to enhance the patient reporting process.
Clinical Pharmacy System
The FlexiMed pharmacy information system is a patient
focused, integrated pharmacy information system using
state-of-the-art client server technology. This system provides
reporting of medication use across the entire continuum of
care and puts the pharmacy in control of drug therapy,
documenting each step of the medication management process.
8
In addition, it addresses two pressing needs in today's
health care environment: medication therapy outcomes and
pharmacy cost control.
Some key features of the FlexiMed system include dose
range checking, medication profiling, order entry and
management, clinical consulting and documentation,
dispensing and inventory control, high volume drug
prescriptions and ad hoc reporting capabilities.
The inpatient functionality has several operational
options: traditional cart exchange, "just-in-time"
envelope fill, automated drug distribution machines, or a
combination of these.
The FlexiMed system incorporates standard clinical alerts
such as drug interaction and allergy alerts, and its
configurable medication management provides the
pharmacist with the necessary time to evaluate and act on
this advanced clinical information.
Clinical Financial System
The Sunquest Financial information system provides the tools
needed to manage the laboratory business and includes:
Accounts Receivable/Billing, General Ledger, Accounts
Payable, Materials Management and Electronic
Claims/Electronic Data Interchange ("EDI").
The Accounts Receivable/Billing product provides features
that allow efficient billing and collections processing
of laboratory services. These features include front-end
validations, full inquiry, cash receipts entry, one step
adjustment processing and comprehensive reporting. The
system also has tools that can assist the laboratory in
meeting regulatory compliance requirements of local
carriers. This product can be sold as an option for the
FlexiLab and Commercial Laboratory systems, as well as
the laboratory information systems of other companies.
The General Ledger application is the core product of the
Sunquest Financial system. The system is designed to
provide complete management of financial information and
is fully integrated with all components of the Sunquest
Financial system.
The Accounts Payable product provides tools to
efficiently manage the expenditures of the laboratory.
The system evaluates commitments, prints and reconciles
checks, and produces comprehensive vendor related
management reports.
The Materials Management product manages a laboratory's
supplies inventory. Features include the capability to
order, receive, issue, transfer and report all activity
within multiple locations and/or multiple inventory
environments. The system also allows retail sales of
supplies to laboratory clients, with this activity
automatically transferring to the Accounts
Receivable/Billing product.
The Electronic Claims/EDI services provide the
capabilities to electronically transmit and
electronically receive payment and rejection activity.
These capabilities are
9
available for Medicare, Medicaid, Blue Shield and prominent
clearinghouses such as NEIC, Per-Se Technologies and IMS.
Pursuant to a value added remarketer agreement with Per-
Se Technologies, Inc. ("Per-Se"), Sunquest is co-
marketing Per-Se's EDI clearinghouse services
("Clearinghouse"). The clearinghouse is interfaced to
the Sunquest Financial system as one of its Electronic
Claims/EDI services. The clearinghouse provides a full
range of EDI services, including electronic claims
submission for a broad range of payors, electronic
remittance advice processing, and wholesale laser
printing services for statements and claims. The
clearinghouse offers providers a HIPAA compliant solution
for processing electronic health care transactions.
Commercial and Medical Reference Laboratory Systems
Sunquest also offers laboratory information systems for the
commercial laboratory marketplace. Sunquest Commercial
systems provide a total solution for customers ranging from
small hospital outreach programs to large commercial
reference laboratories.
The Commercial Laboratory product group is an efficient,
performance-oriented management system that streamlines
daily operations and increases customer efficiency.
Client specific features such as reporting conventions,
call parameters and management and statistical reporting
tools give customers a competitive edge in an aggressive
marketplace. Customer service features including
stat/call lists, courier tracking, client problem
tracking and streamlined inquiry options provide
convenient access to information that is needed to serve
a dynamic client base.
The system offers quick and simple requisition entry
allowing orders to be placed more efficiently. Bar-code
reading and processing capabilities maximize workflow and
can be used in conjunction with instrument interfaces.
Batching is also available to facilitate high volume
processing. Patient reports may be faxed, printed on-
site or printed remotely. Automatic report scheduling
with client specific features provides for prompt and
accurate reporting.
The Paperless Microbiology product is fully integrated
with the Commercial Laboratory product and features user-
defined workcards on which daily culture observations and
activity can be recorded. Instrument interfaces and bar-
coded plate labels are also available to increase
efficiency. Epidemiology and management reports provide
detail and summary information to be used in statistical
evaluation of the department's activities.
The Anatomic Pathology product is available for
commercial laboratories providing pathology and cytology
services. The product uses the same flexible ordering,
reporting, and customer service features that distinguish
Sunquest's other commercial products. The system
compiles and compares required elements of test data,
facilitating regulatory compliance. Efficient storage of
historical data makes it possible to link large volumes
of patient history records with current data for quick
retrieval.
10
Cytology features include batching capabilities,
streamlined results entry screens, and comprehensive
statistical reporting. Pathology supports Systematized
Nomenclature of Medicine (SNOMED) coding, with
accompanying management reports for data analysis. QA
reporting is also available to correlate results and
document any discrepancies detected.
Integration and Connectivity
The integration and connectivity product group allows the
Company to seamlessly integrate laboratory instruments and
other vendors' HCISs into Sunquest software systems using a
variety of configuration options. This systems library is
composed of over 17,000 interfaces developed, installed and
currently supported for more than 1,000 types of laboratory
instruments and 235 HCISs from multiple vendors.
Instrument Interfaces facilitate the linking of clinical
laboratory instruments, utilizing the full communication
capability of each instrument.
The Instrument Autofiler allows laboratories to streamline
their result review process, update patient files quickly
and improve overall process efficiency and accuracy. The
Instrument Autofiler utilizes user-defined criteria to
determine if results can pass directly from an instrument
into a patient file or must be reviewed. The criteria
include items such as quality assurance ranges, result flags
received from the instrument that indicate an unusual state,
receipt of a result in an invalid range, or a result of a
particular control in a particular order.
Application Interfaces facilitate the linking of third-party
application systems, such as hospital information and
financial systems of other vendors, to Sunquest's
departmental clinical systems. Sunquest's proven ability to
handle the complexities of interacting information systems
provides customers with more flexible configuration options.
Support and Services
Sunquest provides clients with one of the industry's most
reputable and comprehensive service offerings that includes
education, installation, implementation, documentation,
product and technical support, project and systems management
and custom programming.
Consulting
Balanced View Consulting ("BVC"), Sunquest's growing
clinical consulting division, offers a wide array of both
technical consulting services and management consulting
services which can be customized to meet specific project
needs. BVC can assist in the development of profitable
outreach services, billing optimization programs, development
of business plans to support integration and networks, the
performance of HIPAA compliance assessments, and can provide
technical support for timely application installations and
upgrades. In addition to
11
the approximately 30 full-time staff in BVC, the division utilizes
five to ten specialized external consultants as needed.
BVC remains committed to providing high quality "client-
side" services to our installed client base as well as new
site implementations. We are continuing our expansion into
the management consulting area, specifically in the areas of
HIPAA and best practices for billing and clinical laboratory
services reimbursement.
Clinical Data Management
Sunquest's Clinical Data Management products are designed
to provide integrated clinical patient care data directly to
the caregiver or clinical department by combining Sunquest's
groups of ancillary systems or by seamless integration with
disparate systems.
The Clinical Event Manager ("CEM") system monitors patient
specific data within a network and immediately alerts health
care providers to significant patient information based on
predetermined rules. Providers simply identify the clinical
rules of interest and the Clinical Event Manager module
notifies them via pager or e-mail of any event triggered by
the rules. Additionally, the system can check for reminders
placed by the health care provider to order tests at
specific intervals. The system can also check for
interdisciplinary events for a given patient, such as
changes in vital signs versus administration of a particular
drug. CEM is also available as an ASP product.
Application Service Provider
Sunquest's e-Suite ASP applications are designed to
leverage the Internet to reduce the cost of distribution and
support. The e-Suite applications, which consist of e-
Reference Lab, e-Financial, e-Hospital Lab and e-CEM, are ASP
models that meet a well-defined market need and an extended
domestic market of more than 4,000 hospitals with less than
200 beds and more than 5,370 small commercial laboratories.
As of December 31, 2000, the Company had three ASP
products, e-Reference Lab, e-Financial, and e-CEM in general
release and live at four sites. In addition, a fourth ASP
product, e-Hospital Lab, is in Beta testing.
e-Reference Lab is a feature-rich laboratory information
system specially designed to streamline and expedite the day-
to-day operations of independent laboratories. e-Reference
Lab's flexible configuration offers quick and easy
requisition entry, accurate and complete worklist and
results processing. Enhanced customer service features
combined with rapid retrieval of client, patient and
specimen data strengthen the laboratory's ability to provide
superior frontline support.
e-Financial is a comprehensive financial management system
for laboratories that incorporates accounts receivable,
billing and general ledger functions into one simple, easy-
to-configure application. e-Financial is invoice-driven,
not patient-driven, in order to accelerate cash flow, making
this an ideal application for hospital laboratories with
outreach programs, as well as for traditional commercial
laboratories. Support for
12
multiple payor types, management reporting abilities and contract
management features allows laboratories to conduct business with
maximum flexibility.
e-CEM is an ASP rules-based expert alerting system that
automatically sends vital clinical data to clinicians' text
pagers and/or email. The data is sent the instant it is
processed by laboratory, pharmacy or radiology systems, and
filtered by predetermined or customer defined rules so
clinicians only receive alerts critical to the care of their
patients. In addition, the rules engine processes data to
alert hospital staff to relevant events that require
intervention for improved patient care and cost reduction.
The ASP model being used for each of the e-Suite
applications allows the applications and data to reside at
the Company's host facility, accessible via a virtual
private network (VPN) for a monthly subscription fee.
Third-Party 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 several VAR agreements, joint marketing
agreements and licensing agreements with other vendors.
In addition to the third-party agreements previously
noted in this report, hardware and resold software are
purchased from third-party vendors under VAR and other
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.
Products Under Development
--------------------------
The following products are under development utilizing
either the same client-server architecture as the Company's
existing systems or Web-based technology. The development of
new products is an uncertain process. There can be no
assurance that the following products will be successfully
developed or, if developed, that they will be accepted in the
marketplace. See "Other Factors Affecting Future Performance"
below.
FlexiMed-Outpatient (Departmental Clinical Systems) The
FlexiMed system has two major components: an inpatient system
and an outpatient system. The inpatient system is used in
hospitals and is a proven product installed at seven sites.
The outpatient system focuses on functionality similar to
retail pharmacy and is currently under development.
Outpatient functionality will provide the user with high
volume prescription processing and will be automated with bar-
code checking. The advanced multi-site capability will
support on-line, third-party claims adjudication with billing
algorithms and financial processing that will be configurable
for site-specific variations.
13
e-Hospital Lab (Application Service Provider) is an advanced
laboratory information management application for hospitals
and multi-facility medical communities. e-Hospital Lab's
advanced design allows multiple laboratories to collaborate to
provide the best service possible, yet retain site-specific
flexibility and independence, even across multiple time zones.
Full hospital laboratory functionality will be offered
including outreach capabilities, making it an ideal package
for acute-care hospital laboratories, outreach programs, or
long term care facilities.
Clinical Decision Support (Clinical Data Management) will
serve as a management tool to retrieve and combine data from
multiple databases and their interfaces. Clinical Decision
Support will provide a dynamic means to access data faster,
generate impromptu reports more quickly and will provide
longer term data storage for trend analysis. Clinical
Decision Support will be an invaluable tool for today's
informed decision maker, leveraging Web browser interfaces and
e-mail reporting throughout an organization.
Integrated Clinical Suite (Departmental Clinical Systems and
Application Service Provider) The Integrated Clinical Suite
will integrate FlexiLab, FlexiRad, FlexiMed, Sunquest
Financial, Clinical Event Manager and Clinical Decision
Support. Under development is a Web-based common user
interface that will provide users with the ability to
seamlessly view clinical data from one Web-based viewer.
Diagnostix.com (Application Service Provider) will utilize the
Internet to help health care participants securely exchange
relevant clinical information and analyze it to make informed
clinical decisions. Diagnostix.com portal services are
targeted at hospitals and IDNs that plan to grow their
outreach business through improved service. This can be
accomplished by providing their clients with connectivity to
clinical information and tools that reduce the probability for
medical errors, enhance patient satisfaction and reduce
administrative tasks.
Based on a centrally hosted ASP model or "thin/client"
technology, Diagnostix.com applications will be affordable,
and easily and efficiently deployed across various systems
using the Internet. Initially, Diagnostix.com will provide
online lab results, lab ordering, and clinical alerting and
later expand to pharmacy, radiology and other areas. With the
initial phases of Diagnostix.com, physicians will be able to
receive lab reports online, view customizable cumulative
results as well as create new or follow-up lab orders, print
labels and requisitions in their offices, check orders status
online, perform medical necessity checking, and print ABNs.
Diagnostix.com will focus initially on leveraging the
relationships Sunquest has with its customers. The Company's
existing client base provides access to a hospital and IDN
network of over 350,000 physicians in the United States.
Diagnostix.com will eventually target expansion beyond
Sunquest's existing client base.
During 2000, Diagnostix.com signed agreements with three major
institutions as Alpha sites to help validate the design
requirements and conduct usability tests. Additionally,
Diagnostix.com has initiated client agreements to beta test
the initial modules, as they become available. Diagnostix.com
is currently pursuing additional customers for Beta trials
prior to general release.
14
Client Education Online ("CLEO") (Application Service Provider) will
consist of a comprehensive series of both self-paced and
Web-enabled instructor led learning modules, job aids and Web
conferences that are designed to build professional skills and optimize
customer use of Sunquest's clinical information systems. This
state-of-the-art technology is built upon a sound fundamental adult
learning methodology that supports just-in-time training, available 24
hours a day, 365 days a year.
Client Services
---------------
At December 31, 2000, the Company's client services
division employed approximately 415 professionals. Sunquest
Client Services provides clients with a wide array of services
including implementation, account management and education
services, as well as product and technical support. Client
Services employs skilled professionals with a strong focus on
clinical skills and technical expertise. Client Services'
employees attend rigorous training including, where required,
a formal six-month initial training program to comply with the
Company's certification requirements that are designed to
ensure the highest degree of competence.
Sunquest utilizes a variety of traditional and innovative
methods to provide educational services to its clients. In
addition to a standard "Train the Trainer" approach, PC and
Internet-based educational services are offered. Web
conferences have been successfully introduced in 2000 as part
of an on-going effort to provide post-live educational
opportunities for Sunquest clients. The Company has offered
32 e-Learning conferences for its clients since the
implementation of this program in March of 2000. During our
annual client user group meeting, clients are offered
workshops and lectures in a variety of topics ranging from
technical to management training.
Areas of specialty have been developed within the Client
Services organization to support the deep level of
functionality in the Company's products. Client Services has
specific teams dedicated to the following areas:
instrumentation, application interfacing, devices,
microbiology, anatomic pathology, blood bank and operating
systems. In addition, a Crisis Team is maintained to provide
rapid and dedicated response in the event of a major system
outage. All support services are staffed 24 hours per day, 7
days per week and are managed through a Help Desk "triaging"
service located in Tucson, Arizona. Services are delivered
via conventional methodologies as well as via the Internet and
other advanced technologies. The Company utilizes outside
consulting services as well as internally conducted surveys to
continually assess client satisfaction and the quality of
services provided.
Every client is assigned a dedicated Client Advocate who
provides a single, long-term point of contact. The Client
Advocate conducts regularly scheduled meetings with their
clients to ensure that all expectations are being met and
focuses on proactive site management to assist clients with
their business needs.
15
Marketing
---------
The primary markets for the Company's systems and
services are the approximately 3,500 acute care hospitals in
the United States and Canada that have more than 250 beds and
the approximately 500 premier commercial and medical reference
laboratories in the United States. In addition to these
markets, the Company, through its e-commerce initiatives, will
be targeting the more than 4,000 domestic hospitals with less
than 200 beds and the more than 5,370 small commercial
laboratories markets. The Company also markets its systems
and services in the United Kingdom, Ireland and Denmark.
Sunquest's principal sources of referrals are its clients,
strategic partners 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, direct mail
campaigns, telemarketing and advertisements in trade journals.
The Company's marketing department is composed of a team
of specialists in product management, marketing operations,
business development/strategic alliances, marketing
communications and sales support. Its sales force is
organized into two divisions: (i) North American Sales which
is divided into three areas, Western, Central and Eastern and
(ii) European Sales, offering the Company's systems in the
United Kingdom and Europe. At December 31, 2000, the Company
employed a sales and marketing force of approximately 97
individuals.
Technology
----------
Sunquest's clinical products operate on IBM's RS6000
servers using the AIX operating system and Compaq's Alpha
servers using Tru64 UNIX or OpenVMS operating systems. Users
access the Company's applications using IBM compatible PCs
and/or terminals. The FlexiLab, FlexiRad, Sunquest Financial
and Sunquest Commercial products are offered on both IBM and
Compaq platforms. The FlexiMed product is offered on the IBM
RS6000 platform only. The Company's commercial and medical
reference laboratory systems are offered on both IBM and
Compaq platforms. Ancillary modules of the FlexiLab product
operate on Intel platforms using the Microsoft Windows NT
operating system.
The Company utilizes Microsoft Visual Studio for a multi-
tiered approach for its development efforts. Microsoft
InterDev is used for Internet presentation development.
Microsoft Visual C++ and Visual Basic are used for graphical
presentation. Visual C++ and ANSI M are used in the
development of its laboratory and radiology clinical systems
business logic. The laboratory and radiology systems use
InterSystem's OpenM or Cache for data storage. Microsoft's
SQL-Server database is also used for newer ancillary modules.
The CoPath anatomic pathology product is developed using
PowerBuilder and a Sybase database. FlexiRad is a completely
client-server system while the FlexiLab system uses both
client-server and monolithic based modules. These monolithic
based modules represent a limited set of functionality written
entirely in the M language. FlexiMed, the Company's pharmacy
product, is developed using PowerBuilder fourth generation
language on an Oracle database. All of the products use or
are migrating to utilize Microsoft's Windows 95/98/NT/2000 for
the client operating system. The Company's commercial and
medical reference laboratory systems have been developed in
the M language.
16
Sunquest is evolving its laboratory and radiology
clinical systems to object-oriented middle tiers with
graphical Web-based presentation layers while continuing to
utilize hierarchical and relational data structures (all
residing on the server) which 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 evolve all of its systems and modules to this object
oriented and component-based architecture over time.
Sunquest resells 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 clinical information systems 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 phased product development lifecycle
discipline and release management methodology. This process
includes on-going analysis of the marketplace, determination
of users' requirements, prototypical engineering, user and
usability feedback, detailed design specifications, and
regression and beta testing to ensure that new systems meet
clients' needs.
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 technology group, which researches industry-
standard components and develops new technologies for
integration into the Company's current and future products.
During 2000, Sunquest began development activities in
Bangalore, India, through Sunquest India. This offers several
advantages, including access to India's large pool of
technical talent, the ability to operate a 24-hour development
effort, a significant labor cost advantage, and added
development resources to help achieve rapid time-to-market
targets for new product initiatives. Currently, Sunquest
India is assisting in the development of the integrated
clinical product suite that will incorporate the Company's
laboratory, radiology, pharmacy, financial and decision-
support systems. At December 31, 2000, the Company's research
and development organization employed approximately 293
professionals.
In 2000, 1999 and 1998, the Company's research and
development expenses before capitalization of software
development costs totaled approximately $24.9 million, $19.1
million and $18.5 million, respectively. See "Other Factors
Affecting Future Performance" below.
17
Competition
-----------
The markets for HCISs, including the markets for the
Company's information systems, are highly competitive. A
significant portion of the Company's revenues is derived from
securing business through lengthy, competitive procurement
processes managed by sophisticated purchasers. These
purchasers are typically replacing legacy clinical information
systems and thoroughly 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, quality of client support, product architecture,
functionality and features, ease of use, speed of
implementation, product performance and price.
The Company's principal competitors are divided into two
primary categories: Hospital Information Systems ("HIS")
vendors and stand-alone Clinical Information Systems ("CIS")
vendors. The Company's HIS competitive vendors are: McKesson
HBOC, Inc., Medical Information Technology, Inc., Siemens
Medical Solutions Health Services Corporation and Cerner
Corporation. The primary CIS competitors are: IDX Systems
Corporation, Mediware Information Systems, Inc., Soft Computer
Consultants, Inc. and Triple G Corporation. In addition, the
Company competes with a large number of other information
system vendors. See "Other Factors Affecting Future
Performance" below.
Regulation
----------
The United States Food and Drug Administration (the
"FDA") is authorized to regulate medical "devices" under the
Federal Food, Drug, and Cosmetic Act, as amended (the "Act").
The FDA has interpreted the term "device" to include software
intended for use in the diagnosis, cure, mitigation,
treatment, or prevention of disease. A software product that
meets this definition is subject to the Act's regulatory
requirements applicable to devices, unless the software
product is exempted from one or more of those requirements.
The FDA's interpretation is that hospital information systems,
laboratory information management systems, expert medical
decision software systems, and blood bank information
management systems are medical devices. Software products
intended only for general accounting, communications, or
education are not subject to regulation as devices.
Under an FDA draft policy for the regulation of computer
products, dated November 13, 1989, health information
management products that have not been classified by the FDA
are deemed medical devices but are exempt from active
regulation by the FDA if they involve competent human
intervention before any impact on human health occurs (e.g.,
clinical judgment and experience can be used to check and
interpret a system's data output). Active regulation would
include establishment registration, device listing, premarket
notification or premarket approval, quality system regulation
("QSR") compliance, and adverse event reporting. The FDA
includes in the category of software products that are exempt
from active regulation hospital information systems and
pharmacy ordering systems. The FDA has suggested that
laboratory information systems may be considered Class I
devices under 21 C.F.R. 862.2100, which are exempted by that
regulation from premarket notification under section 510(k) of
the Act but are not exempt from other device regulatory
requirements, such as QSR and adverse event reporting.
18
In March 1994, the FDA notified blood bank software
manufacturers that blood bank software products would be
subject to active device regulation, including premarket
notification or premarket approval. On August 16, 1999, the
Company received 510(k) clearance for the FlexiLab Blood Bank
and Blood Donor System version 5.2 on both the IBM AIX and the
Compaq (DEC) UNIX platforms. On November 17, 1999, the
Company also received 510(k) clearance for the FlexiLab Blood
Bank and Blood Donor System on the Compaq Alpha Open VMS
platform. The Company has notified customers that it would not
seek FDA clearance for additional platforms. Sunquest is
facilitating customer specified conversion schedules to
platforms that have received FDA clearance. The conversion
process is not expected to have a significant effect on the
Company's business. In addition, the marketing of versions of
the FlexiLab Blood Bank and Blood Donor System other than
version 5.2 may require FDA 510(k) premarket clearance.
Compliance with the premarket notification and other device
regulatory requirements could be costly and could delay or
preclude the introduction of certain new products.
Under FDA medical device reporting ("MDR") regulations,
manufacturers are required to report to the FDA device-related
deaths, serious injuries, and any malfunction which could
result in death or serious injury if it were to recur. MDRs
can result in voluntary corrective actions, such as recalls or
customer notifications, or agency action, such as inspection
or enforcement action. Since March 2000, the Company has
reported to the FDA an MDR related to each of its FlexiLab and
Blood Bank and Blood Donor products under 21 C.F.R. Part 803.
All affected customer sites were notified and provided with
appropriate temporary workarounds, and subsequently have
been notified of the availability of the software corrections.
Manufacturers are also required to report to the FDA certain
field corrections or removals of marketed medical devices.
Since March 2000, the Company has effected four field
corrections in its FlexiLab product and two field corrections
for its Blood Bank and Blood Donor product, which were
reported to the FDA under 21 C.F.R Part 806. The FDA is
currently processing the field correction notice information
for these field corrections. All affected customer sites were
notified and provided with appropriate temporary workarounds.
Subsequently, all affected customer sites were notified of the
availability of the software corrections with the exception of
a software correction involving the Blood Bank and Blood Donor
product. The coding for this software correction is currently
in process.
The HIPAA contains administrative simplification
requirements with respect to the exchange of certain health
care information. To date, the DHHS has released only the
Transactions and Code Sets Rules and the Privacy Rules
required by HIPAA as final rules. The following eight
regulations are in various stages of completion: Security,
Claims Attachments, Electronic Signature, Enforcement, Health
Plan Identifiers, Employer Identifiers, Individual Identifiers
(on hold) and Provider Identifiers. The Administrative
Simplification Regulations are likely to impact customer
operations involving use of the Company's products and the
Company will need to ensure that its products support
compliance with HIPAA requirements to the extent the
regulations are applicable. The final Transactions and Code
Sets Rules would standardize the electronic exchange of health
information. The final Privacy Rules would require protection
of protected health information in hardcopy and electronic
form, provide for patient access and modification privileges
to their data and restrict the use and further disclosure of
protected health information. Covered entities (health care
providers, health care clearinghouses, health plans)
19
are generally expected to be compliant with the regulations 24
months after the final rules become effective. The final
Privacy Rules are scheduled to be effective on April 14, 2001.
The DHHS has opened the final Privacy Rules for a 30-day
comment period ending March 30, 2001. These comments may
impact the effective date, the compliance date and the content
of the Privacy Rules. Transaction and Code Sets Rules were
effective October 16, 2000, and compliance for most covered
entities is required by October 16, 2002. The Company has
determined that its financial software products, excluding
financial transactions in its FlexiMed outpatient product
(which is currently a product under development), are coded to
be in compliance with the new regulations. The FlexiMed
outpatient financial transactions are expected to be in
compliance during the first quarter of 2002. Sunquest is
actively evaluating its product features using final and proposed
Administrative Simplification Regulations as the
standard, but has not determined at this time the total
effect, if any, that these regulations may have on its
business. Sunquest has and continues to evaluate these
regulations as they are drafted and modified. At present,
Sunquest does not believe that these pending regulations will
have a material effect on its business.
The health care industry is subject to changing
political, economic and regulatory influences that may affect
the procurement practices and operations 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. This 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 HCISs and services. Such regulatory changes, if adopted,
and the reaction of health care providers to such changes may
have a material adverse effect on the Company's business and
results of operations. See "Other Factors Affecting Future
Performance" below.
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 and subscription agreements under
which the Company licenses or provides access to its software
products 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 permitted 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, clients are required to hold the
20
software and proprietary information in confidence and use reasonable
care to preserve and safeguard such information.
FlexiLab, FlexiRad, FlexiMed, Sunquest and Sunquest
Information Systems, among other marks, are used by Sunquest
in its business and have been registered in the United States
Patent and Trademark Office. The trade name Sunquest and
various other marks used by Sunquest in its business have also
been registered by Sunquest in the United Kingdom and various
other countries. e-Suite and Diagnostix.com, among other
marks, are trademarks of Sunquest Information Systems, Inc.
The trade name Antrim and other marks used by Antrim in its
business have also been registered with the United States
Patent and Trademark Office. Also, certain of the Company's
intellectual property is the subject of patent protection or a
pending patent application.
System Acquisition Agreements and Subscription Agreements
---------------------------------------------------------
The Company typically furnishes its systems to its
clients pursuant to system acquisition agreements and, in the
case of the Company's ASP model, pursuant to subscription
agreements.
In the case of system acquisition agreements, clients are
granted perpetual, non-exclusive and non-transferable licenses
to use the systems, which are the subject of the agreements,
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 monthly or annual
fees under separate maintenance agreements.
In the case of subscription agreements, clients are
granted access, through a host system which is presently
maintained and operated by the Company, to certain software
applications which are the subject of the agreements, for the
terms specified in the agreements. Clients pay specified
subscription fees for access through the host system, via a
Company-approved connection, to software applications
proprietary to the Company. Clients also pay specified fees
for set up of the application environment, the provision and
license of specified interfaces and training in use of the
applications prior to access.
Subscription fees for the Company's applications are
typically based on a number of factors, including the number
and type of applications accessed, as well as the volume of
use of the applications. The Company generally supports the
clients' use of the applications for no additional fees during
the terms of the agreements.
21
Backlog
-------
At December 31, 2000, the Company had a total contract
backlog of $121.3 million, which consisted of $49.4 million of
system sales and services and $71.9 million of support and
subscription fees. At December 31, 1999, total contract
backlog was $124.6 million, which consisted of $55.9 million
of system sales and services and $68.7 million of support.
System sales and services backlog consists of the unearned
amounts of signed contracts which have not yet been recognized
as revenues. Support backlog consists primarily of contracted
software support for a period of 12 months. Subscription fee
backlog consists primarily of contracted subscription fees
related to the Company's ASP products 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.
Employees
---------
As of December 31, 2000, the Company had 901 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.
Other Factors Affecting Future Performance
------------------------------------------
Forward-Looking Statements
This report contains forward-looking statements,
including statements which contain words such as "will,"
"expects," "believes," "plans," "anticipates" and words of
similar impact. The following are certain factors that may
cause the Company's actual results to vary materially from
those which are the subject of any such forward-looking
statements.
Dependence on Single Product. To date, the Company has
derived the majority of its revenues from sales of turnkey
LISs and related implementation support services in the United
States. The Company expects that it will continue to derive a
significant portion of its total revenues for the foreseeable
future from sales of LISs and related implementation and
support services. Accordingly, market factors adversely
affecting sales of LISs could have a material adverse effect
on the Company's business and results of operations. Such
factors include, but are not limited to, consolidation among
the Company's customers, reduced investment income of the
Company's customers, changes in the criteria used by such
customers in making purchase decisions, and competitive
pricing pressures. The Company's target market for its
turnkey LISs, consisting primarily of large and mid-sized
hospitals, is characterized by continuing consolidation
resulting in fewer purchasing decisions at a higher dollar
value, a trend that may favor larger vendors with greater
numbers of hospitals currently under contract. There can be no
assurance that the Company will continue to be the vendor of
choice as newly consolidated customers replace legacy systems.
In addition, changes in the criteria used in making purchasing
decisions such as a shift to purchasing single vendor,
hospital-wide systems may have a material adverse effect on
the Company's ability to attract new customers. Competitive
pressures or other factors, including the Company's efforts to
expand its LIS offerings to new markets, may result in
significant price decreases that could
22
have a material adverse effect on the Company's business and results of
operations. There can be no assurance that the Company will be able to
sustain or increase the level of revenues from sales of its
LISs on an annual or quarterly basis.
Rapid Technological Change and Dependence on New Product
Development, Enhancement and Acceptance. The HCIS market is
characterized by rapid technological advances, frequent new
product introductions and evolving industry standards that are
outside the control of the Company. The development and sale
of additional or new applications or products is a principal
means of competition in the HCIS market. Advances in both
hardware and software technology, including the introduction
of new hardware platforms, new programming languages and new
software applications, will require the Company to make
significant ongoing expenditures for research and development
in order to adapt the Company's existing and subsequently
introduced HCISs to such new technologies and to take
advantage of the benefits they offer. For the foreseeable
future, the Company intends to continue to devote substantial
financial, managerial and personnel resources to its product
development efforts. The development of new and enhanced
HCISs is a complex and uncertain process requiring high levels
of innovation and the accurate anticipation of technological
and market trends, and from time to time the Company has
experienced delays in introducing new HCISs, HCIS enhancements
and integrating new HCISs. The Company intends to complete
its migration of products and clients to Windows-based
software and to Web-enable many of its products. An inability
to accomplish these initiatives or any significant delay in
these initiatives could have an adverse effect on the
Company's business and results of operations. The failure of
the Company to develop and introduce new HCIS products, HCIS
enhancements, or its e-commerce initiatives successfully or
the failure to respond effectively to technological changes,
including the use of the Internet, could have a material
adverse effect on the Company's business and results of
operations.
Uncertainty of the Internet. The impact on the Company
of emerging areas such as the Internet, electronic commerce
and on-line services is uncertain. While the rapid growth in
the use of and interest in the Internet and electronic
commerce is a continuing trend, the Company cannot predict
with any assurance whether the acceptance and use will
continue to develop or that a sufficiently broad base of
customers will adopt or continue to use the Internet as a
medium of commerce. Demand for and market acceptance of
recently introduced services and products over the Internet
are subject to a high level of uncertainty and there exist few
proven services and products.
There can be no assurance that the Company will provide
product offerings that will satisfy customer demands in these
new emerging areas. In addition, standards for network
protocols, as well as other standards adopted by the industry
for the Internet, are evolving rapidly. There can be no
assurance that standards chosen by the Company will leverage
its products to compete effectively for Internet business
opportunities as they arise. If the Company is unable to
develop services and products that attract, retain and expand
its customer base, results of operations and financial
condition could be materially adversely affected.
Critical issues concerning the commercial use of the
Internet, including security, demand, reliability, cost, ease
of use, accessibility, quality of service and potential tax or
other government regulation, remain unresolved and may affect
the use of the Internet as a medium to support the
distribution of the Company's software. If these issues are not
23
favorably resolved, the Company's business, results of
operations and financial condition could be materially
adversely affected.
In addition, problems with the Company's computer and
communications hardware and network systems, including
problems with third parties' systems, could cause
interruptions. Those interruptions could result from software
or hardware failures, inadequate Internet infrastructure
capacity and other human or mechanical causes. The Company
expects to experience occasional, temporary capacity
constraints due to, among other things, anticipated increased
Internet traffic, which could cause unanticipated system
disruptions, slower response time, impaired quality and
degradation of levels of customer service. If the Company
experiences frequent or long-term system interruptions, it may
experience a decrease in the number of customers using its
products and services over the Internet.
Significant Fluctuations in Quarterly Operating Results;
Revenue Recognition Policy. The Company's quarterly revenues
and results of operations have varied significantly as a
result of a number of factors, including (i) the volume and
timing of systems sales and installations; (ii) the timing of
client acceptances; (iii) the length and complexity of the
systems sales and installation cycles; (iv) seasonal buying
trends as a result of clients' annual purchasing and budgeting
practices; and (v) the Company's sales commission practices.
The Company expects that these variations will continue for
the foreseeable future. Revenues from the software portion of
system sales are recognized on the percentage-of-completion
method and are determined based upon actual hours incurred
related to total estimated installation hours. As a result,
the timing of revenue recognition varies considerably and
could be impeded by a number of factors, including
availability of Company personnel, the Company's need to
allocate system installation resources to other installations
or to research and development activities, availability of
client personnel and other resources, and complexity of the
clients' needs and delays imposed by clients. Since a
significant percentage of the Company's expenses, particularly
employee compensation, is relatively fixed, variations in the
timing of system sales, installations and training costs can
cause significant variations in operating results from quarter
to quarter. If total revenues are below expectations in any
period, the Company's inability to adjust spending to
compensate fully for the lower revenues may magnify the
adverse effect of such a shortfall on the Company's results of
operations. Accordingly, the Company believes that period-to-
period comparisons of revenue and results of operations are
not necessarily meaningful and should not be relied upon as
indicators of future performance.
Competition. The markets for HCISs, including the
markets for the Company's information systems, are highly
competitive, rapidly evolving and subject to rapid technology
change. Most of the Company's revenues are derived from
lengthy, competitive procurement processes managed by
sophisticated purchasers that extensively investigate and
compare HCISs 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, quality of client support, product
architecture, functionality and features, ease of use,
rapidity of implementation, 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. In
addition, 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 new products
24
more rapidly than the Company or 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.
Regulation. The Company expects that the FDA is likely
to become increasingly active in regulating computer software
that is intended for use in health care settings. In March
1994, the FDA notified blood bank software manufacturers that
blood bank software products would be subject to active device
regulation, including premarket notification or premarket
approval. On August 16, 1999, the Company received 510(k)
clearance for the FlexiLab Blood Bank and Blood Donor System
version 5.2 on both the IBM AIX and the Compaq (DEC) UNIX
platforms. On November 17, 1999, the Company also received
510(k) clearance for the FlexiLab Blood Bank and Blood Donor
System on the Compaq Alpha Open VMS platform. The Company has
notified customers that it would not seek FDA clearance for
additional platforms. Sunquest is facilitating customer
specified conversion schedules to platforms that have received
FDA clearance. The conversion process is not expected to have
a significant effect on the Company's business. In addition,
the marketing of versions of the FlexiLab Blood Bank and Blood
Donor System other than version 5.2 may require FDA 510(k)
premarket clearance. Compliance with the premarket
notification and other device regulatory requirements could be
costly and could delay or preclude the introduction of certain
new products.
The HIPAA contains administrative simplification
requirements with respect to the exchange of certain health
care information. To date, the DHHS has released only the
Transactions and Code Sets Rules and the Privacy Rules
required by HIPAA as final rules. The following eight
regulations are in various stages of completion: Security,
Claims Attachments, Electronic Signature, Enforcement, Health
Plan Identifiers, Employer Identifiers, Individual Identifiers
(on hold) and Provider Identifiers. The Administrative
Simplification Regulations are likely to impact customer
operations involving use of the Company's products and the
Company will need to ensure that its products support
compliance with HIPAA requirements to the extent the
regulations are applicable. The final Transactions and Code
Sets Rules would standardize the electronic exchange of health
information. The final Privacy Rules would require protection
of protected health information in hardcopy and electronic
form, provide for patient access and modification privileges
to their data and restrict the use and further disclosure of
protected health information. Covered entities (health care
providers, health care clearinghouses, health plans) are
generally expected to be compliant with the regulations 24
months after the final rules become effective. The final
Privacy Rules are scheduled to be effective on April 14, 2001.
The DHHS has opened the final Privacy Rules for a 30-day
comment period ending March 30, 2001. These comments may
impact the effective date, the compliance date and the content
of the Privacy Rules. Transaction and Code Sets Rules were
effective October 16, 2000, and compliance for most covered
entities is required by October 16, 2002. The Company has
determined that its financial software products, excluding
financial transactions in its FlexiMed outpatient product
(which is currently a product under development), are coded to
be in compliance with the new regulations. The FlexiMed
outpatient financial transactions are expected to be in
compliance during the first quarter of 2002. Sunquest is
actively evaluating its product features using final and
proposed Administrative Simplification Regulations as the
standard, but has not determined at this time the total
effect, if any, that these regulations may have on its
business. Sunquest has and continues to evaluate these
regulations as they are drafted and modified.
25
In addition, the health care industry is subject to
changing political, economic and regulatory influences that
may affect the procurement practices and operations 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. This 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 HCISs and services. Such regulatory changes, if adopted,
and the reaction of health care providers to such changes may
have a material adverse effect on the Company's business and
results of operations.
Control by Current Shareholders; Payments upon Change in
Control. As of the date of this Report, Dr. Sidney A.
Goldblatt, Chairman of the Board and Chief Executive Officer
of the Company; Bradley L. Goldblatt, Dr. Goldblatt and Nina
M. Dmetruk, the Executive Vice President, Chief Financial
Officer, Secretary and Treasurer of the Company, as trustees
for the benefit of Bradley L. Goldblatt; Bradley L. Goldblatt,
Dr. Goldblatt and Ms. Dmetruk, as trustees for the benefit of
Curtis S. Goldblatt; and Jodi Beth Gottlieb, Dr. Goldblatt and
Ms. Dmetruk, as trustees for the benefit of Jodi Beth Gottlieb
(such trusts being collectively referred to herein as the
"Trusts") own approximately 76.5% of the outstanding Common
Stock. As a result, these shareholders, if acting in concert,
will be able to elect or remove the entire Board of Directors
and control the outcomes of all other issues submitted to the
Company's shareholders for approval. This concentration of
ownership may enable Dr. Goldblatt and the Trusts to cause or
prevent change in control of the Company without the approval
of other shareholders. There can be no assurance that this
concentration of ownership will not have a material adverse
effect on the market price of the Common Stock. In the event
that Dr. Goldblatt, his three children and trusts created for
their benefit (including the Trusts) cease to own, directly or
indirectly, fifty percent or more of the outstanding stock of
the Company, Ms. Dmetruk will be entitled to elect, during the
ninety days following such event, to terminate her employment
with the Company and receive $1.2 million in severance pay.
Dependence on Key Personnel; Management of Changing
Business. The Company's future success depends to a
significant extent upon the executive officers, the Board of
Directors, and certain other managerial, technical and
marketing personnel. The Company has experienced turnover at
the executive level in the past, and the loss of the services
of key personnel could have a material adverse effect on the
Company's business and results of operations. The Company's
ability to manage growth will require it to continue to
attract, motivate and retain highly skilled managerial,
technical, sales and marketing personnel. Competition for
such personnel is intense, and there can be no assurance that
the Company will be successful in attracting, motivating and
retaining the personnel required to maintain and improve its
business and results of operations.
Risks Associated with Identifying and Integrating
Acquisitions; Other Strategic Alternatives. The Company may
grow through the acquisition of complementary products,
technologies or businesses in the HCIS industry. The
Company's management has limited experience in identifying
appropriate acquisitions and in integrating products,
technologies and businesses into its operations. The
evaluation, negotiation and integration of any such
26
acquisition may divert the time, attention and resources of
the Company, particularly its management. There can be no
assurance that the Company will be able to integrate
successfully any acquired products, technologies or businesses
into its operations. In addition, there is significant
competition for acquisition opportunities in the HCIS
industry. Consolidation in the industry may intensify such
competition and thereby increase the costs of such acquisition
opportunities. The failure to identify and compete
successfully for strategic acquisition opportunities or to
integrate successfully any acquired products, technologies or
businesses could have a material adverse effect on the
Company. In addition to acquisitions, the Company may from
time to time consider other strategic alternatives including,
without limitation, mergers, consolidations, joint ventures
and recapitalizations. The evaluation and implementation of
any such alternative may divert the time, attention and
resources of the Company. There can be no assurance that any
such strategic alternative would be implemented successfully.
Dependence on 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 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. There can be no assurance that
others will not assert claims or commence litigation 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.
Product Liability. The Company's systems include
applications that may relate to confidential patient medical
histories and treatment plans. Improper disclosure of this
information or any failure by the Company's systems to provide
accurate and timely information could result in claims against
the Company by its clients or their patients. A successful
claim brought against the Company in excess of its insurance
coverage could have a material adverse effect on the Company's
business or results of operations, and even unsuccessful
claims could result in the expenditure of substantial funds in
litigation and the diversion of management time and resources.
There can be no assurance that the Company will not be subject
to such claims in the future, that such claims will not result
in liability in excess of any insurance coverage maintained by
the Company with respect to such claims,
27
that insurance will cover such claims or that appropriate insurance
will continue to be available to the Company at commercially reasonable
rates.
Fluctuations of Stock Price. In recent years, the stock
market in general, and the shares of software, health care and
high technology companies in particular, have experienced
extreme price fluctuations that are often unrelated to the
operating performance of such companies. The Company has
experienced fluctuations in its stock price related to these
general market fluctuations and to such operating factors as
quarterly fluctuations in its revenues or results of
operations, general conditions in the information technology
services industry and announcements of new products or
services by the Company or its competitors. These
fluctuations may adversely affect the future market price of
the Company's Common Stock.
Dependence on Third Party Products. The Company is
authorized to sell, re-market and/or sublicense certain third-
party technology used in, or in conjunction with, certain of
the Company's products under, among other things, various
value added reseller, marketing, or licensing agreements with
various third-party vendors. Certain of these agreements
terminate after the expiration of the term set forth in the
relevant agreement or may be terminated by the relevant vendor
if the Company breaches a material term of the agreement and
fails to cure the material breach within a specified period of
time. If the relevant agreement is terminated and/or not
renewed at the end of the term, the Company will not be able
to continue selling, re-marketing or sub-licensing the related
technology. As a result, the Company may have to delay or
discontinue the installation of certain of its products, which
may have a material adverse effect on the Company's business
and results of operations. In addition, Sunquest's
competitors may obtain the right to use the technologies
covered by certain of these agreements and use the related
technologies to compete with the Company.
Transactions with Affiliates. The Company has
historically engaged in transactions with affiliates,
including Dr. Sidney A. Goldblatt, the Trusts and certain
affiliates of the Trusts. Although the Company took
precautions to achieve results which the Company believes were
equivalent to arm's-length transactions, there can be no
assurance that actual results will be as favorable to the
Company as arm's-length transactions. In May 1996, the
Company adopted a policy that all future transactions between
the Company and its officers, directors, principal
shareholders and their affiliates shall be on terms no less
favorable to the Company than could be obtained by the Company
from unrelated third parties, and shall be approved by a
majority of the outside independent and disinterested
directors. This policy does not apply to transactions entered
into before the adoption of the policy or to renewals of
existing transactions on similar terms.
28
Executive Officers of the Registrant
------------------------------------
Information concerning the executive officers of the
Company, as of March 16, 2001, is set forth below.
Name Age Position
---- --- --------
Sidney A. Goldblatt 66 Chief Executive Officer and
Chairman of the Board
Mark J. Emkjer 45 President and Chief Operating Officer
Nina M. Dmetruk 48 Executive Vice President & Chief
Financial Officer, Secretary, Treasurer
and Director
James F. Garliepp 49 Executive Vice President-Chief Design Officer
Ivan G. Boyd 46 Senior Vice President-World Wide Sales
Keith B. Hagen 38 Senior Vice President-Product Development
and Chief Technology Officer
Joseph J. Stumpf 51 Senior Vice President-Balanced View Consulting
Josh E. Wisham 42 Senior Vice President-Client Services
Sidney A. Goldblatt, M.D., a co-founder of the Company,
has been Chief Executive Officer of the Company since December
1994, a director of the Company since its formation in 1979
and Chairman of the Board since 1987. Dr. Goldblatt also
served as President of the Company from September 1986 to
February 2000 and 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.
Mark J. Emkjer has been President of the Company since
February 2000 and Chief Operating Officer since January 1999.
From April 1996 to December 1998, Mr. Emkjer was employed by
PACE Health Management Systems, Inc., a company that developed
clinical decision support software for IDNs, where he served
as President and Chief Executive Officer. From January 1991
to March 1996, Mr. Emkjer was employed by Hospital Cost
Consultants, a provider of clinical and financial software
solutions to the health care industry, where he served as
President and Chief Executive Officer.
Nina M. Dmetruk has served as 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 and
Treasurer of the Company since April 1998. 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 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 and consulting firm for more than five years.
James F. Garliepp has been Executive Vice President-Chief
Design Officer since March 2000. From September 1991 to March
2000, Mr. Garliepp served as Executive Vice President-Chief
Technology Officer. Mr. Garliepp previously served as Senior
Vice President-Technology from 1989 to September 1991 and
served in various other positions from 1982 to 1989.
29
Ivan G. Boyd has been Senior Vice President-World Wide
Sales since June 2000. From November 1997 to June 2000, Mr.
Boyd served as Senior Vice President-Sales and Marketing.
From October 1995 to September 1997, Mr. Boyd was employed by
ADAC HealthCare Information Systems, Inc., a division of ADAC
Labs, a health care information systems company, where he
served as Executive Vice President of Sales and Marketing.
From September 1994 to July 1995, Mr. Boyd was employed by
First Data Corporation, a health care information systems
company, where he served as Senior Vice President of Sales.
From June 1980 to September 1994, Mr. Boyd was employed by
Digital Equipment Corporation, a computer manufacturing
company, where he served as Worldwide Healthcare Director from
April 1993 to September 1994 and U.S. Channels Marketing
Director from July 1991 to April 1993.
Keith B. Hagen has been Senior Vice President-Product
Development and Chief Technology Officer since February 2001.
From February 2000 to February 2001, Mr. Hagen served as Vice
President-Product Development and Chief Technology Officer.
From 1986 until February 2000, Mr. Hagen was employed by The
Compucare Company, a subsidiary of the QuadraMed Company, a
health care information technology company, where he served as
Senior Vice President of Products and Technology and Chief
Technology Officer.
Joseph J. Stumpf has been Senior Vice President-Balanced
View Consulting since April 2000. From December 1997 to April
2000, Mr. Stumpf served as Vice President-Balanced View
Consulting. Mr. Stumpf previously served as Vice President-
Consulting/Sales from October 1995 through December 1997 and
served in various other positions from 1989 to 1995.
Josh E. Wisham has been Senior Vice President-Client
Services since April 2000. From April 1999 to April 2000, Mr.
Wisham served as Vice President-Client Services. From October
1998 to April 2000, Mr. Wisham was owner and President of
Clinical Services and Solutions. From July 1996 to October
1998, Mr. Wisham was employed by PACE Health Management
Systems, Inc., a company that developed clinical decision
support software for IDNs, where he served as Vice President
of Client Services. From April 1993 to September 1995, Mr.
Wisham was employed by Clinicom, Inc., a developer of point-of-
care clinical applications, where he served as Director of
Client Services.
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.
The Company leases the buildings from Any Travel, Inc., which
is owned by the Trusts. The lease for the 102,000 square foot
building, which includes an adjacent two-level parking
facility, currently requires monthly rental payments of
$104,121 and expires in September 2001. The Company is
currently in the process of negotiating a new lease agreement
with Any Travel for this building. The Company occupies
approximately 70,550 square feet of office space in the other
building and subleases the
30
remaining space to a number of subtenants. The lease for the second
building currently requires monthly rental payments of $77,370 and
expires in May 2004. Sunquest receives monthly rental payments under the
subleases totaling approximately $13,345. In addition, the
Company owns a facility containing approximately 43,620 square
feet, in Tucson, Arizona, which was purchased in February 1997
for cash in the amount of $1.8 million. The building is being
leased to third parties but will eventually be used for office
expansion. Currently, Sunquest receives monthly rental
payments of approximately $32,509 from this facility. The
Company also owns a two-story building, containing
approximately 18,000 square feet, in Johnstown, Pennsylvania.
This two-story building is currently under contract for sale
to an unrelated third party. Under the contract, the closing
of the sale of the building (which is currently set to occur
on or before June 30, 2001), is subject to the satisfactory
completion of certain inspection and intended use
contingencies.
Antrim currently leases office space in Plano, Texas,
containing approximately 47,420 square feet. The lease
currently requires monthly rental payments of $67,178. In
March 2001, the lease was extended to May 2006. Effective
June 1, 2001, the leased space will be reduced to 34,498
square feet and the monthly rental payments will be reduced to
$57,497. Antrim receives monthly rental payments under a
sublease totaling approximately $6,338, which expires in June
2001.
Sunquest India leases office space in the International
Technology Park in Bangalore, India, containing approximately
20,115 square feet. The lease currently requires monthly
rental payments of $15,136 and expires in May 2003.
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 National Trust and Savings Association ("Bank of
America") are secured by all of the Company's assets. There
were no borrowings outstanding as of December 31, 2000. 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.
Item 3. Legal Proceedings.
The civil action initiated by Dynamic Healthcare
Technologies, Inc. ("Dynamic") against the Company and pending
before the United States District Court for the Southern
District of Florida for alleged breaches by the Company of the
Value Added Reseller Agreement ("VAR") between them (pursuant
to which the Company is authorized to grant sublicenses of
Dynamic's CoPathPlus ("CoPath") software), and the counter
claims asserted by the Company against Dynamic in the civil
action for tortious interference with current and prospective
contractual relations, defamation and disparagement of the
Company and breaches by Dynamic of the VAR, were settled in
March 2001 without material impact on the Company's financial
position. Under terms of the settlement, the Company and
Dynamic entered into an Amended and Restated VAR agreement,
pursuant to which the Company continues to be authorized to
grant sublicenses of Dynamic's CoPath software and has the
right to enhance and integrate the CoPath software with the
Company's laboratory information systems software. The Company
also prepaid certain amounts to Dynamic for
31
the rights to obtain modifications and enhancements to the CoPath
software for a specified period of time and for subsequent sublicenses.
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 is currently pending
before the Court.
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 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, 2000.
32
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." 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.
Price Range
Period High Low
-------------------------------------------
2000
First quarter $14.8750 $ 9.0625
Second quarter $13.1250 $ 6.8750
Third quarter $15.2500 $ 9.5000
Fourth quarter $13.8125 $ 6.8750
Price Range
Period High Low
-------------------------------------------
1999
First quarter $15.0000 $ 9.3750
Second quarter $16.5000 $10.7500
Third quarter $17.7500 $12.2500
Fourth quarter $16.0000 $10.6875
Except for S corporation distributions, the last of which
was in 1997, 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 prohibits the payment of capital
distributions or dividends. At March 16, 2001, there were 31
holders of record of the Common Stock, and the Company
believes that on that date there were in excess of 1,200
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, 2000 (the "Annual Report") and such
information 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 such information is incorporated herein by
reference.
33
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
The Company is exposed to market risk from changes in
interest rates. The Company's primary interest rate risk
relates to its short-term investments in Tax-exempt Municipals
and Short-term Demand Notes all of which are classified as
available-for-sale. At December 31, 2000, the Company had
total short-term investments of $61.9 million. Assuming a 10%
increase in interest rates on the Company's short-term
investments (i.e., an increase from the December 31, 2000
weighted-average interest rate of 5.01% to a weighted-average
interest rate of 5.51%), the fair value of these investments
would decrease by approximately $451,000.
Item 8. Financial Statements and Supplementary Data.
The financial statements, together with the report
thereon of Ernst & Young LLP dated February 2, 2001, and
supplementary data required by this item are included in the
Annual Report and such financial statements and supplementary
data are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None
Part III
Item 10. Directors and Executive Officers of the Registrant.
The information set forth under the caption "Executive
Officers of the Registrant" in Part I of this Annual Report on
Form 10-K and the information set forth under the caption
"Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's Proxy
Statement for the 2001 Annual Meeting of Shareholders (the
"Proxy Statement") is incorporated herein by reference.
Item 11. Executive Compensation.
The information set forth under the caption "Executive
Compensation and Related Information" in the Proxy Statement
is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information set forth under the caption "Security
Ownership of Certain Beneficial Owners and Management" in the
Proxy Statement is incorporated herein by reference.
34
Item 13. Certain Relationships and Related Transactions.
The information set forth under the caption "Certain
Transactions and Business Relationships" in the Proxy
Statement is incorporated herein by reference.
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 2, 2001
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Income and Comprehensive
Income for the years ended December 31, 2000, 1999 and 1998
Consolidated Statements of Shareholders' Equity for
the years ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years
ended December 31, 2000, 1999 and 1998
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
--------
3A Amended and Restated Articles of Incorporation of
the registrant. (1)
3B Amended and Restated Bylaws of the registrant. (1)
10.3 Sunquest Information Systems, Inc. and Affiliates 401(k)
Profit Sharing Plan (as Amended and Restated Generally
Effective January 1, 1997). (2) (4)
10.4 Qualified Plan Trust Agreement dated September 2, 1999
between the registrant and T. Rowe Price Trust Company. (2) (4)
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)
35
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)
10I.3 Stock Incentive Plan of 1996, as amended March 12, 1998. (2) (6)
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)
10N Tax Indemnification Agreement dated as of April 30, 1996,
between the registrant and its shareholders of record as of
April 30, 1996. (1)
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. (7)
10S Form of Underwriting Agreement dated May 30, 1996,
filed as Exhibit 1A to Registration Statement No. 333-2790
and incorporated herein by reference.
10T Business Loan Agreement dated as of December 30, 1997, among
the registrant, Sunquest Europa Limited, Antrim Corporation,
Sunquest Pharmacy Information Systems, Inc., Sunquest Germany
GmbH and Bank of America National Trust and Savings
Association. (6)
10.2 Third Amendment to Business Loan Agreement dated
December 30, 1997, among the registrant, Sunquest Europa
Limited, Antrim Corporation, Sunquest Pharmacy Information
Systems, Inc., Sunquest Germany GmbH, Sunquest India Ltd.
and Bank of America N.A., filed as Exhibit 10.1 to Form 10-Q
for the quarter ended March 31, 2000.
10U 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.
10.1 Employment Agreement effective December 14, 1998
between Mark J. Emkjer and the registrant. (2) (5)
10.5 First Amendment to Office Lease dated March 2, 2001
between Antrim Corporation, as lessee, and
Cornerstone Suburban Office, L.P., successor to
Massachusetts Mutual Life Insurance Company, as
lessor, with respect to office space in Plano,
Texas. (3)
13.1 Financial Information Section of Annual Report to
Shareholders for 2000. (3)
21.1 Subsidiaries of the registrant. (3)
36
23.1 Consent of Independent Auditors, dated March 26, 2001. (3)
27.1 Financial Data Schedule for the year ended December 31, 2000. (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.
(4) Filed, under the same number, as an exhibit to the Form 10-K
for the year ended December 31, 1999.
(5) Filed, under the same number, as an exhibit to the Form 10-K
for the year ended December 31, 1998.
(6) Filed, under the same number, as an exhibit to the Form 10-K
for the year ended December 31, 1997.
(7) Filed, under the same number, as an exhibit to the Form 10-K
for the year ended December 31, 1996.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the registrant during
the quarter ended December 31, 2000.
37
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 28, 2001.
SUNQUEST INFORMATION SYSTEMS, INC.
(Registrant)
By: /s/ Sidney A. Goldblatt
-----------------------
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.
Signature Title Date
--------- ----- ----
/s/ Sidney A. Goldblatt Chairman of the Board and March 28, 2001
_______________________ Chief Executive Officer
Sidney A. Goldblatt (Principal Executive Officer)
and Director
/s/ Nina M. Dmetruk Executive Vice President & March 28, 2001
___________________ Chief Financial Officer
Nina M. Dmetruk (Principal Financial and
Accounting Officer) and
Director
/s/ Larry R. Ferguson Director March 28, 2001
_____________________
Larry R. Ferguson
/s/ Curtis S. Goldblatt Director March 28, 2001
_______________________
Curtis S. Goldblatt
/s/ Stanley J. Lehman Director March 28, 2001
_____________________
Stanley J. Lehman
/s/ Charles A. Schliebs Director March 28, 2001
_______________________
Charles A. Schliebs
38
Sunquest Information Systems, Inc.
Form 10-K For Fiscal Year Ended December 31, 2000
Commission File No. 0-28212
---------------------------
Exhibit Index
-------------
Exhibit No. Description
----------- -----------
3A Amended and Restated Articles of Incorporation of
the registrant. *
3B Amended and Restated Bylaws of the registrant. *
10.3 Sunquest Information Systems, Inc. and Affiliates 401(k)
Profit Sharing Plan (as Amended and Restated Generally
Effective January 1, 1997). *
10.4 Qualified Plan Trust Agreement dated September 2, 1999
between the registrant and T. Rowe Price Trust Company. *
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. *
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. *
10I.3 Stock Incentive Plan of 1996, as amended March 12, 1998. *
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. *
10N Tax Indemnification Agreement dated as of April 30, 1996,
between the registrant and its shareholders of record as
of April 30, 1996. *
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. *
10S Form of Underwriting Agreement dated May 30, 1996. *
10T Business Loan Agreement dated as of December 30, 1997,
among the registrant, Sunquest Europa Limited, Antrim
Corporation, Sunquest Pharmacy Information Systems, Inc.,
Sunquest Germany GmbH and Bank of America National Trust
and Savings Association. *
10.2 Third Amendment to Business Loan Agreement dated
December 30, 1997, among the registrant, Sunquest
Europa Limited, Antrim Corporation, Sunquest
Pharmacy Information Systems, Inc., Sunquest Germany GmbH,
Sunquest India Ltd. and Bank of America N.A. *
10U Stock Purchase Agreement with The Compucare Company,
dated as of November 26, 1996. *
10.1 Employment Agreement effective December 14, 1998
between Mark J. Emkjer and the registrant. *
10.5 First Amendment to Office Lease dated March 2, 2001
between Antrim Corporation, as lessee, and
Cornerstone Suburban Office, L.P., successor to
Massachusetts Mutual Life Insurance Company, as
lessor, with respect to office space in Plano,
Texas.
13.1 Financial Information Section of Annual Report to
Shareholders for 2000.
21.1 Subsidiaries of the registrant.
23.1 Consent of Independent Auditors, dated March 26, 2001.
27.1 Financial Data Schedule for the year ended December 31, 2000.
___________________
* Incorporated by reference.
Dates Referenced Herein and Documents Incorporated by Reference
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